NOTES TO
CONSOLIDATED
FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 2014, 2013 AND 2012
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Abaxis, Inc. (“Abaxis,” the “Company” or “we”), incorporated in California in 1989, develops, manufactures, markets and sells portable blood analysis systems that are used in a broad range of medical specialties in human or veterinary patient care to provide clinicians with rapid blood constituent measurements. Abaxis provides veterinary reference laboratory diagnostic and consulting services for veterinarians. We conduct business worldwide and manage our business on the basis of the following two reportable segments: the medical market and the veterinary market.
Abaxis Europe GmbH, our wholly-owned subsidiary in Darmstadt, Germany, markets, promotes and distributes diagnostic systems for medical and veterinary uses in the European market.
Basis of Presentation
Principles of Consolidation.
The accompanying consolidated financial statements include the accounts of Abaxis and our wholly-owned subsidiary, Abaxis Europe GmbH. Intercompany transactions and balances have been eliminated in consolidation.
Reclassifications.
Certain reclassifications have been made to prior periods’ financial statements to conform to the current period presentation. Additionally, during fiscal 2013, certain reclassifications were made to prior fiscal year financial statements, primarily related to segment categories (Note 16, “Segment Reporting Information”). In the fourth quarter of fiscal 2013, we reclassified certain revenues related to extended maintenance contracts and costs related to instrument repair and support, from our unallocated category to its respective business segment, either medical market or veterinary market. The Company reclassified the historically presented reportable segments to reflect changes in the way its decision maker evaluates the performance of its operations and allocates resources. These reclassifications did not result in any change in previously reported net income, total assets or shareholders’ equity.
Summary of Significant Accounting Policies
Management Estimates.
The preparation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements, the reported amounts of revenues and expenses during the reporting period, and related disclosures. Significant management estimates made in preparing the consolidated financial statements relate to allowance for doubtful accounts, sales and other allowances, estimated selling price of our products, valuation of inventory, fair value of investments, fair value and useful lives of intangible assets, income taxes, valuation allowance for deferred tax assets, share-based compensation, legal exposures and warranty reserves. Our management bases their estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Our actual results may differ materially from these estimates.
Cash and Cash Equivalents.
Cash equivalents consist of highly liquid investments with original or remaining maturities of three months or less at the time of purchase that are readily convertible into cash. The fair value of these investments was determined by using quoted prices for identical investments in active markets which are measured at Level 1 inputs under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures.” The carrying value of cash equivalents approximates fair value due to their relatively short-term nature.
Investments.
We hold both short-term and long-term investments and our portfolio primarily consists of certificates of deposit, commercial paper, corporate bonds, municipal bonds and U.S. agency securities. Short-term investments have maturities of one year or less. All other investments with maturity dates greater than one year are classified as long-term. Our investments are accounted for as either available-for-sale or held-to-maturity. Investments classified as available-for-sale are reported at fair value at the balance sheet date, and temporary differences between cost and fair value are presented as a separate component of accumulated other comprehensive income (loss), net of any related tax effect, in shareholders’ equity. Investments classified as held-to-maturity are based on the Company’s positive intent and ability to hold to maturity and these investments are carried at amortized cost.
Realized gains and losses from investments are included in “Interest and other income (expense), net,” computed using the specific identification cost method. We assess whether an other-than-temporary impairment loss on our investments has occurred due to declines in fair value or other market conditions. Declines in fair value that are determined to be other-than-temporary, if any, are recorded as charges against “Interest and other income (expense), net” in the consolidated statements of income. We did not recognize any impairment loss on investments during fiscal 2014, 2013 or 2012.
Concentration of Credit Risks and Certain Other Risks.
Financial instruments that potentially subject us to a concentration of credit risk consist primarily of cash, cash equivalents, investments and receivables. We place our cash, cash equivalents and investments with high credit quality financial institutions which are regularly monitored by management. Deposits held with banks may exceed the amount of the insurance provided by the federal government on such deposits. To date, the Company has not experienced any losses on such deposits. We also have short and long-term investments in certificates of deposit, commercial paper, corporate bonds, municipal bonds and U.S. agency securities, which can be subject to certain credit risk. However, we mitigate the risks by investing in high-grade instruments, limiting our exposure to any one issuer, and monitoring the ongoing creditworthiness of the financial institutions and issuers.
We sell our products to distributors and direct customers located primarily in North America, Europe and other countries. Credit is extended to our customers and we generally do not require our customers to provide collateral for purchases on credit. Credit risks are mitigated by our credit evaluation process and monitoring the amounts owed to us, taking appropriate action when necessary. Collection of receivables may be affected by changes in economic or other industry conditions and may, accordingly, impact our overall credit risk. We maintain an allowance for doubtful accounts, but historically have not experienced any material losses related to an individual customer or group of customers in any particular industry or geographic area. At March 31, 2014, one distributor in the United States accounted for 24% of our total receivables balance. At March 31, 2013, two distributors in the United States accounted for 12% and 23%, respectively, of our total receivables balance.
We are subject to certain risks and uncertainties and believe that changes in any of the following areas could have a material adverse effect on our future financial position or results of operations: continued Food and Drug Administration compliance or regulatory changes; uncertainty regarding health care reforms; fundamental changes in the technology underlying blood testing; the ability to develop new products and services that are accepted in the marketplace; competition, including, but not limited to, pricing and products or product features and services; the adequate and timely sourcing of inventories; foreign currency fluctuations; litigation, product liability or other claims against Abaxis; the ability to attract and retain key employees; stock price volatility due to general economic conditions or future issuances and sales of our stock; changes in legal and accounting regulations and standards; and changes in tax regulations.
Fair Value Measurements.
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability. The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy are described below.
Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2: Directly or indirectly observable inputs as of the reporting date through correlation with market data, including quoted prices for similar assets and liabilities in active markets and quoted prices in markets that are not active. Level 2 also includes assets and liabilities that are valued using models or other pricing methodologies that do not require significant judgment since the input assumptions used in the models, such as interest rates and volatility factors, are corroborated by readily observable data from actively quoted markets for substantially the full term of the financial instrument.
Level 3: Unobservable inputs that are supported by little or no market data and require the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions.
Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Our financial instruments include cash, cash equivalents, investments, receivables, accounts payable and certain other accrued liabilities. The fair value of cash, cash equivalents, receivables, accounts payable and certain other accrued liabilities are valued at their carrying value, which approximates fair value due to their short maturities. See Note 3, “Fair Value Measurements” for further information on fair value measurement of our financial and nonfinancial assets and liabilities.
Inventories.
Inventories include material, labor and manufacturing overhead, and are stated at the lower of standard cost (which approximates actual cost using the first-in, first-out method) or market. Provisions for excess, obsolete and unusable inventories are determined primarily by management’s evaluation of future demand of our products and market conditions.
Investment in Unconsolidated Affiliate.
In February 2011, we purchased a 15% equity ownership interest in Scandinavian Micro Biodevices APS (“SMB”) for $2.8 million in cash. We use the equity method to account for our investment in this entity because we do not control it, but have the ability to exercise significant influence over it. Equity method investments are recorded at original cost and adjusted periodically to recognize (1) our proportionate share of the investees’ net income or losses after the date of investment, (2) additional contributions made and dividends or distributions received, and (3) impairment losses resulting from adjustments to net realizable value. We eliminate all intercompany transactions in accounting for our equity method investments. During fiscal 2014, 2013 and 2012, we recorded our proportionate share of the investee’s net income or loss in “Interest and other income (expense), net” on the consolidated statements of income.
We assess the potential impairment of our equity method investments when indicators such as a history of operating losses, a negative earnings and cash flow outlook, and the financial condition and prospects for the investee’s business segment might indicate a loss in value. We did not recognize any impairment loss on investment in unconsolidated affiliate during fiscal 2014, 2013 or 2012.
Property and Equipment.
Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight-line method over the following estimated useful lives of the assets:
Asset Classification
|
Estimated Useful Life
|
Machinery and equipment
|
2-15 years
|
Furniture and fixtures
|
3-8 years
|
Computer equipment
|
2-7 years
|
Leasehold improvements
|
Shorter of estimated useful life or remaining lease term
|
Construction in progress primarily consists of purchased material and internal payroll and related costs used in the development of production lines. We did not capitalize interest on constructed assets during fiscal 2014 or 2013 due to immateriality.
Property and equipment includes instruments transferred from inventory and held for loan or evaluation or demonstration purposes to customers. Units held for loan, evaluation or demonstration purposes are carried at cost and depreciated over their estimated useful lives of three to five years. Depreciation expense related to these instruments is recorded in cost of revenues or in the respective operating expense line based on the function and purpose for which it is being used. Proceeds from the sale of evaluation units are recorded as revenue.
Intangible Assets.
Intangible assets, consisting of licenses and other rights acquired from third parties, are presented at cost, net of accumulated amortization. The intangible assets are amortized using the straight-line method over their estimated useful lives of 6-10 years, which approximates the economic benefit. If our underlying assumptions regarding the estimated useful life of an intangible asset change, then the amortization period, amortization expense and the carrying value for such asset would be adjusted accordingly. During fiscal 2014, 2013 and 2012, our changes in estimated useful life of intangible assets were not significant.
Valuation of Long-Lived Assets.
We evaluate the carrying value of our long-lived assets, such as property and equipment and amortized intangible assets, whenever events or changes in business circumstances or our planned use of long-lived assets indicate that the carrying amount of an asset may not be fully recoverable or their useful lives are no longer appropriate. We look to current and future profitability, as well as current and future undiscounted cash flows, excluding financing costs, as primary indicators of recoverability. An impairment loss would be recognized when the sum of the undiscounted future net cash flows expected to result from the use of the asset and its eventual disposal is less than the carrying amount. If impairment is determined to exist, any related impairment loss is calculated based on fair value and long-lived assets are written down to their respective fair values. We did not recognize any impairment charges on long-lived assets in fiscal 2014, 2013 or 2012.
Revenue Recognition.
Revenues from product sales and services, net of estimated sales allowances, discounts and rebates, are recognized when the following four criteria are met:
·
|
Evidence of an arrangement exists: Persuasive evidence of an arrangement with a customer that reflects the terms and conditions to deliver products or render services must exist in order to recognize revenue.
|
·
|
Upon shipment of the products or rendering of services to the customer: Delivery is considered to occur at the time of shipment of products to a distributor or direct customer, as title and risk of loss have been transferred to the distributor or direct customer on delivery to the common carrier. Rights of return are not provided. For services, delivery is considered to occur as the service is provided. Service revenues are primarily generated from veterinary reference laboratory diagnostic and consulting services for veterinarians. Net service revenues are recognized at the time services are performed.
|
·
|
Fixed or determinable sales price: When the sales price is fixed or determinable that amount is recognized as revenue.
|
·
|
Collection is reasonably assured: Collection is deemed probable if a customer is expected to be able to pay amounts under the arrangement as those amounts become due. Revenue is recognized when collectibility of the resulting receivable is reasonably assured.
|
Amounts collected in advance of revenue recognition are recorded as a current or non-current deferred revenue liability based on the time from the balance sheet date to the future date of revenue recognition. We recognize revenue associated with extended maintenance agreements ratably over the life of the contract. From time to time, we offer discounts on AVRL services for a specified period as incentives. Discounts are reductions to invoiced amounts within a specified period and are recorded at the time services are performed.
Multiple Element Revenue Arrangements
.
Our sales arrangements may contain multiple element revenue arrangements in which a customer may purchase a combination of instruments, consumables or extended maintenance agreements. Additionally, we provide incentives in the form of free goods or extended maintenance agreements to customers in connection with the sale of our instruments. We participate in selling arrangements in the veterinary market that include multiple deliverables, such as instruments, consumables and service agreements associated with our veterinary reference laboratory. Judgments as to the allocation of consideration from an arrangement to the multiple elements of the arrangement, and the appropriate timing of revenue recognition are critical with respect to these arrangements.
A multiple element arrangement includes the sale of one or more tangible product offerings with one or more associated services offerings, each of which are individually considered separate units of accounting. We allocate revenues to each element in a multiple element arrangement based upon the relative selling price of each deliverable. When applying the relative selling price method, we determine the selling price for each deliverable using vendor-specific objective evidence (“VSOE”) of selling price, if it exists, or third-party evidence (“TPE”) of selling price. If neither VSOE nor TPE of selling price exist for a deliverable, we use our best estimate of selling price for that deliverable. Revenue allocated to each element is then recognized when all revenue recognition criteria are met for each element.
Revenues from our multiple element arrangements are allocated separately to the instruments, consumables, extended maintenance agreements and incentives based on the relative selling price method. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately. Revenues allocated to each element are then recognized when the basic revenue recognition criteria, as described above, are met for each element. Revenues associated with incentives in the form of free goods are deferred until the goods are shipped to the customer. Revenues associated with incentives in the form of extended maintenance agreements are deferred and recognized ratably over the life of the extended maintenance contract, generally one to three years. Incentives in the form of extended maintenance agreements are our most significant multiple element arrangement.
For our selling arrangements in the veterinary market that include multiple deliverables, such as instruments, consumables and service agreements associated with our veterinary reference laboratory, revenue is recognized upon delivery of the product or performance of the service during the term of the service contract when the basic revenue recognition criteria, as described above, are met for each element. We allocate revenues to each element based on the relative selling price of each deliverable. Amounts allocated to each element are based on its objectively determined fair value, such as the sales price for the product or service when it is sold separately.
From time to time, we offer customer incentives comprising of arrangements with customers to include discounts on future sales of services associated with our veterinary reference laboratory. We apply judgment in determining whether future discounts are significant and incremental. When the future discount offered is not considered significant and incremental, we do not account for the discount as an element of the original arrangement. To determine whether a discount is significant and incremental, we look to the discount provided in comparison to standalone sales of the same product to similar customers, the level of discount provided on other elements in the arrangement, and the significance of the discount to the overall arrangement. If the discount in the multiple element arrangement approximates the discount typically provided in standalone sales, that discount is not considered incremental. During fiscal 2014, 2013 and 2012, our customer incentive programs with future discounts were not significant.
Customer Programs
.
From time to time, we offer customer marketing and incentive programs. Our most significant customer programs are described as follows:
Instrument Trade-In Programs
. We periodically offer trade-in programs to customers for trading in an existing instrument to purchase a new instrument and we will either provide incentives in the form of free goods or reduce the sales price of the instrument. These incentives in the form of free goods are recorded based on the relative selling price method according to the policies described above.
Instrument Rental Programs
. We periodically offer programs to customers whereby certain instruments are made available to customers for rent or on an evaluation basis. These programs typically require customers to purchase a minimum quantity of consumables during a specified period for which we recognize revenue on the related consumables according to the policies described above. Depending on the program offered, customers may purchase the instrument during the rental or evaluation period. Proceeds from such sale are recorded as revenue according to the policies described above. Rental income, if any, are also recorded as revenue according to the policies described above.
Sales Incentive Programs
.
We periodically offer customer sales incentive programs and we record reductions to revenue related to these programs. Incentives may be provided in the form of volume-based incentives, end-user rebates and discounts. Volume-based incentives, in the form of rebates, are offered from time to time to distributors and group purchasing organizations upon meeting the sales volume requirements during a qualifying period and are recorded as a reduction to gross revenues during a qualifying period. Cash rebates are offered to end-users who purchase certain products or instruments during a promotional period and are recorded as a reduction to gross revenues. Additionally, we periodically offer sales incentives to end-users, in the form of sales discounts, to purchase consumables for a specified promotional period, typically over five years from the sale of our instrument, and we reimburse resellers for the value of the sales discount provided to the end-user. We estimate the amount of the incentive earned by end-users during a quarter and record a liability to the reseller as a reduction to gross revenues.
Royalty Revenues
.
Royalties are typically based on licensees’ net sales of products that utilize our technology and are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured, such as upon the receipt of a royalty statement from the licensee.
Allowance for Doubtful Accounts.
We recognize revenue when collection from the customer is reasonably assured. We maintain an allowance for doubtful accounts based on our assessment of the collectability of the amounts owed to us by our customers. We regularly review the allowance and consider the following factors in determining the level of allowance required: the customer’s payment history, the age of the receivable balance, the credit quality of our customers, the general financial condition of our customer base and other factors that may affect the customers’ ability to pay. An additional allowance is recorded based on certain percentages of our aged receivables, using historical experience to estimate the potential uncollectible. Account balances are charged off against the allowance when we believe it is probable the receivable will not be recovered.
Shipping and Handling.
In a sale transaction we recognize amounts billed to customers for shipping and handling as revenue. Shipping and handling costs incurred for inventory purchases and product shipments are recorded in cost of revenues.
Research and Development Expenses.
Research and development expenses, including internally developed software costs, are expensed as incurred and include expenses associated with new product research and regulatory activities. Our products include certain software applications that are resident in the product. The costs to develop such software have not been capitalized as we believe our current software development processes are completed concurrent with the establishment of technological feasibility of the software.
Advertising Expenses.
Costs of advertising, which are recognized as sales and marketing expenses, are generally expensed in the period incurred. Advertising expenses were $843,000, $1.5 million and $2.1 million, for fiscal 2014, 2013 and 2012, respectively.
Income Taxes.
We account for income taxes using the liability method under which deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be recovered.
We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of evidence indicates that it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions that are more likely than not to be sustained upon audit, the second step is to measure the tax benefit as the largest amount that is more than 50 percent likely to be realized upon settlement. Significant judgment is required to evaluate uncertain tax positions. At March 31, 2014 and 2013, we had no significant uncertain tax positions. Our policy is to include interest and penalties related to gross unrecognized tax benefits within our provision for income taxes. For fiscal 2014, 2013 and 2012, we did not recognize any interest or penalties related to uncertain tax positions in the consolidated statements of income, and at March 31, 2014 and 2013, we had no accrued interest or penalties.
Share-Based Compensation Expense.
We account for share-based compensation in accordance with ASC 718, “Compensation-Stock Compensation.” We recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award to employees and directors. As required by fair value provisions of share-based compensation, employee share-based compensation expense recognized is calculated over the requisite service period of the awards and reduced for estimated forfeitures. The forfeiture rate is estimated based on historical data of our share-based compensation awards that are granted and cancelled prior to vesting and upon historical experience of employee turnover.
Prior to fiscal 2007, we granted stock option awards to employees and directors as part of our share-based compensation program. We have not granted any stock options since the beginning of fiscal 2007. We have recognized compensation expense for stock options granted during the requisite service period of the stock option. As of March 31, 2014, we had no unrecognized compensation expense related to stock options granted.
For restricted stock units, share-based compensation expense is based on the fair value of our stock at the grant date
and recognized net of an estimated forfeiture rate, over the requisite service period of the award
.
Net Income Per Share.
Basic net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing the net income attributable to common shareholders by the weighted average number of common shares that would have been outstanding during the period assuming the issuance of common shares for all potential dilutive common shares outstanding using the treasury stock method. Dilutive potential common shares outstanding include outstanding stock options, restricted stock units and warrants.
Comprehensive Income.
Comprehensive income generally represents all changes in shareholders’ equity during a period, resulting from net income and transactions from non-owner sources. Comprehensive income consists of net income and the net-of-tax amounts for unrealized gain (loss) on available-for-sale investments (difference between the cost and fair market value). For the periods presented, the accumulated other comprehensive income (loss) consisted of the unrealized gains or losses on the Company’s available-for-sale investments, net of tax.
Foreign Currency.
The U.S. dollar is the functional currency for our international subsidiary, Abaxis Europe GmbH, located in Darmstadt, Germany. Foreign currency transactions of our subsidiary are remeasured into U.S. dollars at the end-of-period exchange rates for monetary assets and liabilities, and historical exchange rates for nonmonetary assets.
Accordingly, the effects of foreign currency transactions, and of remeasuring the financial condition into the functional currency resulted in foreign currency gains and losses, which were included in “Interest and other income (expense), net” on the consolidated statements of income and were insignificant for fiscal 2014, 2013 and 2012.
Recent Accounting Pronouncements
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income:
In February 2013,
the
FASB issued
Accounting Standards Update
No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” (Topic 220)
-
Comprehensive Income (“ASU 2013-02”), to amend existing rules to improve the reporting of reclassification out of accumulated other comprehensive income (“AOCI”). The amendment expands the existing disclosure by requiring entities to present information about significant items reclassified out of AOCI by component. In addition, an entity is required to provide information about the effects on net income of significant amounts reclassified out of each component of AOCI to net income either on the face of the statement where net income is presented or as a separate disclosure in the notes of the financial statements. We adopted ASU 2013-02 as of April 1, 2013.
As this update only required additional disclosures, adoption of this
amendment
did not have a material impact on our financial
position
, results of operations and cash flows
during fiscal 2014
.
NOTE 2. INVESTMENTS
Our investments are classified as either available-for-sale or held-to-maturity. The following table summarizes available-for-sale and held-to-maturity investments as of March 31, 2014 and 2013 (in thousands):
|
|
Available-for-Sale Investments
|
|
March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
498
|
|
|
$
|
1
|
|
|
$
|
-
|
|
|
$
|
499
|
|
Corporate bonds
|
|
|
10,392
|
|
|
|
32
|
|
|
|
(42
|
)
|
|
|
10,382
|
|
Total available-for-sale investments
|
|
$
|
10,890
|
|
|
$
|
33
|
|
|
$
|
(42
|
)
|
|
$
|
10,881
|
|
|
|
Held-to-Maturity Investments
|
|
March 31, 2014
|
|
|
|
|
|
|
|
Gross
Unrecognized
(Loss)
|
|
|
|
|
Certificates of deposit
|
|
$
|
5,722
|
|
|
$
|
-
|
|
|
$
|
(8
|
)
|
|
$
|
5,714
|
|
Commercial paper
|
|
|
12,991
|
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
12,990
|
|
Corporate bonds
|
|
|
14,920
|
|
|
|
65
|
|
|
|
(33
|
)
|
|
|
14,952
|
|
Municipal bonds
|
|
|
3,079
|
|
|
|
20
|
|
|
|
(29
|
)
|
|
|
3,070
|
|
Total held-to-maturity investments
|
|
$
|
36,712
|
|
|
$
|
85
|
|
|
$
|
(71
|
)
|
|
$
|
36,726
|
|
|
|
Available-for-Sale Investments
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
996
|
|
|
$
|
5
|
|
|
$
|
-
|
|
|
$
|
1,001
|
|
Corporate bonds
|
|
|
6,029
|
|
|
|
65
|
|
|
|
-
|
|
|
|
6,094
|
|
Municipal bonds
|
|
|
529
|
|
|
|
-
|
|
|
|
-
|
|
|
|
529
|
|
Total available-for-sale investments
|
|
$
|
7,554
|
|
|
$
|
70
|
|
|
$
|
-
|
|
|
$
|
7,624
|
|
|
|
Held-to-Maturity Investments
|
|
March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
$
|
3,341
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,341
|
|
Corporate bonds
|
|
|
16,284
|
|
|
|
121
|
|
|
|
(3
|
)
|
|
|
16,402
|
|
Municipal bonds
|
|
|
13,105
|
|
|
|
32
|
|
|
|
(10
|
)
|
|
|
13,127
|
|
Total held-to-maturity investments
|
|
$
|
32,730
|
|
|
$
|
153
|
|
|
$
|
(13
|
)
|
|
$
|
32,870
|
|
The amortized cost of our held-to-maturity investments approximates their fair value. As of March 31, 2014 and 2013, we did not have other-than-temporary impairment in the fair value of any individual security classified as held-to-maturity or available-for-sale. As of March 31, 2014 and 2013, we had unrealized gains (losses) on available-for-sale investments,
net of related income taxes
of $(5,000) and $42,000, respectively. Redemptions of investments in accordance with the callable provisions during fiscal 2014, 2013 and 2012 were $623,000, $1.3 million and $16.3 million, respectively.
The following table summarizes the amortized cost and fair value of our investments, classified by stated maturity as of March 31, 2014 and 2013 (in thousands):
|
|
March 31, 2014
|
|
|
March 31, 2014
|
|
|
|
Available-for-Sale Investments
|
|
|
Held-to-Maturity Investments
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Due in less than one year
|
|
$
|
6,509
|
|
|
$
|
6,542
|
|
|
$
|
22,560
|
|
|
$
|
22,571
|
|
Due in 1 to 4 years
|
|
|
4,381
|
|
|
|
4,339
|
|
|
|
14,152
|
|
|
|
14,155
|
|
Total investments
|
|
$
|
10,890
|
|
|
$
|
10,881
|
|
|
$
|
36,712
|
|
|
$
|
36,726
|
|
|
|
March 31, 2013
|
|
|
March 31, 2013
|
|
|
|
Available-for-Sale Investments
|
|
|
Held-to-Maturity Investments
|
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
|
Amortized Cost
|
|
|
Fair Value
|
|
Due in less than one year
|
|
$
|
1,027
|
|
|
$
|
1,029
|
|
|
$
|
22,325
|
|
|
$
|
22,387
|
|
Due in 1 to 4 years
|
|
|
6,527
|
|
|
|
6,595
|
|
|
|
10,405
|
|
|
|
10,483
|
|
Total investments
|
|
$
|
7,554
|
|
|
$
|
7,624
|
|
|
$
|
32,730
|
|
|
$
|
32,870
|
|
NOTE 3. FAIR VALUE MEASUREMENTS
The following table summarizes financial assets, measured at fair value on a recurring basis, by level of input within the fair value hierarchy as of March 31, 2014 and 2013 (in thousands):
|
|
As of March 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
5,035
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,035
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
-
|
|
|
|
499
|
|
|
|
-
|
|
|
|
499
|
|
Corporate bonds
|
|
|
-
|
|
|
|
10,382
|
|
|
|
-
|
|
|
|
10,382
|
|
Total assets at fair value
|
|
$
|
5,035
|
|
|
$
|
10,881
|
|
|
$
|
-
|
|
|
$
|
15,916
|
|
|
|
|
|
|
|
As of March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
12,189
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
12,189
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
|
-
|
|
|
|
1,001
|
|
|
|
-
|
|
|
|
1,001
|
|
Corporate bonds
|
|
|
-
|
|
|
|
6,094
|
|
|
|
-
|
|
|
|
6,094
|
|
Municipal bonds
|
|
|
-
|
|
|
|
529
|
|
|
|
-
|
|
|
|
529
|
|
Total assets at fair value
|
|
$
|
12,189
|
|
|
$
|
7,624
|
|
|
$
|
-
|
|
|
$
|
19,813
|
|
As of March 31, 2014 and 2013, our Level 1 financial assets are comprised of money market mutual funds. Our cash equivalents are highly liquid instruments with original or remaining maturities of three months or less at the time of purchase that are readily convertible into cash. The fair value of our Level 1 financial assets is based on quoted market prices of the underlying security.
Our Level 2 financial assets primarily consist of certificates of deposit, corporate bonds and municipal bonds. For our Level 2 financial assets, we review trading activity and pricing for these investments as of the measurement date. When sufficient quoted pricing for identical securities is not available, we use market pricing and other observable market inputs for similar securities obtained from third party data providers. These inputs represent quoted prices for similar assets in active markets or these inputs have been derived from observable market data.
As of March 31, 2014 and 2013, we did not have any Level 1 and Level 2 financial liabilities or Level 3 financial assets or liabilities measured at fair value on a recurring basis. We did not have any transfers between Level 1 and Level 2 or transfers in or out of Level 3 during fiscal 2014, 2013 and 2012.
NOTE 4. INVENTORIES
Components of inventories at March 31, 2014 and 2013 were as follows (in thousands):
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Raw materials
|
|
$
|
14,348
|
|
|
$
|
12,621
|
|
Work-in-process
|
|
|
3,463
|
|
|
|
3,696
|
|
Finished goods
|
|
|
9,167
|
|
|
|
10,469
|
|
Inventories
|
|
$
|
26,978
|
|
|
$
|
26,786
|
|
NOTE 5. INVESTMENT IN UNCONSOLIDATED AFFILIATE
Our investment in an unconsolidated affiliate consists of an investment in equity securities of Scandinavian Micro Biodevices APS (“SMB”). In February 2011, we purchased a 15% equity ownership interest in SMB, for $2.8 million in cash. SMB is a privately-held developer and manufacturer of point-of-care diagnostic products for veterinary use. SMB, based in Farum, Denmark, has been the original equipment manufacturer of the Abaxis VetScan VS
pro
point-of-care specialty analyzer since 2008. We accounted for our investment in SMB using the equity method due to our significant influence over SMB’s operations. During fiscal 2014, 2013 and 2012, we recorded our allocated portions of SMB’s net gain (loss) of $33,000, $(13,000) and $(143,000), respectively.
NOTE 6. PROPERTY AND EQUIPMENT, NET
Property and equipment, net,
at March 31, 2014 and 2013 consisted of the following (in thousands):
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Property and equipment at cost:
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
34,106
|
|
|
$
|
28,676
|
|
Furniture and fixtures
|
|
|
2,314
|
|
|
|
1,567
|
|
Computer equipment
|
|
|
6,688
|
|
|
|
5,840
|
|
Leasehold improvements
|
|
|
10,418
|
|
|
|
10,098
|
|
Construction in progress
|
|
|
5,434
|
|
|
|
5,949
|
|
|
|
|
58,960
|
|
|
|
52,130
|
|
Accumulated depreciation and amortization
|
|
|
(31,784
|
)
|
|
|
(26,800
|
)
|
Property and equipment, net
|
|
$
|
27,176
|
|
|
$
|
25,330
|
|
Depreciation and amortization expense for property and equipment amounted to $5.9 million, $5.4 million and $4.5 million in fiscal 2014, 2013 and
2012, respectively.
NOTE 7. INTANGIBLE ASSETS, NET
Intangible assets, net, at March 31, 2014 and 2013 consisted of the following (in thousands):
|
|
Cost
|
|
|
|
|
|
|
|
Balance, March 31, 2014
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
5,000
|
|
|
$
|
3,800
|
|
|
|
1,200
|
|
Other
|
|
|
637
|
|
|
|
213
|
|
|
|
424
|
|
Total intangible assets
|
|
$
|
5,637
|
|
|
$
|
4,013
|
|
|
$
|
1,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
5,000
|
|
|
$
|
2,360
|
|
|
|
2,640
|
|
Other
|
|
|
637
|
|
|
|
155
|
|
|
|
482
|
|
Total intangible assets
|
|
$
|
5,637
|
|
|
$
|
2,515
|
|
|
$
|
3,122
|
|
In January 2009, we entered into a license agreement with Inverness Medical Switzerland GmbH, now known as Alere Switzerland GmbH (“Alere”), pursuant to which we licensed co-exclusively certain worldwide patent rights. We paid a $5.0 million up-front license fee to Alere in January 2009, which was recorded as an intangible asset on the consolidated balance sheets. See Note 10, “Commitments and Contingencies” for additional information on our patent license agreement with Alere.
Other intangible assets, with a cost basis of $249,000 and $388,000, were acquired by issuing warrants to Kansas State University Institute for Commercialization (formerly known as National Institute for Strategic Technology Acquisition and Commercialization) in January 2011 and October 2011, respectively.
Amortization expense for intangible assets, included in cost of revenues or in the respective operating expense line based on the function and purpose for which it is being used, amounted to $1.5 million, $868,000 and $614,000 in fiscal 2014, 2013 and 2012, respectively. Based on our intangible assets subject to amortization as of March 31, 2014, the estimated amortization expense for succeeding years is as follows (in thousands):
|
|
Estimated Future Annual Amortization Expense
|
|
|
|
|
|
|
Fiscal Year Ending March 31,
|
|
|
|
Total
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Thereafter
|
|
Amortization expense
|
|
$
|
1,624
|
|
|
$
|
1,258
|
|
|
$
|
58
|
|
|
$
|
58
|
|
|
$
|
58
|
|
|
$
|
58
|
|
|
$
|
134
|
|
NOTE 8. WARRANTY RESERVES
We provide for the estimated future costs to be incurred under our standard warranty obligation on our instruments and reagent discs.
Instruments.
Our standard warranty obligation on instruments ranges from one to five years, depending on the type of product. The estimated contractual warranty obligation is recorded when the related revenue is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. Cost of revenues reflects estimated warranty expense for instruments sold in the current period and any adjustments in estimated warranty expense for the installed base under our standard warranty obligation based on our quarterly evaluation of service experience. The estimated accrual for warranty exposure is based on historical experience as to product failures, estimated product failure rates, estimated repair costs, material usage and freight incurred in repairing the instrument after failure and known design changes under the warranty plan.
Effective October 2013, management prospectively changed the standard warranty obligations on certain instruments sold from three to five years. The increase in the standard warranty period did not result in a material impact on our cost of revenues or our accrued warranty costs during fiscal 2014. During fiscal 2013, we recorded an adjustment to pre-existing warranties of $290,000, which reduced our warranty reserves and our cost of revenues, based on both historical and projected product performance rates of instruments. Management periodically evaluates the sufficiency of the warranty provisions and makes adjustments when necessary. If an unusual performance rate related to warranty claims is noted, an additional warranty accrual may be assessed and recorded when a failure event is probable and the cost can be reasonably estimated.
Reagent Discs.
We record a provision for defective reagent discs when the related sale is recognized and any additional amount is recorded when such cost is probable and can be reasonably estimated. The warranty cost includes the replacement costs and freight of a defective reagent disc. For fiscal 2014, 2013 and 2012, the provision for warranty expense related to replacement of defective reagent discs was $518,000, $369,000 and $456,000, respectively. The balance of accrued warranty reserve related to replacement of defective reagent discs at March 31, 2014 and 2013 was $619,000 and $571,000, respectively, which was classified as a current liability on the consolidated balance sheets.
We evaluate our estimates for warranty reserves on an ongoing basis and believe we have the ability to reasonably estimate warranty costs. However, unforeseeable changes in factors may impact the estimate for warranty and such changes could cause a material change in our warranty reserve accrual in the period in which the change was identified.
The change in our accrued warranty reserve during fiscal 2014, 2013 and 2012 is summarized as follows (in thousands):
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Balance at beginning of period
|
|
$
|
1,384
|
|
|
$
|
1,846
|
|
|
$
|
1,222
|
|
Provision for warranty expense
|
|
|
2,068
|
|
|
|
1,228
|
|
|
|
1,698
|
|
Warranty costs incurred
|
|
|
(1,584
|
)
|
|
|
(1,400
|
)
|
|
|
(1,331
|
)
|
Adjustment to pre-existing warranties
|
|
|
-
|
|
|
|
(290
|
)
|
|
|
257
|
|
Balance at end of period
|
|
|
1,868
|
|
|
|
1,384
|
|
|
|
1,846
|
|
Non-current portion of warranty reserve
|
|
|
821
|
|
|
|
389
|
|
|
|
601
|
|
Current portion of warranty reserve
|
|
$
|
1,047
|
|
|
$
|
995
|
|
|
$
|
1,245
|
|
NOTE 9. BORROWINGS
Notes Payable.
We have a ten year loan agreement with the Community Redevelopment Agency of the City of Union City (“the Agency”) whereby the Agency provides us with an unsecured loan of up to $1.0 million, primarily to purchase capital equipment. The loan was effective January 2011, bears interest at 5.0% and is payable quarterly. As of March 31, 2014, our short-term and long-term notes payable balances were $100,000 and $581,000, respectively, and we recorded the short-term balance in “Other accrued liabilities” on the consolidated balance sheets. The entire outstanding balance of the note is payable in full on the earlier of: (i) December 2020, or (ii) the date Abaxis ceases operations in Union City, California. The Agency also has the right to accelerate the maturity date and declare all balances immediately due and payable upon the event of default as defined in the loan agreement. We evaluate covenants in our loan agreement on a quarterly basis, and we were in compliance with such covenants as of March 31, 2014.
In accordance with the terms of the loan agreement, the Agency will provide Abaxis with an annual credit that can be applied against the accrued interest and outstanding principal balance on a quarterly basis. The Agency determines the annual credit based on certain taxes paid by Abaxis to the City of Union City, California for a specified period, as defined in the loan agreement. We anticipate that our annual credits from the Agency will be used to fully repay our notes payable due to the Agency. We may carry forward unused quarterly credits to apply against our outstanding balance in a future period. Credits applied to repay our notes payable and accrued interest are recorded in “Interest and other income (expense), net” on the consolidated statements of income.
NOTE 10. COMMITMENTS AND CONTINGENCIES
Leases
As of March 31, 2014, our contractual obligations for our operating lease obligations for succeeding years are as follows (in thousands):
|
|
Payments Due by Period
|
|
|
|
|
|
|
Due in Fiscal
|
|
|
|
Total
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Thereafter
|
|
Operating lease obligations
|
|
$
|
14,821
|
|
|
$
|
2,049
|
|
|
$
|
2,163
|
|
|
$
|
2,034
|
|
|
$
|
1,855
|
|
|
$
|
1,852
|
|
|
$
|
4,868
|
|
Our operating lease obligations were comprised of our principal facility and various leased facilities and equipment under operating lease agreements, which expire on various dates from fiscal 2015 through fiscal 2025. Our principal facilities located in Union City, California is under a non-cancelable operating lease agreement, which expires in fiscal 2021. The monthly rental payments on principal facilities lease increase based on a predetermined schedule and accordingly, we recognize rent expense on a straight-line basis over the life of the lease. Rent expense under operating leases was $2.1 million, $2.1 million and $2.0 million for fiscal 2014, 2013 and 2012, respectively.
Commitments
We have purchase commitments, comprising of supply and inventory related agreements, totaling approximately $11.7 million as of March 31, 2014. These purchase order commitments include our purchase obligations with SMB of Denmark to purchase VS
pro
specialty analyzers and related cartridges through calendar year 2016 under our amended agreement effective January 2014 and Diatron of Hungary to purchase Diatron hematology instruments under our current agreement through fiscal year 2015.
Patent Licensing Agreement.
Effective January 2009, we entered into a license agreement with Alere. Under our license agreement, we licensed co-exclusively certain worldwide patent rights related to lateral flow immunoassay technology in the field of animal health diagnostics in the professional marketplace. The license agreement provides that Alere shall not grant any future rights to any third parties under its current lateral flow patent rights in the animal health diagnostics field in the professional marketplace. The license agreement enables us to develop and market products under rights from Alere to address animal health and laboratory animal research markets.
In exchange for the license rights, we (i) paid an up-front license fee of $5.0 million to Alere in January 2009, (ii) agreed to pay royalties during the term of the agreement, based solely on sales of products in a jurisdiction country covered by valid and unexpired claims in that jurisdiction under the licensed Alere patent rights, and (iii) agreed to pay a yearly minimum license fee of between $500,000 to $1.0 million per year, which fee will be creditable against any royalties due during such calendar year. The royalties, if any, are payable through the date of the expiration of the last valid patent licensed under the agreement that includes at least one claim in a jurisdiction covering products we sell in that jurisdiction. The yearly minimum fees are payable for so long as we desire to maintain exclusivity under the agreement.
Litigation
On June 28, 2010, we filed a patent infringement lawsuit against Cepheid. On September 24, 2012, the parties agreed to terminate all pending and future claims connected with the litigation in exchange for a one-time payment by Cepheid of $17.3 million, which we recognized as an offset to operating expenses during the second quarter of fiscal 2013.
On October 1, 2012, St. Louis Police Retirement System, a purported shareholder of Abaxis, filed a lawsuit against certain officers and each of the directors of the Company in the United States District Court for the Northern District of California alleging, among other things, that the directors violated Section 14(a) of the Securities Exchange Act of 1934 and breached their fiduciary duties by allegedly failing to disclose material information in our 2010 proxy statement, breached their fiduciary duties by allegedly violating the terms of our 2005 Equity Incentive Plan, and breached their fiduciary duties by failing to disclose alleged material information in our 2012 proxy statement regarding (1) the events leading up to our proposal to amend the 2005 Equity Incentive Plan to eliminate the limit on the number of shares that may be issued pursuant to restricted stock units, and (2) the effects of the proposed amendment on certain settled and outstanding restricted stock units. The plaintiff seeks, among other things, damages, disgorgement and attorney’s fees. In addition, the plaintiff sought, and on October 23, 2012, the court issued, an order preliminarily enjoining our shareholder vote on Proposal 2 in our 2012 proxy statement, regarding an amendment to the 2005 Equity Incentive Plan, until such time as additional disclosures could be made. We filed with the SEC and mailed to shareholders supplemental proxy materials approved by the court, the injunction was lifted and our shareholders approved the proposal to amend our 2005 Equity Incentive Plan. A hearing on defendants’ motion to dismiss the claims was held on May 7, 2013.
On October 1, 2013, before the court ruled on the motions to dismiss, the parties notified the court that they had reached a settlement of the lawsuit. On January 16, 2014, the parties entered into a Stipulation of Settlement, and the following day, the plaintiff filed a motion for preliminary approval. On April 15, 2014, the court issued an order granting preliminary approval of the settlement. The parties have agreed, subject to court approval, that the claims against the defendants will be dismissed with prejudice and will be granted the release of certain known or unknown claims that have been or could have been brought later in the court arising out of the same allegations. We have agreed that if the proposed settlement terms are approved by the court, we will adopt certain corporate governance measures, such measures to be in effect for at least five years. The plaintiff has petitioned the court for an attorney’s fee award of $1.7 million. The court has scheduled a hearing for June 17, 2014, at which time it will consider whether to grant final approval of the settlement and whether to grant plaintiff’s petition for an attorney’s fee award. The settlement is not contingent on the payment of any attorney’s fee award. We believe that any attorney’s fees that would be awarded to plaintiff’s counsel would not have a material adverse effect on Abaxis, our consolidated financial position or our results of operations.
We are involved from time to time in various litigation matters in the normal course of business. There can be no assurance that existing or future legal proceedings arising in the ordinary course of business or otherwise will not have a material adverse effect on our business, consolidated financial position, results of operations or cash flows.
NOTE 11. EMPLOYEE BENEFIT PLAN
We have established the
Abaxis 401(k) Plan (the “401(k) Plan”), a tax deferred savings plan, for the benefit of qualified employees. The 401(k) Plan is designed to provide employees with an accumulation of funds at retirement. Qualified employees may elect to have salary reduction contributions made to the plan on a bi-weekly basis. We may make quarterly contributions to the plan at the discretion of our Board of Directors either in cash or in common stock. Our matching contributions to the tax deferred savings plan totaled
$297,000, $608,000 and $422,000 in fiscal 2014, 2013 and 2012, respectively. In fiscal 2014, 2013 and 2012, our matching contributions were made in cash. We did not have any matching contributions in the form of common stock in fiscal 2014, 2013 and 2012.
NOTE 12. EQUITY COMPENSATION PLANS AND SHARE-BASED COMPENSATION
Equity Compensation Plans
Our share-based compensation plans are described below.
2005 Equity Incentive Plan.
Our 2005 Equity Incentive Plan (the “Equity Incentive Plan”) restated and amended our 1998 Stock Option Plan. The Equity Incentive Plan allows for the awards of stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance cash awards, performance shares, performance units, deferred compensation awards or other share-based awards to employees, directors and consultants. As of March 31, 2014, the Equity Incentive Plan provided for the issuance of a maximum of 6,786,000 shares, of which 1,018,000 shares of common stock were then available for future issuance. Shares that are canceled or forfeited from an award and shares withheld in satisfaction of tax withholding obligations are again available for issue under the Equity Incentive Plan.
1992 Outside Directors’ Stock Option Plan.
Under our 1992 Outside Directors’ Stock Option Plan (the “Directors Plan”), options to purchase shares of common stock were automatically granted, annually, to non-employee directors. Options under the Directors Plan were nonqualified stock options and were granted at the fair market value on the date of grant and expired ten years from the date of grant. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. Additionally, no shares of common stock were available for future issuance because the time period for granting options expired in June 2002 in accordance with the terms of the Directors Plan. The Directors Plan provided for the issuance of a maximum of 250,000 shares. During fiscal 2012, the remaining stock options outstanding granted under the Directors Plan were exercised and as of March 31, 2014, there were no stock options outstanding under the Directors Plan.
Our current practice is to issue new shares of common stock from our authorized shares for share-based awards upon the exercise of stock options or vesting of restricted stock units.
Share-Based Compensation
The following table summarizes total share-based compensation expense, net of tax, related to restricted stock units for fiscal 2014, 2013 and 2012, which is included in our consolidated statements of income (in thousands, except per share data):
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Cost of revenues
|
|
$
|
1,105
|
|
|
$
|
921
|
|
|
$
|
918
|
|
Research and development
|
|
|
1,138
|
|
|
|
1,150
|
|
|
|
866
|
|
Sales and marketing
|
|
|
2,146
|
|
|
|
2,506
|
|
|
|
1,877
|
|
General and administrative
|
|
|
3,254
|
|
|
|
2,509
|
|
|
|
2,022
|
|
Share-based compensation expense before income taxes
|
|
|
7,643
|
|
|
|
7,086
|
|
|
|
5,683
|
|
Income tax benefit
|
|
|
(2,605
|
)
|
|
|
(2,557
|
)
|
|
|
(2,001
|
)
|
Total share-based compensation expense after income taxes
|
|
$
|
5,038
|
|
|
$
|
4,529
|
|
|
$
|
3,682
|
|
Net impact of share-based compensation on:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.23
|
|
|
$
|
0.21
|
|
|
$
|
0.17
|
|
Diluted net income per share
|
|
$
|
0.22
|
|
|
$
|
0.20
|
|
|
$
|
0.16
|
|
Share-based compensation has been classified in the consolidated statements of income or capitalized on the consolidated balance sheets in the same manner as cash compensation paid to employees. Capitalized share-based compensation costs at March 31, 2014, 2013 and 2012 were $137,000, $151,000 and $139,000, respectively, which were included in inventories on our consolidated balance sheets.
Cash Flow Impact
The accounting standard with respect to share-based payment requires cash flows resulting from excess tax benefits to be classified as a part of cash flows from financing activities. Excess tax benefits are realized tax benefits from tax deductions for exercised stock options and vested restricted stock units in excess of the deferred tax asset attributable to share-based compensation expense for such share-based awards. Excess tax benefits are considered realized when the tax deductions reduce taxes that otherwise would be payable. Excess tax benefits classified as a financing cash inflow for fiscal 2014, 2013 and 2012 were $2.2 million, $2.7 million and $862,000, respectively.
Stock Options
Prior to fiscal 2007, we granted stock option awards to employees and directors as part of our share-based compensation program. Option awards to consultants were insignificant. Options granted to employees and directors generally expire ten years from the grant date. Options granted to employees generally become exercisable over a period of four years based on cliff-vesting terms and continuous employment. Options granted to non-employee directors generally become exercisable over a period of one year based on monthly vesting terms and continuous service. We have not granted any stock options since the beginning of fiscal 2007. We have recognized compensation expense for stock options granted during the requisite service period of the stock option. As of March 31, 2014, we had no unrecognized compensation expense related to stock options granted.
Stock Option Activity
Stock option activity under all stock plans is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(406,000 shares exercisable at a weighted average exercise price of $12.10 per share)
|
|
|
406,000
|
|
|
$
|
12.10
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(122,000
|
)
|
|
|
5.04
|
|
|
|
|
|
|
|
|
|
Canceled or forfeited
|
|
|
(2,000
|
)
|
|
|
5.31
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(282,000 shares exercisable at a weighted average exercise price of $15.21 per share)
|
|
|
282,000
|
|
|
|
15.21
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(210,000
|
)
|
|
|
13.38
|
|
|
|
|
|
|
|
|
|
Canceled or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(72,000 shares exercisable at a weighted average exercise price of $20.50 per share)
|
|
|
72,000
|
|
|
|
20.50
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(70,000
|
)
|
|
|
20.74
|
|
|
|
|
|
|
|
|
|
Canceled or forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
2,000
|
|
|
$
|
13.24
|
|
|
|
0.81
|
|
|
$
|
59
|
|
Vested and expected to vest at March 31, 2014
|
|
|
2,000
|
|
|
$
|
13.24
|
|
|
|
0.81
|
|
|
$
|
59
|
|
Exercisable at March 31, 2014
|
|
|
2,000
|
|
|
$
|
13.24
|
|
|
|
0.81
|
|
|
$
|
59
|
|
The aggregate intrinsic value in the table above represents the pre-tax intrinsic value, based on our closing stock price as of March 31, 2014, that would have been received by the option holders had all option holders exercised their stock options as of that date. Total intrinsic value of stock options exercised during fiscal 2014, 2013 and 2012 was $1.2 million, $5.5 million and $2.5 million, respectively. Cash proceeds from stock options exercised during fiscal 2014, 2013 and 2012 were $1.5 million, $2.8 million and $615,000, respectively.
The following table summarizes information regarding stock options outstanding and stock options exercisable at March 31, 2014:
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
Range of Exercise Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11.05
|
|
-
|
|
|
$
|
11.05
|
|
|
|
500
|
|
|
|
0.93
|
|
|
$
|
11.05
|
|
|
|
500
|
|
|
$
|
11.05
|
|
|
$
|
12.99
|
|
-
|
|
|
$
|
19.45
|
|
|
|
1,500
|
|
|
|
0.78
|
|
|
|
13.71
|
|
|
|
1,500
|
|
|
|
13.71
|
|
|
$
|
11.05
|
|
-
|
|
|
$
|
19.45
|
|
|
|
2,000
|
|
|
|
0.81
|
|
|
|
13.24
|
|
|
|
2,000
|
|
|
|
13.24
|
|
Restricted Stock Units
Since fiscal 2007, we have granted restricted stock unit awards to employees and directors as part of our share-based compensation program. Restricted stock unit awards to consultants have been insignificant. Awards of restricted stock units are issued at no cost to the recipient and may have time-based vesting criteria, or a combination of time-based and performance-based vesting criteria, as described below. From time to time, restricted stock unit awards granted to employees may be subject to accelerated vesting upon achieving certain performance-based milestones. Additionally, the Compensation Committee of our Board of Directors (the “Compensation Committee”) in its discretion, may provide in the event of a change in control for the acceleration of vesting and/or settlement of the restricted stock unit held by a participant upon such conditions and to such extent as determined by the Compensation Committee. Our Board of Directors has adopted an executive change in control severance plan, which it may terminate or amend at any time, that provides that awards granted to executive officers will accelerate fully on a change of control. The vesting of non-employee director and officer awards granted under the Equity Incentive Plan automatically will also accelerate in full upon a change in control.
Restricted Stock Unit Awards (Time Vesting)
Restricted stock unit awards with only time-based vesting terms, which we refer to as restricted stock unit awards (time vesting), entitle holders to receive shares of common stock at the end of a specified period of time. For restricted stock unit awards (time vesting), vesting is based on continuous employment or service of the holder. Upon vesting, the equivalent number of common shares are typically issued net of tax withholdings. If the service vesting conditions are not met, unvested restricted stock unit awards (time vesting) will be forfeited. Generally, restricted stock unit awards (time vesting) vest according to one of the following time-based vesting schedules:
·
|
Restricted stock unit awards to employees: Four-year time-based vesting as follows: five percent vesting after the first year; additional ten percent after the second year; additional 15 percent after the third year; and the remaining 70 percent after the fourth year of continuous employment with the Company.
|
·
|
Restricted stock unit awards to non-employee directors: 100 percent vesting after one year of continuous service to the Company.
|
The fair value of restricted stock unit awards (time vesting) used in our expense recognition method is measured based on the number of shares granted and the closing market price of our common stock on the date of grant. Such value is recognized as an expense over the corresponding requisite service period. The share-based compensation expense is reduced for an estimate of the restricted stock unit awards that are expected to be forfeited. The forfeiture estimate is based on historical data and other factors, and compensation expense is adjusted for actual results. As of March 31, 2014, the total unrecognized compensation expense related to restricted stock unit awards (time vesting) granted amounted to $17.3 million, which is expected to be recognized over a weighted average service period of 1.5 years.
Restricted Stock Unit Awards (Performance Vesting)
We also began granting restricted stock unit awards subject to performance vesting criteria, which we refer to as restricted stock unit awards (performance vesting), to our executive officers starting in fiscal 2013. Restricted stock unit awards (performance vesting) consist of the right to receive shares of common stock, subject to achievement of time-based criteria and certain corporate performance-related goals over a specified period, as established by the Compensation Committee. For restricted stock units subject to performance vesting, we
recognize any related share-based compensation expense ratably over the service period based on the most probable outcome of the performance condition. The fair value of our restricted stock unit awards (performance vesting) used in our expense recognition method is measured based on the number of shares granted, the closing market price of our common stock on the date of grant and an estimate of the probability of the achievement of the performance goals. The amount of share-based compensation expense recognized in any one period can vary based on the attainment or expected attainment of the performance goals. If such performance goals are not ultimately met, no compensation expense is recognized and any previously recognized compensation expense is reversed.
Fiscal 2013 Performance RSUs.
In April 2012, the Compensation Committee approved the grant of restricted stock unit awards (performance vesting) for 84,000 shares of common stock to our executive officers
that contained both time-based and performance-based vesting terms
(the “FY2013 Performance RSUs”). The FY2013 Performance RSUs were subject to vesting in four equal annual increments based upon: (1) achievement of certain pre-established corporate annual performance-related goals, as established by the Compensation Committee; and (2) the grantee’s
satisfaction of
service requirements through the vesting period. The annual financial performance goals were established at the beginning of each performance period and, accordingly, the portion (or “tranche”) of the FY2013 Performance RSU subject to each goal is treated as a separate grant for accounting purposes. The number of vested restricted stock unit awards (performance vesting) is determined at the end of each annual performance period.
The fiscal 2013 performance target for the FY2013 Performance RSUs
was established at the grant date following ASC 718-10-55-95 and the aggregate estimated grant date fair value of the FY2013 Performance RSUs was $752,000, or $35.62 per share, based on the closing market price of our common stock on the date of grant. Only the target for fiscal 2013 performance for the first tranche was set in April 2012, and accordingly, only 25% of the FY2013 Performance RSUs were deemed granted in fiscal 2013 in accordance with ASC 718-10-55-95. In April 2013, in consideration of the grant of the FY2014 Performance RSUs described below, the remaining 75% of the FY2013 Performance RSUs
, which consisted of the
second, third and fourth tranches, were cancelled. As a result, these restricted stock units are no longer outstanding. The remaining 75% of the FY2013 Performance RSUs were not deemed granted for accounting purposes because each annual performance target was to be set at the start of each respective single-fiscal year performance period in accordance with ASC 718-10-55-95.
On April 29, 2013, 21,000 shares subject to the FY2013 Performance RSUs
were issued to our executive officers as a result of achieving performance-related goals for the fiscal year ended March 31, 2013.
We fully recognized compensation expense for the FY2013 Performance RSUs during the requisite service period in fiscal 2013. As of March 31, 2014,
we had no unrecognized compensation expenses related to FY2013 Performance RSUs.
Fiscal 2014 Performance RSUs.
In April 2013, the Compensation Committee approved the grant of restricted stock unit awards (performance vesting) for 129,000 shares of common stock to our executive officers that also contained both time-based and performance-based vesting terms (the “FY2014 Performance RSUs”). The aggregate estimated grant date fair value of the FY2014 Performance RSUs was $5.5 million, or $42.43 per share, based on the closing market price of our common stock on the date of grant. The FY2014 Performance RSUs vest only if both of the following criteria are satisfied: (1) our consolidated income from operations for the fiscal year ending March 31, 2014, as certified by the Compensation Committee, is in excess of the applicable target amount described below; and (2) the recipient remains in the Service of the Company (as defined in our Equity Incentive Plan) until the applicable vesting date set forth as follows:
·
|
25% shares issuable upon settlement of FY2014 Performance RSUs upon satisfying 90% of target of consolidated income from operations for the year ending March 31, 2014 and time-based vesting on April 29, 2016;
|
·
|
25% shares issuable upon settlement of FY2014 Performance RSUs upon satisfying 90% of target of consolidated income from operations for the year ending March 31, 2014 and time-based vesting on April 29, 2017;
|
·
|
25% shares issuable upon settlement of FY2014 Performance RSUs upon satisfying 100% of target of consolidated income from operations for the year ending March 31, 2014 and time-based vesting on April 29, 2016; and
|
·
|
25% shares issuable upon settlement of FY2014 Performance RSUs upon satisfying 100% of target of consolidated income from operations for the year ending March 31, 2014 and time-based vesting on April 29, 2017.
|
As of March 31, 2014, we reviewed each of the underlying performance targets related to the outstanding FY2014 Performance RSUs and determined that it was not probable that the FY2014 Performance RSUs will vest and did not record share-based
compensation related to these awards during fiscal 2014.
On April 23, 2014, the Compensation Committee determined that the Company’s consolidated income from operations for fiscal 2014 was below 90% of target and, accordingly, the FY2014 Performance RSUs did not vest and were cancelled.
Fiscal 2015 Performance RSUs.
In April 2014, the Compensation Committee approved the grant of restricted stock unit awards (performance vesting) for 172,000 shares of common stock to our executive officers that also contained both time-based and performance-based vesting terms (the “FY2015 Performance RSUs”). The aggregate estimated grant date fair value of the FY2015 Performance RSUs was $7.0 million, or $40.82 per share, based on the closing market price of our common stock on the date of grant. The FY2015 Performance RSUs vest only if both of the following criteria are satisfied: (1) our consolidated income from operations for the fiscal year ending March 31, 2015, as certified by the Compensation Committee, is in excess of the applicable target amount described below; and (2) the recipient remains in the Service of the Company (as defined in our Equity Incentive Plan) until the applicable vesting date set forth as follows:
·
|
25% shares issuable upon settlement of FY2015 Performance RSUs upon satisfying 90% of target of consolidated income from operations for the year ending March 31, 2015 and time-based vesting on April 28, 2017;
|
·
|
25% shares issuable upon settlement of FY2015 Performance RSUs upon satisfying 90% of target of consolidated income from operations for the year ending March 31, 2015 and time-based vesting on April 28, 2018;
|
·
|
25% shares issuable upon settlement of FY2015 Performance RSUs upon satisfying 100% of target of consolidated income from operations for the year ending March 31, 2015 and time-based vesting on April 28, 2017; and
|
·
|
25% shares issuable upon settlement of FY2015 Performance RSUs upon satisfying 100% of target of consolidated income from operations for the year ending March 31, 2015 and time-based vesting on April 28, 2018.
|
Restricted Stock Unit Activity
The following table summarizes restricted stock unit activity during fiscal 2014, 2013 and 2012:
|
|
Time-Based Restricted
Stock Units
|
|
|
Performance-Based Restricted
Stock Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested at March 31, 2011
|
|
|
940,000
|
|
|
$
|
22.09
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
436,000
|
|
|
|
27.25
|
|
|
|
-
|
|
|
|
-
|
|
Vested(3)
|
|
|
(237,000
|
)
|
|
|
22.12
|
|
|
|
-
|
|
|
|
-
|
|
Canceled or forfeited
|
|
|
(19,000
|
)
|
|
|
24.03
|
|
|
|
-
|
|
|
|
-
|
|
Unvested at March 31, 2012
|
|
|
1,120,000
|
|
|
$
|
24.06
|
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
192,000
|
|
|
|
36.30
|
|
|
|
21,000
|
|
|
|
35.62
|
|
Vested(3)
|
|
|
(257,000
|
)
|
|
|
23.40
|
|
|
|
-
|
|
|
|
-
|
|
Canceled or forfeited
|
|
|
(75,000
|
)
|
|
|
26.78
|
|
|
|
-
|
|
|
|
-
|
|
Unvested at March 31, 2013
|
|
|
980,000
|
|
|
$
|
26.42
|
|
|
|
21,000
|
|
|
$
|
35.62
|
|
Granted
|
|
|
175,000
|
|
|
|
41.29
|
|
|
|
129,000
|
|
|
|
42.43
|
|
Vested(3)
|
|
|
(295,000
|
)
|
|
|
21.73
|
|
|
|
(21,000
|
)
|
|
|
35.62
|
|
Canceled or forfeited
|
|
|
(86,000
|
)
|
|
|
31.61
|
|
|
|
(16,000
|
)
|
|
|
42.43
|
|
Unvested at March 31, 2014
|
|
|
774,000
|
|
|
$
|
30.98
|
|
|
|
113,000
|
|
|
$
|
42.43
|
|
(1)
|
The weighted average grant date fair value of restricted stock units is based on the number of shares and the closing market price of our common stock on the date of grant.
|
(2)
|
The shares granted during fiscal 2013 and unvested at March 31, 2013 related to FY2013 Performance RSUs do not include the awards approved by the Compensation Committee during the fiscal year 2013 that were deemed not to have been granted in accordance with ASC 718‑10‑55‑95.
|
(3)
|
The number of restricted stock units vested includes shares that we withheld on behalf of our employees to satisfy the statutory tax withholding requirements.
|
Total intrinsic value of restricted stock units vested during fiscal 2014, 2013 and 2012 was $13.2 million, $9.1 million and $6.6 million, respectively. The total grant date fair value of restricted stock units vested during fiscal 2014, 2013 and 2012 was $7.2 million, $6.0 million and $5.2 million, respectively.
NOTE 13. SHAREHOLDERS’ EQUITY
Share Repurchase Program
Between August 2011 and January 2012, our Board of Directors authorized the repurchase of up to a total of $55.0 million of our common stock. In July 2013, our Board of Directors approved a $12.3 million increase to our existing share repurchase program to a total of $67.3 million. As of March 31, 2014, $37.0 million was available to purchase common stock under our share repurchase program.
Since the share repurchase program began, through March 31, 2014, we have repurchased 1.3 million shares of our common stock at a total cost of $30.3 million, including commission expense. During fiscal 2014, we repurchased 86,000 shares at a total cost of $3.0 million and an average per share cost including commission expense of $34.58. During fiscal 2013, we did not repurchase any shares of our common stock. During fiscal 2012, we repurchased 1.2 million shares of our common stock at a total cost of $27.3 million and an average per share cost including commission of $23.41. The repurchases are made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. Repurchased shares are retired.
Stock Purchase Rights
On April 22, 2003, our Board of Directors approved the adoption of a Shareholder Rights Plan. Under the terms of the plan, shareholders of record on May 8, 2003, received one preferred stock purchase right for each outstanding share of common stock held. Each right entitled the registered holder to purchase from us one one-thousandth of a share of our Series RP Preferred Stock, $0.001 par value, at a price of $24.00 per share and would have become exercisable if a person or group acquired 15% or more of our common stock without prior approval by the Board of Directors.
In addition, under certain conditions involving an acquisition or proposed acquisition, the rights permitted the holders (other than the acquirer) to purchase our common stock at a 50% discount from the market price at that time, and in the event of certain business combinations, the rights permitted the purchase of the common stock of an acquirer at a 50% discount from the market price at that time. Under certain conditions, the purchase rights would have been redeemed by the Company in whole, but not in part, at a price of $0.001 per right. The rights had no voting privileges and were attached to and automatically traded with our common stock.
The Shareholder Rights Plan and rights granted thereunder expired in April 2013.
Dividend Payments
In December 2012, the Company declared a special cash dividend of $1.00 per share on our outstanding common stock, payable on December 28, 2012 to shareholders of record as of the close of business on December 17, 2012. The total dividend payout was $22.0 million and was made from retained earnings.
Common Stock Warrants
At March 31, 2014, there were warrants to purchase 30,000 shares of common stock outstanding, of which 20,000 shares were vested, at a weighted average exercise price of $3.00 per share, expiring in fiscal years 2016 through 2017. At March 31, 2013, there were 30,000 warrants outstanding, of which 14,000 shares were vested, to purchase common stock at a weighted average exercise price of $3.00 per share, expiring in fiscal years 2016 through 2017. At March 31, 2012, there were 30,000 warrants outstanding, of which 8,000 shares were vested, to purchase common stock at a weighted average exercise price of $3.00 per share, expiring in fiscal years 2016 through 2017. The fair value of the warrants issued were determined using the Black-Scholes option-pricing model and are amortized over their estimated useful life, of approximately ten years, as an intangible asset. The warrants vest at a rate of 20% annually from their issuance dates and have a term of five years.
NOTE 14. NET INCOME PER SHARE
The following is a reconciliation of the weighted average number of common shares outstanding used in calculating basic and diluted net income per share (in thousands, except share and per share data):
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
14,185
|
|
|
$
|
27,459
|
|
|
$
|
13,091
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
22,270,000
|
|
|
|
21,946,000
|
|
|
|
22,084,000
|
|
Weighted average effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
20,000
|
|
|
|
89,000
|
|
|
|
130,000
|
|
Restricted stock units
|
|
|
257,000
|
|
|
|
318,000
|
|
|
|
230,000
|
|
Warrants
|
|
|
28,000
|
|
|
|
28,000
|
|
|
|
18,000
|
|
Weighted average common shares outstanding - diluted
|
|
|
22,575,000
|
|
|
|
22,381,000
|
|
|
|
22,462,000
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.64
|
|
|
$
|
1.25
|
|
|
$
|
0.59
|
|
Diluted net income per share
|
|
$
|
0.63
|
|
|
$
|
1.23
|
|
|
$
|
0.58
|
|
Stock options and warrants are excluded from the computation of diluted weighted average shares outstanding if the exercise price of the stock options and warrants is greater than the average market price of our common stock during the period because the inclusion of these stock options and warrants would be antidilutive to net income per share. There were no stock options and warrants excluded from the computation of diluted weighted average shares outstanding during fiscal 2014, 2013 and 2012.
We excluded the following restricted stock units from the computation of diluted weighted average shares outstanding because the inclusion of these awards would be antidilutive to net income per share:
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Weighted average number of shares underlying antidilutive restricted stock units
|
|
|
5,000
|
|
|
|
2,000
|
|
|
|
267,000
|
|
If the performance criteria for our restricted stock unit awards (performance vesting) are achieved, these awards will be considered outstanding for the purpose of computing diluted net income per share if the effect is dilutive. Because the performance criteria for restricted stock unit awards (performance vesting) related to FY2014 Performance RSUs were not achieved during fiscal 2014, these awards were not included in the diluted net income per share calculation. The performance criteria for our restricted stock unit awards (performance vesting) related to FY 2013 Performance RSUs were achieved during fiscal 2013 and were included in the computation of diluted weighted average shares outstanding. There were no restricted stock unit awards (performance vesting) excluded from
the computation of diluted weighted average shares outstanding during fiscal 2013.
NOTE 15. INCOME TAXES
Income Tax Provision
The components of our income tax provision are summarized as follows (in thousands):
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
6,800
|
|
|
$
|
14,575
|
|
|
$
|
5,552
|
|
State
|
|
|
851
|
|
|
|
1,488
|
|
|
|
584
|
|
Foreign
|
|
|
892
|
|
|
|
174
|
|
|
|
267
|
|
Total current income tax provision
|
|
|
8,543
|
|
|
|
16,237
|
|
|
|
6,403
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(631
|
)
|
|
|
(1,219
|
)
|
|
|
790
|
|
State
|
|
|
(154
|
)
|
|
|
(88
|
)
|
|
|
(117
|
)
|
Total deferred income tax provision
|
|
|
(785
|
)
|
|
|
(1,307
|
)
|
|
|
673
|
|
Total income tax provision
|
|
$
|
7,758
|
|
|
$
|
14,930
|
|
|
$
|
7,076
|
|
The components of our income before income tax provision are summarized as follows (in thousands):
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
United States
|
|
$
|
19,319
|
|
|
$
|
41,743
|
|
|
$
|
19,403
|
|
Foreign
|
|
|
2,624
|
|
|
|
646
|
|
|
|
764
|
|
Income before income tax provision
|
|
$
|
21,943
|
|
|
$
|
42,389
|
|
|
$
|
20,167
|
|
The income tax provision differs from the amount computed by applying the federal statutory income tax rate (35 percent) to income before income tax provision as follows (in thousands):
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Income taxes at federal income tax rate
|
|
$
|
7,681
|
|
|
$
|
14,836
|
|
|
$
|
7,059
|
|
State income taxes, net of federal benefits
|
|
|
387
|
|
|
|
1,123
|
|
|
|
455
|
|
Non-deductible compensation
|
|
|
260
|
|
|
|
56
|
|
|
|
159
|
|
Research and development tax credits
|
|
|
(210
|
)
|
|
|
(541
|
)
|
|
|
(254
|
)
|
Tax-exempt interest income
|
|
|
(20
|
)
|
|
|
(32
|
)
|
|
|
(65
|
)
|
Qualified production activities income benefit
|
|
|
(490
|
)
|
|
|
(525
|
)
|
|
|
(306
|
)
|
Other
|
|
|
150
|
|
|
|
13
|
|
|
|
28
|
|
Total income tax provision
|
|
$
|
7,758
|
|
|
$
|
14,930
|
|
|
$
|
7,076
|
|
During fiscal 2014, 2013 and 2012, we recognized $2.2 million, $2.7 million and $842,000, respectively, of tax deductions related to share-based compensation in excess of recognized share-based compensation expense (“excess benefits”) which was recorded to shareholders’ equity. We record excess benefits to shareholders’ equity when the benefits result in a reduction in cash paid for income taxes.
Our policy is to reinvest earnings of our foreign subsidiary unless such earnings are subject to U.S. taxation. As of March 31, 2014, the cumulative earnings upon which U.S. income taxes has not been provided is approximately $543,000. The U.S. tax liability if the earnings were repatriated is $217,000.
Unrecognized Tax Benefits
During fiscal 2014, we did not recognize any interest and penalties related to unrecognized tax benefits. We file income tax returns in the U.S. federal jurisdiction, Germany and various state jurisdictions. The statute of limitations is three years for federal and four years for California. Our federal income tax returns are subject to examination for fiscal years 2011 through 2014. Our California income tax returns are subject to examination for fiscal years 2010 through 2014, with the exception of California tax credit carryovers. To the extent there is a research and development tax credit available for carryover to future years, the statute of limitations with respect to the tax credit begins in the year utilized. As a result of the timing for the utilization of California tax credit carryovers, our California research and development tax credits are subject to examination for fiscal years 2005 through 2014. We are subject to examination in Germany for fiscal years 2011 through 2014.
Deferred Tax Assets and Liabilities
The following table presents the breakdown between current and non-current net deferred tax assets (liabilities) (in thousands):
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Deferred tax assets, current
|
|
$
|
4,464
|
|
|
$
|
4,589
|
|
Deferred tax assets, non-current
|
|
|
1,557
|
|
|
|
643
|
|
Total net deferred tax assets
|
|
$
|
6,021
|
|
|
$
|
5,232
|
|
Significant components of our deferred tax assets (liabilities) are as follows (in thousands):
|
|
March 31,
|
|
|
|
2014
|
|
|
2013
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Research and development tax credit carryforwards
|
|
$
|
646
|
|
|
$
|
475
|
|
Capitalized research and development
|
|
|
136
|
|
|
|
167
|
|
Inventory reserves
|
|
|
622
|
|
|
|
601
|
|
Deferred revenue from extended maintenance agreements
|
|
|
1,940
|
|
|
|
1,834
|
|
Warranty reserves
|
|
|
704
|
|
|
|
524
|
|
Accrued payroll and other accrued expenses
|
|
|
1,269
|
|
|
|
1,266
|
|
Share-based compensation
|
|
|
2,129
|
|
|
|
2,145
|
|
Alternative minimum tax credits
|
|
|
24
|
|
|
|
24
|
|
Tax on deferred intercompany profit
|
|
|
742
|
|
|
|
1,120
|
|
Other
|
|
|
792
|
|
|
|
457
|
|
Total deferred tax assets
|
|
|
9,004
|
|
|
|
8,613
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(2,876
|
)
|
|
|
(3,257
|
)
|
Other
|
|
|
(107
|
)
|
|
|
(124
|
)
|
Total deferred tax liabilities
|
|
|
(2,983
|
)
|
|
|
(3,381
|
)
|
Net deferred tax assets
|
|
$
|
6,021
|
|
|
$
|
5,232
|
|
A valuation allowance against deferred tax assets is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. As of March 31, 2014, 2013 and 2012, we did not have a valuation allowance.
As of March 31, 2014, we had no federal or California net operating loss carryforwards. As of March 31, 2014, our California research and development tax credit carryforwards were $990,000. The California research and development tax credit will carryforward indefinitely.
NOTE 16. SEGMENT REPORTING INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by our chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance.
Abaxis develops, manufactures, markets and sells portable blood analysis systems for use in human or veterinary patient care setting to provide clinicians with rapid blood constituent measurements. We identify our reportable segments as those customer groups that represent more than 10% of our combined revenue or gross profit or loss of all reported operating segments. We manage our business on the basis of the following two reportable segments: (i) the medical market and (ii) the veterinary market, which are based on the products sold and services provided by market and customer group. For the products that we manufacture and sell, each reportable segment has similar manufacturing processes, technology and shared infrastructures. The accounting policies for segment reporting are the same as for the Company as a whole. We do not segregate assets by segments since our chief operating decision maker, or decision making group, does not use assets as a basis to evaluate a segment’s performance.
Medical Market
In the medical market reportable segment, we serve a worldwide customer group consisting of physicians’ office practices across multiple specialties, urgent care, outpatient and walk-in clinics (free-standing or hospital-connected), health screening operations, home care providers (national, regional or local), nursing homes, ambulance companies, oncology treatment clinics, dialysis centers, pharmacies, hospital laboratories, military installations (ships, field hospitals and mobile care units), pharmaceutical clinical trials and cruise ship lines. The products manufactured and sold in this segment primarily consist of Piccolo chemistry analyzers and medical reagent discs.
Veterinary Market
In the veterinary market reportable segment, we serve a worldwide customer group consisting of companion animal hospitals, animal clinics with mixed practices of small animals, birds and reptiles, equine and bovine practitioners, veterinary emergency clinics, veterinary referral hospitals, universities, government, pharmaceutical companies, biotechnology companies and private research laboratories. Our veterinary market product offerings include VetScan chemistry analyzers and veterinary reagent discs, VetScan hematology instruments and related reagent kits, VetScan VS
pro
specialty analyzers and related consumables, VetScan i
‑
STAT analyzers and related consumables and VetScan rapid tests. Since October 2011, our veterinary market services comprise of veterinary reference laboratory diagnostic and consulting services for veterinarians in the United States through Abaxis Veterinary Reference Laboratories (“AVRL”).
Total Revenues, Cost of Revenues and Gross Profit by Segment
The table below summarizes revenues, cost of revenues and gross profit from our two operating segments and from certain unallocated items for fiscal 2014, 2013 and 2012 (in thousands).
|
|
Year Ended March 31,
|
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Medical Market
|
|
$
|
28,134
|
|
|
$
|
31,643
|
|
|
$
|
30,404
|
|
Veterinary Market
|
|
|
140,698
|
|
|
|
150,510
|
|
|
|
122,253
|
|
Other(1)
|
|
|
3,038
|
|
|
|
3,872
|
|
|
|
3,939
|
|
Total revenues
|
|
|
171,870
|
|
|
|
186,025
|
|
|
|
156,596
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market
|
|
|
15,623
|
|
|
|
15,179
|
|
|
|
14,323
|
|
Veterinary Market
|
|
|
73,030
|
|
|
|
72,477
|
|
|
|
57,032
|
|
Other(1)
|
|
|
108
|
|
|
|
138
|
|
|
|
138
|
|
Total cost of revenues
|
|
|
88,761
|
|
|
|
87,794
|
|
|
|
71,493
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical Market
|
|
|
12,511
|
|
|
|
16,464
|
|
|
|
16,081
|
|
Veterinary Market
|
|
|
67,668
|
|
|
|
78,033
|
|
|
|
65,221
|
|
Other(1)
|
|
|
2,930
|
|
|
|
3,734
|
|
|
|
3,801
|
|
Gross profit
|
|
$
|
83,109
|
|
|
$
|
98,231
|
|
|
$
|
85,103
|
|
(1)
|
Represents unallocated items, not specifically identified to any particular business segment.
|
NOTE 17. REVENUES BY PRODUCT AND SERVICE CATEGORY AND GEOGRAPHIC REGION AND SIGNIFICANT CONCENTRATIONS
Revenue Information
The following is a summary of our revenues by product and service category (in thousands):
|
|
Year Ended March 31,
|
|
Revenues by Product and Service Category
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
Instruments(1)
|
|
$
|
37,539
|
|
|
$
|
46,034
|
|
|
$
|
35,150
|
|
Consumables(2)
|
|
|
117,533
|
|
|
|
127,481
|
|
|
|
113,810
|
|
Other products and services(3)
|
|
|
16,648
|
|
|
|
12,360
|
|
|
|
7,472
|
|
Product and service revenues, net
|
|
|
171,720
|
|
|
|
185,875
|
|
|
|
156,432
|
|
Development and licensing revenue
|
|
|
150
|
|
|
|
150
|
|
|
|
164
|
|
Total revenues
|
|
$
|
171,870
|
|
|
$
|
186,025
|
|
|
$
|
156,596
|
|
(1)
|
Instruments include chemistry analyzers, hematology instruments, VS
pro
specialty analyzers and i-STAT analyzers.
|
(2)
|
Consumables include reagent discs, hematology reagent kits, VS
pro
specialty cartridges, i-STAT cartridges and rapid tests.
|
(3)
|
Other products and services include veterinary reference laboratory diagnostic and consulting services.
|
The following is a summary of our revenues by geographic region based on customer location (in thousands):
|
|
Year Ended March 31,
|
|
Revenues by Geographic Region
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
North America
|
|
$
|
136,607
|
|
|
$
|
152,774
|
|
|
$
|
128,969
|
|
Europe
|
|
|
27,161
|
|
|
|
26,086
|
|
|
|
21,926
|
|
Asia Pacific and rest of the world
|
|
|
8,102
|
|
|
|
7,165
|
|
|
|
5,701
|
|
Total revenues
|
|
$
|
171,870
|
|
|
$
|
186,025
|
|
|
$
|
156,596
|
|
Significant Concentrations
During fiscal 2014 two distributors in the United States, MWI Veterinary Supply and Abbott Point of Care accounted for 18% and 10%, respectively, of our total worldwide revenues.
During fiscal 2013 one distributor in the United States, Animal Health International, accounted for 11% of our total worldwide revenues.
Substantially all of our long-lived assets are located in the United States.
NOTE 18. SUMMARY OF QUARTERLY DATA (UNAUDITED)
The following is a summary of unaudited quarterly data for fiscal 2014 and 2013 (in thousands, except per share data):
|
|
Quarter Ended
|
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
March 31
|
|
Fiscal Year Ended March 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
43,169
|
|
|
$
|
45,851
|
|
|
$
|
40,810
|
|
|
$
|
42,040
|
|
Gross profit
|
|
$
|
20,892
|
|
|
$
|
21,872
|
|
|
$
|
19,333
|
|
|
$
|
21,012
|
|
Income tax provision
|
|
$
|
1,811
|
|
|
$
|
2,210
|
|
|
$
|
1,636
|
|
|
$
|
2,101
|
|
Net income
|
|
$
|
3,229
|
|
|
$
|
3,996
|
|
|
$
|
3,222
|
|
|
$
|
3,738
|
|
Net income per share - basic
|
|
$
|
0.15
|
|
|
$
|
0.18
|
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
Net income per share - diluted
|
|
$
|
0.14
|
|
|
$
|
0.18
|
|
|
$
|
0.14
|
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
42,014
|
|
|
$
|
44,258
|
|
|
$
|
49,802
|
|
|
$
|
49,951
|
|
Gross profit
|
|
$
|
22,849
|
|
|
$
|
23,123
|
|
|
$
|
26,076
|
|
|
$
|
26,183
|
|
Income tax provision
|
|
$
|
1,699
|
|
|
$
|
8,012
|
|
|
$
|
2,996
|
|
|
$
|
2,223
|
|
Net income
|
|
$
|
2,864
|
|
|
$
|
12,909
|
|
|
$
|
4,988
|
|
|
$
|
6,698
|
|
Net income per share - basic
|
|
$
|
0.13
|
|
|
$
|
0.59
|
|
|
$
|
0.23
|
|
|
$
|
0.30
|
|
Net income per share - diluted
|
|
$
|
0.13
|
|
|
$
|
0.58
|
|
|
$
|
0.22
|
|
|
$
|
0.30
|
|
NOTE 19. SUBSEQUENT EVENTS
On April 23, 2014, our Board of Directors declared a quarterly dividend of $0.10 per share on our outstanding common stock to be paid on June 17, 2014 to all shareholders of record as of the close of business on June 3, 2014.