abmd-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended September 30, 2016

OR

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

For the transition period from                      to                      

Commission file number 001-09585

 

ABIOMED, INC.

(Exact name of registrant as specified in its charter)

 

 

DELAWARE

 

04-2743260

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

22 CHERRY HILL DRIVE

DANVERS, MASSACHUSETTS 01923

(Address of principal executive offices, including zip code)

(978) 646-1400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

  (Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of October 26, 2016, 43,380,993 shares of the registrant’s common stock, $.01 par value, were outstanding.

 

 

 

 


 

ABIOMED, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

 

 

 

Page

PART I - FINANCIAL INFORMATION:

 

 

 

 

 

 

Item 1.

Condensed Consolidated Financial Statements (unaudited)

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2016 and March 31, 2016

 

3

 

 

 

 

 

Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2016 and 2015

 

4

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended September 30, 2016 and 2015

 

5

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2016 and 2015

 

6

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

7

 

 

 

 

Item 2.

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

 

18

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

PART II - OTHER INFORMATION:

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

28

 

 

 

 

Item 1A.

Risk Factors

 

28

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

30

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

30

 

 

 

 

Item 4.

Mine Safety Disclosures

 

31

 

 

 

 

Item 5.

Other Information

 

31

 

 

 

 

Item 6.

Exhibits

 

32

 

 

 

 

SIGNATURES

 

34

 

 

NOTE REGARDING COMPANY REFERENCES

Throughout this report on Form 10-Q (the “Report”), “Abiomed, Inc.,” the “Company,” “we,” “us” and “our” refer to ABIOMED, Inc. and its consolidated subsidiaries.

 

NOTE REGARDING TRADEMARKS

ABIOMED, IMPELLA, IMPELLA CP and IMPELLA RP are trademarks of ABIOMED, Inc., and are registered in the U.S. and certain foreign countries. AB5000, IMPELLA 2.5, IMPELLA 5.0, IMPELLA LD and cVAD REGISTRY are trademarks of ABIOMED, Inc.  RECOVER is a trademark of Abiomed Europe GmbH, a subsidiary of ABIOMED, Inc., and is registered in certain foreign countries.

2


 

PART 1. FINANCIAL INFORMATION

ITEM 1:

FINANCIAL STATEMENTS

ABIOMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in thousands, except share data)

 

 

 

September 30, 2016

 

 

March 31, 2016

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,709

 

 

$

48,231

 

Short-term marketable securities

 

 

178,236

 

 

 

163,822

 

Accounts receivable, net

 

 

46,607

 

 

 

42,821

 

Inventories

 

 

31,491

 

 

 

26,740

 

Prepaid expenses and other current assets

 

 

8,827

 

 

 

6,778

 

Total current assets

 

 

319,870

 

 

 

288,392

 

Long-term marketable securities

 

 

4,004

 

 

 

1,000

 

Property and equipment, net

 

 

50,207

 

 

 

23,184

 

Goodwill

 

 

32,582

 

 

 

33,003

 

In-process research and development

 

 

15,199

 

 

 

15,396

 

Long-term deferred tax assets, net

 

 

48,614

 

 

 

58,534

 

Other assets

 

 

4,422

 

 

 

4,422

 

Total assets

 

$

474,898

 

 

$

423,931

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

14,066

 

 

$

9,381

 

Accrued expenses

 

 

28,013

 

 

 

28,382

 

Deferred revenue

 

 

9,103

 

 

 

8,778

 

Current portion of capital lease obligation

 

 

740

 

 

 

 

Total current liabilities

 

 

51,922

 

 

 

46,541

 

Other long-term liabilities

 

 

4

 

 

 

220

 

Contingent consideration

 

 

7,749

 

 

 

7,563

 

Long-term deferred tax liabilities

 

 

821

 

 

 

832

 

Capital lease obligation, net of current portion

 

 

15,961

 

 

 

 

Total liabilities

 

 

76,457

 

 

 

55,156

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Class B Preferred Stock, $.01 par value

 

 

 

 

 

 

Authorized - 1,000,000 shares; Issued and outstanding - none

 

 

 

 

 

 

 

 

Common stock, $.01 par value

 

 

433

 

 

 

426

 

Authorized - 100,000,000 shares; Issued - 44,905,284 shares at September 30, 2016 and 43,973,119 shares at March 31, 2016

 

 

 

 

 

 

 

 

Outstanding - 43,333,607 shares at September 30, 2016 and 42,596,228 shares at March 31, 2016

 

 

 

 

 

 

 

 

Additional paid in capital

 

 

536,859

 

 

 

508,624

 

Accumulated deficit

 

 

(77,290

)

 

 

(99,075

)

Treasury stock at cost - 1,571,677 shares at September 30, 2016 and 1,376,891 shares

at March 31, 2016

 

 

(46,266

)

 

 

(26,660

)

Accumulated other comprehensive loss

 

 

(15,295

)

 

 

(14,540

)

Total stockholders' equity

 

 

398,441

 

 

 

368,775

 

Total liabilities and stockholders' equity

 

$

474,898

 

 

$

423,931

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited)

 

 

3


 

ABIOMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product revenue

 

$

 

102,928

 

 

$

 

76,354

 

 

$

 

205,917

 

 

$

 

149,780

 

Funded research and development

 

 

 

27

 

 

 

 

5

 

 

 

 

33

 

 

 

 

11

 

 

 

 

 

102,955

 

 

 

 

76,359

 

 

 

 

205,950

 

 

 

 

149,791

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenue

 

 

 

17,309

 

 

 

 

12,144

 

 

 

 

32,379

 

 

 

 

23,012

 

Research and development

 

 

 

18,052

 

 

 

 

11,569

 

 

 

 

33,712

 

 

 

 

21,779

 

Selling, general and administrative

 

 

 

53,086

 

 

 

 

39,829

 

 

 

 

104,118

 

 

 

 

77,152

 

 

 

 

 

88,447

 

 

 

 

63,542

 

 

 

 

170,209

 

 

 

 

121,943

 

Income from operations

 

 

 

14,508

 

 

 

 

12,817

 

 

 

 

35,741

 

 

 

 

27,848

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment income, net

 

 

 

342

 

 

 

 

62

 

 

 

 

611

 

 

 

 

125

 

Other (expense) income, net

 

 

 

(114

)

 

 

 

87

 

 

 

 

(191

)

 

 

 

140

 

 

 

 

 

228

 

 

 

 

149

 

 

 

 

420

 

 

 

 

265

 

Income before income taxes

 

 

 

14,736

 

 

 

 

12,966

 

 

 

 

36,161

 

 

 

 

28,113

 

Income tax provision

 

 

 

5,861

 

 

 

 

5,231

 

 

 

 

14,376

 

 

 

 

11,519

 

Net income

 

$

 

8,875

 

 

$

 

7,735

 

 

$

 

21,785

 

 

$

 

16,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

 

0.21

 

 

$

 

0.18

 

 

$

 

0.51

 

 

$

 

0.40

 

Basic weighted average shares outstanding

 

 

 

43,129

 

 

 

 

42,228

 

 

 

 

42,971

 

 

 

 

41,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

$

 

0.20

 

 

$

 

0.17

 

 

$

 

0.49

 

 

$

 

0.37

 

Diluted weighted average shares outstanding

 

 

 

44,580

 

 

 

 

44,922

 

 

 

 

44,493

 

 

 

 

44,778

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited)

 

 

4


 

ABIOMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(in thousands)

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income

 

$

8,875

 

 

$

7,735

 

 

$

21,785

 

 

$

16,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation gains (losses)

 

 

812

 

 

 

710

 

 

 

(887

)

 

 

2,308

 

Net unrealized gains (losses) on marketable securities

 

 

(18

)

 

 

6

 

 

 

132

 

 

 

16

 

Other comprehensive income (loss)

 

 

794

 

 

 

716

 

 

 

(755

)

 

 

2,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

9,669

 

 

$

8,451

 

 

$

21,030

 

 

$

18,918

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited)

 

 

5


 

ABIOMED, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

For the Six Months Ended September 30,

 

 

 

2016

 

 

2015

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

21,785

 

 

$

16,594

 

Adjustments required to reconcile net income to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation expense

 

 

2,958

 

 

 

1,352

 

Bad debt expense

 

 

(13

)

 

 

(18

)

Stock-based compensation

 

 

18,047

 

 

 

15,592

 

Write-down of inventory

 

 

1,354

 

 

 

952

 

Excess tax benefit from stock-based awards

 

 

(3,631

)

 

 

(383

)

Deferred tax provision

 

 

9,777

 

 

 

10,803

 

Change in fair value of contingent consideration

 

 

186

 

 

 

307

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,807

)

 

 

(5,214

)

Inventories

 

 

(6,284

)

 

 

(6,855

)

Prepaid expenses and other assets

 

 

(2,029

)

 

 

456

 

Accounts payable

 

 

1,906

 

 

 

(1,817

)

Accrued expenses and other liabilities

 

 

3,157

 

 

 

(2,674

)

Deferred revenue

 

 

330

 

 

 

(239

)

Net cash provided by operating activities

 

 

43,736

 

 

 

28,856

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(134,235

)

 

 

(99,002

)

Proceeds from the sale and maturity of marketable securities

 

 

116,685

 

 

 

101,453

 

Purchase of other investment

 

 

 

 

 

(750

)

Purchases of property and equipment

 

 

(10,453

)

 

 

(3,419

)

Net cash used for investing activities

 

 

(28,003

)

 

 

(1,718

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from the exercise of stock options

 

 

5,764

 

 

 

7,971

 

Excess tax benefit from stock-based awards

 

 

3,631

 

 

 

383

 

Taxes paid related to net share settlement of vesting of stock awards

 

 

(19,608

)

 

 

(3,810

)

Proceeds from the issuance of stock under employee stock purchase plan

 

 

769

 

 

 

451

 

Principal payments on capital lease obligation

 

 

(83

)

 

 

 

Net cash (used for) provided by financing activities

 

 

(9,527

)

 

 

4,995

 

Effect of exchange rate changes on cash

 

 

272

 

 

 

(113

)

Net increase in cash and cash equivalents

 

 

6,478

 

 

 

32,020

 

Cash and cash equivalents at beginning of period

 

 

48,231

 

 

 

22,401

 

Cash and cash equivalents at end of period

 

$

54,709

 

 

$

54,421

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

560

 

 

$

576

 

Cash paid for interest on capital lease obligation

 

 

89

 

 

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment under capital lease obligation

 

 

16,784

 

 

 

 

Property and equipment in accounts payable and accrued expenses

 

 

3,810

 

 

 

396

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements (unaudited)

 

 

6


 

ABIOMED, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In thousands, except share data)

 

 

Note 1. Nature of Business and Basis of Preparation

Abiomed, Inc. (the “Company” or “Abiomed”) is a provider of mechanical circulatory support devices and offers a continuum of care to heart failure patients. The Company develops, manufactures and markets proprietary products that are designed to enable the heart to rest, heal and recover by improving blood flow and/or performing the pumping function of the heart. The Company’s products are used in the cardiac catheterization lab, or cath lab, by interventional cardiologists and in the heart surgery suite by heart surgeons for patients who are in need of hemodynamic support prophylactically or emergently before, during or after angioplasty or heart surgery procedures.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial reporting and in accordance with Article 10 of Regulation S-X. Accordingly, they do not include all of the information and note disclosures required by GAAP for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 that has been filed with the Securities and Exchange Commission (the “SEC”).

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature and are necessary for a fair presentation of results for the interim periods presented. The results of operations for any interim period may not be indicative of results for the full fiscal year or any other subsequent period.

There have been no changes in the Company’s significant accounting policies for the three and six months ended September 30, 2016 as compared to the significant accounting policies described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2016 that has been filed with the SEC, except as follows:

Leases

Lease agreements are evaluated to determine whether they are capital or operating leases in accordance with ASC 840, Leases. When any one of the four test criteria in ASC 840 is met, the lease then qualifies as a capital lease. Capital leases are capitalized at the lower of the net present value of the total amount payable under the leasing agreement (excluding finance charges) or the fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis, over a period consistent with the Company’s normal depreciation policy for tangible fixed assets. Interest charges are expensed over the period of the term of the capital lease obligation in relation to the carrying value of the capital lease.

Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of each lease term.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers to provide updated guidance on revenue recognition. ASU 2014-09 requires a company to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies may need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 will become effective for the Company beginning in fiscal 2019 under either full or modified retrospective adoption, with early adoption permitted as of the original effective date of ASU 2014-09.  The Company is currently evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which applies to inventory that is measured using first-in, first-out or average cost methods. Under the updated guidance, an entity should measure inventory that is within scope at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Subsequent measurement is unchanged for inventory that is measured using last-in, last-out. ASU-2015-11 is effective for annual and interim periods beginning after December 15,

7


 

2016, and should be applied prospectively with early adoption permitted at the beginning of an interim or annual reporting period. The Company does not expect the adoption of ASU 2015-11 to have a material impact on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. This guidance requires an entity to recognize lease liabilities and a right-of-use asset for all leases on the balance sheet and to disclose key information about the entity's leasing arrangements. ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period, with earlier adoption permitted. ASU 2016-02 must be adopted using a modified retrospective approach for all leases existing at, or entered into after the date of initial adoption, with an option to elect to use certain transition relief. The Company is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09,   Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements.

 

 

Note 2. Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income by the weighted average number of dilutive common shares outstanding during the period. Diluted shares outstanding are calculated by adding to the weighted average shares outstanding any potential dilutive securities outstanding for the period. Potential dilutive securities include stock options, restricted stock units, performance-based stock awards and shares to be purchased under the Company’s employee stock purchase plan. In periods when a net loss is reported, all common stock equivalents are excluded from the calculation because they would have an anti-dilutive effect, meaning the loss per share would be reduced. Therefore, in periods when a loss is reported, basic and dilutive loss per share are the same. The Company’s basic and diluted net income per share for the three and six months ended September 30, 2016 and 2015 were as follows (in thousands, except per share data):

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Basic Net Income Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

8,875

 

 

$

 

7,735

 

 

$

 

21,785

 

 

$

 

16,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing basic net

   income per share

 

 

43,129

 

 

 

 

42,228

 

 

 

 

42,971

 

 

 

 

41,963

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - basic

$

 

0.21

 

 

$

 

0.18

 

 

$

 

0.51

 

 

$

 

0.40

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Diluted Net Income Per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

 

8,875

 

 

$

 

7,735

 

 

$

 

21,785

 

 

$

 

16,594

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used in computing basic net

   income per share

 

 

43,129

 

 

 

 

42,228

 

 

 

 

42,971

 

 

 

 

41,963

 

Effect of dilutive securities

 

 

1,451

 

 

 

 

2,694

 

 

 

 

1,522

 

 

 

 

2,815

 

Weighted average shares used in computing diluted

   net income per share

 

 

44,580

 

 

 

 

44,922

 

 

 

 

44,493

 

 

 

 

44,778

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per share - diluted

$

 

0.20

 

 

$

 

0.17

 

 

$

 

0.49

 

 

$

 

0.37

 

 

For the three and six months ended September 30, 2016, approximately 1,500 and 8,800 shares underlying out-of-the-money stock options, respectively, were excluded in the computation of diluted earnings per share because their effect would have been anti-dilutive. Also, approximately 186,000 restricted shares in each of the three and six months ended September 30, 2016, respectively, related to performance-based awards for which milestones have not been met, were not included in the computation of diluted earnings per share.

8


 

For the three and six months ended September 30, 2015, approximately 1,000 shares underlying out-of-the-money stock options, respectively, were excluded in the computation of diluted earnings per share because their effect would have been anti-dilutive. Also, approximately 227,000 and 226,000 restricted shares in each of the three and six months ended September 30, 2015, respectively, related to performance-based awards for which milestones had not been met were not included in the computation of diluted earnings per share.

 

 

Note 3. Marketable Securities and Fair Value Measurements

Marketable Securities

The Company’s marketable securities are classified as available-for-sale securities and, accordingly, are recorded at fair value. The difference between amortized cost and fair value is included in stockholders’ equity.

The Company’s marketable securities at September 30, 2016 and March 31, 2016 are invested in the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

 

Gross

Unrealized

 

 

Gross

Unrealized

 

 

Fair Market

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(in $000's)

 

September 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term US Treasury mutual fund securities

 

$

37,141

 

 

$

9

 

 

$

(1

)

 

$

37,149

 

Short-term government-backed securities

 

 

90,823

 

 

 

39

 

 

 

(3

)

 

 

90,859

 

Short-term corporate debt securities

 

 

50,079

 

 

 

165

 

 

 

(16

)

 

 

50,228

 

Long-term US Treasury mutual fund securities

 

 

2,003

 

 

 

1

 

 

 

-

 

 

 

2,004

 

Long-term government-backed securities

 

 

1,999

 

 

 

1

 

 

 

-

 

 

 

2,000

 

 

 

$

182,045

 

 

$

215

 

 

$

(20

)

 

$

182,240

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized

 

 

Gross

Unrealized

 

 

Gross

Unrealized

 

 

Fair Market

 

 

 

Cost

 

 

Gains

 

 

Losses

 

 

Value

 

 

 

(in $000's)

 

March 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Treasury mutual fund securities

 

$

45,635

 

 

$

21

 

 

$

 

 

$

45,656

 

Short-term government-backed securities

 

 

118,125

 

 

 

45

 

 

 

(4

)

 

 

118,166

 

Long-term government-backed securities

 

 

999

 

 

 

1

 

 

 

-

 

 

 

1,000

 

 

 

$

164,759

 

 

$

67

 

 

$

(4

)

 

$

164,822

 

 

Fair Value Hierarchy

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets and liabilities carried at fair value are to be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

Level 1 primarily consists of financial instruments whose values are based on quoted market prices such as exchange-traded instruments and listed equities.

Level 2 includes financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, prepayment speeds, default rates, loss severity, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace.

9


 

Level 3 is comprised of unobservable inputs that are supported by little or no market activity. Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flows, or similar techniques, and at least one significant model assumption or input is unobservable.

The following table presents the Company’s financial instruments recorded at fair value in the condensed consolidated balance sheets, classified according to the three categories described above:

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

September 30, 2016:

 

(in $000's)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term U.S. Treasury mutual fund securities

 

$

 

 

$

37,149

 

 

$

 

 

$

37,149

 

Short-term government-backed securities

 

 

 

 

 

90,859

 

 

 

 

 

 

90,859

 

Short-term corporate debt securities

 

 

 

 

 

50,228

 

 

 

 

 

 

50,228

 

Long-term U.S. Treasury mutual fund securities

 

 

 

 

 

2,004

 

 

 

 

 

 

2,004

 

Long-term government-backed securities

 

 

 

 

 

2,000

 

 

 

 

 

 

2,000

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

 

 

 

 

 

 

 

7,749

 

 

 

7,749

 

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

March 31, 2016:

 

(in $000's)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury mutual fund securities

 

$

 

 

$

45,656

 

 

$

 

 

$

45,656

 

Short-term government-backed securities

 

 

 

 

 

118,166

 

 

 

 

 

 

118,166

 

Long-term government-backed securities

 

 

 

 

 

1,000

 

 

 

 

 

 

1,000

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

 

 

 

 

 

 

 

7,563

 

 

 

7,563

 

 

The Company’s investments in U.S. Treasury mutual fund securities, short-term government-backed securities, short-term corporate debt securities and long-term government-backed securities are reported as Level 2 financial assets as they are not exchange-traded instruments.

The Company’s financial liabilities consisted of contingent consideration potentially payable related to the acquisition of ECP Entwicklungsgesellschaft mbH (“ECP”) and AIS GmbH Aachen Innovative Solutions (“AIS”), in July 2014. This liability is reported as Level 3 as the estimated fair value of the contingent consideration related to the acquisition of the ECP requires significant management judgment or estimation and is calculated using the income approach, using various revenue and cost assumptions and applying a probability to each outcome.

The following table summarizes the change in fair value, as determined by Level 3 inputs, of the contingent consideration for the three and six months ended September 30, 2016 and 2015:

 

 

 

For the Three Months Ended September 30,

 

 

For the Six Months Ended September 30,

 

 

 

 

2016

 

 

 

2015

 

 

 

2016

 

 

 

2015

 

 

 

(in $000's)

 

 

(in $000's)

 

Level 3 liabilities, beginning balance

 

$

7,739

 

 

$

6,661