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Note 1 – Description of Business and Basis of Presentation
Description of Business
Maxwell Technologies, Inc. is a Delaware corporation originally incorporated in 1965 under the name Maxwell Laboratories, Inc. In 1983, the Company completed an initial public offering, and in 1996, changed its name to Maxwell Technologies, Inc. The Company is headquartered in San Diego, California and has two manufacturing locations, in San Diego, California and Rossens, Switzerland, and is in the process of opening a manufacturing facility in Peoria, Arizona. In addition, the Company has two contract manufacturers located in China. Maxwell operates as one operating segment called High Reliability, which is comprised of three product lines:
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Ultracapacitors: The Company’s primary focus, ultracapacitors, are energy storage devices that possess a unique combination of high power density, extremely long operational life and the ability to charge and discharge very rapidly. The Company’s ultracapacitor cells and multi-cell packs and modules provide highly reliable energy storage and power delivery solutions for applications in multiple industries, including transportation, automotive, information technology, renewable energy and consumer and industrial electronics. |
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High-Voltage Capacitors: The Company’s CONDIS ® high-voltage capacitors are extremely robust devices that are designed and manufactured to perform reliably for decades. These products include grading and coupling capacitors and capacitive voltage dividers that are used to ensure the safety and reliability of electric utility infrastructure and other applications involving transport, distribution and measurement of high-voltage electrical energy. |
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Radiation-Hardened Microelectronic Products: The Company’s radiation-hardened microelectronic products include high-performance, high-density power modules, memory modules and single board computers that incorporate our proprietary RADPAK® packaging and shielding technology and novel architectures that enable them to withstand environmental radiation effects and perform reliably in space. |
The Company’s products are designed to perform reliably for the life of the products and systems into which they are integrated. The Company achieves high reliability through the application of proprietary technologies and rigorously controlled design, development, manufacturing and test processes.
Financial Statement Presentation
The accompanying condensed consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances have been eliminated in consolidation. The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in the Interim Reporting Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements in this Form 10-Q contain all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary to present fairly the financial position, results of operations, and cash flows of Maxwell Technologies, Inc. for all periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted in the accompanying interim consolidated financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. These estimates include, but are not limited to, assessing the collectability of accounts receivable, applied and unapplied production costs, production capacities, the usage and recoverability of inventories and long-lived assets, including deferred income taxes, the incurrence of warranty obligations, impairment of goodwill and other intangible assets, estimation of the cost to complete certain projects, accruals for estimated losses from legal matters, and estimation of the value of stock-based compensation awards, including the probability that the performance criteria of restricted stock awards will be met.
Warranty Obligation
The Company provides warranties on all product sales. The majority of the Company’s warranties are for one to two years in the normal course of business. The Company accrues for the estimated warranty costs at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure.
Net Income (Loss) per Share
In accordance with the Earnings Per Share Topic of the FASB ASC, basic net income (loss) per share is calculated using the weighted average number of common shares outstanding during the period. Diluted net income per share includes the impact of additional common shares that would have been outstanding if potentially dilutive common shares were issued. Potentially dilutive securities are not considered in the calculation of diluted net loss per share, as their inclusion would be anti-dilutive. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Numerator |
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Net income (loss) |
$ | 2,658 | $ | (1,217 | ) | $ | 3,162 | $ | (1,021 | ) | ||||||
Denominator |
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Weighted-average common shares outstanding |
28,672 | 27,669 | 28,397 | 27,478 | ||||||||||||
Effect of potentially dilutive securities: |
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Options to purchase common stock |
85 | — | 223 | — | ||||||||||||
Restricted stock awards |
5 | — | 23 | — | ||||||||||||
Restricted stock unit awards |
— | — | 4 | — | ||||||||||||
Employee stock purchase plan |
18 | — | 33 | — | ||||||||||||
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Weighted-average common shares outstanding, assuming dilution |
28,780 | 27,669 | 28,680 | 27,478 | ||||||||||||
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Net income (loss) per share |
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Basic |
$ | 0.09 | $ | (0.04 | ) | $ | 0.11 | $ | (0.04 | ) | ||||||
Diluted |
$ | 0.09 | $ | (0.04 | ) | $ | 0.11 | $ | (0.04 | ) |
The following table summarizes instruments that may be convertible into common shares that are not included in the denominator used in the diluted net income (loss) per share calculation because to do so would be anti-dilutive (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Outstanding options to purchase common stock |
637 | 1,404 | 318 | 1,404 | ||||||||||||
Restricted stock awards |
340 | 259 | 238 | 259 | ||||||||||||
Restricted stock unit awards |
21 | 22 | — | 22 | ||||||||||||
Employee stock purchase plan |
— | 19 | — | 19 |
Change in Additional Paid in Capital
For the six months ended June 30, 2012, additional paid in capital increased $13.3 million. This increase includes $10.2 million related to proceeds from shares of common stock sold pursuant to the Company’s shelf registration statement, net of offering costs, and $3.4 million associated with the Company’s stock-based compensation plans, offset by $318,000 for the repurchase of shares that were withheld by the Company to satisfy employee tax liabilities upon the vesting of restricted stock awards.
Pending Accounting Pronouncements
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities, which requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. This standard will be effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not expect the adoption of the standard update to impact its financial position or results of operations, as it only requires additional disclosure in the Company’s financial statements.
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Note 2 – Balance Sheet Details (in thousands)
Inventories
June 30, 2012 |
December 31, 2011 |
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Raw material and purchased parts |
$ | 12,159 | $ | 10,361 | ||||
Work-in-process |
3,014 | 3,552 | ||||||
Finished goods |
15,044 | 13,319 | ||||||
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Total inventories |
$ | 30,217 | $ | 27,232 | ||||
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Intangible Assets
Intangible assets consisted of the following:
Gross Carrying Value |
Accumulated Amortization |
Foreign Currency Adjustment |
Net Carrying Value |
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As of June 30, 2012: |
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Patents |
$ | 2,476 | $ | (1,802 | ) | $ | — | $ | 674 | |||||||
Developed core technology |
1,100 | (1,393 | ) | 299 | 6 | |||||||||||
Patent license agreement |
741 | (572 | ) | 5 | 174 | |||||||||||
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Total intangible assets at June 30, 2012 |
$ | 4,317 | $ | (3,767 | ) | $ | 304 | $ | 854 | |||||||
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Gross Carrying Value |
Accumulated Amortization |
Foreign Currency Adjustment |
Net Carrying Value |
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As of December 31, 2011: |
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Patents |
$ | 2,476 | $ | (1,699 | ) | $ | — | $ | 777 | |||||||
Developed core technology |
1,100 | (1,325 | ) | 304 | 79 | |||||||||||
Patent license agreement |
741 | (494 | ) | 8 | 255 | |||||||||||
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Total intangible assets at December 31, 2011 |
$ | 4,317 | $ | (3,518 | ) | $ | 312 | $ | 1,111 | |||||||
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Goodwill
The change in the carrying amount of goodwill from December 31, 2011 to June 30, 2012 is as follows:
Balance at December 31, 2011 |
$ | 24,887 | ||
Foreign currency translation adjustments |
(266 | ) | ||
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Balance at June 30, 2012 |
$ | 24,621 | ||
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Accrued Warranty
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Beginning balance |
$ | 258 | $ | 449 | ||||
Product warranties issued |
170 | 86 | ||||||
Settlement of warranties |
(120 | ) | (155 | ) | ||||
Change related to preexisting warranties |
(42 | ) | — | |||||
Other changes/adjustments |
(1 | ) | (76 | ) | ||||
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Ending balance |
$ | 265 | $ | 304 | ||||
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Accumulated Other Comprehensive Income
Foreign Currency Translation Adjustment |
Defined Benefit Pension Plan |
Accumulated Other Comprehensive Income |
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Balance as of December 31, 2011 |
$ | 14,580 | $ | (3,950 | ) | $ | 10,630 | |||||
Current period change |
(894 | ) | 110 | (784 | ) | |||||||
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Balance as of June 30, 2012 |
$ | 13,686 | $ | (3,840 | ) | $ | 9,846 | |||||
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Note 3 – Convertible Debentures
On December 20, 2005, the Company issued $25 million in aggregate principal amount of senior subordinated convertible debentures (the “Debentures”) due and payable in quarterly installments of $2.8 million which commenced December 2008. However, the holder, at its election, could defer each quarterly payment one time, for a 24 month period. As the holder had elected to defer some quarterly installments, the outstanding principal of the Debentures at December 31, 2010 was $8.3 million. In February 2011, the holder of the Debentures converted the remaining $8.3 million principal balance into 514,086 shares of the Company’s common stock at a conversion price of $16.21 per share. On the conversion date, the common stock had a fair value of $9.3 million, which was based on the closing market price. This conversion resulted in a gain of $1.0 million, which is included in “gain on embedded derivatives” in the consolidated statement of operations for the six months ended June 30, 2011.
Interest paid with cash and principal converted into shares of common stock are as follows (in thousands):
Six Months Ended June 30, 2011 |
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Value | Shares | |||||||
Conversion of principal into shares of common stock |
$ | 8,333 | 514 | |||||
Interest paid with cash |
17 | — | ||||||
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Total debenture payments |
$ | 8,350 | 514 | |||||
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Until the conversion of the remaining principal balance in February 2011, the principal balance was convertible by the holder at any time into common shares. In addition, after eighteen months from the issue date, the Company could have required that a specified amount of the principal of the Debentures be converted if certain conditions were satisfied for a period of 20 consecutive trading days. The Company accounted for the conversion options in the Debentures as derivative liabilities in accordance with the Derivatives and Hedging Topic of the FASB ASC. The discount at the issuance date of $9.2 million related to the fair value of the conversion options and embedded warrants issued in connection with the Debentures, and debt issuance costs, were amortized using the effective interest method over the term of the Debentures. For the six months ended June, 2011, $6,000 of the discount and prepaid fees were amortized. Upon conversion of the remaining principal balance of the Debentures into shares of the Company’s common stock in February 2011, the remaining unamortized discount was written off and is included in “amortization of debt discount and prepaid debt costs” in the consolidated statement of operations.
For the six months ended June 30, 2011, the change in fair value on revaluation of the conversion rights was the difference between the fair value on the conversion date in February 2011 and the fair value at the beginning of the period using the value calculated by the Black-Scholes pricing model. The effect of the fair market value adjustment for six months ended June 30, 2011 was a $78,000 gain, which is recorded as “gain on embedded derivatives” in the consolidated statement of operations.
As long as the Debentures were outstanding, the Company was required to maintain a minimum cash balance of $8.0 million. The cash restriction was released in February 2011 when the outstanding principal amount of the convertible debentures was converted to shares of the Company’s common stock.
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Note 4 – Credit Facility
In December 2011, the Company obtained a secured credit facility in the form of a revolving line of credit up to a maximum of $15.0 million (the “Revolving Line of Credit”) and an equipment term loan up to a maximum of $12.5 million (the “Equipment Term Loan”) (together, the “Credit Facility”). In general, amounts borrowed under the Credit Facility are secured by a lien on all of the Company’s assets other than its intellectual property. The agreement also contains certain restrictive covenants and certain financial covenants that the Company must meet on a quarterly basis during the term of the credit agreement. Borrowings under the Credit Facility bear interest, payable monthly, at either (i) the bank’s prime rate or (ii) LIBOR plus 2.25%, at the Company’s option subject to certain limitations. The Revolving Line of Credit matures on December 5, 2013, and may be prepaid in whole or in part at any time without penalty. On April 30, 2012, the principal amount outstanding under the Equipment Term Loan became payable in 36 equal monthly installments beginning in May 2012 such that the Equipment Term Loan is to be fully repaid by the maturity date of April 30, 2015, but may be prepaid in whole or in part at any time. In March 2012, the Company drew down $5.0 million from the Equipment Term Loan to fund capital expenditures. As of June 30, 2012, $4.9 million was outstanding under the Equipment Term Loan and the applicable interest rate was LIBOR plus 2.25% (2.5% as of June 30, 2012). As of April 30, 2012, the Equipment Term Loan is no longer available for new borrowings. As of June 30, 2012, no amounts were outstanding under the Revolving Line of Credit, therefore, the full amount was available to the Company.
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Note 5 – Fair Value Measurements
The Company records certain financial instruments at fair value in accordance with the Fair Value Measurements and Disclosures Topic of the FASB ASC. As of June 30, 2012, the financial instruments to which this topic applied were foreign currency forward contracts. As of June 30, 2012, the fair value of these foreign currency forward contracts was a liability of $51,000 which is recorded in “accounts payable and accrued liabilities” in the consolidated balance sheet. The fair value of these derivative instruments is measured using quoted market prices in active markets for identical instruments, which is a Level 1 input under the fair value hierarchy of the Fair Value Measurements and Disclosures Topic of the FASB ASC.
The carrying value of short-term and long-term borrowings approximates fair value because of the relative short maturity of these instruments and the interest rates the Company could currently obtain.
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Note 6 – Foreign Currency Derivative Instruments
Maxwell uses forward contracts to hedge certain monetary assets and liabilities, primarily receivables and payables, denominated in a foreign currency. The change in fair value of these instruments represents a natural hedge as gains and losses offset the changes in the underlying fair value of the monetary assets and liabilities due to movements in currency exchange rates. These contracts generally expire in one month. These contracts are considered economic hedges and are not designated as hedges under the Derivatives and Hedging Topic of the FASB ASC, therefore, the change in the fair value of the instrument is recognized currently in the consolidated statement of operations.
The net gains and losses on foreign currency forward contracts included in cost of revenue and selling, general and administrative expense are as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Cost of revenue |
$ | — | $ | (122 | ) | $ | — | $ | (238 | ) | ||||||
Selling, general and administrative |
(1,984 | ) | 1,958 | (1,232 | ) | 2,015 | ||||||||||
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Total gain (loss) |
$ | (1,984 | ) | $ | 1,836 | $ | (1,232 | ) | $ | 1,777 | ||||||
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As of June 30, 2012, the total notional amount of foreign currency forward contracts not designated as hedges was $17.3 million. The fair value of these derivatives was a $51,000 liability as of June 30, 2012. For additional information, refer to Note 5 – Fair Value Measurements.
The net gains and losses on foreign currency forward contracts were partially offset by net gains and losses on the underlying monetary assets and liabilities. Foreign currency gains and losses on those underlying monetary assets and liabilities included in cost of revenue and selling, general and administrative expense are as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Cost of revenue |
$ | (17 | ) | $ | 138 | $ | (1 | ) | $ | 223 | ||||||
Selling, general and administrative |
1,993 | (2,088 | ) | 1,125 | (2,189 | ) | ||||||||||
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Total gain (loss) |
$ | 1,976 | $ | (1,950 | ) | $ | 1,124 | $ | (1,966 | ) | ||||||
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Note 7 – Stock Plans
The Company has two active stock-based compensation plans as of June 30, 2012: the 2004 Employee Stock Purchase Plan and the 2005 Omnibus Equity Incentive Plan under which incentive stock options, non-qualified stock options, restricted stock awards and restricted stock units can be granted to employees and non-employee directors.
Stock Options
Compensation expense recognized from employee stock options for the three months ended June 30, 2012 and 2011 was $167,000 and $336,000, respectively, and $712,000 and $815,000 for the six months ended June 30, 2012 and 2011, respectively. Beginning in 2011, the Company ceased granting stock options and began granting restricted stock awards to employees as part of its annual equity incentive award program. The Company may determine to grant stock options in the future under the Incentive Plan.
Restricted Stock Awards
During the three months ended June 30, 2012 and 2011, the Company granted 1,700 and 2,900 shares, respectively, subject to restricted stock awards with an average grant date fair value per share of $8.90 and $16.46, respectively. During the six months ended June 30, 2012 and 2011, the Company granted 251,066 and 215,916 shares, respectively, subject to restricted stock awards with an average grant date fair value per share of $ 20.81 and $18.94, respectively. The following table summarizes the amount of compensation expense recognized for restricted stock awards for the three and six months ended June 30, 2012 and 2011 (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Service-based restricted stock |
$ | 368 | $ | 234 | $ | 847 | $ | 465 | ||||||||
Performance-based restricted stock |
97 | 90 | 160 | 150 | ||||||||||||
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Total compensation expense recognized for restricted stock awards |
$ | 465 | $ | 324 | $ | 1,007 | $ | 615 | ||||||||
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Restricted Stock Units
Beginning in 2011, non-employee directors receive an annual restricted stock unit award as part of their annual retainer compensation, which vests one year from the date of grant. During the three months ended June 30, 2012 and 2011, no restricted stock units were granted. During the six months ended June 30, 2012 and 2011, non-employee directors were granted a total of 20,342 and 22,036 restricted stock units, respectively, with an average grant date fair value per share of $20.65 and $19.06, respectively.
Total compensation expense recognized for service-based restricted stock unit awards was $104,000 and $105,000 during the three months ended June 30, 2012 and 2011, respectively, and $210,000 and $163,000 for the six months ended June 30, 2012 and 2011, respectively.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (“ESPP”) permits substantially all employees to purchase common stock through payroll deductions, at 85% of the lower of the trading price of the stock at the beginning or at the end of each six month offering period commencing on January 1 and July 1. The number of shares purchased is based on participants’ contributions made during the offering period.
Compensation expense recognized for the ESPP for the three months ended June 30, 2012 and 2011 was $34,000 and $24,000, respectively, and $128,000 and $113,000 for the six months ended June 30, 2012 and 2011, respectively. The fair value of the ESPP shares was estimated using the Black-Scholes valuation model for a call and a put option with the following weighted-average assumptions:
Three and Six Months Ended June 30, |
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2012 | 2011 | |||||||
Expected dividends |
$ | — | $ | — | ||||
Exercise price |
$ | 16.24 | $ | 18.89 | ||||
Expected volatility |
63 | % | 48 | % | ||||
Average risk-free interest rate |
0.06 | % | 0.19 | % | ||||
Expected life/term (in years) |
0.5 | 0.5 | ||||||
Fair value per share |
$ | 5.26 | $ | 5.51 |
Stock-based Compensation Expense
Compensation cost for restricted stock, restricted stock units, employee stock options and the ESPP included in cost of revenue; selling, general and administrative expense; and research and development expense is as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Cost of revenue |
$ | 238 | $ | 84 | $ | 380 | $ | 203 | ||||||||
Selling, general and administrative |
411 | 597 | 1,374 | 1,242 | ||||||||||||
Research and development |
121 | 108 | 302 | 261 | ||||||||||||
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Total stock-based compensation expense |
$ | 770 | $ | 789 | $ | 2,056 | $ | 1,706 | ||||||||
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Note 8 – Stock Offering
In April 2011, the Company filed a shelf registration statement on Form S-3 with the SEC to, from time to time, sell up to an aggregate of $125 million of our common stock, warrants or debt securities. On August 19, 2011, the registration statement was declared effective by the SEC, which will allow the Company to access the capital markets for the three year period following this effective date. In February 2012, the Company entered into an At-the-Market Equity Offering Sales Agreement (“Sales Agreement”) with Citadel Securities LLC (“Citadel”) pursuant to which the Company may sell, at its option, up to an aggregate of $30.0 million in shares of common stock through Citadel, as sales agent. The Company will pay Citadel a commission equal to 2% of the gross proceeds from the sale of shares of the Company’s common stock under the Sales Agreement. During the three months ended March 31, 2012, 572,510 shares of the Company’s common stock were sold under this Sales Agreement for net proceeds to the Company of $10.3 million. No shares were sold under this Sales Agreement during the three months ended June 30, 2012.
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Note 9 – Defined Benefit Plan
Maxwell SA, a subsidiary of the Company, has a retirement plan that is classified as a defined benefit pension plan. The employee pension benefit is based on compensation, length of service and credited investment earnings. The plan guarantees both a minimum rate of return as well as minimum annuity purchase rates. The Company’s funding policy with respect to the pension plan is to contribute the amount required by Swiss law, using the required percentage applied to the employee’s compensation. In addition, participating employees are required to contribute to the pension plan. This plan has a measurement date of December 31.
Components of net periodic pension cost are as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Service cost |
$ | 168 | $ | 202 | $ | 339 | $ | 388 | ||||||||
Interest cost |
163 | 182 | 329 | 351 | ||||||||||||
Expected return on plan assets |
(351 | ) | (412 | ) | (709 | ) | (793 | ) | ||||||||
Prior service cost amortization |
11 | 11 | 22 | 22 | ||||||||||||
Deferred loss amortization |
54 | 79 | 110 | 152 | ||||||||||||
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Net periodic pension cost |
$ | 45 | $ | 62 | $ | 91 | $ | 120 | ||||||||
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Employer contributions of $183,000 and $200,000 were paid during the three months ended June 30, 2012 and 2011, respectively. Employer contributions of $370,000 and $385,000 were paid during the six months ended June 30, 2012 and 2011, respectively. Additional employer contributions of approximately $311,000 are expected to be paid during the remainder of fiscal 2012.
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Note 10 – Legal Proceedings
Although the Company expects to incur significant legal costs in connection with the below legal proceedings, the Company is unable to estimate the amount of such legal costs and therefore, such costs will be expensed in the period the legal services are performed.
FCPA Matter
As a result of being a publicly traded company in the U.S., the Company is subject to the U.S. Foreign Corrupt Practices Act (“FCPA”), which prohibits companies from making improper payments to foreign officials for the purpose of obtaining or keeping business. Beginning in 2009, the Company conducted an internal review into payments made to its former independent sales agent in China with respect to sales of the Company’s high voltage capacitor products produced by the Company’s Swiss subsidiary. In January 2011, the Company reached settlements with the SEC and the U.S. Department of Justice (“DOJ”) with respect to charges asserted by the SEC and DOJ relating to the anti-bribery, books and records, internal controls, and disclosure provisions of the FCPA and other securities law violations. The Company settled civil charges with the SEC, agreeing to an injunction against further violations of the FCPA. Under the terms of the settlement with the SEC, the Company agreed to pay a total of $6.4 million in profit disgorgement and prejudgment interest, in two installments, with $3.2 million paid in each of the first quarters of 2011 and 2012. Under the terms of the settlement with the DOJ, the Company agreed to pay a total of $8.0 million in penalties in three installments, with $3.5 million paid in the first quarter of 2011, $2.3 million paid in the first quarter of 2012, and $2.3 million payable in the first quarter of 2013. As part of the settlement, the Company entered into a three-year deferred prosecution agreement (“DPA”) with the DOJ. If the Company remains in compliance with the terms of the DPA, at the conclusion of the term, the charges against the Company asserted by the DOJ will be dismissed with prejudice. Further, under the terms of the agreements, the Company will periodically report to the SEC and DOJ on the Company’s internal compliance program concerning anti-bribery. As of June 30, 2012, the Company has accrued a liability of $2.3 million for this matter, which is included in “accounts payable and accrued liabilities” on the accompanying consolidated balance sheet.
Customer Bankruptcy Matter
In January 2011, the Company attended a bankruptcy proceeding for a previous customer in order to bid on certain intellectual property and physical assets that were being auctioned. During this proceeding, an offer for sale was presented for any and all potential claims held by the previous customer against the Company. These potential claims related primarily to payments made to the Company prior to the previous customer filing bankruptcy, as well as a potential intellectual property dispute between the Company and the previous customer. At the January 2011 bankruptcy proceeding, the Company bid $250,000 to purchase the right to any and all future claims against the Company stemming from rights held by the previous customer. However, following the auction, the previous customer essentially declined this offer for settlement. Since this time, in the interest of a more expedient resolution to this matter, the Company recently increased its settlement offer to $750,000. However, this settlement offer was rejected by the previous customer. The Company believes that it has strong legal defenses against any and all potential claims related to this matter, and does not believe a settlement amount in excess of $750,000 is likely. The Company’s current estimate of the range of loss on this matter is $750,000 to $1,100,000, with the low end of this range based on the Company’s recent settlement offer, and the high end of the range based on the amount the Company expects that the previous customer would immediately accept without further negotiation. The Company has accrued a total of $750,000 as the estimated loss on this matter, which is included in “accounts payable and accrued liabilities” in the consolidated balance sheet as of June 30, 2012.
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Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and related disclosures. These estimates include, but are not limited to, assessing the collectability of accounts receivable, applied and unapplied production costs, production capacities, the usage and recoverability of inventories and long-lived assets, including deferred income taxes, the incurrence of warranty obligations, impairment of goodwill and other intangible assets, estimation of the cost to complete certain projects, accruals for estimated losses from legal matters, and estimation of the value of stock-based compensation awards, including the probability that the performance criteria of restricted stock awards will be met.
Warranty Obligation
The Company provides warranties on all product sales. The majority of the Company’s warranties are for one to two years in the normal course of business. The Company accrues for the estimated warranty costs at the time of sale based on historical warranty experience plus any known or expected changes in warranty exposure.
Net Income (Loss) per Share
In accordance with the Earnings Per Share Topic of the FASB ASC, basic net income (loss) per share is calculated using the weighted average number of common shares outstanding during the period. Diluted net income per share includes the impact of additional common shares that would have been outstanding if potentially dilutive common shares were issued. Potentially dilutive securities are not considered in the calculation of diluted net loss per share, as their inclusion would be anti-dilutive.
Financial Statement Presentation
The accompanying condensed consolidated financial statements include the accounts of Maxwell Technologies, Inc. and its subsidiaries. All significant intercompany transactions and account balances have been eliminated in consolidation. The Company has prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the standards of accounting measurement set forth in the Interim Reporting Topic of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Consequently, the Company has not necessarily included in this Form 10-Q all information and footnotes required for audited financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements in this Form 10-Q contain all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary to present fairly the financial position, results of operations, and cash flows of Maxwell Technologies, Inc. for all periods presented. The results reported in these condensed consolidated financial statements should not be regarded as necessarily indicative of results that may be expected for any subsequent period or for the entire year. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted in the accompanying interim consolidated financial statements. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.
Change in Additional Paid in Capital
For the six months ended June 30, 2012, additional paid in capital increased $13.3 million. This increase includes $10.2 million related to proceeds from shares of common stock sold pursuant to the Company’s shelf registration statement, net of offering costs, and $3.4 million associated with the Company’s stock-based compensation plans, offset by $318,000 for the repurchase of shares that were withheld by the Company to satisfy employee tax liabilities upon the vesting of restricted stock awards.
Pending Accounting Pronouncements
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities, which requires companies to disclose information about financial instruments that have been offset and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. Companies will be required to provide both net (offset amounts) and gross information in the notes to the financial statements for relevant assets and liabilities that are offset. This standard will be effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The Company does not expect the adoption of the standard update to impact its financial position or results of operations, as it only requires additional disclosure in the Company’s financial statements.
The Company accounted for the conversion options in the Debentures as derivative liabilities in accordance with the Derivatives and Hedging Topic of the FASB ASC. The discount at the issuance date of $9.2 million related to the fair value of the conversion options and embedded warrants issued in connection with the Debentures, and debt issuance costs, were amortized using the effective interest method over the term of the Debentures.
The Company records certain financial instruments at fair value in accordance with the Fair Value Measurements and Disclosures Topic of the FASB ASC. As of June 30, 2012, the financial instruments to which this topic applied were foreign currency forward contracts. As of June 30, 2012, the fair value of these foreign currency forward contracts was a liability of $51,000 which is recorded in “accounts payable and accrued liabilities” in the consolidated balance sheet. The fair value of these derivative instruments is measured using quoted market prices in active markets for identical instruments, which is a Level 1 input under the fair value hierarchy of the Fair Value Measurements and Disclosures Topic of the FASB ASC.
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The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Numerator |
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Net income (loss) |
$ | 2,658 | $ | (1,217 | ) | $ | 3,162 | $ | (1,021 | ) | ||||||
Denominator |
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Weighted-average common shares outstanding |
28,672 | 27,669 | 28,397 | 27,478 | ||||||||||||
Effect of potentially dilutive securities: |
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Options to purchase common stock |
85 | — | 223 | — | ||||||||||||
Restricted stock awards |
5 | — | 23 | — | ||||||||||||
Restricted stock unit awards |
— | — | 4 | — | ||||||||||||
Employee stock purchase plan |
18 | — | 33 | — | ||||||||||||
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Weighted-average common shares outstanding, assuming dilution |
28,780 | 27,669 | 28,680 | 27,478 | ||||||||||||
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Net income (loss) per share |
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Basic |
$ | 0.09 | $ | (0.04 | ) | $ | 0.11 | $ | (0.04 | ) | ||||||
Diluted |
$ | 0.09 | $ | (0.04 | ) | $ | 0.11 | $ | (0.04 | ) |
The following table summarizes instruments that may be convertible into common shares that are not included in the denominator used in the diluted net income (loss) per share calculation because to do so would be anti-dilutive (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Outstanding options to purchase common stock |
637 | 1,404 | 318 | 1,404 | ||||||||||||
Restricted stock awards |
340 | 259 | 238 | 259 | ||||||||||||
Restricted stock unit awards |
21 | 22 | — | 22 | ||||||||||||
Employee stock purchase plan |
— | 19 | — | 19 |
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Inventories
June 30, 2012 |
December 31, 2011 |
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Raw material and purchased parts |
$ | 12,159 | $ | 10,361 | ||||
Work-in-process |
3,014 | 3,552 | ||||||
Finished goods |
15,044 | 13,319 | ||||||
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Total inventories |
$ | 30,217 | $ | 27,232 | ||||
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Intangible Assets
Intangible assets consisted of the following:
Gross Carrying Value |
Accumulated Amortization |
Foreign Currency Adjustment |
Net Carrying Value |
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As of June 30, 2012: |
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Patents |
$ | 2,476 | $ | (1,802 | ) | $ | — | $ | 674 | |||||||
Developed core technology |
1,100 | (1,393 | ) | 299 | 6 | |||||||||||
Patent license agreement |
741 | (572 | ) | 5 | 174 | |||||||||||
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Total intangible assets at June 30, 2012 |
$ | 4,317 | $ | (3,767 | ) | $ | 304 | $ | 854 | |||||||
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Gross Carrying Value |
Accumulated Amortization |
Foreign Currency Adjustment |
Net Carrying Value |
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As of December 31, 2011: |
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Patents |
$ | 2,476 | $ | (1,699 | ) | $ | — | $ | 777 | |||||||
Developed core technology |
1,100 | (1,325 | ) | 304 | 79 | |||||||||||
Patent license agreement |
741 | (494 | ) | 8 | 255 | |||||||||||
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Total intangible assets at December 31, 2011 |
$ | 4,317 | $ | (3,518 | ) | $ | 312 | $ | 1,111 | |||||||
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Goodwill
The change in the carrying amount of goodwill from December 31, 2011 to June 30, 2012 is as follows:
Balance at December 31, 2011 |
$ | 24,887 | ||
Foreign currency translation adjustments |
(266 | ) | ||
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Balance at June 30, 2012 |
$ | 24,621 | ||
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Accrued Warranty
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Beginning balance |
$ | 258 | $ | 449 | ||||
Product warranties issued |
170 | 86 | ||||||
Settlement of warranties |
(120 | ) | (155 | ) | ||||
Change related to preexisting warranties |
(42 | ) | — | |||||
Other changes/adjustments |
(1 | ) | (76 | ) | ||||
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Ending balance |
$ | 265 | $ | 304 | ||||
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Accumulated Other Comprehensive Income
Foreign Currency Translation Adjustment |
Defined Benefit Pension Plan |
Accumulated Other Comprehensive Income |
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Balance as of December 31, 2011 |
$ | 14,580 | $ | (3,950 | ) | $ | 10,630 | |||||
Current period change |
(894 | ) | 110 | (784 | ) | |||||||
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Balance as of June 30, 2012 |
$ | 13,686 | $ | (3,840 | ) | $ | 9,846 | |||||
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Interest paid with cash and principal converted into shares of common stock are as follows (in thousands):
Six Months Ended June 30, 2011 |
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Value | Shares | |||||||
Conversion of principal into shares of common stock |
$ | 8,333 | 514 | |||||
Interest paid with cash |
17 | — | ||||||
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Total debenture payments |
$ | 8,350 | 514 | |||||
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The net gains and losses on foreign currency forward contracts included in cost of revenue and selling, general and administrative expense are as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Cost of revenue |
$ | — | $ | (122 | ) | $ | — | $ | (238 | ) | ||||||
Selling, general and administrative |
(1,984 | ) | 1,958 | (1,232 | ) | 2,015 | ||||||||||
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Total gain (loss) |
$ | (1,984 | ) | $ | 1,836 | $ | (1,232 | ) | $ | 1,777 | ||||||
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Foreign currency gains and losses on those underlying monetary assets and liabilities included in cost of revenue and selling, general and administrative expense are as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Cost of revenue |
$ | (17 | ) | $ | 138 | $ | (1 | ) | $ | 223 | ||||||
Selling, general and administrative |
1,993 | (2,088 | ) | 1,125 | (2,189 | ) | ||||||||||
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Total gain (loss) |
$ | 1,976 | $ | (1,950 | ) | $ | 1,124 | $ | (1,966 | ) | ||||||
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The fair value of the ESPP shares was estimated using the Black-Scholes valuation model for a call and a put option with the following weighted-average assumptions:
Three and Six Months Ended June 30, |
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2012 | 2011 | |||||||
Expected dividends |
$ | — | $ | — | ||||
Exercise price |
$ | 16.24 | $ | 18.89 | ||||
Expected volatility |
63 | % | 48 | % | ||||
Average risk-free interest rate |
0.06 | % | 0.19 | % | ||||
Expected life/term (in years) |
0.5 | 0.5 | ||||||
Fair value per share |
$ | 5.26 | $ | 5.51 |
Compensation cost for restricted stock, restricted stock units, employee stock options and the ESPP included in cost of revenue; selling, general and administrative expense; and research and development expense is as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Cost of revenue |
$ | 238 | $ | 84 | $ | 380 | $ | 203 | ||||||||
Selling, general and administrative |
411 | 597 | 1,374 | 1,242 | ||||||||||||
Research and development |
121 | 108 | 302 | 261 | ||||||||||||
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Total stock-based compensation expense |
$ | 770 | $ | 789 | $ | 2,056 | $ | 1,706 | ||||||||
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The following table summarizes the amount of compensation expense recognized for restricted stock awards for the three and six months ended June 30, 2012 and 2011 (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Service-based restricted stock |
$ | 368 | $ | 234 | $ | 847 | $ | 465 | ||||||||
Performance-based restricted stock |
97 | 90 | 160 | 150 | ||||||||||||
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Total compensation expense recognized for restricted stock awards |
$ | 465 | $ | 324 | $ | 1,007 | $ | 615 | ||||||||
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Components of net periodic pension cost are as follows (in thousands):
Three Months Ended June 30, |
Six Months Ended June 30, |
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2012 | 2011 | 2012 | 2011 | |||||||||||||
Service cost |
$ | 168 | $ | 202 | $ | 339 | $ | 388 | ||||||||
Interest cost |
163 | 182 | 329 | 351 | ||||||||||||
Expected return on plan assets |
(351 | ) | (412 | ) | (709 | ) | (793 | ) | ||||||||
Prior service cost amortization |
11 | 11 | 22 | 22 | ||||||||||||
Deferred loss amortization |
54 | 79 | 110 | 152 | ||||||||||||
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Net periodic pension cost |
$ | 45 | $ | 62 | $ | 91 | $ | 120 | ||||||||
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