What changed in this filing

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Item 1. Financial Statements

2021-02-09 compared with 2020-11-10 · 162 added, 115 removed, 386 unchanged (42% of the section changed)

3 unchanged sentences

(In thousands, except share and per share data)

September 3 0 ,

Dec ember 3 1 ,

Current assets:

Cash and cash equivalents

Accounts receivable - less allowance for doubtful accounts of $3,229 at September 30, 2020 and $3,240 at June 30, 2020

Accounts receivable - less allowance for doubtful accounts of $3,185 at December 31, 2020 and $3,240 at June 30, 2020

Inventories, net

30 unchanged sentences

20,000,000 shares authorized;

issued and outstanding (net of treasury shares) 6,516,290 at September 30, 2020 and 6,752,372 at June 30, 2020

issued and outstanding (net of treasury shares) 6,363,865 at December 31, 2020 and 6,752,372 at June 30, 2020

Additional paid-in capital

Retained earnings

Treasury stock, at cost, 2,340,387 shares at September 30, 2020 and 2,104,305 June 30, 2020

Treasury stock, at cost, 2,523,254 shares at December 31, 2020 and 2,104,305 June 30, 2020

Accumulated other comprehensive loss

6 unchanged sentences

Three Months Ended

September 30,

Six Months Ended

Cost of goods sold

Selling, general and administrative

Income (loss) from operations

Income from operations

Other (expense) income:

1 unchanged sentence

Interest expense

Foreign exchange (loss) gain

Foreign exchange loss

Total other (expense) income

Income before income taxes

(Benefit) provision for income taxes

Unrealized (loss) gain resulting from change in fair value of derivative instruments, net of tax

Comprehensive income

Provision for income taxes

Unrealized loss resulting from change in fair value of derivative instruments, net of tax

Comprehensive income (loss)

Net income per common share:

3 unchanged sentences

Condensed Consolidated Statements Of Stockholders’ Equity

Three -Month Period End ed September 3 0 , 2020 and 201 9

Three -Month Period End ed Dec ember 3 1 , 2020 and 201 9

(Dollars in thousands)

2 unchanged sentences

Income (Loss)

Balance, June 30, 2020

Balance, September 30, 2020

Compensation expense related to stock compensation plans

Repurchase of common stock

Issuance of common stock for stock option exercise

Unrealized loss resulting from change in fair value of derivative instruments, net of tax

Balance, December 31, 2020

Balance, September 30, 2019

Issuance of common stock for restricted stock grants

Compensation expense related to stock compensation plans

Repurchase of common stock

Unrealized loss resulting from change in fair value of derivative instruments, net of tax

Balance, December 31, 2019

See accompanying notes to condensed consolidated financial statements.

Natural Alternatives International, Inc.

Condensed Consolidated Statements Of Stockholders’ Equity

Six-Month Period Ended December 31, 20 20 and 201 9

(Dollars in thousands)

Treasury Stock

Comprehensive

Income (Loss)

Balance, June 30, 2020

1 unchanged sentence

Repurchase of common stock

Issuance of common stock for stock option exercise

Unrealized loss resulting from change in fair value of derivative instruments, net of tax

Balance, December 31, 2020

Balance, June 30, 2019

Issuance of common stock for restricted stock grants

Compensation expense related to stock compensation plans

Repurchase of common stock

Forfeiture of restricted stock

1 unchanged sentence

Reclassification pursuant to adoption of ASU 2018-02

Unrealized gain resulting from change in fair value of derivative instruments, net of tax

Balance, September 30, 2019

Unrealized loss resulting from change in fair value of derivative instruments, net of tax

Balance, December 31, 2019

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

(In thousands, except share and per share data)

Three Months Ended

September 3 0 ,

Six Months Ended

Dec ember 3 1 ,

Cash flows from operating activities

4 unchanged sentences

Deferred income taxes

(Gain) loss on disposal of assets

Pension expense, net of contributions

9 unchanged sentences

Purchases of property and equipment

Proceeds from sale of property and equipment

Net cash used in investing activities

15 unchanged sentences

In management’s opinion, all adjustments necessary for a fair presentation of the financial position, results of operations, stockholders’ equity, and cash flows have been included and are of a normal, recurring nature.

The results of operations for the three months ended September 30, 2020 are not necessarily indicative of the operating results for the full fiscal year or for any future periods.

The results of operations for the six months ended December 31, 2020 are not necessarily indicative of the operating results for the full fiscal year or for any future periods.

You should read the financial statements and these notes, which notes are an integral part of the financial statements, together with our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2020 (“2020 Annual Report”).

1 unchanged sentence

Recently Adopted Accounting Pronouncements

We did not adopt any accounting pronouncements during the three months ended September 30, 2020.

We did not adopt any accounting pronouncements during the three or six months ended December 31, 2020.

Recently Issued Accounting and Regulatory Pronouncements

8 unchanged sentences

Three Months Ended

September 30,

Six Months Ended

Basic weighted average common shares outstanding

3 unchanged sentences

Diluted net income per common share

During the three months ended September 30, 2020 we excluded shares related to stock options totaling 90,000 and 116,658 shares of unvested restricted stock, as their impact would have been anti-dilutive.

We did not exclude any stock options or restricted stock shares for the three months ended September 30, 2019 as none would have had an anti-dilutive impact.

We did not exclude any stock options or restricted stock shares for the three months ended December 31, 2020.

During the six months ended December 31, 2020 we excluded shares relating to stock options totaling 90,000 and 116,658 shares of unvested restricted stock, as their impact would have been anti-dilutive.

We did not exclude any stock options or restricted stock shares for the three or six months ended December 31, 2019 as none would have had an anti-dilutive impact.

Revenue Recognition

21 unchanged sentences

We estimate returns based on historical experience and recognize a returns liability for any estimated returns.

As of September 30, 2020, we have no liability recorded for estimated returns of products.

As of December 31, 2020, we have no liability recorded for estimated returns of products.

We have an Exclusive Manufacturing Agreement with Juice Plus+, as amended and restated on March 31, 2019, (the "JP Agreement”).

2 unchanged sentences

As part of the JP Agreement, we provide Juice Plus+ a cash discount that is amortized ratably over the remaining life of the JP Agreement based on the full value of the cash discount expected to be given over the same period.

We recorded $0.4 million of cash sales discount during the three months ended September 30, 2020 and $0.4 million during the three months ended September 30, 2019.

We recorded $0.4 million of cash sales discount during the three months ended December 31, 2020 and $0.8 million during the six months ended December 31, 2020.

We recorded $0.4 million of cash sales discount during the three months ended December 31, 2019 and $0.8 million for the six months ended December 31, 2019.

We currently own certain U.S.

patents, and each patent’s corresponding foreign patent applications.

patents, and each such patent’s corresponding foreign patent applications.

All of these patents and patent rights relate to the ingredient known as “beta-alanine”, which we market and sell under our CarnoSyn® and SR CarnoSyn® trade names.

We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $2.7 million during the three months ended September 30, 2020.

We similarly recorded $3.2 million during the three months ended September 30, 2019.

We recorded beta-alanine raw material sales and royalty and licensing income as a component of revenue in the amount of $2.8 million during the three months ended December 31, 2020 and $5.4 million during the six months ended December 31, 2020.

We similarly recorded $4.3 million during the three months ended December 31, 2019 and $7.5 million during the six months ended December 31, 2019.

These royalty income and raw material sale amounts resulted in royalty expense paid to the original patent holders from whom NAI acquired its patents and patent rights.

We recognized royalty expense as a component of cost of goods sold in the amount of $0.1 million during the three months ended September 30, 2020.

We recognized $0.2 million of royalty expense during the three months ended September 30, 2019.

We recognized royalty expense as a component of cost of goods sold in the amount of $0.1 million during the three months ended December 31, 2020 and $0.3 million during the six months ended December 31, 2020.

We recorded $0.2 million during the three months ended December 31, 2019 and $0.4 million during the six months ended December 31, 2019.

Stock-Based Compensation

We had an omnibus equity incentive plan that was approved by our Board of Directors effective October 15, 2009 and approved by our stockholders at the Annual Meeting of Stockholders held on November 30, 2009 ("2009 Plan").

Under the 2009 Plan, we granted nonqualified and incentive stock options and restricted stock grants to employees, non-employee directors and consultants.

The 2009 Plan expired on October 15, 2019.

The Board of Directors approved a new omnibus equity incentive plan to be effective October 15, 2019 (“2019 Plan”), subject to stockholder approval.

However, the 2019 Plan was not approved by our stockholders and therefore did not become effective.

We currently do not have an equity incentive plan but may still be recording exercises and forfeitures under the 2009 Plan.

We did not grant any options during each of the three month periods ending September 30, 2020 and September 30, 2019, respectively.

The Board of Directors approved a new omnibus equity incentive plan to be effective January 1, 2021 (“2020 Plan”), which was approved by our stockholders at the Annual Meeting of Stockholders on December 4, 2020.

Under the 2020 Plan, we may grant nonqualified and incentive stock options, restricted stock grants, restricted stock units, stock appreciation rights, and other stock-based awards to employees, non-employee directors and consultants.

We did not grant any options during each of the three or six month periods ended December 31, 2020 and December 31, 2019.

All remaining outstanding stock options are fully vested.

No options were exercised during the three month period ending September 30, 2020 and September 30, 2019.

There were no option forfeitures during the three month periods ended September 30, 2020 or September 30, 2019.

We did not grant any restricted stock shares during the three months ending September 30, 2020 or September 30, 2019.

No restricted stock shares were forfeited during the three months ended September 30, 2020.

During the three months ended September 30, 2019, 15,000 restricted stock shares were forfeited.

Our net income included stock based compensation expense in connection with prior restricted stock grants of approximately $0.4 million for the three months ended September 30, 2020.

Our net income included stock based compensation expense in connection with prior restricted stock grants of approximately $0.4 million for the three months ended September 30, 2019.

During the three and six months ended December 31, 2020, 100,000 stock options were exercised.

These exercises were cashless net exercises resulting in the issuance of 30,442 shares.

No options were exercised during the three and six month period ended December 31, 2019.

There were no option forfeitures during the three or six month periods ended December 31, 2020 or December 31, 2019.

We did not grant any restricted stock shares during the three or six months ended December 31, 2020.

During the three and six months ended December 31, 2019, we granted 5,000 shares of restricted stock shares to a new member of our management team.

No restricted stock shares were forfeited during the three or six months ended December 31, 2020.

During the three months ended December 31, 2019, there were no restricted stock forfeitures.

During the six months ended December 31, 2019, 15,000 restricted stock shares were forfeited.

Our net income included stock based compensation expense in connection with prior restricted stock grants of approximately $0.3 million for the three months ended December 31, 2020 and $0.7 million for the six months ended December 31, 2020.

Our net income included stock based compensation expense of approximately $0.5 million for the three months ended December 31, 2019, and $0.9 million for the six months ended December 31, 2019.

Deferred Compensation Plan

Effective July 16, 2020, the Board of Directors approved and adopted a Non-Qualified Incentive Plan (the “NQ Plan”).

Pursuant to the NQ Plan, the Human Resources Committee and the Board of Directors may make deferred cash payments or other cash awards (“Awards”) to directors, officers, employees and eligible consultants of NAI (“Participants”).

Effective July 16, 2020, the Board of Directors approved and adopted a Non-Qualified Incentive Plan (the “Incentive Plan”).

Pursuant to the Incentive Plan, the Human Resources Committee and the Board of Directors may make deferred cash payments or other cash awards (“Awards”) to directors, officers, employees and eligible consultants of NAI (“Participants”).

These Awards are made subject to conditions precedent that must be met before NAI is obligated to make the payment.

The purpose of the NQ Plan is to enhance the long-term stockholder value of NAI by providing the Human Resources Committee and the Board of Directors the ability to make deferred cash payments or other cash awards to encourage Participants to serve NAI or to remain in the service of NAI, or to assist NAI to achieve results determined by the Human Resources Committee or the Board of Directors to be in NAI's best interest.

The NQ Plan authorizes the Human Resources Committee or the Board of Directors to grant to, and administer, unsecured and deferred cash Awards to Participants and to subject each Award to whatever conditions are determined appropriate by the Human Resources Committee or the Board of Directors.

The purpose of the Incentive Plan is to enhance the long-term stockholder value of NAI by providing the Human Resources Committee and the Board of Directors the ability to make deferred cash payments or other cash awards to encourage Participants to serve NAI or to remain in the service of NAI, or to assist NAI to achieve results determined by the Human Resources Committee or the Board of Directors to be in NAI's best interest.

The Incentive Plan authorizes the Human Resources Committee or the Board of Directors to grant to, and administer, unsecured and deferred cash Awards to Participants and to subject each Award to whatever conditions are determined appropriate by the Human Resources Committee or the Board of Directors.

The terms of each Award, including the amount and any conditions that must be met to be entitled to payment of the Award are set forth in an Award Agreement between each Participant and NAI.

The NQ Plan provides the Board of Directors with the discretion to set aside assets to fund the NQ Plan although that has not been done to date.

On July 16, 2020, deferred cash awards of $1.0 million were granted to various officers, directors and employees of NAI pursuant to the NQ Plan, each providing for three equal cash payments to the Participant, each of which shall be paid on the one year, and two year, and three year anniversary of the date of the grant of such Award (the “Award Date”);

The Incentive Plan provides the Board of Directors with the discretion to set aside assets to fund the Incentive Plan although that has not been done to date.

On July 16, 2020, deferred cash awards of $1.0 million were granted to various officers, directors and employees of NAI pursuant to the Incentive Plan, each providing for three equal cash payments to the applicable Participant to be paid on the one year, and two year, and three year anniversary of the date of the grant of such Award (the “Award Date”);

provided that, on the date of each payment (the “Payment Date”), the Participant has been since Award Date, and continues to be through the Payment Date, a member of our Board of Directors or an employee of NAI.

1 unchanged sentence

Fair Value of Financial Instruments

Except for cash and cash equivalents and assets and liabilities related to our pension plan, as of September 30, 2020 and June 30, 2020, we did not have any financial assets or liabilities classified as Level 1.

Except for cash and cash equivalents, as of December 31, 2020 and June 30, 2020, we did not have any financial assets or liabilities classified as Level 1.

We classify derivative forward exchange contracts as Level 2 assets and liabilities.

The fair value of our forward exchange contracts as of September 30, 2020 was a net liability of $2.4 million.

The fair value of our forward exchange contracts as of June 30, 2020 included a net asset of $0.3 million.

The fair value of our forward exchange contracts as of December 31, 2020 was a net liability of $3.6 million.

The fair values were determined by obtaining pricing from our bank and corroborating those values with a third party bank.

We also classify our outstanding line of credit balance as a Level 2 liability, as the fair value is based on inputs that can be derived from information available in publicly quoted markets.

As of September 30, 2020, and June 30, 2020, we did not have any financial assets or liabilities classified as Level 3.

We did not transfer any assets or liabilities between these levels during fiscal 2020 or the three months ended September 30, 2020.

As of December 31, 2020, and June 30, 2020, we did not have any financial assets or liabilities classified as Level 3.

We did not transfer any assets or liabilities between levels during the three and six months ended December 31, 2020 or the three and six months ended December 31, 2019.

COVID-19 Pandemic

4 unchanged sentences

Inventories, net consisted of the following (in thousands):

September 3 0 ,

Dec ember 3 1 ,

Raw materials

1 unchanged sentence

Finished goods

The inventory reserve includes $0.8 million as of September 30, 2020 and $1.0 million as of June 30, 2020 related to one of our former customers, Kaged Muscle.

The inventory reserve includes $0.5 million as of December 31, 2020 and $1.0 million as of June 30, 2020 related to one of our former customers, Kaged Muscle.

We are working with this former customer to transition to a replacement manufacturer, including the transfer of inventory items we hold specific to this customer.

However, due to the uncertainty regarding the future operations of this former customer, we recorded a reserve against inventory specific to this customer equal to the estimated net realizable value of those items.

During the three months ended September 30, 2020 our inventory reserve related to this customer was reduced by $0.2 million due to amounts purchased by the customer and their new contract manufacturer.

Since establishing the reserve, we have reduced the reserve due to amounts purchased by the former customer and their new contract manufacturer.

During the three months ended December 31, 2020, we reduced our inventory reserve related to this customer by $0.3 million.

During the six months ended December 31, 2020, we reduced our inventory reserve related to this customer by $0.5 million.

Property and Equipment

1 unchanged sentence

Depreciable Life

September 3 0 ,

Dec ember 3 1 ,

Building and building improvements

6 unchanged sentences

Other Comprehensive Loss

Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the three months ended September 30, 2020 and September 30, 2019 (in thousands):

Other comprehensive (loss) income (“OCL” and “OCI”) consisted of the following during the three and six months ended December 31, 2020 and December 31, 2019 (in thousands):

Three Months Ended

September 30, 2020

Six Months Ended

December 31, 2020

Beginning Balance

5 unchanged sentences

Three Months Ended

September 30 , 2019

Six Months Ended

December 31, 2019

Beginning Balance

6 unchanged sentences

ASU 2018-02, “ Income Statement-Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ”, allows for a reclassification from accumulated other comprehensive income (OCI) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act.

Under this ASU, we reclassified $0.1 million of gains from OCI to retained earnings for the three months ended September 30, 2019.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income ”, allowed for a reclassification from accumulated other comprehensive income (OCI) to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act.

Under this ASU, we reclassified $0.1 million of gains from OCI to retained earnings for the six months ended December 30, 2019.

On July 1, 2019, we adopted FASB Accounting Standards Codification (“ASC”), Topic 842, Leases , or ASC 842, which requires the recognition of the “Right of Use Assets” and related operating and finance lease liabilities on the balance sheet.

14 unchanged sentences

Other information related to leases was as follows (in thousands):

Supplemental Cash Flows Information

Three Months Ended

September 30, 2020

Three Months Ended

September 30, 2019

Six Months Ended

Supplemental Cash Flows Information

December 31, 2020

December 31, 2019

December 31, 2020

December 31, 2019

Cash paid for amounts included in the measurement of operating lease liabilities

2 unchanged sentences

We lease substantially all of our product manufacturing and support office space used to conduct our business.

For contracts entered into on or after that effective date, at the inception of a contract we assess whether the contract is, or contains, a lease.

For contracts entered into on or after July 1, 2019, at the inception of a contract we assess whether the contract is, or contains, a lease.

Our assessment is based on:

7 unchanged sentences

We have no leases classified as finance leases.

As of September 30, 2020, the weighted average remaining lease term for our operating leases was 7.0 years.

The weighted average discount rate for our operating leases was 3.25%.

As of June 30, 2020, the weighted average remaining lease term for our operating leases was 7.2 years.

The weighted average discount rate was 3.24%.

As of December 31, 2020, the weighted average remaining lease term for our operating leases was 6.8 years and the weighted average discount rate for our operating leases was 3.25%.

As of June 30, 2020, the weighted average remaining lease term for our operating leases was 7.2 years and the weighted average discount rate was 3.24%.

For all leases at the lease commencement date, a Right of Use Asset and a lease liability are recognized.

32 unchanged sentences

Amounts outstanding that are subject to a fixed interest rate may be prepaid at any time in minimum amounts of $100,000, subject to a prepayment fee equal to the sum of the discounted monthly differences between payment under a fixed rate versus payment under the variable rate for each month from the month of prepayment through the month in which the then applicable fixed rate term matures.

On September 30, 2020, we were in compliance with all of the financial and other covenants required under the Credit Agreement.

During the six months ended December 31, 2020, we were in compliance with all of the financial and other covenants required under the Credit Agreement.

Our obligations under the Credit Agreement are secured by our accounts receivable and other rights to payment, general intangibles, inventory, equipment and fixtures.

4 unchanged sentences

While we have not yet experienced any significant negative effects related to COVID-19 and notwithstanding our belief that our cash position and working capital excluding this $10.0 million borrowing is sufficient to support our ongoing operations, we deemed it prudent to borrow against our line of credit to ensure that such funds would be available to us if and when we need them.

As of September 30, 2020, we did not have any remaining availability under our credit facilities.

As of December 31, 2020, we did not have any remaining availability under our credit facilities.

On February 2, 2021 we repaid the entire balance of our $10.0 million credit line with Wells Fargo Bank, N.A.

bringing our outstanding debt under the line to zero and increasing our amount available for borrowing to $10.0 million.

Economic Dependency

3 unchanged sentences

Three Months Ended

September 30,

(a) Sales were less than 10% of the respective period’s total net sales.

Six Months Ended

We buy certain products, including beta-alanine, from a limited number of raw material suppliers who meet our quality standards.

2 unchanged sentences

Three Months Ended

September 30,

(a) Purchases were less than 10% of the respective period’s total raw material purchases.

Six Months Ended

Financial instruments that subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.

We place our cash and cash equivalents with highly rated financial institutions.

Credit risk with respect to receivables is concentrated with two of our largest customers, whose receivable balances collectively represented 55.8% of gross accounts receivable at September 30, 2020 and 65.7% at June 30, 2020.

As of September 30, 2020 and June 30, 2020, we had a receivable balance of $3.3 million from a former contract manufacturing customer that we have recorded a bad debt reserve equal to 100% of this outstanding balance and thus did not reflect it in the percentages listed above.

Additionally, amounts due related to our beta-alanine raw material sales were 4.9% of gross accounts receivable at September 30, 2020, and 2.5% of gross accounts receivable at June 30, 2020.

Credit risk with respect to receivables is concentrated with two of our largest customers, whose receivable balances collectively represented 59.0% of gross accounts receivable at December 31, 2020 and 65.7% at June 30, 2020.

As of December 31, 2020 and June 30, 2020, we had a receivable balance of $3.3 million from a former contract manufacturing customer that we have recorded a bad debt reserve equal to 100% of this outstanding balance and thus did not reflect it in the percentages listed above.

Additionally, amounts due related to our beta-alanine raw material sales were 4.5% of gross accounts receivable at December 31, 2020, and 2.5% of gross accounts receivable at June 30, 2020.

Concentrations of credit risk related to the remaining accounts receivable balances are limited due to the number of customers comprising our remaining customer base.

11 unchanged sentences

Three Months Ended

September 30,

Six Months Ended

Private label contract manufacturing

2 unchanged sentences

Three Months Ended

September 30,

Income (Loss) from Operations

Six Months Ended

Income from Operations

Private label contract manufacturing

2 unchanged sentences

Corporate expenses not allocated to segments

Total Income (Loss) from Operations

September 30,

Total Income from Operations

Dec ember 31,

Private-label contract manufacturing

7 unchanged sentences

Three Months Ended

September 30,

Six Months Ended

United States

1 unchanged sentence

Products manufactured by our Swiss subsidiary ("NAIE") accounted for 83% of net sales in markets outside the U.S.

for the three months ended September 30, 2020.

for the three months ended December 31, 2020 and 85% for the six months ended December 31, 2020.

Products manufactured by NAIE accounted for 91% of net sales in markets outside the U.S.

for the three months ended September 30, 2019.

for the three months ended December 31, 2019 and 90% for the six months ended December 31, 2019.

No products manufactured by NAIE were sold in U.S.

markets during the three month periods ended September 30, 2020 and 2019.

markets during the three or six month periods ended December 31, 2020 and 2019.

Long-lived assets by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

September 30, 20 20

December 31, 20 20

June 30, 20 20

2 unchanged sentences

Total assets by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

September 30, 20 20

Dec ember 3 1 , 20 20

June 30, 20 20

1 unchanged sentence

Capital expenditures by geographic region, based on the location of the company or subsidiary at which they were located or made, were as follows (in thousands):

Three Months Ended

September 30, 20 20

September 30, 201 9

Six Months Ended

December 31, 2020

December 31, 2019

United States

Total Capital Expenditures

Our effective tax rate for the three months ended September 30, 2020 was (28.0%).

Our effective rates differ from the fiscal 2021 U.S.

Our effective tax rate for the three months ended December 31, 2020 was 20.8% and the effective rate for the six months ended December 31, 2020 was 7.2%.

Our effective rate for the six months ended December 31, 2020, differed from the fiscal 2021 U.S.

federal statutory rate of 21% primarily due to a discrete tax benefit discussed below.

Our effective tax rate for the three months ended September 30, 2019 was 21.3%.

The effective tax rate for the three months ended December 31, 2019 was 17.0% and the effective tax rate for the six months ended December 31, 2019 was 17.8%.

To determine our quarterly provision for income taxes, we use an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions to which we are subject.

6 unchanged sentences

On July 23, 2020, the Department of Treasury issued final regulations which provide an exclusion to the global intangible low-taxed income (GILTI) calculation on an elective basis.

These regulations were effective September 21, 2020 and may be retroactively.

These regulations were effective September 21, 2020 and may be retroactively applied.

Under these new regulations, we are able to exclude the GILTI calculation from our domestic taxable income if the deemed effective tax rate at our foreign subsidiary is greater than 18.9%.

We assessed this rate, including the implementation of certain tax strategies, and we have determined that our effective rate at NAIE is greater than 18.9% as of the year ending June 30, 2020.

We reassessed our estimated taxes for fiscal 2020 and in the three months ended September 30, 2020 we recorded a reduction to our fiscal 2020 estimated taxes of $0.4 million as a discrete benefit.

As a result of this adjustment, we now expect our domestic tax return will reflect a net operating loss and, in accordance with the CARES ACT, we plan on carrying this loss back to fiscal 2015, which reflected a higher federal tax rate.

Due to this rate differential we have recorded a permanent discrete tax benefit of $0.3 million during the three months ended September 30, 2020.

As a result of this tax planning strategy for NAIE, during the three months ended September 30, 2020 we have recorded additional foreign estimated tax expense of $0.4 million and we have reversed our deferred tax liability of $0.5 million.

We reassessed our estimated taxes for fiscal 2020 and in the six months ended December 31, 2020 we recorded a reduction to our fiscal 2020 estimated taxes of $0.4 million as a discrete benefit.

As a result of this adjustment, we now expect our domestic tax return for fiscal 2020 will reflect a net operating loss and, in accordance with the CARES ACT, we plan on carrying this loss back to fiscal 2015, which reflected a higher federal tax rate.

Due to this rate differential we have recorded a permanent discrete tax benefit of $0.3 million during the six months ended December 31, 2020.

As a result of this tax planning strategy for NAIE, during the six months ended December 31, 2020 we have recorded additional foreign estimated tax expense of $0.4 million and we have reversed our deferred tax liability of $0.5 million.

We had no significant discrete tax items for the three months ended December 31, 2020, or for the three and six months ended December 31, 2019.

We record valuation allowances to reduce our deferred tax assets to an amount we believe is more likely than not to be realized.

1 unchanged sentence

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

During the three months ended September 30, 2020, there was no change to our valuation allowance for our deferred tax assets.

During the three and six months ended December 31, 2020, there was no change to our valuation allowance for our deferred tax assets.

Income taxes are accounted for under the asset and liability method.

10 unchanged sentences

Our tax reserves are analyzed quarterly, and adjustments are made as events occur that we believe warrant adjustments to those reserves.

There were no adjustments to reserves in the three month periods ended September 30, 2020.

There were no adjustments to reserves in the three and six month periods ended December 31, 2020.

Treasury Stock

1 unchanged sentence

Under the Repurchase Plan, we may, from time to time, purchase shares of our common stock, depending upon market conditions, in open market or privately negotiated transactions.

During the three months ended September 30, 2020 we repurchased 235,390 shares at a weighted average cost of $7.38 and a total cost of $1.7 million under this Repurchase Plan.

During the three months ended September 30, 2019 we repurchased 1,031 shares at a weighted average cost of $8.44 and a total cost of $8,700 under this Repurchase Plan.

During the three months ended September 30, 2020, we acquired 692 shares from employees in connection with restricted stock shares that vested during that year at a weighted average cost of $6.74 per share and a total cost of $5,000.

During the three months ended September 30, 2019, we acquired 686 shares from employees in connection with restricted stock shares that vested during the period at a weighted average cost of $9.90 per share and a total cost of $7,000.

During the three months ended December 31, 2020 we repurchased 175,123 shares at a weighted average cost of $9.72 per share and a total cost of $1.7 million under this Repurchase Plan.

During the six months ended December 31, 2020 we repurchased 410,513 shares at a weighted average cost of $8.38 per share and a total cost of $3.4 million under this Repurchase Plan.

Included in the repurchases for the three and six months ended December 31, 2020, was 30,442 shares acquired from employees and directors in connection with exercises of stock options.

During the three months ended December 31, 2019 we repurchased 150,307 shares at a weighted average cost of $8.33 per share and a total cost of $1.3 million under this Repurchase Plan.

During the six months ended December 31, 2019 we repurchased 151,338 shares at weighted average cost of $8.33 per share and a total cost of $1.3 million under this Repurchase Plan.

During the three months ended December 31, 2020, we acquired 7,744 shares from employees in connection with restricted stock shares that vested during that period at a weighted average cost of $7.40 per share and a total cost of $57,000.

During the six months ended December 31, 2020, we acquired 8,436 shares from employees in connection with restricted stock shares that vested during that period at a weighted average cost of $7.34 per share and a total cost of $62,000.

During the three months ended December 31, 2019 we acquired 7,644 shares from employees in connection with restricted stock shares that vested during that period at a weighted average cost of $8.67 per share and a total cost of $66,000.

During the six months ended December 31, 2019, we acquired 8,330 shares from employees in connection with restricted stock shares that vested during that period at a weighted average cost of $8.74 per share and a total cost of $73,000.

These shares were returned to us by the subject employees and in exchange we paid each employee’s required tax withholding liability incurred due to the vesting of their restricted stock shares during that period.

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Derivatives and Hedging

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted product sales denominated in foreign currencies and to other transactions of NAIE, our foreign subsidiary.

We are exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to forecasted product sales and expenditures denominated in foreign currencies and to other transactions of NAIE, our foreign subsidiary.

As part of our overall strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, we may use foreign exchange contracts in the form of forward contracts.

To the extent we enter into such contracts, there can be no guarantee any such contracts will be effective hedges against our foreign currency exchange risk.

As of September 30, 2020, we had forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S.

As of December 31, 2020, we had forward contracts designated as cash flow hedges primarily to protect against the foreign exchange risks inherent in our forecasted sales of products at prices denominated in currencies other than the U.S.

These contracts are expected to be settled through August 2022.

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We measure effectiveness by comparing the cumulative change in the hedge contract with the cumulative change in the hedged item.

No hedging relationships were terminated as a result of ineffective hedging for the three months ended September 30, 2020 and September 30, 2019.

No hedging relationships were terminated as a result of ineffective hedging for the three or six months ended December 31, 2020 and December 31, 2019.

We monitor the probability of forecasted transactions as part of the hedge effectiveness testing on a quarterly basis.

During the three months ended September 30, 2020 and September 30, 2019, we did not have any losses or gains related to the ineffective portion of our hedging instruments.

As of September 30, 2020, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $75.7 million (EUR 66.2 million).

As of September 30, 2020, a net loss of approximately $1.8 million related to derivative instruments designated as cash flow hedges was recorded in OCI.

During the three or six months ended December 31, 2020 and December 31, 2019, we did not have any losses or gains related to the ineffective portion of our hedging instruments.

For foreign currency contracts not designated as cash flow hedges, changes in the fair value of the hedge are recorded directly to foreign exchange gain or loss in other income in an effort to offset the change in valuation of the underlying hedged item.

During the three months ended December 31, 2020 we entered into a forward contract in order the hedge foreign exchange risk associated with our lease liability at NAIE, which is denominated in Swiss Francs (CHF).

As of December 31, 2020, the notional amounts of our foreign exchange contracts designated as cash flow hedges were approximately $53.5 million (EUR 46.5 million).

As of December 31, 2020, a net loss of approximately $3.0 million related to derivative instruments designated as cash flow hedges was recorded in OCI.

It is expected that $2.5 million will be reclassified into earnings in the next 12 months along with the earnings effects of the related forecasted transactions.

As of September 30, 2020, $2.5 million of the fair value of our cash flow hedges was classified as a short term liability, and $0.1 million was classified as other noncurrent assets in our Consolidated Balance Sheets.

During the three months ended September 30, 2020, we recognized $2.1 million of net losses in OCI, and reclassified $0.6 million of losses and forward point amortization from OCI to Sales.

As of December 31, 2020, the notional amounts of our foreign exchange contracts not designated as cash flow hedges were approximately $6.6 million (CHF 5.8 million).

As of December 31, 2020, $3.2 million of the fair value of our cash flow hedges was classified as a short term liability, and $0.4 million was classified as other noncurrent liabilities in our Consolidated Balance Sheets.

During the three months ended December 31, 2020, we recognized $1.9 million of net losses in OCI, and reclassified $0.7 million of losses and forward point amortization from OCI to Sales.

During the six months ended December 31, 2020, we recognized $3.9 million of net losses in OCI, and reclassified $1.3 million of losses and forward point amortization from OCI to Sales.

As of June 30, 2020, $0.5 million of the fair value of our cash flow hedges was classified as a current asset, and $0.2 million was classified as a long-term liability in our Consolidated Balance Sheets.

During the three months ended September 30, 2019, we recognized $1.3 million of net gains in OCI, reclassified $0.8 million of gains and forward point amortization from OCI to Sales, and reclassified $54,000 of gains from OCI to Other Income.

During the three months ended December 31, 2019, we recognized $0.4 million of net losses in OCI, and reclassified $0.8 million of gains and forward point amortization from OCI to Sales.

During the six months ended December 31, 2019, we recognized $0.9 million of net gains in OCI, reclassified $1.6 million of gains and forward point amortization from OCI to Sales, and reclassified $54,000 of gains from OCI to Other Income.

Contingencies

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Our evaluation of the likely impact of these actions could change in the future and we could have unfavorable outcomes we do not expect.

Subsequent Event

On February 2, 2021 we repaid the entire balance of our $10.0 million credit line with Wells Fargo Bank, N.A.

bringing our outstanding debt under the line to zero and increasing our amount available for borrowing to $10.0 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements