APT Alpha Pro Tech Ltd

ITEM 2 .      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with our unaudited condensed consolidated financial statements and the notes to our unaudited condensed consolidated financial statements, which appear elsewhere in this report.

Special Note Regarding Forward-Looking Statements

Certain information set forth in this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to potential acquisitions and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. We may make additional forward-looking statements from time to time. All forward-looking statements, whether written or oral and whether made by us or on our behalf, are expressly qualified by this special note.

Any expectations based on these forward-looking statements are subject to risks and uncertainties. These and many other factors could affect the Company ’s future operating results and financial condition and could cause actual results to differ materially from expectations based on forward-looking statements made in this document or elsewhere by the Company or on its behalf.

Special Note Regarding Smaller Reporting Company Status

We are filing this report as a “smaller reporting company” (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended) . As a result of being a smaller reporting company, we are allowed and have elected to omit certain information from this Management’s Discussion and Analysis of Financial Condition and Results of Operations; however, we have provided all information for the periods presented that we believe to be appropriate.

Where to find more information about us. We make available, free of charge, on our Internet website (http://www.alphaprotech.com) our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-K furnished or filed since our most recent Annual Report on Form 10-K, and any amendments to such reports, as soon as reasonably practicable following the electronic filing of such reports with the Securities and Exchange Commission (“SEC”). In addition, in accordance with SEC rules, we provide electronic or paper copies of our filings free of charge upon request .

Critical Accounting Policies

The preparation of our financial statements in conformity with US generally accepted accounting principles (“US GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. We base estimates on past experience and on various other assumptions that are believed to be reasonable under the circumstances. The application of these accounting policies on a consistent basis enables us to provide timely and reliable financial information. Our critical accounting polic ies include the following:

Marketable Securities : The Company periodically invests a portion of its cash in excess of short-term operating needs in marketable equity securities. These investments are classified as available-for-sale in accordance with US GAAP. The Company does not have any investments classified as held-to-maturity or trading securities. Available-for-sale investments are carried at their fair value using quoted prices in active markets for identical securities, with unrealized gains and losses, net of deferred income taxes, reported as a component of accumulated other comprehensive income (loss). Realized gains and losses, and declines in value deemed to be other-than-temporary on available-for-sale investments, are recognized in earnings. The cost of securities sold is based on the specific identification method. Investments that the Company intends to hold for more than one year are classified as long-term investments in the accompanying condensed consolidated balance sheets.

Alpha Pro Tech, Ltd.

I nventories: Inventories include freight-in, materials, labor and overhead costs and are stated at the lower of cost or net realizable value. Allowances are recorded for slow-moving, obsolete or unusable inventory. We assess our inventory for estimated obsolescence or unmarketable inventory and write down the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future sales and quantities on hand, if necessary. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Accounts Receivable: Accounts receivable are recorded at the invoice amount and do not bear interest. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable; however, changes in circumstances relating to accounts receivable may result in a requirement for additional allowances in the future. The Company determines the allowance based upon historical write-off experience and known conditions about customers’ current ability to pay. Account balances are charged against the allowance when management determines that the potential for recovery is remote.

Revenue Recognition: For sales transactions, we comply with the provisions of the SEC Staff Accounting Bulletin No. 104, Revenue Recognition , which states that revenue should be recognized when all of the following revenue recognition criteria are met: (1) persuasive evidence of an arrangement exists; (2) title transfers and the customer assumes the risk of loss; (3) the selling price is fixed or determinable; and (4) collection of the resulting receivable is reasonably assured. These criteria are satisfied upon shipment of product, and sales are recognized accordingly.

Sales Returns, Rebates and Allowances: Sales are reduced for any anticipated sales returns, rebates and allowances based on historical experience. Since our return policy is only 90 days and our products are not generally susceptible to external factors such as technological obsolescence or significant changes in demand, we are able to make a reasonable estimate for returns. We offer end-user, product-specific and sales volume rebates to select distributors. Our rebates are based on actual sales and are accrued monthly .

Stock-Based Compensation: We record compensation expense for the fair value of stock-based awards determined on the date of grant, including employee stock options.

The fair values of stock option grants are determined using the Black-Scholes option-pricing model and are based on the following assumptions: expected stock price volatility based on historical data and management ’s expectations of future volatility, risk-free interest rates from published sources, expected life based on historical data and no dividend yield, as the Board of Directors has no current plans to pay dividends in the near future. The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and that are fully transferable. The option-pricing model requires the input of highly subjective assumptions, including expected stock price volatility. Our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value of such options.

OVERVIEW

Alpha Pro Tech is in the business of protecting people, products and environments. We accomplish this by developing, manufacturing and marketing a line of high-value, disposable protective apparel and infection control products for the cleanroom, industrial, pharmaceutical, medical and dental markets. We also manufacture a line of building supply construction weatherization products. Our products are sold under the "Alpha Pro Tech" brand name, as well as under private label.

Our products are grouped into three business segments: the Building Supply segment, consisting of construction weatherization products such as housewrap and synthetic roof underlayment as well as other woven material; the Disposable Protective Apparel segment, consisting of disposable protective apparel such as shoecovers, bouffant caps, gowns, coveralls, lab coats, frocks and other miscellaneous products; and the Infection Control segment, consisting of face masks and eye shields. All financial information presented herein reflects the current segmentation.

Alpha Pro Tech, Ltd.

Our target markets include pharmaceutical manufacturing, bio-pharmaceutical manufacturing , medical device manufacturing, lab animal research, high technology electronics manufacturing (which includes the semi-conductor market), medical and dental distributors, and construction, building supply and roofing distributors.

Our products are used primarily in cleanrooms, industrial safety manufacturing environments, health care facilities, such as hospitals, laboratories and dental offices, and building and re-roofing sites. Our products are distributed principally in the United States through a network consisting of purchasing groups, national distributors, local distributors, independent sales representatives and our own sales and marketing force.

Th ree and nine months ended September 30, 2017 compared to three and nine months ended September 30, 201 6

Sales. Consolidated sales for the three months ended September 30, 2017 increased to $12,049,000 from $11,779,000 for the three months ended September 30, 2016, representing an increase of $270,000, or 2.3%. This increase consisted of increased sales in the Building Supply segment of $54,000, increased sales in the Disposable Protective Apparel segment of $147,000 and increased sales in the Infection Control segment of $69,000.

Building Supply segment sales for the three months ended September 30, 2017 increased by $54,000, or 0.8%, to $7,076,000, compared to $7,022,000 for the same period of 2016. This segment increase was primarily due to a 20.3% increase in sales of housewrap and a 37.2% increase in sales of other woven material, partially offset by a 14.9% decrease in sales of synthetic roof underlayment (including REX™, TECHNOply™ and TECHNO SB). The sales mix of the Building Supply segment for the three months ended September 30, 2017 was 48% for synthetic roof underlayment, 42% for housewrap and 10% for other woven material. This compared to 57% for synthetic roof underlayment, 35% for housewrap and 8% for other woven material for the three months ended September 30, 2016.

Although synthetic roof underlayment segment sales were down, housewrap sales remained strong, with increased sales in the third quarter of 20.3% and 10.0% year to date. At the end of the third quarter, we announced a new, innovative and exciting product line to our housewrap family, REX™ Wrap Fortis with JX ALTA 360° Drainage Technology™. With its one-of-a-kind construction, this product uniquely enables the drainage of water in EVERY direction to protect buildings from the elements exponentially better than a traditional housewrap, while decreasing job site material waste, simplifying installation to reduce labor and allowing fewer products to be carried. This new product offering will compete in a segment of the housewrap market that is currently untapped for us, and we anticipate that it will provide us with significant growth opportunities. Synthetic roof underlayment sales were down in the third quarter of 2017, primarily due to lower sales to private label customers and competitive pricing pressure. In particular, sales to one of our largest private label distributors were down significantly in the third quarter as well as year to date, as they are struggling with a general decline in their overall building sales. In addition, sales to another smaller private label distributor were down due to a change in strategy during 2016. Although sales were down, the number of rolls of label synthetic roof underlayment sold, excluding sales to the two distributors mentioned above, were actually up 5.9% for the quarter. We believe that our line of synthetic roof underlayment will be a growth driver in the coming year. Management expects the Building Supply segment to experience growth in 2018.

Alpha Pro Tech, Ltd.

Sales for the Disposable Protective Apparel segment for the three months ended September 30, 2017 increased by $147,000, or 4.0%, to $3,845,000, compared to $3,698,000 for the same period of 2016, primarily due to increased sales to our major international supply chain partner, partially offset by decreased sales to national and regional distributors.

Infection Control segment sales for the three months ended September 30, 2017 increased by $69,000, or 6.5%, to $1,128,000, compared to $1,059,000 for the same period of 2016. Mask sales were up by 6.1%, or $43,000, to $751,000, and shield sales were up by 7.4%, or $26,000, to $377,000.

Consolidated sales for the nine months ended September 30, 2017 decreased to $34,082,000 from $36,334,000 for the nine months ended September 30, 2016, representing a decrease of $2,252,000, or 6.2%. This decrease was due to decreased sales in the Building Supply segment of $2,402,000 and decreased sales in the Disposable Protective Apparel segment of $233,000, partially offset by increased sales in the Infection Control segment of $383,000.

Building Supply segment sales for the nine months ended September 30, 2017 decreased by $2,402,000, or 11.1%, to $19,298,000, compared to $21,700,000 for the same period of 2016. This segment decrease was primarily due to a 25.3% decrease in sales of synthetic roof underlayment (including REX™, TECHNOply™ and our new TECHNO SB), partially offset by a 10.0% increase in sales of housewrap and a 30.3% increase in sales of other woven material. The sales mix of the Building Supply segment for the nine months ended September 30, 2017 was 51% for synthetic roof underlayment, 41% for housewrap and 8% for other woven material. This compared to 61% for synthetic roof underlayment, 33% for housewrap and 6% for other woven material for the nine months ended September 30, 2016.

Sales for the Disposable Protective Apparel segment for the nine months ended September 30, 2017 decreased by $233,000, or 2.1%, to $10,914,000, compared to $11,147,000 for the same period of 2016. Although Disposable Protective Apparel segment sales were down year to date, sales have been up in the two most recent quarters. The year to date decrease was primarily due to decreased sales to our national and regional distributors, partially offset by an increase to our major international supply chain partner.

Infection Control segment sales for the nine months ended September 30, 2017 increased by $383,000, or 11.0%, to $3,870,000, compared to $3,487,000 for the same period of 2016. Mask sales were up by 12.7%, or $303,000, to $2,695,000, and shield sales were up by 7.3%, or $80,000, to $1,175,000.

Gross Profit. Gross profit increased by $196,000, or 4.3%, to $4,712,000 for the three months ended September 30, 2017 from $4,516,000 for the same period of 2016. The gross profit margin was 39.1% for the three months ended September 30, 2017, compared to 38.3% for the same period of 2016.

Gross profit increased by $191,000, or 1.4%, to $13,493,000 for the nine months ended September 30, 2017 from $13,302,000 for the same period of 2016. The gross profit margin was 39.6% for the nine months ended September 30, 2017, compared to 36.6% for the same period of 2016.

Management expects gross profit margin to be around 39% for fiscal 2017.

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased by $292,000, or 9.2%, to $3,450,000 for the three months ended September 30, 2017 from $3,158,000 for the three months ended September 30, 2016. As a percentage of net sales, selling, general and administrative expenses increased to 28.6% for the three months ended September 30, 2017, from 26.8% for the same period of 2016.

The change in selling, general and administrative expenses for the third quarter of 2017 by segment was as follows: Building Supply was up $153,000, or 14.6%, Infection Control was up $2,000, or 1.5%, Disposable Protective Apparel was up $29,000, or 3.5%, and corporate unallocated expenses were up $108,000, or 9.3%. The increase was primarily due to an increase in sales and marketing expenses, as we invested in additional sales representatives primarily in the Building Supply segment.

Alpha Pro Tech, Ltd.

Selling, general and administrative expenses increased by $319,000, or 3.2%, to $10,269,000 for the nine months ended September 30, 2017 from $9,950,000 for the nine months ended September 30, 2016. As a percentage of net sales, selling, general and administrative expenses increased to 30.1% for the nine months ended September 30, 2017, from 27.4% for the same period of 2016.

The change in selling, general and administrative expenses for the first nine months of 2017 by segment was as follows: Building Supply was up $204,000, or 6.1%, Infection Control was up $4,000, or 1.0%, corporate unallocated expenses were up $234,000, or 6.8%, and Disposable Protective Apparel was down $123,000, or 4.5%.

Pursuant to their employment agreements, the Company’s Chief Executive Officer and President are each entitled to a bonus equal to 5% of the pre-tax profits of the Company, excluding bonus expense. Bonuses of $190,000 were accrued for the three months ended September 30, 2017, as compared to $76,000 for the same period of 2016. Bonuses of $392,000 were accrued for the nine months ended September 30, 2017, as compared to $177,000 for the same period of 2016. The Chief Executive Officer was not entitled to receive this bonus during 2016.

Depreciation and Amortization. Depreciation and amortization expense decreased by $6,000, or 3.9%, to $147,000 for the three months ended September 30, 2017 from $153,000 for the same period of 2016.

Depreciation and amortization expense increased by $1,000, or 0.2%, to $426,000 for the nine months ended September 30, 2017 from $425,000 for the same period of 2016.

Income from Operations. Income from operations decreased by $90,000, or 7.5%, to $1,115,000 for the three months ended September 30, 2017, compared to $1,205,000 for the three months ended September 30, 2016. The decreased income from operations was primarily due to an increase in selling, general and administrative expenses of $292,000, partially offset by an increase in gross profit of $196,000.

Income from operations decreased by $129,000, or 4.4%, to $2,798,000 for the nine months ended September 30, 2017, compared to $2,927,000 for the nine months ended September 30, 2016. The decreased income from operations was primarily due to an increase in selling, general and administrative expenses of $319,000, partially offset by an increase in gross profit of $191,000.

Other Income. Other income increased by $248,000 to $491,000 for the three months ended September 30, 2017 from $243,000 for the same period of 2016. Other income consisted primarily of equity in income of unconsolidated affiliate of $105,000, a gain on the sale of property of $385,000 and interest income of $1,000 for the three months ended September 30, 2017. Other income consisted primarily of equity in income of unconsolidated affiliate of $242,000 and interest income of $1,000 for the three months ended September 30, 2016.

Other income increased by $291,000 to $727,000 for the nine months ended September 30, 2017 from $436,000 for the same period of 2016. Other income consisted primarily of equity in income of unconsolidated affiliate of $339,000, a gain on the sale of property of $385,000 and interest income of $3,000 for the nine months ended September 30, 2017. Other income consisted primarily of equity in income of unconsolidated affiliate of $433,000 and interest income of $3,000 for the nine months ended September 30, 2016.

Income before Provision for Income Taxes. Income before provision for income taxes for the three months ended September 30, 2017 was $1,606,000, compared to income before provision for income taxes of $1,448,000 for the three months ended September 30, 2016, representing an increase of $158,000, or 10.9%. This increase in income before provision for income taxes was primarily due to an increase in other income of $248,000, partially offset by a decrease in income from operations of $90,000.

Alpha Pro Tech, Ltd.

Income before provision for income taxes for the nine months ended September 30, 2017 was $3,525,000, compared to income before provision for income taxes of $3,363,000 for the nine months ended September 30, 2016, representing an increase of $162,000, or 4.8%. The increase in income before provision for income taxes was primarily due to an increase in other income of $291,000, partially offset by a decrease in income from operations of $129,000.

Provision for Income Taxes. The provision for income taxes for the three months ended September 30, 2017 was $503,000, compared to $429,000 for the same period of 2016. The effective tax rate was 31.3% for the three months ended September 30, 2017, compared to 29.6% for the same period of 2016. The Company does not record a tax provision on equity in income of unconsolidated affiliate. For the three months ended September 30, 2017, the estimated effective tax rate would have been 33.5% if the equity in income of unconsolidated affiliate was taxable. Management expects the effective tax rate to be in the low 30% range for fiscal 2017.

The provision for income taxes for the nine months ended September 30, 2017 was $1,068,000, compared to $1,040,000 for the same period of 2016. The effective tax rate was 30.3% for the nine months ended September 30, 2017, compared to 30.9% for the same period of 2016.

Net Income. Net income for the three months ended September 30, 2017 was $1,103,000, compared to net income of $1,019,000 for the three months ended September 30, 2016, representing an increase of $84,000, or 8.2%. The net income increase was due to an increase in income before provision for income taxes of $158,000, partially offset by an increase in provision for income taxes of $74,000. Net income as a percentage of net sales for the three months ended September 30, 2017 was 9.2%, and net income as a percentage of net sales for the same period of 2016 was 8.7%. Basic and diluted earnings per common share for the three months ended September 30, 2017 and 2016 were $0.07 and $0.06, respectively.

Net income for the nine months ended September 30, 2017 was $2,457,000, compared to net income of $2,323,000 for the nine months ended September 30, 2016, representing an increase of $134,000, or 5.8%. The net income increase was due to an increase in income before provision for income taxes of $162,000, partially offset by an increase in provision for income taxes of $28,000. Net income as a percentage of net sales for the nine months ended September 30, 2017 was 7.2%, and net income as a percentage of net sales for the same period of 2016 was 6.4%. Basic and diluted earnings per common share for the nine months ended September 30, 2017 and 2016 were $0.16 and $0.14, respectively.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2017 , we had cash of $8,968,000 and working capital of $25,646,000, representing a decrease in working capital of 5.7%, or $1,552,000, from December 31, 2016. As of September 30, 2017, our current ratio (current assets/current liabilities) was 14:1, compared to a 12:1 current ratio as of December 31, 2016. Cash decreased by 5.2%, or $488,000, to $8,968,000 as of September 30, 2017, compared to $9,456,000 as of December 31, 2016. The decrease in cash was due to cash used in financing activities of $2,776,000 and cash used in investing activities of $386,000, partially offset by cash provided by operating activities of $2,674,000.

We have a $3,500,000 credit facility with Wells Fargo Bank, consisting of a line of credit with interest at prime plus 0.5%. As of September 30, 2017, the prime interest rate was 4.25%. This credit line was renewed in May 2016 and expires in May 2018. The available line of credit is based on a formula of eligible accounts receivable and inventories. Our borrowing capacity on the line of credit was $3,500,000 as of September 30, 2017. As of September 30, 2017, we did not have any borrowings under this credit facility and do not anticipate using it in the near future.

Net cash provided by operating activities of $ 2,674,000 for the nine months ended September 30, 2017 was due to net income of $2,457,000, adjusted primarily by the following: stock-based compensation expense of $244,000, depreciation and amortization of $426,000, equity in income of unconsolidated affiliate of $339,000, gain on sale of property of $385,000, an increase in accounts receivable of $1,073,000, a decrease in inventory of $1,530,000, a decrease in prepaid expenses and other current assets of $254,000 and a decrease in accounts payable and accrued liabilities of $440,000.

Alpha Pro Tech, Ltd.

Accounts receivable increased by $1,073,000, or 22.3%, to $5,895,000 as of September 30, 2017 from $4,822,000 as of December 31, 2016. The increase in accounts receivable was primarily related to increased revenue in the third quarter of 2017 compared to the fourth quarter of 2016. The number of days that sales remained outstanding as of September 30, 2017, calculated by using an average of accounts receivable outstanding, was 42 days, compared to 30 days as of December 31, 2016.

Inventory decreased by $ 1,530,000, or 13.9%, to $9,464,000 as of September 30, 2017 from $10,994,000 as of December 31, 2016. The decrease was primarily due to a decrease in inventory for the Disposable Protective Apparel segment of $1,014,000, or 27.1%, to $2,722,000, a decrease in inventory for the Building Supply segment of $474,000, or 9.7%, to $4,435,000, and a decrease in inventory for the Infection Control segment of $42,000, or 1.8%, to $2,307,000.

Prepaid expenses and other current assets decreased by $ 254,000, or 7.6%, to $3,092,000 as of September 30, 2017 from $3,346,000 as of December 31, 2016. The decrease was primarily due to a decrease in deposits for the purchase of inventory.

Accounts payable and accrued liabilities as of September 30, 2017 decreased by $440,000, or 17.8%, to $2,025,000, from $2,465,000 as of December 31, 2016. The change was primarily due to a decrease in accrued liabilities of $483,000 and an increase in trade payables of $43,000.

Net cash used in investing activities was $ 386,000 for the nine months ended September 30, 2017, compared to net cash used in investing activities of $253,000 for the same period of 2016. Our investing activities for the nine months ended September 30, 2017 consisted of the purchase of property and equipment of $923,000 and proceeds of $537,000 from the sale of property. Our investing activities for the nine months ended September 30, 2016 consisted of the purchase of property and equipment of $212,000 and the purchase of marketable securities of $41,000.

Net cash used in financing activities was $ 2,776,000 for the nine months ended September 30, 2017, compared to net cash used in financing activities of $3,672,000 for the same period of 2016. The net cash used in financing activities for the nine months ended September 30, 2017 was due to the payment of $2,901,000 for the repurchase of shares of our common stock, offset by proceeds from exercise of stock options of $125,000. The net cash used in financing activities for the nine months ended September 30, 2016 was due to the payment of $3,689,000 for the repurchase of shares of our common stock, offset by proceeds from exercise of stock options of $17,000.

As of September 30, 2017 , we had $1,604,000 available for additional stock purchases under our stock repurchase program. During the nine months ended September 30, 2017, we repurchased 898,242 shares of common stock at a cost of $2,901,000. As of September 30, 2017, we had repurchased a total of 15,869,773 shares of common stock at a cost of $27,916,000 through our repurchase program. We retire all stock upon its repurchase. Future repurchases are expected to be funded from cash on hand and cash flows from operating activities.

We believe that our current cash balance and the funds available under our credit facility will be sufficient to satisfy our projected working capital and planned capital expenditures for the foreseeable future.

Recent Accounting Pronouncements

Accounting Standards Update (“ ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”) is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration that it expects to receive in exchange for those goods or services.  In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach.  ASU 2014-09 is effective for the first interim period within an annual reporting period beginning after December 15, 2017, and early adoption is not permitted. The Company will adopt ASU 2014-09 during the first quarter of 2018. Management is evaluating the provisions of this update and at this point in time has determined that its adoption will have limited to no impact on the Company’s financial position or results of operations.

Alpha Pro Tech, Ltd.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes , which requires deferred income tax liabilities and assets to be classified as noncurrent on the balance sheet rather than being separated into current and noncurrent. The guidance was effective for public entities for annual periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption being permitted. The Company adopted this guidance in the first quarter of 2017. The Company netted $410,000 in deferred tax assets netted against deferred tax liabilities as of the end of the first quarter of 2017. Prior periods were not retrospectively adjusted.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities , which provides guidance for the recognition, measurement, presentation and disclosure of financial instruments. The new guidance revises the accounting requirements related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value.  The guidance also changes certain disclosure requirements associated with the fair value of financial instruments. These changes will require an entity to measure, at fair value, investments in equity securities and other ownership interests in an entity and recognize the changes in fair value within net income. The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017. The Company has not yet adopted this guidance and has not yet determined the impact of adoption on the Company’s financial position or results of operations.

I n February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on the balance sheet. The provisions of this guidance are effective for annual periods beginning after December 15, 2018 and interim periods within those years, with early adoption permitted. Management is evaluating the requirements of this guidance and has not yet determined the impact of the adoption on the Company’s financial position or results of operations.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which simplifies several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. The provisions of this guidance were effective for annual reporting periods beginning after December 15, 2016 and interim periods within those annual periods, with early adoption permitted. T he Company adopted this guidance during the quarter ended March 31, 2017, and the Company recorded a one-time $866,000 cumulative-effect adjustment to reduce additional paid-in capital and increase retained earnings for excess tax benefits from stock option exercises that had previously been recorded to additional paid-in capital. The adoption of this guidance also increased the number of dilutive shares because excess tax benefits are no longer included in the assumed proceeds when calculating the number of dilutive shares. In addition, the effective tax rate will be reduced in future periods when there are excess tax benefits from stock options exercised.

Management periodically reviews new accounting standards that are issued. Management has not identified any other new standards that it believes merit further discussion.