UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended March 31, 2009 |
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or | |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from to |
Commission File Number 001-08123
QUIXOTE CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware | 36-2675371 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
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35 East Wacker Drive | 60601 |
Chicago, Illinois | (Zip Code) |
(Address of principal executive offices) |
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(312) 467-6755
(Registrant’s telephone number, including area code)
No Change
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filero |
| Accelerated filerx |
Non-accelerated filero | (Do not check if a smaller reporting company) | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Nox
As of April 30, 2009, there were 9,296,383 shares of the registrant’s common stock ($.01-2/3 par value) outstanding.
ITEM 1. FINANCIAL STATEMENTS
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
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| Nine Months Ended March 31, |
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| 2009 |
| 2008 |
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Net sales |
| $ | 67,301,000 |
| $ | 73,252,000 |
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Cost of sales |
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| 48,303,000 |
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| 47,699,000 |
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Gross profit |
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| 18,998,000 |
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| 25,553,000 |
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Operating expenses: |
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Selling & administrative |
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| 19,419,000 |
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| 18,563,000 |
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Research & development |
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| 2,394,000 |
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| 2,603,000 |
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Severance costs |
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| 1,172,000 |
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Asset impairment charge |
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| 9,246,000 |
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| 32,231,000 |
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| 21,166,000 |
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Operating profit (loss) |
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| (13,233,000 | ) |
| 4,387,000 |
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Other income (expense): |
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Interest income |
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| 7,000 |
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| 338,000 |
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Interest expense |
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| (2,630,000 | ) |
| (3,306,000 | ) |
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| �� |
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| (2,623,000 | ) |
| (2,968,000 | ) |
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Earnings (loss) from continuing operations before income taxes |
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| (15,856,000 | ) |
| 1,419,000 |
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Income tax provision (benefit) |
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| (4,880,000 | ) |
| 539,000 |
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Earnings (loss) from continuing operations |
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| (10,976,000 | ) |
| 880,000 |
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Discontinued operations: |
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Loss from operations, net of income taxes |
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| (46,000 | ) |
| (815,000 | ) |
Loss on sale, net of income taxes |
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| (712,000 | ) |
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Loss from discontinued operations, net of income taxes |
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| (758,000 | ) |
| (815,000 | ) |
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Net earnings (loss) |
| $ | (11,734,000 | ) | $ | 65,000 |
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Per share data - basic: |
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Earnings (loss) from continuing operations |
| $ | (1.19 | ) | $ | 0.10 |
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Loss from discontinued operations |
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| (0.08 | ) |
| (0.09 | ) |
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Net earnings (loss) |
| $ | (1.27 | ) | $ | 0.01 |
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Weighted average common shares outstanding |
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| 9,226,818 |
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| 9,087,053 |
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Per share data - diluted: |
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Earnings (loss) from continuing operations |
| $ | (1.19 | ) | $ | 0.10 |
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Loss from discontinued operations |
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| (0.08 | ) |
| (0.09 | ) |
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Net earnings (loss) |
| $ | (1.27 | ) | $ | 0.01 |
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Weighted average common shares outstanding |
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| 9,226,818 |
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| 9,138,763 |
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Cash dividends declared per share of common stock |
| $ | 0.00 |
| $ | 0.20 |
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See Notes to Consolidated Financial Statements.
2
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
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| Three Months Ended March 31, |
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| 2009 |
| 2008 |
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Net sales |
| $ | 22,105,000 |
| $ | 22,869,000 |
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Cost of sales |
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| 16,448,000 |
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| 15,720,000 |
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Gross profit |
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| 5,657,000 |
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| 7,149,000 |
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Operating expenses: |
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Selling & administrative |
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| 6,564,000 |
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| 6,597,000 |
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Research & development |
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| 674,000 |
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| 875,000 |
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Severance costs |
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| 329,000 |
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Asset impairment charge |
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| 9,246,000 |
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| 16,813,000 |
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| 7,472,000 |
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Operating loss |
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| (11,156,000 | ) |
| (323,000 | ) |
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Other income (expense): |
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Interest income |
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| 7,000 |
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| 336,000 |
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Interest expense |
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| (848,000 | ) |
| (1,068,000 | ) |
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| (841,000 | ) |
| (732,000 | ) |
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Loss from continuing operations before income taxes |
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| (11,997,000 | ) |
| (1,055,000 | ) |
Income tax benefit |
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| (3,414,000 | ) |
| (400,000 | ) |
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Loss from continuing operations |
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| (8,583,000 | ) |
| (655,000 | ) |
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Discontinued operations: |
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Loss from operations, net of income taxes |
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| (509,000 | ) |
Loss on sale, net of income taxes |
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Loss from discontinued operations, net of income taxes |
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| (509,000 | ) |
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Net loss |
| $ | (8,583,000 | ) | $ | (1,164,000 | ) |
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Per share data - basic: |
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Loss from continuing operations |
| $ | (0.93 | ) | $ | (0.07 | ) |
Loss from discontinued operations |
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| (0.06 | ) |
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Net loss |
| $ | (0.93 | ) | $ | (0.13 | ) |
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Weighted average common shares outstanding |
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| 9,265,533 |
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| 9,113,751 |
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Per share data - diluted: |
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Loss from continuing operations |
| $ | (0.93 | ) | $ | (0.07 | ) |
Loss from discontinued operations |
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| (0.06 | ) |
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Net loss |
| $ | (0.93 | ) | $ | (0.13 | ) |
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Weighted average common shares outstanding |
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| 9,265,533 |
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| 9,113,751 |
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Cash dividends declared per share of common stock |
| $ | 0.00 |
| $ | 0.00 |
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See Notes to Consolidated Financial Statements.
3
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
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| March 31, |
| June 30, |
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| 2009 |
| 2008 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 128,000 |
| $ | 408,000 |
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Accounts receivable, net of allowance for doubtful accounts |
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| 17,996,000 |
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| 23,801,000 |
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Inventories, net: |
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Raw materials |
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| 5,481,000 |
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| 3,943,000 |
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Work in process |
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| 4,388,000 |
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| 5,007,000 |
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Finished goods |
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| 8,668,000 |
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| 10,439,000 |
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| 18,537,000 |
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| 19,389,000 |
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Deferred income tax assets |
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| 2,608,000 |
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| 2,608,000 |
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Other current assets |
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| 1,090,000 |
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| 504,000 |
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Current assets of business held for sale |
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| 20,161,000 |
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Total current assets |
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| 40,359,000 |
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| 66,871,000 |
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Property, plant and equipment, at cost |
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| 45,208,000 |
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| 43,873,000 |
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Less accumulated depreciation |
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| (29,127,000 | ) |
| (27,162,000 | ) |
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| 16,081,000 |
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| 16,711,000 |
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Goodwill |
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| 8,139,000 |
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| 17,385,000 |
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Intangible assets, net |
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| 2,029,000 |
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| 2,206,000 |
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Deferred income tax assets |
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| 18,599,000 |
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| 13,371,000 |
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Other assets |
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| 452,000 |
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| 890,000 |
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Assets of business held for sale |
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| 4,109,000 |
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| $ | 85,659,000 |
| $ | 121,543,000 |
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See Notes to Consolidated Financial Statements.
4
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
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| March 31, |
| June 30, |
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| 2009 |
| 2008 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 42,850,000 |
| $ | 17,600,000 |
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Accounts payable |
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| 4,162,000 |
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| 5,950,000 |
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Dividends payable |
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| 1,829,000 |
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Accrued expenses |
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| 4,378,000 |
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| 5,748,000 |
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Current liabilities of business held for sale |
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| 5,520,000 |
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Total current liabilities |
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| 51,390,000 |
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| 36,647,000 |
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Long-term debt, net of current portion |
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| 40,000,000 |
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Other long-term liabilities |
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| 1,032,000 |
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| 1,059,000 |
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| 52,422,000 |
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| 77,706,000 |
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Commitments and contingent liabilities (Note 10) |
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Shareholders’ equity: |
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Preferred stock, no par value; authorized 100,000 shares; none issued |
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Common stock, par value $.01-2/3; authorized 30,000,000 shares; issued 11,077,711 shares at March 31 and 11,051,815 at June 30 |
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| 185,000 |
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| 184,000 |
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Capital in excess of par value of common stock |
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| 66,467,000 |
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| 66,498,000 |
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Accumulated deficit |
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| (11,783,000 | ) |
| (49,000 | ) |
Treasury stock, at cost, 1,796,894 shares at March 31 and 1,893,552 shares at June 30 |
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| (21,632,000 | ) |
| (22,796,000 | ) |
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Total shareholders’ equity |
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| 33,237,000 |
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| 43,837,000 |
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$ | 85,659,000 |
| $ | 121,543,000 | |||
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See Notes to Consolidated Financial Statements.
5
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
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| Nine Months Ended March, |
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| 2009 |
| 2008 |
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Operating activities: |
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Net earnings (loss) |
| $ | (11,734,000 | ) | $ | 65,000 |
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Loss on sale, net of tax |
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| 712,000 |
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Loss from discontinued operations, net of tax |
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| 46,000 |
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| 815,000 |
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Income (loss) from continuing operations, net of tax |
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| (10,976,000 | ) |
| 880,000 |
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Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: |
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Asset impairment charge |
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| 9,246,000 |
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Depreciation |
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| 2,076,000 |
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| 2,137,000 |
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Amortization |
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| 740,000 |
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| 605,000 |
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Deferred income taxes |
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| (5,345,000 | ) |
| 40,000 |
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Provisions for losses on accounts receivable |
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| 361,000 |
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| (373,000 | ) |
Issuance of stock retirement plan shares |
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| 268,000 |
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Issuance of stock to 401K plan |
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| 576,000 |
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| 798,000 |
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Share-based compensation expense |
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| 290,000 |
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| 579,000 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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| 5,444,000 |
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| 5,567,000 |
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Inventories |
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| 852,000 |
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| (1,850,000 | ) |
Other assets |
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| (640,000 | ) |
| (719,000 | ) |
Income taxes |
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| (132,000 | ) |
| 2,650,000 |
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Accounts payable and accrued expenses |
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| (3,347,000 | ) |
| (4,423,000 | ) |
Other long-term liabilities |
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| (27,000 | ) |
| 28,000 |
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Net cash (used in) provided by operating activities – continuing operations |
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| (614,000 | ) |
| 5,919,000 |
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Net cash used in operating activities – discontinued operations |
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| (1,545,000 | ) |
| (5,661,000 | ) |
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Net cash (used in) provided by operating activities |
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| (2,159,000 | ) |
| 258,000 |
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Investing activities: |
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Capital expenditures |
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| (1,446,000 | ) |
| (2,965,000 | ) |
Patent expenditures |
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| (71,000 | ) |
| (65,000 | ) |
Proceeds from sale of business |
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| 20,000,000 |
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Net cash provided by (used in) investing activities – continuing operations |
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| 18,483,000 |
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| (3,030,000 | ) |
Net cash used in investing activities – discontinued operations |
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| (25,000 | ) |
| (1,239,000 | ) |
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Net cash provided by (used in) investing activities |
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| 18,458,000 |
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| (4,269,000 | ) |
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Financing activities: |
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Proceeds from revolving credit agreement |
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| 22,800,000 |
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| 26,500,000 |
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Payments on revolving credit agreement |
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| (37,550,000 | ) |
| (18,500,000 | ) |
Payments on notes payable |
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| (122,000 | ) |
Payment of semi-annual cash dividend |
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| (1,829,000 | ) |
| (3,533,000 | ) |
Proceeds from exercise of stock options |
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| 84,000 |
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Purchase of treasury stock |
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| (2,000 | ) |
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Net cash (used in) provided by financing activities |
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| (16,579,000 | ) |
| 4,427,000 |
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(Decrease) increase in cash and cash equivalents |
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| (280,000 | ) |
| 416,000 |
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Cash and cash equivalents at beginning of period |
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| 408,000 |
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| 848,000 |
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Cash and cash equivalents at end of period |
| $ | 128,000 |
| $ | 1,264,000 |
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See Notes to Consolidated Financial Statements.
6
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. The accompanying unaudited consolidated financial statements present information in accordance with generally accepted accounting principles for interim financial information and applicable rules of Regulation S-X. Accordingly, they do not include all information or footnotes required by generally accepted accounting principles for complete financial statements. The June 30, 2008 consolidated balance sheet as presented was derived from the audited financial statements. The interim financial statements and notes should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2008. Management believes the financial statements include all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented.
Certain balances in fiscal 2008 have been reclassified to conform to the 2009 presentation. Included with the reclassifications are restatements for discontinued operations. The discontinued operations arise out of the divested Intersection Control segment.
Recently Adopted and Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued Financial Accounting Standard No. 157 (FAS No. 157), “Fair Value Measurements”. This statement clarifies the definition of fair value, establishes a framework for measuring fair value, and expands the disclosures on fair value measurements. In February 2008, the FASB issued FASB Staff Position FSP 157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2), which delays the effective date of FAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are disclosed at fair value in the financial statements on a recurring basis (at least annually). In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active”, which clarifies the application of FAS No. 157 in determining the fair values of assets or liabilities in a market that is not active. Staff Position No. FAS 157-3 became effective upon issuance, including prior periods for which financial statements have not been issued. We adopted FAS No. 157 related to financial assets and liabilities on July 1, 2008, as discussed further in footnote 11, and it did not have a material impact on our consolidated financial statements. We are currently evaluating the impact, if any, that FAS No. 157 may have on our future consolidated financial statements related to non-financial assets and liabilities.
In February 2007, the FASB issued FAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” FAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. We adopted FAS No. 159 on July 1, 2008. We did not adopt the fair value option permitted under this statement and therefore the adoption of this statement had no effect on our results of operations or financial position.
In March 2008, the FASB issued FAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an Amendment of FASB Statement 133”. FAS No. 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Our adoption of this statement effective January 1, 2009 did not impact our results of operations or financial position.
7
In December 2007, the FASB issued FAS No. 141 (revised 2007), “Business Combinations”, and FAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements”. FAS No. 141 (revised 2007) requires an acquirer to measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets acquired. This standard also requires the fair value measurement of certain other assets and liabilities related to the acquisition such as contingencies and research and development. FAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. In April 2009, the FASB issued FSP 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP 141(R)-1 amends and clarifies issues that arose regarding initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. The effective date for both Statements and FSP 141(R)-1 is the beginning of our fiscal 2010. We do not expect the adoption of FAS No. 141 (revised 2007), FSP 141(R)-1 and FAS No. 160 to have an impact on our results of operations or financial position, however, future transactions will need to be evaluated under the requirements of these standards.
In April 2008, the FASB issued Staff Position (FSP) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets” (FSP 142-3). This guidance is intended to improve the consistency between the useful life of a recognized intangible asset under FAS 142, “Goodwill and Other Intangible Assets” and the period cash flows used to measure the fair value of the asset under FAS 141R when the underlying arrangement includes renewal or extension of terms that would require substantial costs or result in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible asset must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for FAS 142’s entity-specific factors. The effective date for FAS 142-3 is the beginning of our fiscal 2010. We do not expect the adoption of this statement to have a material effect on our results of operations or financial position.
In May 2008, the FASB issued FSP Accounting Principles Board (APB) 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Settlement)” (FSP APB 14-1). FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. The effective date for FSP APB 14-1 is the beginning of our fiscal 2010. We are currently evaluating the impact that the adoption of FSP APB 14-1 will have on our results of operations and financial position.
In May 2008, the FASB issued FAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (FAS No. 162). FAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). FAS No. 162 will become effective 60 days following the SEC’s approval of the Public Company Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not currently expect the adoption of FAS No. 162 to have a material effect on our results of operations or financial position.
8
In April 2009, the FASB issued three new accounting standards which are required to be adopted no later than periods ending after June 15, 2009, which will be the beginning of our fiscal 2010. We are currently evaluating the impact of the following:
i) FASB Staff Position FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (FSP FAS 157-4), which provides guidelines for making fair value measurements more consistent with the principles presented in SFAS 157. FSP FAS 157-4 provides additional authoritative guidance in determining whether a market is active or inactive, and whether a transaction is distressed, is applicable to all assets and liabilities (i.e. financial and nonfinancial) and will require enhanced disclosures.
ii) FASB Staff Position FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” provides additional guidance to provide greater clarity about the credit and noncredit component of an other-than-temporary impairment event and to improve presentation and disclosure of other than temporary impairments in financial statements.
iii) FASB Staff Position FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments”, to require disclosures about fair value of financial instruments in interim as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in all interim financial statements.
2. On July 25, 2008, we sold our Intersection Control segment to Signal Group, Inc. for $20 million in cash. The Intersection Control segment sold products including traffic controllers, traffic and pedestrian signals, traffic uninterruptible power supply (UPS) systems, video detection equipment, toll road monitoring systems and parking detection devices. We have reflected the results of those operations as discontinued operations. We recognized a loss on sale of the Intersection Control segment of $712,000, net of income taxes of $436,000, in the first quarter of fiscal 2009. Also during that period in connection with the sale, approximately $11 million in deferred tax assets were recorded as net operating losses which were classified as other temporary differences as of June 30, 2008. These amounts were not classified as assets held for sale within our consolidated balance sheet as of June 30, 2008 as the net operating losses can be used to offset future consolidated income.
The results of discontinued operations are as follows:
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| Three months |
| Nine months ended |
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| 2008 |
| 2009 |
| 2008 |
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Net sales |
| $ | 7,001,000 |
| $ | 1,732,000 |
| $ | 22,717,000 |
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Loss from operations of discontinued operations before income taxes |
| $ | (822,000 | ) | $ | (75,000 | ) | $ | (1,314,000 | ) |
Loss from sale of assets of business |
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|
| (1,148,000 | ) |
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Loss before taxes |
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| (822,000 | ) |
| (1,223,000 | ) |
| (1,314,000 | ) |
Income tax benefit |
|
| (313,000 | ) |
| (465,000 | ) |
| (499,000 | ) |
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| ||||||
Loss from discontinued operations, net of income tax benefit |
| $ | (509,000 | ) | $ | (758,000 | ) | $ | (815,000 | ) |
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9
Assets and liabilities of the Intersection Control segment were classified as assets and liabilities held for sale within our consolidated balance sheet as of June 30, 2008 and consisted of the following:
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Assets: |
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Current assets |
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Accounts Receivable, net |
| $ | 6,270,000 |
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Inventories |
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| 13,134,000 |
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Other current assets |
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| 757,000 |
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| ||
Total current assets |
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| 20,161,000 |
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Property, plant and equipment |
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| 2,474,000 |
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Other assets |
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| 1,635,000 |
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| ||
Total assets of business held for sale |
| $ | 24,270,000 |
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Liabilities: |
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Total liabilities of business held for sale |
| $ | 5,520,000 |
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As of March 31, 2009, there were no assets of the Intersection Control segment due to the sale of the segment on July 25, 2008.
3. Share-based compensation cost recognized in the nine and three-month periods ended March 31, 2009 and 2008 includes compensation cost for share-based awards based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). As of March 31, 2009, we have 469,663 common shares reserved for future grants from our stock option and award plans. Our stock option and award plans are discussed in further detail in our Annual Report on Form 10-K for the year ended June 30, 2008.
Share-based Compensation Expense
The share-based compensation cost that has been charged to Selling and Administrative Expense for stock options and restricted stock awards under our stock option and award plans was $104,000 and $193,000 for the three-month periods ending March 31, 2009 and 2008, respectively and $290,000 and $579,000 for the nine-month periods ended March 31, 2009 and 2008, respectively. As of March 31, 2009, the total compensation cost related to unvested stock options and restricted stock granted under our stock option plans not yet recognized was approximately $441,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 1.6 years and will be adjusted for subsequent changes in estimated forfeitures. The 214,433 unvested stock options outstanding at March 31, 2009 had a weighted-average fair value of $2.25. The 13,532 shares of restricted stock unvested at March 31, 2009 had a fair value of $19.52.
Determining Fair Value
The fair value of stock options granted is estimated using the Black-Scholes option-pricing model that uses the assumptions noted below. Expected volatilities are based on historical volatility of the Company’s stock. We use historical data to estimate option exercise patterns, employee termination and forfeiture rates within the valuation model; separate groups of optionees that have similar historical exercise behavior are considered separately for valuation purposes. The expected term of options granted is derived from the output of the option valuation model and represents the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The expected dividend yield is determined by dividing the current level of per share dividend by the grant date stock price. We do not incorporate changes in dividends anticipated by management unless those changes have been communicated to marketplace participants.
10
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| Nine Months Ended March 31, | ||
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| 2009 |
| 2008 |
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Risk free interest rate |
| 2.9% |
| 3.8% |
Expected dividend yield |
| 4.57% |
| 2.11% |
Weighted average expected volatility |
| 39% |
| 37% |
Expected term |
| 3.9 – 6.0 yrs |
| 6.0 yrs |
Weighted average expected term |
| 4.3 yrs |
| 6.0 yrs |
Weighted average grant date fair value |
| $1.68 |
| $6.35 |
The fair value of the options granted is being amortized on a straight-line basis over the requisite service period, which is generally the vesting period.
The fair value of the restricted stock granted in the first quarter of fiscal 2008 was determined and fixed based on the price of our stock at the time of the grant. The fair value of the restricted stock awarded is being amortized on a straight-line basis over the requisite service period, which is the vesting period.
Stock Option and Restricted Stock Activity
Information with respect to stock option activity under our plans is as follows:
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| Common Shares |
| Weighted- |
| Weighted- |
| Aggregate |
| ||||
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Outstanding at July 1, 2007 |
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| 859,203 |
| $ | 18.54 |
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Granted |
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| 20,000 |
| $ | 18.93 |
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Exercised |
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| (20,000 | ) | $ | 8.34 |
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Cancelled or expired |
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| (26,800 | ) | $ | 21.06 |
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Outstanding at March 31, 2008 |
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| 832,403 |
| $ | 18.72 |
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| 2.7 Years |
| $ | 0 |
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Outstanding at July 1, 2008 |
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| 830,670 |
| $ | 18.72 |
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Granted |
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| 172,100 |
| $ | 7.36 |
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Exercised |
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Cancelled or expired |
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| (102,434 | ) | $ | 17.39 |
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Outstanding at March 31, 2009 |
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| 900,336 |
| $ | 16.70 |
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| 2.4 Years |
| $ | 0 |
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Vested at March 31, 2009 |
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| 685,903 |
| $ | 18.89 |
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| 1.8 Years |
| $ | 0 |
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Options outstanding as of March 31, 2009 are exercisable as follows: 685,903 currently, 116,369 within one year, 49,029 in two years and 49,035 in three years. As of March 31, 2008, 690,512 options were exercisable. During the nine-month periods ended March 31, 2009 and 2008, the following stock option activity occurred under our plans:
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| Nine Months Ended |
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| March 31, |
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| 2009 |
| 2008 |
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Total intrinsic value of stock options exercised |
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| $ | 153,000 |
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Total fair value of stock options vested |
| $ | 356,000 |
| $ | 747,000 |
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11
Information with respect to restricted stock activity under our plans is as follows:
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| Number of Shares |
| Weighted- |
| ||
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| ||||
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Outstanding at July 1, 2007 |
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Restricted stock granted |
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| 29,100 |
| $ | 19.52 |
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Restricted stock vested |
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Cancelled or expired |
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Unvested at March 31, 2008 |
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| 29,100 |
| $ | 19.52 |
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Outstanding at July 1, 2008 |
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| 29,100 |
| $ | 19.52 |
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Restricted stock granted |
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Restricted stock vested |
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| (9,102 | ) | $ | 19.52 |
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Cancelled or expired |
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| (6,466 | ) | $ | 19.52 |
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Unvested at March 31, 2009 |
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| 13,532 |
| $ | 19.52 |
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Vested at March 31, 2009 |
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| 9,102 |
| $ | 19.52 |
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We also had a retirement stock award program for certain of our key executives which ended with the final issuance of shares in July 2008. The retirement stock award program resulted in a charge to earnings for compensation expense of $268,000 for the nine months ended March 31, 2009 and $160,000 for the nine months ended March 31, 2008.
4. The income tax benefit for the current quarter is based upon the estimated effective income tax rate for the full fiscal year.
On July 1, 2007 we adopted FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” as required under U.S. generally accepted accounting principles. We had unrecognized tax benefits of $227,000 as of March 31, 2009 and June 30, 2008, of which $189,000, if recognized, would favorably affect our income tax rate. The tax liability under FIN 48 is recorded in accrued expenses.
We record the interest related to uncertain tax positions as interest expense during the period incurred. Penalties related to uncertain tax positions, which have historically been immaterial, are recorded as part of the income tax expense during the period incurred. In accrued expenses, we had accrued $39,000 for interest and $6,000 for penalties as of March 31, 2009 and $37,000 for interest and $5,000 for penalties as of June 30, 2008.
We file income tax returns in jurisdictions of operation, including federal, state and international jurisdictions. At times, we are subject to audits in these jurisdictions. The final resolution of any such tax audit could result in either a reduction in our accruals or an increase in our income tax provision, both of which could have an impact on consolidated results of operations in any given period. U.S. federal income tax returns have been audited through fiscal 2004. The tax years 2005 through 2008 remain open to examination by the other major taxing authorities to which we are subject. We currently have no significant audits in process. We do not anticipate significant changes in the unrecognized tax benefits within the next twelve months as the result of examinations or lapse of statues of limitations to be material to our results of operations or financial position.
12
5. Operating results for the first nine months of fiscal 2009 are not necessarily indicative of the performance for the entire year. Our business is generally seasonal with a higher level of sales in the fourth fiscal quarter.
6.The computation of basic and diluted earnings per share is as follows:
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| Nine Months Ended |
| Three Months Ended |
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| 2009 |
| 2008 |
| 2009 |
| 2008 |
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Numerator: |
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Earnings (loss) from continuing operations |
| $ | (10,976,000 | ) | $ | 880,000 |
| $ | (8,583,000 | ) | $ | (655,000 | ) |
Loss from discontinued operations |
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| (46,000 | ) |
| (815,000 | ) |
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| (509,000 | ) |
Loss on sale of discontinued operations |
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| (712,000 | ) |
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Net earnings (loss) |
| $ | (11,734,000 | ) | $ | 65,000 |
| $ | (8,583,000 | ) | $ | (1,164,000 | ) |
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Denominator: |
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Weighted average shares outstanding-basic |
|
| 9,226,818 |
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| 9,087,053 |
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| 9,265,533 |
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| 9,113,751 |
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Effect of dilutive securities- common stock options |
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| 51,710 |
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Weighted average shares outstanding-diluted |
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| 9,226,818 |
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| 9,138,763 |
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| 9,265,533 |
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| 9,113,751 |
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Earnings (loss) per share of common stock - basic: |
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Earnings (loss) from continuing operations |
| $ | (1.19 | ) | $ | 0.10 |
| $ | (0.93 | ) | $ | (0.07 | ) |
Loss from discontinued operations |
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| (0.09 | ) |
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| (0.06 | ) |
Loss on sale of discontinued operations |
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| (0.08 | ) |
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Net earnings (loss) |
| $ | (1.27 | ) | $ | 0.01 |
| $ | (0.93 | ) | $ | (0.13 | ) |
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Earnings (loss) per share of common stock - diluted: |
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Earnings (loss) from continuing operations |
| $ | (1.19 | ) | $ | 0.10 |
| $ | (0.93 | ) | $ | (0.07 | ) |
Loss from discontinued operations |
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| (0.09 | ) |
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| (0.06 | ) |
Loss on sale of discontinued operations |
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| (0.08 | ) |
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Net earnings (loss) |
| $ | (1.27 | ) | $ | 0.01 |
| $ | (0.93 | ) | $ | (0.13 | ) |
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There were outstanding options to purchase common stock at prices that exceeded the average market price for the income statement periods. These options have been excluded from the computation of diluted earnings per share for the three and nine-month periods ended March 31, 2009 and 2008 and are as follows:
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| Nine Months Ended |
| Three Months Ended |
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| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
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Average exercise price per share |
| $ | 16.98 |
| $ | 21.17 |
| $ | 16.70 |
| $ | 19.98 |
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Number of shares |
|
| 880,336 |
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| 507,733 |
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| 900,336 |
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| 677,403 |
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In addition, employee stock options totaling 18,903 shares for the three-month period ending March 31, 2008 were not included in the diluted weighted average shares calculation because the effects of these securities were anti-dilutive.
13
7. Accumulated other comprehensive income consisted of the following as of March 31, 2008:
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| Unrealized gain on derivative instrument: |
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| Beginning balance – July 1 |
| $ | 109,000 |
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| Amortization to earnings |
|
| (89,000 | ) |
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| Total accumulated comprehensive income |
| $ | 20,000 |
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8. We have two continuing reportable segments, one which manufactures and sells products that Protect and Direct and one which manufactures and sells products that Inform. In July, 2008, our Intersection Control segment was divested. The operations from this business segment have been included in discontinued operations, and are discussed in more detail in Note 2 on dispositions. The segment information included below has been reclassified to reflect such discontinued operations.
The primary product lines within the Protect and Direct segment include energy-absorbing products such as crash cushions, truck-mounted attenuators, sand-filled barrels and barriers as well as highway delineators. The products within this segment absorb and dissipate the force of impact in collisions between vehicles and fixed roadside objects as well as prevent collisions and help to control the flow of traffic by directing or guiding. The primary product lines within the Inform segment include highway advisory radio systems; advanced sensing products which measure distance, count and classify vehicles; weather sensing systems and other transportation equipment. The products within this segment provide information to prevent collisions from occurring and to ease traffic congestion.
The majority of our sales of highway and transportation safety products are to distributors and contractors who then provide product and services to federal, state and local governmental units. Our business is conducted principally in the United States, our country of domicile, with sales outside the United States of $19,514,000 and $16,330,000 for the nine months ended March 31, 2009 and 2008, respectively, and $6,108,000 and $4,326,000 for the three months ended March 31, 2009 and 2008, respectively. Inter-company sales between segments represented less than one percent of consolidated net sales in each of those periods.
Our reportable segments are based on similarities in products and represent the aggregation of operating units for which financial information is regularly evaluated in determining resource allocation and assessing performance. We evaluate the performance of our segments and allocate resources to them based on operating income as well as other factors. Operating income is determined by deducting operating expenses from all revenues. In computing operating income, none of the following has been added or deducted: unallocated corporate expenses, interest income or expense, other income or loss or income tax provisions or benefits. Corporate assets consist primarily of cash and cash equivalents, depreciable assets and income tax assets. Accounting policies for the segments are the same as those for the Company.
The following table presents financial information about our continuing operations by segment for the nine and three-month periods ended March 31, 2009 and 2008 along with the items necessary to reconcile the segment information to the totals reported in the consolidated financial statements.
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Protect and |
| Inform |
| Unallocated |
| Total |
| ||||
|
|
|
|
|
| ||||||||
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from external customers |
| $ | 51,244,000 |
| $ | 16,057,000 |
|
|
|
| $ | 67,301,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
| $ | 1,388,000 |
| $ | (8,992,000 | ) | $ | (5,629,000 | ) | $ | (13,233,000 | ) |
Unallocated interest and other |
|
|
|
|
|
|
|
| (2,623,000 | ) |
| (2,623,000 | ) |
|
|
|
|
|
| ||||||||
Total earnings (loss) from continuing operations before taxes |
| $ | 1,388,000 |
| $ | (8,992,000 | ) | $ | (8,252,000 | ) | $ | (15,856,000 | ) |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
| $ | 50,579,000 |
| $ | 13,089,000 |
| $ | 21,991,000 |
| $ | 85,659,000 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from external customers |
| $ | 16,241,000 |
| $ | 5,864,000 |
|
|
|
| $ | 22,105,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
| $ | (509,000 | ) | $ | (9,067,000 | ) | $ | (1,580,000 | ) | $ | (11,156,000 | ) |
Unallocated interest and other |
|
|
|
|
|
|
|
| (841,000 | ) |
| (841,000 | ) |
|
|
|
|
|
| ||||||||
Total loss from continuing operations before taxes |
| $ | (509,000 | ) | $ | (9,067,000 | ) | $ | (2,421,000 | ) | $ | (11,997,000 | ) |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from external customers |
| $ | 56,815,000 |
| $ | 16,437,000 |
|
|
|
| $ | 73,252,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
| $ | 8,383,000 |
| $ | 1,336,000 |
| $ | (5,332,000 | ) | $ | 4,387,000 |
|
Unallocated interest and other |
|
|
|
|
|
|
|
| (2,968,000 | ) |
| (2,968,000 | ) |
|
|
|
|
|
| ||||||||
Total earnings (loss) from continuing operations before taxes |
| $ | 8,383,000 |
| $ | 1,336,000 |
| $ | (8,300,000 | ) | $ | 1,419,000 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets |
| $ | 55,447,000 |
| $ | 22,520,000 |
| $ | 18,178,000 |
| $ | 96,145,000 |
|
Assets held for sale |
|
|
|
|
|
|
|
| 23,996,000 |
|
| 23,996,000 |
|
|
|
|
|
|
| ||||||||
Total identifiable assets |
| $ | 55,447,000 |
| $ | 22,520,000 |
| $ | 42,174,000 |
| $ | 120,141,000 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales from external customers |
| $ | 17,753,000 |
| $ | 5,116,000 |
|
|
|
| $ | 22,869,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
| $ | 1,383,000 |
| $ | 12,000 |
| $ | (1,718,000 | ) | $ | (323,000 | ) |
Unallocated interest and other |
|
|
|
|
|
|
|
| (732,000 | ) |
| (732,000 | ) |
|
|
|
|
|
| ||||||||
Total earnings (loss) from continuing operations before taxes |
| $ | 1,383,000 |
| $ | 12,000 |
| $ | (2,450,000 | ) | $ | (1,055,000 | ) |
|
|
|
|
|
|
9.Intangible assets consist of the following:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| March 31, 2009 |
| June 30, 2008 |
| ||||||||||||||
|
|
|
| ||||||||||||||||
|
| Gross |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| ||||||
|
|
|
|
|
|
|
| ||||||||||||
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and licenses |
| $ | 3,817,000 |
| $ | 2,333,000 |
| $ | 1,484,000 |
| $ | 3,746,000 |
| $ | 2,160,000 |
| $ | 1,586,000 |
|
Technology and installed base |
|
| 1,271,000 |
|
| 899,000 |
|
| 372,000 |
|
| 1,271,000 |
|
| 849,000 |
|
| 422,000 |
|
Customer relationships |
|
| 200,000 |
|
| 200,000 |
|
|
|
|
| 200,000 |
|
| 200,000 |
|
|
|
|
Trade names |
|
| 330,000 |
|
| 157,000 |
|
| 173,000 |
|
| 330,000 |
|
| 132,000 |
|
| 198,000 |
|
Other |
|
| 20,000 |
|
| 20,000 |
|
|
|
|
| 20,000 |
|
| 20,000 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total |
| $ | 5,638,000 |
| $ | 3,609,000 |
| $ | 2,029,000 |
| $ | 5,567,000 |
| $ | 3,361,000 |
| $ | 2,206,000 |
|
|
|
|
|
|
|
|
|
15
Intangible amortization expense was $248,000 and $235,000, respectively, in the nine-month periods ended March 31, 2009 and 2008. The estimated amortization expense for this fiscal year ended June 30, 2009 and for the five fiscal years subsequent to 2009 is as follows: $326,000, $324,000, $322,000, $268,000, $264,000 and $254,000. The carrying amount of goodwill consists of $8,139,000 for the Protect and Direct segment as of March 31, 2009 and as of June 30, 2008 and $9,246,000 for the Inform segment as of June 30, 2008. The remaining goodwill of the Inform segment was written off in the current quarter as described in footnote 13.
10. Disclosures regarding guarantees, commitments and contingencies are provided below.
Lease Commitments
We use various leased facilities and equipment in our operations. The terms for these leased assets vary depending on the lease agreements. These operating leases may include options for renewal and we may guarantee the performance of our obligations under the leases. Annual minimum future rental payments for lease commitments will be approximately $352,000 for the remainder of fiscal year 2009, a total of $2,265,000 in fiscal years 2010 to 2011, a total of $239,000 in fiscal years 2012 to 2013 and $106,000 thereafter, for an aggregate of $2,962,000.
Product Warranty Liability
We warrant to the original purchaser of our products that we will, at our option, repair or replace, without charge, such products if they fail due to a manufacturing defect. The term of these warranties vary by product, the majority of which range from 90 days to 5 years. We accrue for product warranties, when, based on available information, it is probable that customers will make claims under warranties relating to products that have been sold, and a reasonable estimate of the costs can be made. Our estimated product warranty liability for the nine-month periods ended March 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
| 2009 |
| 2008 |
| ||
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| Beginning Balance - July 1 |
| $ | 130,000 |
| $ | 231,000 |
|
| Warranties issued |
|
| 153,000 |
|
| 358,000 |
|
| Repairs, replacements and settlements |
|
| (127,000 | ) |
| (351,000 | ) |
| Changes in liability for pre-existing warranties, including expirations |
|
|
|
|
| (50,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Ending balance – March 31 |
| $ | 156,000 |
| $ | 188,000 |
|
|
|
|
|
|
Legal
We are involved in several pending judicial proceedings for product liability and other damages arising out of the conduct of our business. We record loss contingencies where appropriate within the guidelines established by Statement of FAS No. 5 “Accounting for Contingencies”. While the outcome of litigation is subject to uncertainties, we believe, after consultation with counsel, that the outcome of these proceedings, based on current available information and after taking into account the availability and limits of our insurance coverage, will not have a material effect on our consolidated financial condition and results of operations.
Executive Agreements
We have agreements with certain named executives which are designed to retain the services of key employees and to provide for continuity of management in the event of an actual or threatened change in control of the Company. Upon occurrence of a triggering event after a change in control, as defined, we would be liable for payment of benefits under these agreements, of approximately $4.1 million. A portion of these benefits will fluctuate based upon the share price at the time of the triggering event. We also have employment agreements with certain key executives which are designed to retain the services of those key employees. Upon occurrence of a triggering event under these agreements, we would be liable for payment of certain benefits under these agreements of approximately $1.6 million.
16
We have by-laws and agreements under which we indemnify our directors and officers from liability for certain events or occurrences while the directors or officers are, or were, serving at the Company’s request in such capacities. The term of the indemnification period is for the director’s or officer’s lifetime. We believe that any obligations relating to this indemnification are predominantly covered by insurance subject to certain exclusions and deductibles. Historically, we have not made payments under these executive agreements, and no amount has been accrued in the accompanying consolidated financial statements.
Indemnification of Lenders and Agents Under Credit Facilities
Under our credit facility, we have agreed to indemnify our lender against costs or losses resulting from changes in laws and regulations which would increase the lender’s costs, and from any legal action brought against the lender related to the use of loan proceeds. These indemnification provisions generally extend for the term of the credit facility and do not provide for any limit on the maximum potential liability. Historically, we have not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees.
Bid and Performance Bonds
We have entered into bid and performance related bonds associated with various contracts. Potential payments due under these bonds are related to our performance under the applicable contract. The total amount of bid and performance related bonds that were available and undrawn was $3,111,000 as of March 31, 2009 and $2,684,000 as of June 30, 2008. Historically, customers have not drawn upon these instruments due to non-performance, and no amount has been accrued in the accompanying consolidated financial statements.
Other Commitments
We have standby letters of credit covering potential workers’ compensation liabilities. The total amount of standby letters of credit that were outstanding was $1,120,000 as of March 31, 2009 and $1,012,000 as of June 30, 2008. We have included $557,000 in accrued liabilities for potential workers’ compensation liabilities as of March 31, 2009.
We have certain non-cancelable royalty agreements, which contain certain minimum payments in the aggregate of $1,110,000 through fiscal year 2012. We have included $207,000 in accrued liabilities for current obligations relating to royalty agreements as of March 31, 2009.
11. On July 1, 2008, we adopted FAS No. 157, “Fair Value Measurements”, related to financial assets and liabilities. In accordance with FASB Staff Position No. FAS 157-2, “Effective Date of SFAS 157”, we deferred the adoption of FAS No. 157 for nonfinancial assets and nonfinancial liabilities for one year. The effect of the adoption of FAS No. 157 was not material, resulting only in increased disclosures.
FAS No. 157 establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires that assets and liabilities carried at fair value be classified and disclosed in categories.
|
|
| Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
|
|
| Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. |
|
|
| Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity). |
17
We chose not to elect the fair value accounting option as prescribed by FAS No. 159 for our financial assets and liabilities. Our financial instruments, which consist principally of cash, accounts receivable, accounts payable, short-term debt and convertible debt, are carried at cost. The carrying value of our cash, accounts receivable, accounts payable and accrued liabilities approximates fair value due to their short maturities. The carrying value of our short-term debt from our revolving credit facility approximates fair value due to the variable-rate nature of the respective borrowings. There is very limited trading of the company’s convertible notes payable. The fair value of the company’s convertible notes is estimated at $28,000,000, based on the most recent data available, which is at 70% of par value. The convertible notes are recorded on the balance sheet at par value of $40,000,000 as of March 31, 2009.
12. We recorded $329,000 in severance costs in the third quarter of fiscal 2009 related to workforce reductions primarily within the Protect and Direct segment. We recorded $843,000 in severance costs in the second quarter of fiscal 2009 related to the retirement of our former chief executive officer and a senior executive within the Protect and Direct segment.
13. During the fourth quarter of fiscal 2008, we performed the annual impairment review of our goodwill and intangible assets and concluded that no impairment had occurred. Subsequent to December 31, 2008, our common stock price declined such that the market value of our common equity became lower than our book value and the stock price remained depressed for a sustained period during the current third quarter. In addition, the current economic conditions which began to adversely impact our business to a significant extent during the second quarter of fiscal 2009 continued for a sustained period into the third quarter. As a result, management performed an interim asset impairment assessment of our goodwill and intangible assets during the current third quarter. We performed the interim first step of the asset impairment test for both of our segments and determined that the carrying value of our Inform segment exceeded its fair value, indicating that goodwill of that segment was impaired. Having determined that the Inform segment goodwill was impaired, we then performed the second step of the goodwill impairment test which involves calculating the implied fair value of goodwill by allocating the fair value of the segment to all of its assets and liabilities other than goodwill and comparing the residual amount to the carrying value of goodwill. Based upon that test, we determined that the entire amount of the Inform segment goodwill was impaired and we recorded a goodwill impairment charge in the Inform segment of $9,246,000, or $6,877,000 net of income tax benefits, in the third quarter of fiscal 2009.
18
PART I – FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We develop, manufacture and market highway and transportation safety products to protect, direct and inform motorists, pedestrians and road workers in both domestic and international markets. Our continuing operations are comprised of two reportable segments within the highway and transportation safety industry. Our two reportable segments are: the manufacture and sale of highway and transportation safety products which Protect and Direct and the manufacture and sale of highway products and services which Inform motorists and highway personnel. The Protect and Direct segment provides solutions for improving safety on the roads either by minimizing the severity of crashes that occur or by preventing crashes from occurring by directing or guiding traffic. The primary product lines within the Protect and Direct segment include energy-absorbing products such as crash cushions, truck-mounted attenuators, sand-filled barrels and water-filled barriers, and directing and guiding products such as flexible post delineators and glare screen systems. The Inform segment provides solutions for improving traffic flow and safety on roads and runways by providing information. The primary product lines within the Inform segment include advanced sensing products which measure distance, count and classify vehicles; weather sensing systems and computerized highway advisory radio transmitting systems.
Our products are sold worldwide primarily through a distribution network and supplemented by a direct sales force to customers in the highway construction and safety business, state and municipal departments of transportation, and other governmental transportation agencies. The domestic market for highway and transportation safety products is directly affected by federal, state and local governmental policies and budgets. A portion of our domestic sales is ultimately financed by funds provided to the states by the federal government. Historically, these funds have covered 75% to 90% of the cost of highway safety projects on roads constructed or maintained with federal assistance. Seasonality affects our business with generally a higher level of sales in our fourth fiscal quarter.
Due to the continuing difficult economic conditions and its negative impact on infrastructure spending as well as the events that continue to adversely affect the credit markets, management has placed increased emphasis on reducing costs and monitoring the risks associated with the current environment, particularly the collectibility of accounts receivable and our liquidity. If the economic environment continues to deteriorate, we could experience difficulties due to the financial viability of certain of our customers and suppliers. Increased costs and imposition of more stringent terms and conditions by our suppliers as well as delays in payment and higher default rates by our customers could affect our financial performance. In addition, the volatility of our stock price and declines in our market capitalization could put pressure on the carrying value of goodwill in our Protect and Direct segment and other long-lived assets if these conditions persist for an extended time. See Significant Accounting Policies and Critical Estimates for further information. The holders of our $40,000,000 of convertible notes may require us to repurchase the notes in cash at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any, as early as February 15, 2010. If that occurs, there can be no assurance that we will be able to refinance this debt on a timely basis and on satisfactory terms, if at all. Management will continue to monitor the risks associated with the current economic environment and their impact on our results. See FINANCIAL CONDITION for further information.
19
DISCONTINUED OPERATIONS
On July 25, 2008, we sold our Intersection Control segment to Signal Group, Inc. for $20 million in cash. The Intersection Control segment sold products including traffic controllers, traffic and pedestrian signals, traffic uninterruptible power supply (UPS) systems, video detection equipment and toll road monitoring systems. Accordingly, we reflect the results of those operations as discontinued operations for all periods presented. The assets and liabilities of the divested segment were classified as assets and liabilities held for sale within our consolidated balance sheets until the sale. In the first quarter of fiscal 2009, we recorded a loss on the sale of this business of $712,000, net of income taxes. The sale of this business allowed us to reduce the amount outstanding against our revolving credit facility.
RESULTS OF OPERATIONS
Overall, we saw decreased sales and profitability for the first nine months and the third quarter of fiscal 2009 compared with the same periods last year, primarily due to the effects of the current economic downturn on infrastructure spending. Our results for the quarter reflect improvement in our business over the second quarter of fiscal 2009. For the current third quarter, sales decreased 3% compared to the third quarter of last year due to decreased domestic sales in the Protect and Direct segment, which were partially offset by increased international sales in both segments as well as increased domestic sales in the Inform segment. International sales for the third quarter of fiscal 2009 increased 41% compared to the third quarter last year due to increased sales across most regions. Domestic sales decreased 14% compared to the third quarter of last year. Sales in our Protect and Direct segment decreased 9% while sales in our Inform segment increased 15% compared to the third quarter of last year. The decreased sales volume in the quarter resulted in an operating loss for the Protect and Direct segment for the quarter. Excluding a $9,246,000 non-cash asset impairment charge recorded within the Inform segment, the segment recorded operating profit for the current quarter. See FUTURE OUTLOOK for further information.
20
The following table sets forth selected key operating statistics relating to the financial results of our continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
|
|
| ||||||||||
|
| 2009 |
| 2008 |
| 2009 |
| 2008 |
| ||||
|
|
|
|
|
| ||||||||
Revenues by Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Protect and Direct |
| $ | 16,241,000 |
| $ | 17,753,000 |
| $ | 51,244,000 |
| $ | 56,815,000 |
|
Inform |
|
| 5,864,000 |
|
| 5,116,000 |
|
| 16,057,000 |
|
| 16,437,000 |
|
|
|
|
|
|
| ||||||||
|
| $ | 22,105,000 |
| $ | 22,869,000 |
| $ | 67,301,000 |
| $ | 73,252,000 |
|
|
|
|
|
|
| ||||||||
Geographic Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
| $ | 15,997,000 |
| $ | 18,543,000 |
| $ | 47,787,000 |
| $ | 56,922,000 |
|
International |
|
| 6,108,000 |
|
| 4,326,000 |
|
| 19,514,000 |
|
| 16,330,000 |
|
|
|
|
|
|
| ||||||||
|
| $ | 22,105,000 |
| $ | 22,869,000 |
| $ | 67,301,000 |
| $ | 73,252,000 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) by Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Protect and Direct |
| $ | (509,000 | ) | $ | 1,383,000 |
| $ | 1,388,000 |
| $ | 8,383,000 |
|
Inform |
|
| (9,067,000 | ) (1) |
| 12,000 |
|
| (8,992,000 | ) (1) |
| 1,336,000 |
|
Unallocated Corporate |
|
| (1,580,000 | ) |
| (1,718,000 | ) |
| (5,629,000 | ) |
| (5,332,000 | ) |
|
|
|
|
|
| ||||||||
|
| $ | (11,156,000 | ) | $ | (323,000 | ) | $ | (13,233,000 | ) | $ | 4,387,000 |
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit percentage |
|
| 25.6 | % |
| 31.3 | % |
| 28.2 | % |
| 34.9 | % |
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses as a percentage of sales |
|
| 29.7 | % |
| 28.8 | % |
| 28.9 | % |
| 25.3 | % |
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Diluted earnings (loss) from continuing operations per share |
| $ | (0.93 | ) | $ | (0.07 | ) | $ | (1.19 | ) | $ | 0.10 |
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(1) Includes a $9,246,000 non-cash asset impairment charge.
Revenues
Our net sales for the third quarter of fiscal 2009 decreased $764,000, or 3%, to $22,105,000 from $22,869,000 for the third quarter last year, with decreases in Protect and Direct segment domestic sales partially offset by increased international sales in both segments and increased domestic sales in the Inform segment. The decrease in domestic sales for the Protect and Direct segment in the quarter was due to continuing softness in the domestic market for our Protect and Direct products.
Our net sales for the first nine months of fiscal 2009 decreased $5,951,000, or 8%, to $67,301,000 from $73,252,000 for the same period last year with sales decreases in both the Protect and Direct segment and the Inform segment. Increased international sales in both segments were partially offset by decreased domestic sales primarily due to the effects of the current economic downturn on infrastructure spending.
21
Geographic - International sales for the third quarter of fiscal 2009 increased $1,782,000, or 41%, to $6,108,000, compared to $4,326,000 for the third quarter last year, with increased sales in most regions and particularly in Canada, Europe and Latin America. International sales for the Protect and Direct segment increased 42% primarily due to increased sales of ABC Terminal products in Europe and Latin America and to increased truck mounted attenuator and crash cushion product sales in Canada. International sales for the Inform segment increased 39%, primarily due to large sales of traffic sensors in Argentina and Thailand. Domestic sales for the third quarter of fiscal 2009 decreased 14% to $15,997,000 from $18,543,000 due to decreased sales in the Protect and Direct segment caused by the effects of the domestic economic downturn and state and municipal budgetary constraints.
International sales for the first nine months of fiscal 2009 increased $3,184,000, or 19%, to $19,514,000, compared to $16,330,000 for the same period last year, with increased sales in both segments. International sales for the Protect and Direct segment increased 20% over the first nine months of last year due to increased sales Canada, Europe, Latin America and the Mideast/Africa region. Protect and Direct sales in Asia decreased over the prior year period primarily because approximately $1,000,000 in sales in China during the second quarter last year were not repeated in fiscal 2009. International sales for the Inform segment increased 15% primarily due to increased sales in Latin America and the Asia Pacific region in the first nine months of fiscal 2009. Domestic sales for the first nine months of fiscal 2009 decreased 16% to $47,787,000 from $56,922,000 due to decreased sales in both segments
Protect and Direct – Net sales for the Protect and Direct segment for the third quarter of fiscal 2009 decreased 9% to $16,241,000 from $17,753,000 for the third quarter last year with decreases in domestic sales offsetting increased international sales. Decreased sales of permanent crash cushions, parts, Triton® water-filled barriers and delineators were partially offset by increased sales of truck mounted attenuators, barrels and ABC terminals. We continue to see strong demand for ABC terminals in the international markets and particularly in Europe.
Net sales for the Protect and Direct segment for the first nine months of fiscal 2009 decreased 10% to $51,244,000 from $56,815,000 for the same period last year. Increased international sales were offset by decreased domestic sales in the period. The decrease in sales for the first nine months of this year was across most major product lines, particularly truck mounted attenuators and permanent crash cushions, which were offset somewhat by increased sales of ABC terminals and barrels.
Inform – Net sales for the Inform segment for the third quarter of fiscal 2009 increased 15%, or $748,000, to $5,864,000 from $5,116,000 for the third quarter last year. The increase in sales in the current third quarter compared to the third quarter of fiscal 2008 was due to increases across most major product lines.
Net sales for the Inform segment for the first nine months of fiscal 2009 decreased 2%, or $380,000, to $16,057,000 from $16,437,000 for the same period last year. Increased international sales in the current nine-month period were offset by decreased domestic sales. Increased sales of traffic and weather sensors in the first nine months of this year were more than offset by decreased sales of highway advisory radio products.
Gross Profit Margin
Our gross profit margin for the third quarter of fiscal 2009 was 25.6% compared to 31.3% for the third quarter last year. The gross margin for the Protect and Direct segment declined due to manufacturing inefficiencies related to the lower sales volume and due to unfavorable product sales mix with higher sales of ABC terminals, which have lower gross margins than some other product lines. The gross margin for the Inform segment improved slightly due to volume efficiencies.
22
Our gross profit margin for the first nine months of fiscal 2009 was 28.2% compared to 34.9% primarily due to manufacturing inefficiencies related to the lower sales volume and the fixed nature of many of our expenses and in part due to unfavorable product sales mix with increased sales of ABC Terminals and other third-party manufactured items which have lower gross margins.
Selling and Administrative Expenses
Selling and administrative expenses for the third quarter of fiscal 2009 decreased $33,000, or 1%, to $6,564,000 from $6,597,000 for the third quarter last year. Decreased selling and administrative expenses related to headcount reductions and other cost-savings initiatives were largely offset by increased bad debt expense and legal costs. Selling and administrative expenses increased as a percentage of sales to 29.7% for the third quarter of 2009 from 28.8%.
Selling and administrative expenses for the first nine months of fiscal 2009 increased $856,000, or 5%, to $19,419,000 from $18,563,000 for the same period last year. Selling and administrative expenses in the Protect and Direct and the Inform segments increased due to higher bad debt expenses in both segments and to increased legal and marketing promotion costs in the Protect and Direct segment. Selling and administrative expenses increased as a percentage of sales to 28.9% for the first nine months of 2009 from 25.3% last year.
Research and Development
Research and development expenditures for the third quarter of fiscal 2009 decreased $201,000, or 23%, to $674,000 from $875,000 for the same period last year due to decreases in both segments, primarily caused by headcount reductions.
Research and development expenditures for the nine months of fiscal 2009 decreased $209,000, or 8%, to $2,394,000 from $2,603,000 for the same period last year due to decreases in both segments, primarily caused by headcount reductions.
Severance Costs
We recorded $329,000 in severance costs in the third quarter of fiscal 2009 related to headcount reductions in both segments. Of this amount, the Protect and Direct segment recorded $262,000 and the Inform segment recorded $67,000.
We recorded $1,172,000 in severance costs in the first nine months of fiscal 2009 related to the retirement of our former chief executive officer and a senior executive within the Protect and Direct segment as well as to headcount reductions in both segments. Of this amount, the Protect and Direct segment recorded $323,000, the Inform segment recorded $67,000 and $782,000 was recorded as unallocated corporate expenses.
Asset Impairment Charge
We performed an interim asset impairment assessment as our common stock price remained depressed during the current third quarter, causing our market capitalization to remain below our carrying value for a sustained period and also due to the extent and duration the current economic conditions have affected our operating results. We recorded a non-cash asset impairment charge of $9,246,000 or $6,877,000 net of income taxes, in the third quarter representing the remaining portion of the goodwill recorded for the Inform segment.
23
Operating Profit (Loss)
The operating loss for the third quarter of fiscal 2009 was $11,156,000, compared to an operating loss of $323,000 for the third quarter of fiscal 2008. For the third quarter of fiscal 2009, the operating loss for the Protect and Direct Group was $509,000, compared to operating profit of $1,383,000 in the same period last year, primarily due to the lower sales volume and unfavorable product sales mix. The operating loss for the Inform segment was $9,067,000 including a $9,246,000 non-cash asset impairment charge compared to operating profit of $12,000 for the third quarter of last year. The operating loss for the third quarter of fiscal 2009 also included severance costs of $329,000.
The operating loss for the first nine months of fiscal 2009 was $13,233,000, compared to operating profit of $4,387,000 for the first nine months of fiscal 2008. For the first nine months of fiscal 2009, operating profit for the Protect and Direct Group was $1,388,000, compared to operating profit of $8,383,000 in the same period last year, primarily due to the lower sales volume and unfavorable product sales mix. The operating loss for the Inform segment was $8,992,000 including a $9,246,000 non-cash asset impairment charge compared to operating profit of $1,336,000 for the first nine months of last year. The operating loss for the first nine months of fiscal 2009 also included severance costs of $1,172,000.
Interest Expense
Interest expense for the third quarter of fiscal 2009 decreased $220,000, or 21% to $848,000 from $1,068,000 for the third quarter last year, primarily due to the lower level of revolving debt outstanding and also to the lower interest rates on our revolving debt. The interest rate on our bank facility is based on LIBOR or the British Bankers Association LIBOR, plus a margin. Our overall weighted average interest rate was 6.8% as of March 31, 2009, primarily due to the 7% interest rate on our $40,000,000 in convertible debt.
Interest expense for the first nine months of fiscal 2009 decreased to $2,630,000 from $3,306,000 for the same period last year. The decrease was primarily due to the lower level of revolving debt outstanding and to the lower interest rates on our revolving debt.
Interest Income
Interest income for the third quarter of fiscal 2008 was $336,000, which included interest earned on a $2.6 million federal income tax refund received during the third quarter of last year.
Income Tax Provision (Benefit)
The income tax benefit for the third quarter of fiscal 2009 was $3,414,000 representing a 28% effective income tax rate. An income tax benefit of $2,369,000 was recorded on the asset impairment charge of $9,246,000. The income tax benefit for the third quarter of fiscal 2008 was $400,000, representing a 38% effective income tax rate.
The income tax benefit for the first nine months of fiscal 2009 was $4,880,000, representing a 31% effective income tax rate. This compares to a provision of $539,000 for the same period last year, representing a 38% effective income tax rate.
Earnings (Loss) from Continuing Operations
The loss from continuing operations for the third quarter of fiscal 2009 was $8,583,000, or $0.93 per diluted share, compared to earnings from continuing operations of $655,000, or $0.07 per diluted share, for the third quarter last year. The current quarter loss includes the asset impairment charge of $6,877,000, net of income tax benefit, or $0.74 per diluted share. The current quarter loss also includes severance costs of $204,000, net of income tax benefit, or $0.02 per diluted share. Last year’s third quarter earnings included interest income on a tax refund of $208,000, net of income tax provision, or $0.02 per diluted share.
The loss from continuing operations for the first nine months of fiscal 2009 was $10,976,000, or $1.19 per diluted share, compared to earnings from continuing operations of $880,000, or $0.10 per diluted share, for the first nine months last year. The current nine-month loss includes the asset impairment charge of $6,877,000, net of income tax benefit, or $0.74 per diluted share. The current nine-month loss also includes severance costs of $727,000, net of income tax benefit, or $0.08 per diluted share. Last year’s nine-month earnings included interest income on a tax refund of $208,000, net of income tax provision, or $0.02 per diluted share.
24
Loss from Discontinued Operations, Net of Income Taxes
The loss from discontinued operations, net of income taxes, for the third quarter of fiscal 2008 was $509,000, or $0.06 per diluted share.
The loss from discontinued operations, net of income taxes, for the first nine months of fiscal 2009 was $758,000, or $0.08 per diluted share, compared to a net loss of $815,000, or $0.09 per diluted share, for the same period last year.
Net Earnings (Loss)
The net loss for the third quarter of fiscal 2009 was $8,583,000, or $0.93 per diluted share, compared to a net loss of $1,164,000, or $0.13 per diluted share, for the third quarter last year.
The net loss for the first nine months of fiscal 2009 was $11,734,000, or $1.27 per diluted share, compared to net earnings of $65,000, or $0.01 per diluted share, for the same period last year.
25
FINANCIAL CONDITION
Liquidity and Capital Resources
Our principal sources of cash historically have been cash flows from operations and borrowings from banks and other sources. We had cash and cash equivalents of $128,000 as of March 31, 2009. As of March 31, 2009, we had $2,850,000 outstanding against our bank credit facility and $40,000,000 in 7% Convertible Senior Subordinated Notes due February 2025 (the “Convertible Notes”).
Our current secured bank credit agreement with our senior bank (the “Credit Agreement”) includes both fixed and floating interest rate options, at the LIBOR and British Bankers Association LIBOR rate, plus a margin. The Credit Agreement also contains affirmative and negative covenants including requirements that we meet certain consolidated financial criteria. The covenants also limit the incurrence of additional indebtedness, acquisitions, liens and encumbrances and other matters customarily restricted in such agreements.
We were in violation of certain financial covenants as of the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009 and we received waivers from our senior bank for those violations. Accordingly, we amended the Credit Agreement with an amendment dated November 7, 2008. As of December 31, 2008, we were in violation of certain financial covenants, for which we received a waiver and an amendment dated February 9, 2009. This amendment to the Credit Agreement reduced the amount of the revolver commitment from $40 million to $15 million, changed the expiration date from February 2010 to November 1, 2009, prohibited payments for dividends and the purchase of our common stock for the treasury and increased the interest rate margin and certain fees. As of March 31, 2009, we were in violation of certain financial covenants, for which we received a waiver and an amendment dated May 7, 2009. This amendment modified several financial covenants which effectively eliminated certain financial ratio covenants and added a monthly borrowing base formula to restrict borrowings based on eligible accounts receivable, inventory and fixed assets as well as a minimum earnings covenant. We believe this amendment reduces the possibility that we may violate financial covenants through the term of the Credit Agreement.
The holders of our $40,000,000 of Convertible Notes may require us to repurchase the notes in cash at a price equal to 100% of the principal amount of the Notes plus accrued and unpaid interest, if any, as early as February 15, 2010. In connection with the potential put of the Notes to the Company, during the quarter we hired an advisor to explore financing alternatives. We have also taken several actions to reduce our cost structure and we continue to investigate other potential cost savings alternatives. To conserve cash, we have suspended our semiannual dividend and we have reduced capital expenditures. However, even with these actions, given the continued weakness in the economy and in the credit markets, there can be no assurance that we can obtain the necessary capital on satisfactory terms to pay the Convertible Note holders, should they require payment in February 2010.
Our ability to remain in compliance with the covenants of the Credit Agreement, as amended, and to modify our capital structure is dependent upon our future performance and may be affected in part by events beyond our control, including the current economic downturn. Reduced cash flows from operations, regardless of cause, may make it more difficult to comply with our bank covenants and to obtain an extension of our Credit Agreement. Continuing uncertainty in the credit markets may affect our ability to access those markets and may increase costs associated with borrowing and issuing debt instruments. There are currently no default interest provisions in connection with a default on our Credit Agreement. The provisions of our Credit Agreement and Convertible Notes each include cross-default provisions such that a default on any individual payment obligation greater than $5 million is a default under both agreements.
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Our outstanding borrowings were $42,850,000, or 56.3% of total capitalization, as of March 31, 2009, of which $2,850,000 was outstanding against our bank credit facility. This compares to outstanding borrowings of $57,600,000, or 56.8% of total capitalization, as of June 30, 2008, of which $17,600,000 was outstanding against our bank credit facility. We used $20 million in proceeds from the sale of the Intersection Control segment in the first quarter to pay down substantially all of our revolving bank debt. Based upon the recent amendment to the Credit Agreement, we have approximately $11 million in additional availability under the bank credit facility. Included in long-term debt as of June 30, 2008 was the $40 million of Convertible Notes. The convertible debt is classified as current debt at the end of the current third quarter as the effective maturity date of the Notes is February 15, 2010. The amount of standby letters of credit outstanding was $1,120,000 as of March 31, 2009 and $1,012,000 as of June 30, 2008.
Although the variable interest rates under our revolving credit facility have been volatile due to the current credit environment, the financial effect on us has not been significant as the amount outstanding against the facility was only $2,850,000 as of March 31, 2009. Currently, we do not believe that our operating cash flow needs will require us to significantly increase our bank borrowings in the near term. Our $40 million of 7 % Convertible Notes accounted for the majority of our $42.9 million in outstanding debt as of March 31, 2009. However, given the potential put of the Notes to the Company along with the continued weakness in the economy and in the credit markets, there can be no assurance that we can obtain the necessary capital on satisfactory terms to pay the Convertible Note holders, should they require payment in February 2010.
Cash Flows
Cash flows used in continuing operations were $614,000 during the first nine months of fiscal 2009 compared with $5,919,000 provided by continuing operations in the first nine months of fiscal 2008. For the first nine months of fiscal 2009, the loss from continuing operations was $10,976,000, net of income taxes. Offsetting this loss from continuing operations were non-cash expenses of $8,212,000 including a $9,246,000 non-cash asset impairment charge and depreciation and amortization expenses of $2,816,000. Decreased working capital provided $2,150,000 in cash, primarily representing decreased accounts receivable due to the lower level of our sales. Although we are focused on reducing working capital to provide cash, such as inventory levels, further losses from continuing operations would negatively impact cash flow provided by operations.
Cash used in discontinued operations was $1,545,000 during the first nine months of fiscal 2009 and $5,661,000 in the first nine months of fiscal 2008 primarily representing increased working capital including increased inventory and decreased accounts payable.
Investing activities of continuing operations provided cash of $18,483,000 during the first nine months of fiscal 2009, compared to $3,030,000 used in the first nine months of the prior year. Proceeds from the sale of the Intersection Control segment provided cash of $20 million in the first quarter of fiscal 2009. Expenditures during the first nine months of fiscal 2009 included $1,446,000 for capital expenditures compared with $2,965,000 for the first nine months last year as we manage our capital spending in this difficult environment.
Financing activities used cash of $16,579,000 during the first nine months of fiscal 2009, compared with $4,427,000 of cash provided during the first nine months of fiscal 2008. The $20 million in proceeds from the sale of the Intersection Control segment was used to pay down substantially all of our bank debt in the first quarter of this year. Also during the first nine months of fiscal 2009, we borrowed a net $5,250,000, excluding the $20 million, against our outstanding revolving credit facility. The payment of our semi-annual cash dividend used cash of $1,829,000 in the first quarter of fiscal 2009. Our decision to suspend payment of the semi-annual dividend will save nearly $4 million in annual cash expenditures.
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For the entire fiscal year 2009, we anticipate needing approximately $2,000,000 in cash for capital expenditures compared to $3,371,000 for fiscal 2008 as we manage our capital spending in this difficult environment. As discussed above, we have undertaken a comprehensive examination of financial and strategic alternatives to generate capital from a variety of sources, including, but not limited to, the sale of assets and the restructuring of our current Convertible Notes and Credit Agreement. We currently believe that future cash needs will be financed either through cash on-hand, cash generated from operations, from borrowings available under our bank credit facility or from proceeds resulting from the sale of assets. We currently believe that these sources of cash should be sufficient for all planned operating and capital requirements in the near term. However, continued negative performance would negatively impact cash from operations and our cash flow accordingly. Management will continue to closely monitor our liquidity and the credit markets. However, management cannot predict the impact to our Company caused by any further disruption in the credit environment.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We are subject to certain debt obligations, guarantees, commitments and contingent liabilities further described in our Annual Report on Form 10-K for the year ended June 30, 2008. The following table presents our contractual obligations to make future payments under contracts, such as debt and lease agreements, as of March 31, 2009:
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| 1 Year |
| 1-3 Years |
| 3-5 Years |
| 5 Years |
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Long-term debt (1) |
| $ | 42,850,000 |
| $ | 42,850,000 |
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Estimated interest payments (2) |
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| 2,500,000 |
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| 2,500,000 |
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Operating leases |
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| 2,963,000 |
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| 2,448,000 |
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| 302,000 |
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| 213,000 |
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Minimum royalty payments |
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| 1,110,000 |
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| 510,000 |
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| 600,000 |
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Uncertain tax benefits |
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| 227,000 |
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| 109,000 |
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| 118,000 |
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Purchase obligations |
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| 1,211,000 |
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| 1,211,000 |
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Total |
| $ | 50,861,000 |
| $ | 49,628,000 |
| $ | 1,020,000 |
| $ | 213,000 |
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(1) | Amount includes expected cash payments on long-term debt based upon current and effective maturities as well as expected renewals. |
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(2) | Amount includes estimated interest payments based on interest rates as of the current period. Interest rates on variable-rate debt are subject to change in the future. Interest is estimated based upon current and effective maturities as well as expected renewals of long-term debt currently outstanding. |
As disclosed in the footnotes to the consolidated financial statements, we have entered into bid and performance related bonds associated with various contracts. Potential payments due under these bonds are related to our performance under certain contracts. The total amount of bid and performance related bonds that were available and undrawn as of March 31, 2009 was $3,111,000. We also have standby letters of credit covering potential workers’ compensation liabilities and other liabilities. The total standby exposure relating to letters of credit as of March 31, 2009 was $1,120,000.
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FUTURE OUTLOOK
Looking forward, we remain cautious given the weak global economic conditions and the difficult financial markets. This unfavorable market environment may continue to negatively affect demand for our products indefinitely. However, domestically we are optimistic about the potential positive impact from the federal funding for transportation projects enacted as part of the American Recovery and Reinvestment Act, signed into law in February 2009, which includes approximately $27 billion in stimulus funding for highways and bridges. We were encouraged to see a sharp rebound in order and sales levels in March after the first two months of the third quarter were adversely affected by a weak market environment and delays in domestic customer spending as they waited for enactment of the economic stimulus package. Although we remain cautious, we have guarded optimism that prospects for domestic sales of our products may improve in the near term. However, there is no guarantee that the recent stimulus funding will have a prolonged favorable impact on our business or that domestic sales will increase significantly.
We expect international sales to continue to be an important driver of our sales growth and we plan to continue to focus on these markets to offset the softness in the domestic market. International sales during the third quarter increased 41% and we are currently cautiously optimistic that international sales in fiscal 2009 may modestly outpace last year’s international sales of $24.6 million. We expect that international sales will be an increasing part of our business and may partially offset the softness in domestic sales this fiscal year. However, there can be no assurance that international sales will increase.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Management’s estimates also affect the reported amounts of revenues and expenses during the reporting period. In addition, certain normal and recurring estimates are made, including estimates in determining the allowance for doubtful accounts receivable, inventory valuation reserves, valuation allowance on deferred tax assets and health care liabilities. These estimates are made using management’s best judgment given relevant factors and available data. Actual results could differ materially from those estimates. Note 2 to our June 30, 2008 consolidated financial statements includes a summary of the significant accounting policies, methods and estimates used in the preparation of our consolidated financial statements. There have been no material changes in accounting policies, methods and estimates used by management during this fiscal year except for the adoption of accounting pronouncements as described in Note 1 in the Notes to Consolidated Financial Statements. In most instances, we must use an accounting policy or method because it is the only policy or method permitted under U.S. GAAP. We are providing updated information for the following significant accounting policies:
LONG-LIVED ASSETS: Long-lived assets include such items as goodwill, patents, product rights, other intangible assets and property, plant and equipment. For purposes of evaluating the recoverability of long-lived assets, we assess the possibility of obsolescence, demand, new technology, competition, and other pertinent economic factors and trends that may have an impact on the value or remaining lives of these assets. In performing our impairment assessments, we first assess our indefinite-lived intangibles; second, assess our amortized long-lived assets (including amortized intangible assets and property, plant and equipment); and third, assess our goodwill. Additionally, we reassess the remaining useful lives of our amortized long-lived assets.
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Amortized long-lived assets (including amortized intangible assets and property, plant and equipment) held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in relation to future undiscounted cash flows of underlying asset groups. The net carrying value of assets not recoverable is reduced to fair value. Fair values of amortized long-lived assets are determined based upon the performance of a fair value appraisal. Patents and other finite-lived intangible assets are amortized on a straight-line or systematic method over the life of the patent or intangible asset.
Goodwill and other indefinite-lived intangible assets are tested for impairment annually or when a triggering event occurs. The indefinite-lived intangible asset impairment test is performed by comparing the fair value of the intangible asset to its carrying value in a one-step analysis. If the fair value of the intangible asset is less than its carrying value, the intangible asset is written down to its fair value. The goodwill impairment test is performed at the reporting unit level and is a two-step analysis. First, the fair value of the reporting unit is compared to its book value. If the fair value of the reporting unit is less than its book value, we perform a hypothetical purchase price allocation based on the reporting unit’s fair value to determine the implied fair value of the reporting unit’s goodwill. If the implied fair value of the goodwill is less than its carrying value, the goodwill is written down to its implied fair value. Fair values are determined using discounted cash flow methodologies.
The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of any impairment charge recorded. Estimates of fair value are primarily determined using discounted cash flow methods and are dependent upon assumptions of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount rate applicable to future cash flows. Our stock price is also a factor impacting the assessment of the fair value of our underlying reporting segment for purposes of performing a goodwill impairment assessment. Our stock price can be affected by, among other things, the relatively small public float of our stock, quarterly fluctuations in our operating results, and changes in estimates of our future earnings.
During the fourth quarter of fiscal 2008, we performed the annual impairment review of our goodwill and intangible assets and concluded that no impairment had occurred. Subsequent to December 31, 2008, our common stock price declined such that the market value of our common equity became lower than our book value and the stock price remained depressed for a sustained period during the current third quarter. In addition, the current economic conditions which began to adversely impact our business to a significant extent during the second quarter of fiscal 2009 continued for a sustained period into the third quarter. As a result, management performed an interim asset impairment assessment of our goodwill and intangible assets during the current third quarter. We performed the interim first step of the asset impairment test for both of our segments and determined that the carrying value of our Inform segment exceeded its fair value, indicating that goodwill of that segment was impaired. Having determined that the Inform segment goodwill was impaired, we then performed the second step of the goodwill impairment test which involves calculating the implied fair value of goodwill by allocating the fair value of the segment to all of its assets and liabilities other than goodwill and comparing the residual amount to the carrying value of goodwill. Based upon that test, we determined that the entire amount of the Inform segment goodwill was impaired and we recorded a goodwill impairment charge in the Inform segment of $9,246,000, or $6,877,000 net of income tax benefits, in the third quarter of fiscal 2009.
Our current interim impairment review did not indicate that the assets of the Protect and Direct segment were impaired. However, if the Protect and Direct segment records significantly lower than expected operating profits during the fourth quarter of fiscal 2009 or in interim periods during fiscal 2010, or if we experience changes in expectations related to the extent and duration of the economic downturn and its impact on the operating results of the Protect and Direct segment, or if our market capitalization falls below our carrying value for a sustained period, we may need to perform another goodwill impairment test. The amount of an impairment loss could be up to the total amounts of goodwill and intangible assets recorded as of March 31, 2009 of $8,139,000 and $941,000, respectively, for the Protect and Direct segment. If we are required to take a substantial impairment charge, then our operating results would be materially adversely affected in such period.
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INCOME TAXES
We recognize deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. To the extent that any future tax benefits are not expected to be fully realized, such future tax benefits are reduced by a valuation allowance. Realization of deferred tax assets assumes that we will be able to generate sufficient future taxable income so that the assets will be realized. The factors that we consider in assessing the likelihood of realization include the forecast of future taxable income, available tax planning strategies that could be implemented to realize the deferred tax assets as well as certain federal and state laws that impose restrictions on the utilization of net operating loss and tax credit carryforwards. We currently expect the net deferred tax assets of $21,207,000 recorded as of March 31, 2009 to be fully realizable in part based upon expected future projected income and the length of time to utilize net operating losses. However, changes in expectations related to the extent and duration of the economic downturn and its impact on our operating results could cause us to further review the realizability of our deferred tax assets. It is possible that the review would result in an increased valuation allowance, increasing income tax expense, which would adversely affect our net income.
DERIVATIVES
We may use derivative financial instruments from time to time as a risk management tool to hedge our exposure to changes in interest rates and foreign exchange rates. Our derivatives are designated as cash flow hedges. We record any changes in the fair value of the derivative in accumulated other comprehensive income in stockholders’ equity. We then reclassify these amounts into earnings as the underlying hedged item affects earnings. We do not use derivative financial instruments for speculative purposes or for trading purposes. We may use interest rate swaps to manage interest rate risk associated with fixed and floating-rate borrowings, but we have not used those instruments since issuing our fixed rate convertible debt in fiscal 2005. We may also enter into currency exchange contracts to manage currency risk resulting from exchange rate changes. We do not have any material derivative financial instruments as of March 31, 2009.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note 1 in the Notes to Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
Various statements made within the Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report constitute “forward-looking statements” for purposes of the SEC’s “safe harbor” provisions under the Private Securities Litigation Reform Act of 1995 and Rule 3b-6 under the Securities Exchange Act of 1934, as amended. Except for historical information, any statement that addresses expectations or projections about the future, including statements about our strategy for growth, product development, market position, expenditures, financial results or changes in governmental legislation, policies and conditions, is a forward-looking statement.
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Readers are cautioned not to place undue reliance on these forward-looking statements and that all forward-looking statements involve risks and uncertainties, including those detailed in our public filings with the SEC, news releases and other communications, which speak only as of the dates of those filings or communications. We do not undertake any obligation to release publicly any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. There can be no assurance that actual results will not differ materially from our expectations. Factors which could cause materially different results include uncertainties related to continued weakening of the global economic conditions and the constricted financial markets; continued federal, state and municipal funding for highways and risks related to reductions in government expenditures; market demand for our products; pricing and competitive factors, among others which are set forth in the “Risk Factors” of Part I, Item 1A, to our Annual Report on Form 10-K for the year ended June 30, 2008, as amended at Item 1A of Part II of the Quarterly Report on Form 10-Q filed on February 9, 2009.
ITEM 3.Quantitative and Qualitative Disclosures about Market Risk
Part I, Item 7.A. of our Annual Report on Form 10-K for the year ended June 30, 2008 presents information regarding Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risk from fluctuations in interest rates on our revolving credit facility, and, to a limited extent, currency exchange rates. The majority of our debt is at a fixed interest rate. Given that our exposure to interest rate fluctuations is low, we currently believe that the use of derivative instruments in the form of non-trading interest rate swaps to manage the risk is not necessary.
Assets, liabilities and commitments that are to be settled in cash and are denominated in foreign currencies for transaction purposes are sensitive to changes in currency exchange rates. The majority of our business is transacted in U.S. dollars and the U.S. dollar is considered the primary currency for the majority of our operations. There were no material transaction gains or losses during the first nine months of fiscal 2009 or in fiscal year 2008 and we do not believe we are currently exposed to any material risk of loss from currency exchange fluctuations. We will continue to evaluate the need for the use of derivative financial instruments to manage foreign currency exchange rate changes. In the next few years we may confront greater risks from currency exchange fluctuations as our business expands internationally.
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ITEM 4.Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The design of any system of disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any disclosure controls and procedures will succeed in achieving their stated goals under all potential future conditions.
Our management, under the supervision of and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2009.
(b) Changes in Internal Controls over Financial Reporting
There have been no changes in our internal controls over financial reporting that may have materially affected, or are likely to materially affect, our internal control over financial reporting. Our process for evaluating controls and procedures is continuous and encompasses review of the design and effectiveness of established controls and procedures and the remediation of any deficiencies which may be identified during this process.
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PART II – OTHER INFORMATION
There is no information required to be reported under any items except as indicated below:
Item 1.Legal Proceedings
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| We are involved in several pending judicial proceedings for product liability and other damages arising out of the conduct of our business. While the outcome of litigation is subject to uncertainties, we believe, after consultation with counsel, that the outcome of these proceedings, based on current available information and after taking into account the availability and limits of our insurance coverage, will not have a material effect on our consolidated financial condition and results of operations. |
Item 6.Exhibits
(a) Exhibits
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3.1 | Certificate of Elimination of Series B Junior Participating Preferred Stock |
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10.6 | Waiver, Sixth Amendment to Amended and Restated Credit Agreement and Reaffirmation of Guaranties dated as of May 7, 2009 by and between Quixote Corporation and certain Subsidiaries thereof and Bank of America, N.A. |
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31 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 to be signed on its behalf by the undersigned thereunto duly authorized.
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| QUIXOTE CORPORATION |
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DATED: May 11, 2009 | /s/ Daniel P. Gorey |
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| Daniel P. Gorey |
| Chief Financial Officer, |
| Executive Vice President and Treasurer |
| (Chief Financial & Accounting Officer) |
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EXHIBIT INDEX
Exhibits:
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3.1 | Certificate of Elimination of Series B Junior Participating Preferred Stock |
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10.6 | Waiver, Sixth Amendment to Amended and Restated Credit Agreement and Reaffirmation of Guaranties dated as of May 7, 2009 by and between Quixote Corporation and certain Subsidiaries thereof and Bank of America, N.A. |
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31 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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