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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the Quarterly Period Ended December 31, 2008 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number 001-08123
QUIXOTE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 36-2675371 (IRS Employer Identification No.) | |
35 East Wacker Drive Chicago, Illinois (Address of principal executive offices) | 60601 (Zip Code) |
(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. Yes ý No o
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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of January 31, 2009, there were 9,248,179 shares of the registrant's common stock ($.01-2/3 par value) outstanding.
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
| Six Months Ended December 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | ||||||
Net sales | $ | 45,196,000 | $ | 50,383,000 | ||||
Cost of sales | 31,855,000 | 31,979,000 | ||||||
Gross profit | 13,341,000 | 18,404,000 | ||||||
Operating expenses: | ||||||||
Selling & administrative | 12,855,000 | 11,966,000 | ||||||
Research & development | 1,720,000 | 1,728,000 | ||||||
Severance costs | 843,000 | |||||||
15,418,000 | 13,694,000 | |||||||
Operating profit (loss) | (2,077,000 | ) | 4,710,000 | |||||
Other income (expense): | ||||||||
Interest income | 2,000 | |||||||
Interest expense | (1,782,000 | ) | (2,238,000 | ) | ||||
(1,782,000 | ) | (2,236,000 | ) | |||||
Earnings (loss) from continuing operations before income taxes | (3,859,000 | ) | 2,474,000 | |||||
Income tax provision (benefit) | (1,466,000 | ) | 939,000 | |||||
Earnings (loss) from continuing operations | (2,393,000 | ) | 1,535,000 | |||||
Discontinued operations: | ||||||||
Loss from operations, net of income taxes | (46,000 | ) | (306,000 | ) | ||||
Loss on sale, net of income taxes | (712,000 | ) | ||||||
Loss from discontinued operations, net of income taxes | (758,000 | ) | (306,000 | ) | ||||
Net earnings (loss) | $ | (3,151,000 | ) | $ | 1,229,000 | |||
Per share data—basic: | ||||||||
Earnings (loss) from continuing operations | $ | (0.26 | ) | $ | 0.17 | |||
Loss from discontinued operations | (0.08 | ) | (0.03 | ) | ||||
Net earnings (loss) | $ | (0.34 | ) | $ | 0.14 | |||
Weighted average common shares outstanding | 9,209,672 | 9,073,849 | ||||||
Per share data—diluted: | ||||||||
Earnings (loss) from continuing operations | $ | (0.26 | ) | $ | 0.16 | |||
Loss from discontinued operations | (0.08 | ) | (0.03 | ) | ||||
Net earnings (loss) | $ | (0.34 | ) | $ | 0.13 | |||
Weighted average common shares outstanding | 9,209,672 | 9,141,063 | ||||||
Cash dividends declared per share of common stock | $ | 0.00 | $ | 0.20 | ||||
See Notes to Consolidated Financial Statements.
2
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
| Three Months Ended December 31, | |||||||
---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | ||||||
Net sales | $ | 20,057,000 | $ | 25,879,000 | ||||
Cost of sales | 14,954,000 | 15,894,000 | ||||||
Gross profit | 5,103,000 | 9,985,000 | ||||||
Operating expenses: | ||||||||
Selling & administrative | 6,881,000 | 6,453,000 | ||||||
Research & development | 798,000 | 839,000 | ||||||
Severance costs | 843,000 | |||||||
8,522,000 | 7,292,000 | |||||||
Operating profit (loss) | (3,419,000 | ) | 2,693,000 | |||||
Other income (expense): | ||||||||
Interest expense | (865,000 | ) | (1,143,000 | ) | ||||
(865,000 | ) | (1,143,000 | ) | |||||
Earnings (loss) from continuing operations before income taxes | (4,284,000 | ) | 1,550,000 | |||||
Income tax provision (benefit) | (1,628,000 | ) | 589,000 | |||||
Earnings (loss) from continuing operations | (2,656,000 | ) | 961,000 | |||||
Discontinued operations: | ||||||||
Loss from operations, net of income taxes | (202,000 | ) | ||||||
Loss on sale, net of income taxes | ||||||||
Loss from discontinued operations, net of income taxes | (202,000 | ) | ||||||
Net earnings (loss) | $ | (2,656,000 | ) | $ | 759,000 | |||
Per share data—basic: | ||||||||
Earnings (loss) from continuing operations | $ | (0.29 | ) | $ | 0.10 | |||
Loss from discontinued operations | (0.02 | ) | ||||||
Net earnings (loss) | $ | (0.29 | ) | $ | 0.08 | |||
Weighted average common shares outstanding | 9,231,149 | 9,090,333 | ||||||
Per share data—diluted: | ||||||||
Earnings (loss) from continuing operations | $ | (0.29 | ) | $ | 0.10 | |||
Loss from discontinued operations | (0.02 | ) | ||||||
Net earnings (loss) | $ | (0.29 | ) | $ | 0.08 | |||
Weighted average common shares outstanding | 9,231,149 | 9,155,950 | ||||||
Cash dividends declared per share of common stock | $ | 0.00 | $ | 0.20 | ||||
See Notes to Consolidated Financial Statements.
3
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
| December 31, 2008 | June 30, 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|
ASSETS | |||||||||
Current assets: | |||||||||
Cash and cash equivalents | $ | 985,000 | $ | 408,000 | |||||
Accounts receivable, net of allowance for doubtful accounts of $718,000 at December 31 and $418,000 at June 30 | 17,458,000 | 23,801,000 | |||||||
Inventories, net: | |||||||||
Raw materials | 3,903,000 | 3,943,000 | |||||||
Work in process | 5,470,000 | 5,007,000 | |||||||
Finished goods | 11,540,000 | 10,439,000 | |||||||
20,913,000 | 19,389,000 | ||||||||
Deferred income tax assets | 2,608,000 | 2,608,000 | |||||||
Other current assets | 1,110,000 | 504,000 | |||||||
Current assets of business held for sale | 20,161,000 | ||||||||
Total current assets | 43,074,000 | 66,871,000 | |||||||
Property, plant and equipment, at cost | 44,638,000 | 43,873,000 | |||||||
Less accumulated depreciation | (28,541,000 | ) | (27,162,000 | ) | |||||
16,097,000 | 16,711,000 | ||||||||
Goodwill | 17,385,000 | 17,385,000 | |||||||
Intangible assets, net | 2,093,000 | 2,206,000 | |||||||
Deferred income tax assets | 15,185,000 | 13,371,000 | |||||||
Other assets | 565,000 | 890,000 | |||||||
Assets of business held for sale | 4,109,000 | ||||||||
$ | 94,399,000 | $ | 121,543,000 | ||||||
See Notes to Consolidated Financial Statements.
4
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
| December 31, 2008 | June 30, 2008 | ||||||
---|---|---|---|---|---|---|---|---|
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||
Current liabilities: | ||||||||
Current portion of long-term debt | $ | 1,750,000 | $ | 17,600,000 | ||||
Accounts payable | 4,956,000 | 5,950,000 | ||||||
Dividends payable | 1,829,000 | |||||||
Accrued expenses | 5,142,000 | 5,748,000 | ||||||
Current liabilities of business held for sale | 5,520,000 | |||||||
Total current liabilities | 11,848,000 | 36,647,000 | ||||||
Long-term debt, net of current portion | 40,000,000 | 40,000,000 | ||||||
Other long-term liabilities | 1,031,000 | 1,059,000 | ||||||
52,879,000 | 77,706,000 | |||||||
Commitments and contingent liabilities (Note 10) | ||||||||
Shareholders' equity: | ||||||||
Preferred stock, no par value; authorized 100,000 shares; none issued | ||||||||
Common stock, par value $.012/3; authorized 30,000,000 shares; issued 11,082,377 shares at December 31 and 11,051,815 at June 30 | 185,000 | 184,000 | ||||||
Capital in excess of par value of common stock | 66,712,000 | 66,498,000 | ||||||
Accumulated deficit | (3,200,000 | ) | (49,000 | ) | ||||
Treasury stock, at cost, 1,842,099 shares at December 31 and 1,893,552 shares at June 30 | (22,177,000 | ) | (22,796,000 | ) | ||||
Total shareholders' equity | 41,520,000 | 43,837,000 | ||||||
$ | 94,399,000 | $ | 121,543,000 | |||||
See Notes to Consolidated Financial Statements.
5
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
| Six Months Ended December 31, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | ||||||||
Operating activities: | ||||||||||
Net earnings (loss) | $ | (3,151,000 | ) | $ | 1,229,000 | |||||
Loss on sale, net of tax | 712,000 | |||||||||
Loss from discontinued operations, net of tax | 46,000 | 306,000 | ||||||||
Income (loss) from continuing operations, net of tax | (2,393,000 | ) | 1,535,000 | |||||||
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: | ||||||||||
Depreciation | 1,490,000 | 1,430,000 | ||||||||
Amortization | 489,000 | 430,000 | ||||||||
Deferred income taxes | (1,931,000 | ) | 753,000 | |||||||
Provisions for losses on accounts receivable | 299,000 | (182,000 | ) | |||||||
Issuance of stock retirement plan shares | 268,000 | |||||||||
Issuance of stock to 401K plan | 381,000 | 507,000 | ||||||||
Share-based compensation expense | 185,000 | 386,000 | ||||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts receivable | 6,044,000 | 3,364,000 | ||||||||
Inventories | (1,524,000 | ) | (2,313,000 | ) | ||||||
Other assets | (606,000 | ) | (560,000 | ) | ||||||
Income taxes | (132,000 | ) | 26,000 | |||||||
Accounts payable and accrued expenses | (1,789,000 | ) | (4,333,000 | ) | ||||||
Other long-term liabilities | (28,000 | ) | (22,000 | ) | ||||||
Net cash provided by operating activities—continuing operations | 753,000 | 1,021,000 | ||||||||
Net cash used in operating activities—discontinued operations | (1,545,000 | ) | (3,734,000 | ) | ||||||
Net cash used in operating activities | (792,000 | ) | (2,713,000 | ) | ||||||
Investing activities: | ||||||||||
Capital expenditures | (876,000 | ) | (1,887,000 | ) | ||||||
Patent expenditures | (51,000 | ) | (41,000 | ) | ||||||
Proceeds from sale of business | 20,000,000 | |||||||||
Net cash provided by (used in) investing activities—continuing operations | 19,073,000 | (1,928,000 | ) | |||||||
Net cash used in investing activities—discontinued operations | (25,000 | ) | (886,000 | ) | ||||||
Net cash provided by (used in) investing activities | 19,048,000 | (2,814,000 | ) | |||||||
Financing activities: | ||||||||||
Proceeds from revolving credit agreement | 14,800,000 | 19,000,000 | ||||||||
Payments on revolving credit agreement | (30,650,000 | ) | (11,500,000 | ) | ||||||
Payments on notes payable | (122,000 | ) | ||||||||
Payment of semi-annual cash dividend | (1,829,000 | ) | (1,715,000 | ) | ||||||
Net cash (used in) provided by financing activities | (17,679,000 | ) | 5,663,000 | |||||||
Increase in cash and cash equivalents | 577,000 | 136,000 | ||||||||
Cash and cash equivalents at beginning of period | 408,000 | 848,000 | ||||||||
Cash and cash equivalents at end of period | $ | 985,000 | $ | 984,000 | ||||||
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 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 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
7
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
consolidated statement of income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. The effective date for both Statements is the beginning of fiscal 2010. We are currently in the process of evaluating the impact, if any, that the adoption of FAS No. 141 (revised 2007) and FAS No. 160 will have on our financial position, consolidated results of operations and cash flows.
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. This Statement is effective for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. We do not expect the adoption of this statement to have a material effect on our results of operations or financial position.
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 fiscal 2010. We are currently evaluating the impact, if any, that the adoption of this statement will have on our results of operations and 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 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 consolidated results of operations or financial position.
8
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
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.
The results of discontinued operations are as follows:
| Three months ended December 31, | Six months ended December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2007 | 2008 | 2007 | |||||||
Net sales | $ | 8,201,000 | $ | 1,732,000 | $ | 15,716,000 | ||||
Loss from operations of discontinued operations before income taxes | $ | (326,000 | ) | $ | (75,000 | ) | $ | (492,000 | ) | |
Loss from sale of assets of business | (1,148,000 | ) | ||||||||
Loss before taxes | (326,000 | ) | (1,223,000 | ) | (492,000 | ) | ||||
Income tax benefit | (124,000 | ) | (465,000 | ) | (186,000 | ) | ||||
Loss from discontinued operations, net of income tax benefit | $ | (202,000 | ) | $ | (758,000 | ) | $ | (306,000 | ) | |
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:
Assets: | |||||
Current assets | |||||
Accounts Receivable, net | $ | 6,270,000 | |||
Inventories | 13,134,000 | ||||
Other current assets | 757,000 | ||||
Total current assets | 20,161,000 | ||||
Property, plant and equipment | 2,474,000 | ||||
Other assets | 1,635,000 | ||||
Total assets of business held for sale | $ | 24,270,000 | |||
Liabilities: | |||||
Total liabilities of business held for sale | $ | 5,520,000 | |||
As of December 31, 2008, 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 six and three-month periods ended December 31, 2008 and 2007 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 December 31, 2008, we have 484,997 common shares reserved for future grants from our stock option and award
9
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
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 $185,000 and $386,000 for the six-month periods ended December 31, 2008 and 2007, respectively. As of December 31, 2008, the total compensation cost related to unvested stock options and restricted stock granted under our stock option plans not yet recognized was approximately $673,000. 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 194,433 unvested stock options outstanding at December 31, 2008 had a weighted-average fair value of $2.32. The 18,198 shares of restricted stock unvested at December 31, 2008 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.
| Six Months Ended December 31, | |||
---|---|---|---|---|
| 2008 | 2007 | ||
Risk free interest rate | 2.9% | 3.8% | ||
Expected dividend yield | 5.17% | 2.11% | ||
Weighted average expected volatility. | 38% | 37% | ||
Expected term | 3.9 - 6.0 yrs | 6.0 yrs | ||
Weighted average expected term | 4.4 yrs | 6.0 yrs | ||
Weighted average grant date fair value | $1.69 | $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.
10
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Stock Option and Restricted Stock Activity
Information with respect to stock option activity under our plans is as follows:
| Common Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
Outstanding at July 1, 2007 | 859,203 | $ | 18.54 | |||||||||
Granted | 20,000 | $ | 18.93 | |||||||||
Exercised | ||||||||||||
Cancelled or expired | (26,800 | ) | $ | 21.06 | ||||||||
Outstanding at December 31, 2007 | 852,403 | $ | 18.47 | 2.9 Years | $ | 1,595,000 | ||||||
Outstanding at July 1, 2008 | 830,670 | $ | 18.72 | |||||||||
Granted | 152,100 | $ | 7.79 | |||||||||
Exercised | ||||||||||||
Cancelled or expired | (102,434 | ) | $ | 17.39 | ||||||||
Outstanding at December 31, 2008 | 880,336 | $ | 16.98 | 2.6 Years | $ | 1,250 | ||||||
Vested at December 31, 2008 | 685,903 | $ | 18.89 | 2.0 Years | $ | 0 | ||||||
Options outstanding as of December 31, 2008 are exercisable as follows: 685,903 currently, 109,702 within one year, 42,363 in two years and 42,368 in three years. As of December 31, 2007, 710,512 options were exercisable. During the six-month periods ended December 31, 2008 and 2007, the following stock option activity occurred under our plans:
| Six Months Ended December 31, | ||||||
---|---|---|---|---|---|---|---|
| 2008 | 2007 | |||||
Total intrinsic value of stock options exercised | — | — | |||||
Total fair value of stock options vested | $ | 356,000 | $ | 39,000 |
11
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
Information with respect to restricted stock activity under our plans is as follows:
| Number of Shares | Weighted- Average Grant Date Fair Value | |||||
---|---|---|---|---|---|---|---|
Outstanding at July 1, 2007 | — | — | |||||
Restricted stock granted | 29,100 | $ | 19.52 | ||||
Restricted stock vested | — | — | |||||
Cancelled or expired | — | — | |||||
Unvested at December 31, 2007 | 29,100 | $ | 19.52 | ||||
Outstanding at July 1, 2008 | 29,100 | $ | 19.52 | ||||
Restricted stock granted | — | — | |||||
Restricted stock vested | (9,102 | ) | $ | 19.52 | |||
Cancelled or expired | (1,800 | ) | $ | 19.52 | |||
Unvested at December 31, 2008 | 18,198 | $ | 19.52 | ||||
Vested at December 31, 2008 | 9,102 | $ | 19.52 | ||||
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 six months ended December 31, 2008 and $173,000 for the six months ended December 31, 2007.
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 December 31, 2008 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 $38,000 for interest and $5,000 for penalties as of December 31, 2008 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 audits in process. We do not anticipate 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
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
5. Operating results for the first six 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:
| Six Months Ended December 31, | Three Months Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |||||||||
Numerator: | |||||||||||||
Earnings (loss) from continuing operations | $ | (2,393,000 | ) | $ | 1,535,000 | $ | (2,656,000 | ) | $ | 961,000 | |||
Loss from discontinued operations | (46,000 | ) | (306,000 | ) | — | (202,000 | ) | ||||||
Loss on sale of discontinued operations | (712,000 | ) | — | — | — | ||||||||
Net earnings (loss) | $ | (3,151,000 | ) | $ | 1,229,000 | $ | (2,656,000 | ) | $ | 759,000 | |||
Denominator: | |||||||||||||
Weighted average shares outstanding—basic | 9,209,672 | 9,073,849 | 9,231,149 | 9,090,333 | |||||||||
Effect of dilutive securities—common stock options | — | 67,214 | — | 65,617 | |||||||||
Weighted average shares outstanding—diluted | 9,209,672 | 9,141,063 | 9,231,149 | 9,155,950 | |||||||||
Earnings (loss) per share of common stock—basic: | |||||||||||||
Earnings (loss) from continuing operations | $ | (0.26 | ) | $ | 0.17 | $ | (0.29 | ) | $ | 0.10 | |||
Loss from discontinued operations | — | (0.03 | ) | — | (0.02 | ) | |||||||
Loss on sale of discontinued operations | (0.08 | ) | — | — | — | ||||||||
Net earnings (loss) | $ | (0.34 | ) | $ | 0.14 | $ | (0.29 | ) | $ | 0.08 | |||
Earnings (loss) per share of common stock—diluted: | |||||||||||||
Earnings (loss) from continuing operations | $ | (0.26 | ) | $ | 0.16 | $ | (0.29 | ) | $ | 0.10 | |||
Loss from discontinued operations | — | (0.03 | ) | — | (0.02 | ) | |||||||
Loss on sale of discontinued operations | (0.08 | ) | — | — | — | ||||||||
Net earnings (loss) | $ | (0.34 | ) | $ | 0.13 | $ | (0.29 | ) | $ | 0.08 | |||
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 six-month periods ended December 31, 2007 and 2006 and are as follows:
| Six Months Ended December 31, | Three Months Ended December 31, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | |||||||||
Average exercise price per share | $ | 17.29 | $ | 21.37 | $ | 17.29 | $ | 21.27 | |||||
Number of shares | 855,000 | 468,000 | 855,000 | 488,000 |
13
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
In addition, employee stock options totaling 235 shares for the six-month period ending December 31, 2008 were not included in the diluted weighted average shares calculation because the effects of these securities were anti-dilutive.
7. Accumulated other comprehensive income consisted of the following as of December 31, 2007:
Unrealized gain on derivative instrument: | |||||
Beginning balance—July 1 | $ | 109,000 | |||
Amortization to earnings | (56,000 | ) | |||
Total accumulated comprehensive income | $ | 53,000 | |||
8. We have two continuing reportable segments, one of which manufactures and sells products that Protect and Direct and one of 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 $13,406,000 and $12,004,000 for the six months ended December 31, 2008 and 2007, respectively, and $5,448,000 and $6,956,000 for the three months ended December 31, 2008 and 2007, 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.
14
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents financial information about our continuing operations by segment for the six and three-month periods ended December 31, 2008 and 2007 along with the items necessary to reconcile the segment information to the totals reported in the consolidated financial statements.
| Protect and Direct | Inform | Unallocated Corporate | Total | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2008 | |||||||||||||
SIX MONTHS | |||||||||||||
Net sales from external customers | $ | 35,003,000 | $ | 10,193,000 | $ | 45,196,000 | |||||||
Operating profit (loss) | $ | 1,958,000 | $ | 75,000 | $ | (4,110,000 | ) | $ | (2,077,000 | ) | |||
Unallocated interest and other | (1,782,000 | ) | (1,782,000 | ) | |||||||||
Total earnings (loss) from continuing operations before taxes | $ | 1,958,000 | $ | 75,000 | $ | (5,892,000 | ) | $ | (3,859,000 | ) | |||
Identifiable assets | $ | 53,049,000 | $ | 21,721,000 | $ | 19,629,000 | $ | 94,399,000 | |||||
THREE MONTHS | |||||||||||||
Net sales from external customers | $ | 15,021,000 | $ | 5,036,000 | $ | 20,057,000 | |||||||
Operating loss | $ | (414,000 | ) | $ | (345,000 | ) | $ | (2,660,000 | ) | $ | (3,419,000 | ) | |
Unallocated interest and other | (865,000 | ) | (865,000 | ) | |||||||||
Total loss from continuing operations before taxes | $ | (414,000 | ) | $ | (345,000 | ) | $ | (3,525,000 | ) | $ | (4,284,000 | ) | |
2007 | |||||||||||||
SIX MONTHS | |||||||||||||
Net sales from external customers | $ | 39,062,000 | $ | 11,321,000 | $ | 50,383,000 | |||||||
Operating profit (loss) | $ | 7,000,000 | $ | 1,324,000 | $ | (3,614,000 | ) | $ | 4,710,000 | ||||
Unallocated interest and other | (2,236,000 | ) | (2,236,000 | ) | |||||||||
Total earnings (loss) from continuing operations before taxes | $ | 7,000,000 | $ | 1,324,000 | $ | (5,850,000 | ) | $ | 2,474,000 | ||||
Identifiable assets | $ | 56,499,000 | $ | 23,193,000 | $ | 19,807,000 | $ | 99,499,000 | |||||
Assets held for sale | 22,085,000 | 22,085,000 | |||||||||||
Total identifiable assets | $ | 56,499,000 | $ | 23,193,000 | $ | 41,892,000 | $ | 121,584,000 | |||||
THREE MONTHS | |||||||||||||
Net sales from external customers | $ | 19,337,000 | $ | 6,542,000 | $ | 25,879,000 | |||||||
Operating profit (loss) | $ | 3,771,000 | $ | 979,000 | $ | (2,057,000 | ) | $ | 2,693,000 | ||||
Unallocated interest and other | (1,143,000 | ) | (1,143,000 | ) | |||||||||
Total earnings (loss) from continuing operations before taxes | $ | 3,771,000 | $ | 979,000 | $ | (3,200,000 | ) | $ | 1,550,000 | ||||
15
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
9. Intangible assets consist of the following:
| December 31, 2008 | June 30, 2008 | ||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross Carrying Amount | Accumulated Amortization | Net Intangible Assets | Gross Carrying Amount | Accumulated Amortization | Net Intangible Assets | ||||||||||||||
Amortized intangible assets: | ||||||||||||||||||||
Patents and licenses | $ | 3,797,000 | $ | 2,274,000 | $ | 1,523,000 | $ | 3,746,000 | $ | 2,160,000 | $ | 1,586,000 | ||||||||
Technology and installed base | 1,271,000 | 883,000 | 388,000 | 1,271,000 | 849,000 | 422,000 | ||||||||||||||
Customer relationships | 200,000 | 200,000 | 200,000 | 200,000 | ||||||||||||||||
Trade names | 330,000 | 148,000 | 182,000 | 330,000 | 132,000 | 198,000 | ||||||||||||||
Other | 20,000 | 20,000 | 20,000 | 20,000 | ||||||||||||||||
Total | $ | 5,618,000 | $ | 3,525,000 | $ | 2,093,000 | $ | 5,567,000 | $ | 3,361,000 | $ | 2,206,000 | ||||||||
Intangible amortization expense was $164,000 and $147,000, respectively, in the six-month periods ended December 31, 2008 and 2007. The estimated amortization expense for this fiscal year ended June 30, 2009 and for the five fiscal years subsequent to 2009 is as follows: $325,000, $324,000, $322,000, $268,000, $264,000 and $254,000. The carrying amount of goodwill consists of $9,246,000 for the Inform segment and $8,139,000 for the Protect and Direct segment as of December 31, 2008 and June 30, 2008.
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 $1,516,000 in fiscal year 2009, a total of $2,280,000 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 $4,141,000.
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 six-month periods ended December 31 is as follows:
| 2008 | 2007 | ||||||
---|---|---|---|---|---|---|---|---|
Beginning Balance—July 1 | $ | 130,000 | $ | 231,000 | ||||
Warranties issued | 72,000 | 303,000 | ||||||
Repairs, replacements and settlements | (88,000 | ) | (320,000 | ) | ||||
Changes in liability for pre-existing warranties, including expirations | — | — | ||||||
Ending balance—December 31 | $ | 114,000 | $ | 214,000 | ||||
16
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
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.
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 indemnifications 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 $2,180,000 as of December 31, 2008 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.
17
QUIXOTE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(Unaudited)
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 $890,000 as of December 31, 2008 and $1,012,000 as of June 30, 2008. We have included $520,000 in accrued liabilities for potential workers' compensation liabilities as of December 31, 2008.
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 $143,000 in accrued liabilities for current obligations relating to royalty agreements as of December 31, 2008.
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 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).
We chose not to elect the fair value 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 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 $34,400,000, based on the most recent data available, which was at 86% of par value. The convertible notes are recorded on the balance sheet at par value of $40,000,000 as of December 31, 2008.
12. 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.
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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 effects of the global economic downturn on infrastructure spending worldwide and the recent events that have adversely affected 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 future 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 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 can refinance our debt on a timely basis on satisfactory terms. 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.
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
19
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 strengthen our balance sheet and improve our financial flexibility by reducing the amount outstanding against our revolving credit facility.
RESULTS OF OPERATIONS
Overall, we saw decreased sales and profitability for the first six months and the second quarter of fiscal 2009 compared with the same periods last year, primarily due to the effects of the global economic downturn on infrastructure spending that we experienced during the current second quarter. For the current second quarter, sales decreased 22% compared to the second quarter of last year due to decreased sales across both of our operating segments both domestically and internationally. These decreases in the second quarter offset the sales increases in the first quarter of fiscal 2009. International sales for the second quarter of fiscal 2009 decreased 22% compared to the second quarter last year primarily due to decreased sales in the Asia-Pacific region, particularly in China. However, for the first six months of fiscal 2009, international sales increased 12% compared to the first six months of fiscal 2008. Domestic sales decreased 23% compared to the second quarter of last year. Sales for the Protect and Direct segment decreased 22% and sales in our Inform segment decreased 23% compared to the second quarter of last year. The decreased sales volume resulted in an operating loss for both segments for the 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 December 31, | Six Months Ended December 31, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2008 | 2007 | ||||||||||
Revenues by Segment: | ||||||||||||||
Protect and Direct | $ | 15,021,000 | $ | 19,337,000 | $ | 35,003,000 | $ | 39,062,000 | ||||||
Inform | 5,036,000 | 6,542,000 | 10,193,000 | 11,321,000 | ||||||||||
$ | 20,057,000 | $ | 25,879,000 | $ | 45,196,000 | $ | 50,383,000 | |||||||
Geographic Revenues: | ||||||||||||||
Domestic | $ | 14,609,000 | $ | 18,923,000 | $ | 31,790,000 | $ | 38,379,000 | ||||||
International | 5,448,000 | 6,956,000 | 13,406,000 | 12,004,000 | ||||||||||
$ | 20,057,000 | $ | 25,879,000 | $ | 45,196,000 | $ | 50,383,000 | |||||||
Operating Income (Loss) by Segment: | ||||||||||||||
Protect and Direct | $ | (414,000 | ) | $ | 3,771,000 | $ | 1,958,000 | $ | 7,000,000 | |||||
Inform | (345,000 | ) | 979,000 | 75,000 | 1,324,000 | |||||||||
Unallocated Corporate | (2,660,000 | ) | (2,057,000 | ) | (4,110,000 | ) | (3,614,000 | ) | ||||||
$ | (3,419,000 | ) | $ | 2,693,000 | $ | (2,077,000 | ) | $ | (4,710,000 | ) | ||||
Gross profit percentage | 25.4 | % | 38.6 | % | 29.5 | % | 36.5 | % | ||||||
Selling and administrative expenses as a percentage of sales | 34.3 | % | 24.9 | % | 28.4 | % | 23.8 | % | ||||||
Diluted earnings (loss) from continuing operations per share | $ | (0.29 | ) | $ | 0.10 | $ | (0.26 | ) | $ | 0.16 | ||||
Revenues
Our net sales for the second quarter of fiscal 2009 decreased $5,822,000, or 22%, to $20,057,000 from $25,879,000 for the second quarter last year, with decreases in both domestic and international sales, which we believe is primarily due to the effects of the global economic downturn on infrastructure spending worldwide.
Our net sales for the first six months of fiscal 2009 decreased $5,187,000, or 10%, to $45,196,000 from $50,383,000 for the same period last year with sales decreases in both the Protect and Direct segment and the Inform segment. Sales increases during the first quarter of this year for both segments were offset by the sales decreases during the second quarter of this year.
Geographic—Domestic sales for the second quarter of fiscal 2009 decreased 23% to $14,609,000 from $18,923,000, with decreased sales across both segments, due to the effects of the domestic economic downturn and state and municipal budgetary constraints. International sales for the second quarter of fiscal 2009 decreased $1,507,000, or 22%, to $5,448,000, compared to $6,956,000 for the second quarter last year, primarily due to decreased sales in the Asia-Pacific region. In that region, approximately $1,000,000 in sales in China during the second quarter last year were not repeated in the second quarter of fiscal 2009. International sales for the Protect and Direct segment decreased 20% primarily due to decreased sales of permanent crash cushions in Asia-Pacific, particularly in China. However, we continue to see strong interest in our Protect and Direct products in other regions including Europe, Latin America and the Mideast/Africa region, where sales increased 29% over the second quarter of fiscal 2008. International sales for the Inform segment decreased 32%, primarily due to decreased sales of weather sensors in Europe and Canada.
21
International sales for the first six months of fiscal 2009 increased $1,402,000, or 12%, to $13,406,000, compared to $12,004,000 for the same period last year, primarily due to increased sales of Protect and Direct products in Europe, Latin America and the Mideast/Africa region. International sales for the Protect and Direct segment increased 13% over the first six months of last year. International sales for the Inform segment increased 4% primarily due to increased sales in Canada and the Asia Pacific region in the first quarter of fiscal 2009. Domestic sales for the first six months of fiscal 2009 decreased 17% to $31,790,000 from $38,379,000 due to decreased sales in both segments.
Protect and Direct—Net sales for the Protect and Direct segment for the second quarter of fiscal 2009 decreased 22% to $15,021,000 from $19,337,000 for the second quarter last year with decreases in both domestic and international sales. The decrease in sales was due to decreased sales of permanent crash cushions, truck mounted attenuators, Triton® water-filled barriers, delineators and parts, which were partially offset by increased sales of ABC terminals and barrels.
Net sales for the Protect and Direct segment for the first six months of fiscal 2009 decreased 10% to $35,003,000 from $39,062,000 for the same period last year. Increased international sales in the first quarter of this year were offset by decreased domestic and international sales in the second quarter of this year. The decrease in sales for the first six 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 Triton® water-filled barriers.
Inform—Net sales for the Inform segment for the second quarter of fiscal 2009 decreased 23%, or $1,506,000, to $5,036,000 from $6,542,000 for the second quarter last year. The decrease in sales in the current second quarter compared to the second quarter of fiscal 2008 was primarily due to decreased sales of weather sensors and highway advisory radios, partially offset by increased sales of traffic sensors.
Net sales for the Inform segment for the first six months of fiscal 2009 decreased 10%, or $1,128,000, to $10,193,000 from $11,321,000 for the same period last year. Increased international sales in the first quarter of this year were offset by decreased domestic and international sales in the second quarter of this year. Increased sales of traffic sensors in the first six months of this year were more than offset by decreased sales of weather sensing products and highway advisory radio products.
Gross Profit Margin
Our gross profit margin for the second quarter of fiscal 2009 was 25.4% compared to 38.6% for the second quarter last year. The gross margin for the Protect and Direct segment declined 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 higher sales of ABC terminals, which have lower gross margins than some other product lines. The gross margin for the Inform segment declined due to inefficiencies related to the lower sales volume and in part due to unfavorable product sales mix with lower sales of higher margin highway advisory radios.
Our gross profit margin for the first six months of fiscal 2009 was 29.5% compared to 36.5% 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.
Selling and Administrative Expenses
Selling and administrative expenses for the second quarter of fiscal 2009 increased $428,000, or 7%, to $6,881,000 from $6,453,000 for the second quarter last year. This was primarily due to increased bad debt expenses in both our Protect and Direct and Inform segments. Selling and administrative expenses increased as a percentage of sales to 34.3% for the second quarter of 2009 from 24.9%.
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Selling and administrative expenses for the first six months of fiscal 2009 increased $889,000, or 7%, to $12,855,000 from $11,966,000 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 28.4% for the first six months of 2009 from 23.8% last year.
Severance Costs
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.
Research and Development
Research and development expenditures for the second quarter of fiscal 2009 decreased $41,000, or 5%, to $798,000 from $839,000 for the same period last year due to decreases in the Inform segment.
Research and development expenditures for the first six months of fiscal 2009 remained consistent with expenditures in the same period last year as we continue our development of new products.
Operating Profit (Loss)
The operating loss for the second quarter of fiscal 2009 was $3,419,000, compared to operating profit of $2,693,000 for the second quarter of fiscal 2008. For the second quarter of fiscal 2009, the operating loss for the Protect and Direct Group was $414,000, compared to operating profit of $3,771,000 in the same period last year, primarily due to the lower sales volume, unfavorable product sales mix and increased selling and administrative expenses. The operating loss for the Inform segment was $345,000, compared to operating profit of $979,000 for the second quarter of last year due primarily to decreased sales and unfavorable product sales mix. The operating loss for the second quarter of fiscal 2009 also included severance costs of $843,000.
The operating loss for the first six months of fiscal 2009 was $2,077,000, compared to operating profit of $4,710,000 for the first six months of fiscal 2008. For the first six months of fiscal 2009, operating profit for the Protect and Direct segment was $1,958,000 compared to $7,000,000 for the same period last year, due to the lower sales volume, unfavorable product sales mix and higher selling and administrative expenses. Operating profit for the Inform segment was $75,000 compared to operating profit of $1,324,000 for the first six months of last year, also due to the lower sales volume, unfavorable product sales mix and higher selling and administrative expenses.
Interest Expense
Interest expense for the second quarter of fiscal 2009 decreased $278,000, or 24% to $865,000 from $1,143,000 for the second quarter last year, primarily due to the lower level of revolving debt outstanding and 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 December 31, 2008, primarily due to the 7% interest rate on our $40,000,000 in convertible debt.
Interest expense for the first six months of fiscal 2009 decreased to $1,782,000 from $2,238,000 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.
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Income Tax Provision (Benefit)
The income tax benefit for the second quarter of fiscal 2009 was $1,628,000 representing a 38% effective income tax rate. The income tax provision for the second quarter of fiscal 2008 was $589,000, also representing a 38% effective income tax rate.
The income tax benefit for the first six months of fiscal 2009 was $1,466,000, compared to a provision of $939,000 for the same period last year, both representing a 38% effective income tax rate.
Earnings (Loss) from Continuing Operations
The loss from continuing operations for the second quarter of fiscal 2009 was $2,656,000, or $0.29 per diluted share, compared to earnings from continuing operations of $961,000, or $0.10 per diluted share, for the second quarter last year. The current quarter loss includes severance costs of $843,000, or $0.06 per diluted share.
The loss from continuing operations for the first six months of fiscal 2009 was $2,393,000, or $0.26 per diluted share, compared to earnings of $1,535,000, or $0.16 per diluted share, for the same period last year.
Loss from Discontinued Operations, Net of Income Taxes
The loss from discontinued operations, net of income taxes, for the second quarter of fiscal 2008 was $202,000, or $0.02 per diluted share.
The loss from discontinued operations, net of income taxes, for the first six months of fiscal 2009 was $758,000, or $0.08 per diluted share, compared to a net loss of $306,000, or $0.03 per diluted share, for the same period last year.
Net Earnings (Loss)
The net loss for the second quarter of fiscal 2009 was $2,656,000, or $0.29 per diluted share, compared to net earnings of $759,000, or $0.08 per diluted share, for the second quarter last year.
The net loss for the first six months of fiscal 2009 was $3,151,000, or $0.34 per diluted share, compared to net earnings of $1,229,000, or $0.13 per diluted share, for the same period last year.
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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 $985,000 as of December 31, 2008. As of December 31, 2008, we had $1,750,000 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, such as a fixed charge coverage ratio, a maximum senior leverage ratio, and a maximum total leverage ratio. 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 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 also amended the Credit Agreement with an amendment dated November 7, 2008. As of December 31, 2008, we were in violation of the maximum total leverage ratio and the fixed charge ratio, 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. The Credit Agreement may be renewed one additional year on each anniversary date upon mutual consent of the Company and the bank. We are currently working with our senior bank on an additional amendment to the Credit Agreement. We expect that the amendment will modify several financial covenants which would include the addition of a monthly borrowing base formula to restrict borrowings based on eligible accounts receivable, inventory and fixed assets in order to reduce the possibility that we may violate financial covenants in the future. However, there is no assurance that we will be able to obtain an amendment on terms that are mutually satisfactory to avoid a default. In the event of a default, our senior bank could elect to declare all amounts borrowed under the Agreement, $1,750,000 as of December 31, 2008, to be due and currently payable and could cancel the outstanding letters of credit, $890,000 as of December 31, 2008. We would then attempt to negotiate a new credit agreement. However, there can be no assurance that we would be able to negotiate a new credit agreement with satisfactory terms and conditions within an acceptable time period.
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. We are working with our senior bank and are in the process of evaluating a variety of refinancing alternatives. We are also pursuing other strategic and financial alternatives, including the sale and leaseback of certain assets. 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
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operations, regardless of cause, will make it more difficult to comply with our bank covenants. 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. In the event of a default of our Credit Agreement, there are currently no default interest provisions. 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.
Our outstanding borrowings were $41,750,000, or 50.1% of total capitalization, as of December 31, 2008, of which $1,750,000 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. Included in long-term debt as of December 31, 2008 and June 30, 2008 was the $40 million of Convertible Notes. The amount of standby letters of credit outstanding was $890,000 as of December 31, 2008 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 $1,750,000 as of December 31, 2008. 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 $41.8 million in outstanding debt as of December 31, 2008.
Cash Flows
Cash flows provided by continuing operations were $753,000 during the first six months of fiscal 2009 compared with $1,021,000 provided by continuing operations in the first six months of fiscal 2008. For the first six months of fiscal 2009, cash used to fund the loss from continuing operations, net of tax, of $2,393,000 was offset by cash provided through a decrease in working capital. Decreased working capital provided $1,965,000 primarily representing decreased accounts receivable due to the lower level of our sales. Further offsetting the loss from continuing operations were non-cash expenses of $1,181,000, including depreciation and amortization expense. Although we are focused on reducing working capital, such as inventory levels, to provide cash, 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 six months of fiscal 2009 and $3,734,000 in the first six months of fiscal 2008 primarily representing increased working capital including increased inventory and decreased accounts payable.
Investing activities of continuing operations provided cash of $19,073,000 during the first six months of fiscal 2009, compared to $1,928,000 used in the first six 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 six months of fiscal 2009 included $876,000 for capital expenditures compared with $1,887,000 for the first six months last year as we manage our capital spending in this difficult environment.
Financing activities used cash of $17,679,000 during the first six months of fiscal 2009, compared with $5,663,000 of cash provided during the first six 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 six months of fiscal 2009, we borrowed a net $4,150,000, excluding the $20 million, against our outstanding revolving credit facility. The payment of our semi-annual cash dividend used cash of $1,829,000 during the first six months of fiscal 2009. Our recent decision to suspend payment of the semi-annual dividend will save nearly $4 million in annual cash expenditures.
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For fiscal 2009, we anticipate needing less than $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 December 31, 2008:
| Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Long-term debt(1) | $ | 41,750,000 | $ | 1,750,000 | $ | 40,000,000 | ||||||||||
Estimated interest payments(2) | 5,800,000 | 3,000,000 | 2,800,000 | |||||||||||||
Operating leases | 4,141,000 | 1,516,000 | 2,280,000 | 239,000 | 106,000 | |||||||||||
Minimum royalty payments | 1,110,000 | 510,000 | 600,000 | |||||||||||||
Uncertain tax benefits | 227,000 | 109,000 | 118,000 | |||||||||||||
Purchase obligations | 1,532,000 | 1,532,000 | ||||||||||||||
Total | $ | 54,560,000 | $ | 8,417,000 | $ | 45,798,000 | $ | 239,000 | 106,000 | |||||||
- (1)
- Amount includes expected cash payments on long-term debt based upon current and effective maturities as well as expected renewals.
- (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 December 31, 2008 was $2,180,000. 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 December 31, 2008 was $890,000.
FUTURE OUTLOOK
Looking forward, we remain cautious given the weakening 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 benefits of the proposed federal funding for transportation projects as part of President Obama's economic recovery
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plan. In the Bill the House of Representatives approved in January 2009, $30 billion in federal funding, with no required state match, will be directed toward "shovel-ready" state infrastructure projects that can commence within 90 days of the allocation of funds. In addition, legislation enacted in September 2008 injected $8.0 billion into the federal highway trust fund that will ensure full federal funding until the current federal highway bill expires in September 2009. We also believe the stabilization of gasoline prices may positively impact state and federal gasoline tax collections as drivers return to the road. Although we remain cautious, these factors provide us with guarded optimism that prospects for domestic sales of our products may improve. However, even if the economic recovery package is enacted soon, there is no guarantee that it will have any favorable impact on our business or that domestic sales will increase.
Although international sales decreased during the second quarter of this fiscal year, 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 second quarter decreased due to the weakening global economic conditions and these conditions may cause future international opportunities to be limited. However, 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.
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
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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 in the fourth quarter 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.
During the fourth quarter of fiscal 2008, we performed the annual impairment review relative to goodwill and intangible assets and concluded that no impairment had occurred. Our common stock price declined significantly during fiscal 2008 and has continued to decline during fiscal 2009. Subsequent to December 31, 2008, our stock price declined such that our market value is currently lower than our book value. Management has considered the near-term effects of the weakening global economic conditions and the credit crisis including, but not limited to, lower near-term order levels in the Protect and Direct segment, operating losses in both segments for the second quarter of fiscal 2009 and our depressed stock price. We operate in a seasonal market, with sales highest in our fiscal fourth quarter. Sales in the second quarter are typically the lowest. Sharp rises and declines in demand occur regularly and are not necessarily indicative of a decline in the long-term value of a business. Both of our segments were profitable for the first six months of fiscal 2009. It is our belief that order levels within the Protect and Direct segment, profitability for both segments and our common stock price may rebound along with the eventual improvement in the domestic and world economies. For this and other reasons, management believes that the long-term economic outlook of our reporting segments is not materially different than assumed at the annual impairment analysis date, and therefore management did not perform interim impairment testing during the second quarter of fiscal 2009.
Our stock price is a factor impacting the assessment of the fair value of our underlying reporting segments 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. We believe that the continued weakening of economic conditions globally and the significant turmoil in the financial markets contributed to the volatility of our stock price over the last 9 to 12 months. If our common stock price remains depressed and our market capitalization remains below our carrying value for a sustained period, it is possible that this may be an indicator of goodwill impairment, at which time we would perform a goodwill impairment test. Furthermore, higher than expected operating losses by either of our segments during the third quarter of fiscal 2009 or changes in expectations related to the depth and duration of the global economic downturn and the credit crisis could cause us to perform an interim goodwill impairment test prior to the next annual testing date in the fourth quarter of fiscal 2009. The
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amount of an impairment loss could be up to the total amounts of goodwill and intangible assets recorded as of December 31, 2008 of $9,246,000 and $1,111,000 for the Inform segment, respectively, and $8,139,000 and $982,000 for the Protect and Direct segment, respectively. If we are required to take a substantial impairment charge, then our operating results would be materially adversely affected in such period.
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 and available tax planning strategies that could be implemented to realize the deferred tax assets. We currently expect the deferred tax assets recorded to be fully realizable. However, our recent operating losses and the weakening global economic conditions could cause us to perform a review of the realizability of our deferred tax assets of $17,793,000 recorded as of December 31, 2008. It is possible that the review would result in an increased valuation allowance, increasing income tax expense, which would adversely affect our operating results.
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.
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, which are hereby incorporated by reference, as amended at Item 1A of Part II of this Quarterly Report on Form 10-Q.
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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 six 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 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.
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 December 31, 2008.
- (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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There is no information required to be reported under any items except as indicated below:
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.
The risk factors disclosed in our Annual Report on Form 10-K for the year ended June 30, 2008 are amended to read as follows:
These risk factors include forward-looking statements that involve risks and uncertainties. All forward-looking statements, including those detailed in our public filings with the SEC, news releases and other communications, speak only as of the dates of those filings or communications. There can be no assurance that actual results will not differ materially from our expectations.
The effects of the weakening global economic conditions and the distressed financial markets may adversely affect our sales, capital structure and liquidity.
The current weakening global economic conditions and the distressed financial markets have generally resulted in reduced demand for products, volatility in the capital markets, and constricted credit availability. Continuation of these economic conditions can further reduce our sales, and the uncertainty in the capital and credit markets may adversely affect our ability to access necessary capital, whether by refinancing our existing debt, or obtaining agreements for new debt, or by issuing securities as well as increase the cost of such capital. Reduced access to capital and credit markets combined with reduce cash flow from operations would adversely affect our liquidity.
The downturn in the global economy and the transportation safety and highway construction industries may adversely affect our operating results.
General economic downturns, including downturns in the transportation safety and highway construction industries, could result in a material decrease in our revenues and operating results. We believe that the current downturn of global economic conditions and the related reduction in government funding adversely impacted our performance in fiscal year 2008 and in the first half of fiscal 2009. Sales of our products are sensitive to foreign, domestic and regional economies in general, and in particular, changes in government infrastructure spending which can be adversely impacted by reduced tax revenues. In addition, trends toward privatization of highways may impact the nature of spending on transportation safety products. Many of our costs are fixed and cannot be quickly reduced in response to decreased demand.
A decrease or delay in federal government funding of transportation safety and highway construction and maintenance may cause our revenues, profits and cash flow to decrease.
We depend substantially on federal, state and municipal funding for transportation safety, highway construction and maintenance and other related infrastructure projects. Federal government funding for infrastructure projects is usually accomplished through highway authorization bills, which establish funding over a multi-year period. The most recent highway authorization legislation, SAFETEA-LU, expires September 30, 2009. We anticipate that delays in the passage of a new highway bill will occur, which may increase uncertainty in state and municipal governments and delays in commencing
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infrastructure projects. SAFETEA-LU was delayed more than two years after the previous law had expired. Even after federal legislation is enacted, funding appropriations may be revised in future congressional sessions, and federal funding for infrastructure projects may be reduced in the future.
Federal transportation spending is funded through a highway trust fund which derives most of its money from gasoline tax revenue. When the price of gasoline increased in 2008, the number of miles driven decreased significantly which depleted the surplus in the federal highway trust fund. In September, 2008, legislation was enacted to transfer $8 billion from the general fund to the highway trust fund in an attempt to keep the fund solvent until October 2009. Reduced tax revenues and altered driving patterns may impact the future solvency of the highway trust fund.
Congress is currently considering passage of an economic recovery package which includes an unprecedented $30 billion in federal funding for highway improvements, aimed at increasing jobs through infrastructure projects. There is no assurance that this legislation will become law, or if enacted, that such a law will contain provisions that will positively affect demand for our products.
Any change in the availability of federal funds and the timing of the release of those funds to the state and local governments can have an adverse impact on our revenues, profits and cash flow.
Constraints on state and local government budgets and decreases in state highway funding may adversely affect our financial performance.
States and municipalities may reduce spending on highways due to reduced tax revenues and other budget constraints and priorities. Loss of tax revenues and such budgetary constraints adversely affect the ability of states to fund transportation, highway and infrastructure projects, and therefore reduce the demand for our products. Municipalities also suffer from budget constraints that can reduce transportation safety spending.
Like the federal highway trust fund which depends on gasoline tax revenue, state highway funds also are dependent on revenue from state gasoline taxes. A number of states also contribute a portion of their sales tax on new car purchases into their state highway funds. A decrease in miles driven or new car sales may adversely affect the ability of states to fund transportation projects, and correspondingly, reduce the demand for our products.
Our business could be adversely affected by reduced levels of cash, whether from operations or pursuant to the terms of our debt.
Historically, our principal sources of cash have been cash flows from operations and borrowings from banks and other sources. Given the weakening global economic conditions, operations may continue to generate less cash and could result in our failing to comply with our bank credit agreement covenants. We have obtained waivers from our bank for failure to comply with certain covenants, and we are seeking to amend our current credit facility. Our ability to remain in compliance in the future will depend on our future financial performance and may be affected by events beyond our control. There can be no assurance that we will generate sufficient earnings and cash flow to remain in compliance with our credit agreement, or that we will be able to obtain amendments to our credit agreement to avoid a default. In the event of a default, there can be no assurance that we could negotiate a new credit agreement or that we could obtain a new credit agreement with satisfactory terms and conditions within a reasonable time period.
In addition, the holders of our $40,000,000 of 7% Senior Subordinated Convertible Notes may as of February 2010 require us to repurchase those Notes at 100% of the principal plus unpaid interest.
Reduced levels of cash could adversely affect our plans to grow our business domestically and internationally, because we would not have sufficient cash to fund research and development projects, or enter new markets, or acquire new products.
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We depend on principal customers.
Although we depend on principal customers, no single customer of Quixote represents a significant portion of total revenues. In fiscal 2008, approximately 7%, 7% and 6% of our consolidated revenues resulted from sales to customers in the States of New York, Texas and California, respectively. Customers may include distributors, contractors, departments of transportation, state agencies, local governments or municipalities. Any reduction in state transportation safety spending could materially affect our sales in those states, whether caused by reduced tax revenues or other budget constraints or priorities. The loss of, or a significant reduction in, orders from our customers in these states could have a material adverse effect on our financial condition and results of operations. Many state governments, including New York, Texas and California, have announced budget short-falls, which could further adversely affect sales of our products.
Our customers and suppliers may be adversely affected by the current global economic conditions, reduced government spending on transportation and highway projects, and the distressed credit markets. In turn, delays in placing orders and payment for products and higher default rates by our customers, as well as increased costs and imposition of more stringent terms and conditions by our suppliers could adversely affect our financial performance.
We are in a competitive marketplace.
To the extent one or more of our current or future competitors introduce products that better address customer requirements, or are less expensive than our products, our business could be adversely affected and we may be unable to maintain our leadership position in certain product lines. Competition may adversely affect the selling prices and the profit margins on our products. We may not be successful in developing and marketing our existing products or new products or incorporating new technology on a timely basis or at a reduced cost. If we are unable to timely develop and introduce new products, or enhance existing products, or reduce costs in response to changing market conditions or customer requirements or demands, our business and results of operations could be materially and adversely affected.
We have acquired complementary businesses in the past and, as a part of our strategy, may continue to acquire complementary businesses. The gross profit margins of certain acquired product lines are lower than our historical gross profit margin, which adversely affects our gross profit margin. Given competitive conditions, we may be unable to improve our gross profit margins for these products.
We have been affected by increased prices for certain commodities, particularly steel, aluminum and resin, which are a significant component of the cost of certain of our products. Such price increases negatively impact our gross margin for certain products, if we are unable to pass along to our customers cost increases. Increasing fuel and freight costs adversely affected our performance beginning in fiscal 2006 and into fiscal 2009.
Our products often are subject to government testing, inspection and approval.
We frequently supply products and services pursuant to agreements with general contractors or government agencies. The successful completion of our obligations under these contracts is often subject to satisfactory testing, inspection and approval of such products and services. Although we endeavor to satisfy the requirements of each of these contracts to which we are a party, no assurance can be given that the necessary approval of our products and services will be granted on a timely basis or at all, and that we will receive any payments due to us. In some cases, we may be dependent on others to complete these projects which may also delay payments to us. Any failure to obtain these approvals and payments may have a material adverse effect on our business and future financial performance.
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Global economic conditions, as well as difficulties in managing and expanding in international markets, could affect future growth in these markets.
In fiscal year 2008, international sales were $24,642,000 or 24%, of our total sales and we believe international markets are an important source of our growth. We plan to continue to increase our presence in these markets. However, the current deterioration of the global economy has had an adverse impact on our international sales, and we anticipate, will continue to adversely affect our international sales, as foreign governments reduce spending for transportation and infrastructure projects.
In connection with an increase in international sales efforts, we need to hire, train and retain qualified personnel in countries where language, cultural or regulatory barriers may exist. Moreover, funding and government requirements vary by country with respect to transportation safety. In a number of countries there are no governmental requirements or funding for transportation safety and we must educate officials and demonstrate the need for and the benefits of our products. In addition, our international revenues are subject to the following risks:
- •
- fluctuating currency exchange rates could reduce the demand for or profitability of foreign sales by affecting the pricing of our products;
- •
- the burden of complying with a wide variety of foreign laws and regulations, including the requirements for additional testing of our products;
- •
- dependence on foreign sales agents;
- •
- difficulty collecting foreign receivables,
- •
- political and economic instability of foreign governments; and
- •
- the imposition of protective legislation such as import or export barriers.
There are risks associated with doing business in China.
Some of our future business projects will be located in China, where we opened a new facility in Beijing during fiscal 2007. As a consequence, the economic, political, legal and social conditions in China could have an adverse effect on our business, results of operations and financial condition. The current economic condition in China has affected, and we anticipate will continue to affect, adversely our financial performance in China. Some of the other risks related to doing business in China include:
- •
- The legal environment in China is uncertain and our ability to legally protect our investment could be limited;
- •
- The Chinese government exerts substantial influence over the manner in which we must conduct our business activities;
- •
- Future inflation in China may inhibit our activity to conduct business in China;
- •
- Receivables may be more difficult to collect in China;
- •
- Restrictions on currency exchange may limit our ability to receive and use our cash effectively; and
- •
- More restrictive rules on foreign investment could adversely affect our ability to expand our operation in China or repatriate any profits earned there.
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If we are unable to protect our proprietary technology from infringement or if our technology infringes technology owned by others, then the demand for our products may decrease or we may be forced to modify our products which could increase our costs.
We hold numerous patents covering technology and applications related to many of our products and systems, and numerous trademarks and trade names registered with the U.S. Patent and Trademark Office and in foreign countries. Our existing and future patents and trademarks may not adequately protect us against infringements, especially in certain foreign countries, and pending patent or trademark applications may not result in issued patents or trademarks. Our patents, registered trademarks and patent applications may not be upheld if challenged, and competitors may develop similar or superior methods or products outside the protection of our patents. This could increase competition for our products and materially decrease our revenues. If our products are deemed to infringe the patents or proprietary rights of others, we could be required to modify the design of our products, change the name of our products or obtain a license for the use of some of the technologies used in our products. We may be unable to do any of the foregoing in a timely manner, upon acceptable terms and conditions, or at all, and the failure to do so could cause us to incur additional costs or lose expected revenue.
Past and future acquisitions involve risks that could adversely affect our future financial results.
Historically we have grown by acquisitions and we may acquire additional businesses in the future. We may be unable to achieve the benefits expected to be realized from our acquisitions. We may incur additional costs and our management's attention may be diverted because of unforeseen expenses, complications, delays and other risks inherent in acquiring businesses, including the following:
- •
- we may have difficulty integrating the acquired businesses as planned, which may include integration of systems of internal controls over financial reporting and other financial and administrative functions;
- •
- acquisitions may divert management's attention from our existing operations;
- •
- we may have difficulty in competing successfully for available acquisition candidates, completing future acquisitions or accurately estimating the financial effect of any businesses we acquire;
- •
- we may have delays in realizing the benefits of our strategies for an acquired business;
- •
- we may not be able to retain key employees necessary to continue the operations of an acquired business;
- •
- acquisition costs may be met with cash or debt, increasing the risk that we will be unable to satisfy current financial obligations;
- •
- we may acquire businesses that are less profitable or have lower profit margins than our historical profit margins; and
- •
- acquired companies may have unknown liabilities that could require us to spend significant amounts of additional capital.
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Management's estimates and assumptions affect reported amounts of expenses and changes in those estimates could impact operating results.
Goodwill and other indefinite-lived intangible assets are tested for impairment at least annually, and the results of such testing may adversely affect our financial results. We use a variety of valuation techniques in determining fair value. 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, and actual results may differ significantly from the estimates and assumptions used.
We recognize deferred tax assets and liabilities for the expected future tax consequences of events which are included in the financial statements or tax returns. In assessing the realizability of the deferred tax assets, management makes certain assumptions about whether the deferred tax assets will be realized. We expect the deferred tax assets currently recorded to be fully realizable, however there can be no assurance that an increased valuation allowance would not need to be recorded in the future.
Our success depends on our management and other employees.
To execute our business plans, we need to attract, develop and retain qualified personnel. Our success in attracting qualified people is dependent on the resources available in individual geographic areas and the impact on the labor supply due to general economic conditions as well as our ability to provide a competitive compensation package and work environment. Our ability to attract and retain executives, qualified engineers, skilled manufacturing and marketing personnel and other professionals, either through direct hiring or acquisition of other businesses employing such professionals, is an important factor in determining our future success.
Our facilities or facilities of our customers and suppliers could be susceptible to natural disasters.
One of our major manufacturing facilities is located in the Southeastern U.S. Should a natural disaster such as a hurricane, tornado, earthquake or flood severely damage one of our major manufacturing facilities, or damage a major facility of one or more of our significant customers or suppliers, our business could be materially disrupted.
Our insurance coverage could be inadequate.
In accordance with risk management practices, we continually re-evaluate risks, their potential costs and the cost of minimizing them. To reduce our exposure to material risks, we purchase insurance in certain circumstances. We believe that we maintain adequate insurance coverage to effectively mitigate risk when possible. However, certain risks are inherent in our business and our insurance may not be adequate to cover potential claims or may be unavailable.
Our quarterly operating results are likely to fluctuate, which may affect our stock price.
Our quarterly revenues, expenses, operating results and gross profit margins vary significantly from quarter to quarter. As a result, our operating results may fall below the expectations of securities analysts and investors in some quarters, which could result in a decrease in the market price of our common stock. The reasons our quarterly results may fluctuate include:
- •
- seasonality inherent in the transportation safety and highway construction and maintenance industry;
- •
- variations in profit margins attributable to product mix;
- •
- changes in the general competitive and economic conditions;
- •
- delays in, or uneven timing in the delivery of, customer orders;
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- •
- the introduction of new products by us or our competitors; and
- •
- delays in federal highway funding and budgetary restraints on state and local government spending.
Period to period comparisons of our results should not be relied on as indications of future performance.
We may experience volatility in our stock price.
The market price of our common stock may be subject to significant fluctuations in response to various factors, including:
- •
- the relatively small public float of our stock;
- •
- quarterly fluctuations in our operating results, as described in the prior risk factor;
- •
- changes in securities analysts' estimates of our future earnings; and
- •
- loss of significant customers or significant business developments relating to us or our competitors.
Our failure to meet analysts' expectations, even if minor, could cause the market price of our common stock to decline. In addition, stock markets have generally experienced a high level of price and volume volatility, and the market prices of equity securities of many companies have experienced wide price fluctuations not necessarily related to the operating performance of such companies. These broad market fluctuations may adversely affect our common stock's market price. In the past, securities class action lawsuits have been instituted against companies following periods of volatility in the market price of such companies' securities. If any such litigation is instigated against us, it could result in substantial costs and a diversion of management's attention and resources, which could have a material adverse effect on our business, results of operations and financial condition.
Acts of war or terrorism could adversely impact our business and operating results.
Acts of war or terrorism (wherever located around the world) may cause damage or disruption to our employees, facilities, suppliers, distributors or customers, which could significantly impact our sales, costs, expenses and financial condition. The potential for acts of war or hostility or terrorism may create many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot presently be predicted. We are uninsured for losses and interruption caused by acts of war.
* * *
The foregoing list is not exhaustive. There can be no assurance that we have correctly identified and evaluated all factors affecting our business. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial also may adversely impact us. Should any risks and uncertainties develop into actual events, these developments could have material adverse effects on our business, financial condition and results of operations. For these reasons, the reader is cautioned not to place undue reliance on our forward-looking statements.
Item 4. Submission of Matters to Vote of Security Holders
Our Annual Meeting of Stockholders was held on November 13, 2008. The matters voted on at the Annual Meeting were the following:
- (1)
- The election of Leslie J. Jezuit, Daniel P. Gorey and Duane M. Tyler to serve as Directors for a three-year term until the annual meeting of stockholders in 2011.
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- (2)
- The ratification of the appointment of Grant Thornton LLP as our independent registered public accounting firm.
Messrs. Jezuit, Gorey and Tyler were elected and the ratification of the appointment of Grant Thornton LLP was approved as a result of the following stockholder votes:
| | For | Against | Abstain or Withheld | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
(1) | Election of Directors | |||||||||||
Leslie J. Jezuit | 8,116,600 | 377,720 | ||||||||||
Daniel P. Gorey | 8,004,270 | 490,050 | ||||||||||
Duane M. Tyler | 8,346,151 | 148,169 | ||||||||||
(2) | Ratification of | |||||||||||
Grant Thornton LLP | 8,474,163 | 9,825 | 10,332 |
The terms of James H. DeVries, Lawrence C. McQuade, Victor Schwartz and Robert D. van Roijen as directors continued after this meeting.
(a) On January 15, 2009, we issued a press release announcing preliminary financial results for our second quarter ended December 31, 2008. The full text of the press release is furnished with this Form 10-Q as Exhibit 99. On January 29, 2009 we issued a press release announcing our financial results for the second quarter ended December 31, 2008 and on January 30, 2009 we disclosed the release on Form 8-K and furnished a copy of the release as an exhibit to the Form 8-K.
The information in this Item 5(a) and the related exhibit is being furnished and shall not be deemed "filed" for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that Section. This information shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Act of 1933, as amended.
- (a)
- Exhibits
- 10.1
- Lease dated November 19, 2008 by and between SLP I, LLC, SLP II, LLC and SLP III, LLC, and Surface Systems, Inc. and Guaranty of Lease dated November 19, 2008 by and between SLP I, LLC, SLP II, LLC and SLP III, LLC, and Quixote Corporation
- 10.2
- Severance and Non-Competition Agreement dated as of February 3, 2009 by and between Quixote Corporation and Bruce Reimer
- 10.3
- Change of Control Agreement dated as of February 3, 2009 by and between Quixote Corporation and Bruce Reimer
- 10.4
- Letter Agreement dated as of February 3, 2009 by and between Quixote Corporation and Bruce Reimer
- 10.5
- Retirement Agreement and General Release dated December 23, 2008 by and between Leslie J. Jezuit and Quixote Corporation
- 10.6
- Waiver, Fifth Amendment to Amended and Restated Credit Agreement and Reaffirmation of Guaranties dated as of February 9, 2009 by and between Quixote Corporation and certain
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Subsidiaries thereof and Bank of America, N.A. and Second Amended and Restated Revolving Loan Note dated as of February 9, 2009 from Quixote Corporation to Bank of America, N.A.
- 31
- Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- 32
- Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- 99
- Press Release issued by Quixote Corporation dated January 15, 2009
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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 December 31, 2008 to be signed on its behalf by the undersigned thereunto duly authorized.
QUIXOTE CORPORATION | ||||
DATED: | February 9, 2009 | /s/ DANIEL P. GOREY Daniel P. Gorey Chief Financial Officer, Executive Vice President and Treasurer (Chief Financial & Accounting Officer) |
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Exhibits:
- 10.1
- Lease dated November 19, 2008 by and between SLP I, LLC, SLP II, LLC and SLP III, LLC, and Surface Systems, Inc. and Guaranty of Lease dated November 19, 2008 by and between SLP I, LLC, SLP II, LLC and SLP III, LLC, and Quixote Corporation
- 10.2
- Severance and Non-Competition Agreement dated as of February 3, 2009 by and between Quixote Corporation and Bruce Reimer
- 10.3
- Change of Control Agreement dated as of February 3, 2009 by and between Quixote Corporation and Bruce Reimer
- 10.4
- Letter Agreement dated as of February 3, 2009 by and between Quixote Corporation and Bruce Reimer
- 10.5
- Retirement Agreement and General Release dated December 23, 2008 by and between Leslie J. Jezuit and Quixote Corporation
- 10.6
- Waiver, Fifth Amendment to Amended and Restated Credit Agreement and Reaffirmation of Guaranties dated as of February 9, 2009 by and between Quixote Corporation and certain Subsidiaries thereof and Bank of America, N.A. and Second Amended and Restated Revolving Loan Note dated as of February 9, 2009 from Quixote Corporation to Bank of America, N.A.
- 31
- Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
- 32
- Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- 99
- Press Release issued by Quixote Corporation dated January 15, 2009
QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited)
QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited)
QUIXOTE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
QUIXOTE CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited)
PART I—FINANCIAL INFORMATION
PART II—OTHER INFORMATION
SIGNATURE
EXHIBIT INDEX