UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
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 |
| 36-2675371 |
(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification Number) |
35 East Wacker Drive |
|
|
Chicago, Illinois |
| 60601 |
(Address of principal executive offices) |
| (Zip Code) |
(312) 467-6755
(Registrant’s telephone number, including area code)
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. x YES o NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer x Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o YES x NO
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 9,018,526 shares of the Company’s Common Stock ($.01-2/3 par value) were outstanding as of April 30, 2007.
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
|
| Nine Months Ended March 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Net sales |
| $ | 95,791,000 |
| $ | 116,047,000 |
|
Cost of sales |
| 66,105,000 |
| 82,837,000 |
| ||
Gross profit |
| 29,686,000 |
| 33,210,000 |
| ||
Operating expenses: |
|
|
|
|
| ||
Selling & administrative |
| 25,853,000 |
| 27,479,000 |
| ||
Research & development |
| 3,849,000 |
| 4,427,000 |
| ||
Gain on legal settlement |
|
|
| (633,000 | ) | ||
Gain on sale of assets |
| (1,191,000 | ) |
|
| ||
Restructuring costs |
| 7,655,000 |
|
|
| ||
|
| 36,166,000 |
| 31,273,000 |
| ||
Operating profit (loss) |
| (6,480,000 | ) | 1,937,000 |
| ||
Other income (expense): |
|
|
|
|
| ||
Interest income |
| 17,000 |
| 1,000 |
| ||
Interest expense |
| (3,389,000 | ) | (3,527,000 | ) | ||
|
| (3,372,000 | ) | (3,526,000 | ) | ||
Loss before income taxes |
| (9,852,000 | ) | (1,589,000 | ) | ||
Income tax benefit |
| (3,744,000 | ) | (604,000 | ) | ||
Net loss |
| $ | (6,108,000 | ) | $ | (985,000 | ) |
Per share data—basic: |
|
|
|
|
| ||
Net loss |
| $ | (0.68 | ) | $ | (0.11 | ) |
Weighted average common shares outstanding |
| 8,920,521 |
| 8,856,525 |
| ||
Per share data—diluted: |
|
|
|
|
| ||
Net loss |
| $ | (0.68 | ) | $ | (0.11 | ) |
Weighted average common shares outstanding |
| 8,920,521 |
| 8,856,525 |
| ||
Cash dividends declared per common share |
| $ | 0.19 |
| $ | 0.18 |
|
See Notes to Consolidated Financial Statements.
2
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Continued)
(Unaudited)
|
| Three Months Ended March 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Net sales |
| $ | 30,975,000 |
| $ | 37,470,000 |
|
Cost of sales |
| 20,302,000 |
| 26,420,000 |
| ||
Gross profit |
| 10,673,000 |
| 11,050,000 |
| ||
Operating expenses: |
|
|
|
|
| ||
Selling & administrative |
| 8,471,000 |
| 9,605,000 |
| ||
Research & development |
| 1,222,000 |
| 1,623,000 |
| ||
Gain on sale of assets |
| (598,000 | ) |
|
| ||
|
| 9,095,000 |
| 11,228,000 |
| ||
Operating profit (loss) |
| 1,578,000 |
| (178,000 | ) | ||
Other income (expense): |
|
|
|
|
| ||
Interest income |
|
|
|
|
| ||
Interest expense |
| (1,098,000 | ) | (1,238,000 | ) | ||
|
| (1,098,000 | ) | (1,238,000 | ) | ||
Profit (loss) before income taxes |
| 480,000 |
| (1,416,000 | ) | ||
Income tax provision (benefit) |
| 182,000 |
| (538,000 | ) | ||
Net earnings (loss) |
| $ | 298,000 |
| $ | (878,000 | ) |
Per share data—basic: |
|
|
|
|
| ||
Net earnings (loss) |
| $ | 0.03 |
| $ | (0.10 | ) |
Weighted average common shares outstanding |
| 8,948,133 |
| 8,839,721 |
| ||
Per share data—diluted: |
|
|
|
|
| ||
Net earnings (loss) |
| $ | 0.03 |
| $ | (0.10 | ) |
Weighted average common shares outstanding |
| 9,040,559 |
| 8,839,721 |
|
See Notes to Consolidated Financial Statements.
3
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
|
| March 31, |
| June 30, |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 452,000 |
| $ | 869,000 |
|
Accounts receivable, net of allowance for doubtful accounts of $1,601,000 at March 31 and $1,816,000 at June 30 |
| 27,220,000 |
| 36,481,000 |
| ||
Refundable income taxes |
| 2,612,000 |
| 238,000 |
| ||
Inventories, net: |
|
|
|
|
| ||
Raw materials |
| 10,289,000 |
| 10,356,000 |
| ||
Work in process |
| 5,172,000 |
| 6,642,000 |
| ||
Finished goods |
| 9,191,000 |
| 8,467,000 |
| ||
|
| 24,652,000 |
| 25,465,000 |
| ||
Deferred income tax assets |
| 3,824,000 |
| 3,824,000 |
| ||
Other current assets |
| 1,768,000 |
| 952,000 |
| ||
Total current assets |
| 60,528,000 |
| 67,829,000 |
| ||
Property, plant and equipment, at cost |
| 42,690,000 |
| 46,714,000 |
| ||
Less accumulated depreciation |
| (24,759,000 | ) | (27,179,000 | ) | ||
|
| 17,931,000 |
| 19,535,000 |
| ||
Goodwill |
| 17,385,000 |
| 17,385,000 |
| ||
Intangible assets, net |
| 6,072,000 | �� | 6,467,000 |
| ||
Deferred income tax assets |
| 13,168,000 |
| 11,844,000 |
| ||
Other assets |
| 1,623,000 |
| 2,143,000 |
| ||
|
| $ | 116,707,000 |
| $ | 125,203,000 |
|
See Notes to Consolidated Financial Statements.
4
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
(Unaudited)
|
| March 31, |
| June 30, |
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current portion of long-term debt |
| $ | 242,000 |
| $ | 465,000 |
|
Accounts payable |
| 8,475,000 |
| 13,234,000 |
| ||
Dividends payable |
|
|
| 1,688,000 |
| ||
Accrued restructuring costs |
| 1,648,000 |
| 497,000 |
| ||
| 6,407,000 |
| 8,164,000 |
| |||
Total current liabilities |
| 16,772,000 |
| 24,048,000 |
| ||
Long-term debt, net of current portion |
| 55,250,000 |
| 51,122,000 |
| ||
Other long-term liabilities |
| 1,242,000 |
| 1,087,000 |
| ||
|
| 73,264,000 |
| 76,257,000 |
| ||
Commitments and contingent liabilities (Note 9) |
|
|
|
|
| ||
Shareholders’ equity: |
|
|
|
|
| ||
Preferred stock, no par value; authorized 100,000 shares; none issued |
|
|
|
|
| ||
Common stock, par value $.01-2/3; authorized 30,000,000 shares; issued 10,986,335 shares at March 31 and 10,904,678 shares at June 30 |
| 183,000 |
| 182,000 |
| ||
Capital in excess of par value of common stock |
| 64,408,000 |
| 62,434,000 |
| ||
Retained earnings |
| 2,425,000 |
| 10,226,000 |
| ||
Accumulated other comprehensive income |
| 138,000 |
| 227,000 |
| ||
Treasury stock, at cost, 1,972,177 shares at March 31 and 2,008,636 shares at June 30 |
| (23,711,000 | ) | (24,123,000 | ) | ||
Total shareholders’ equity |
| 43,443,000 |
| 48,946,000 |
| ||
|
| $ | 116,707,000 |
| $ | 125,203,000 |
|
See Notes to Consolidated Financial Statements.
5
QUIXOTE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
|
| Nine Months Ended March 31, |
| ||||
|
| 2007 |
| 2006 |
| ||
Operating activities: |
|
|
|
|
| ||
Net loss |
| $ | (6,108,000 | ) | $ | (985,000 | ) |
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities of continuing operations: |
|
|
|
|
| ||
Depreciation |
| 2,629,000 |
| 3,545,000 |
| ||
Amortization |
| 1,292,000 |
| 1,304,000 |
| ||
Non-cash inventory disposal |
| 3,620,000 |
|
|
| ||
Gain on sale of assets |
| (1,191,000 | ) |
|
| ||
Provisions for losses on accounts receivable |
| 530,000 |
| (64,000 | ) | ||
Common stock issued for 401K plan |
| 690,000 |
| 899,000 |
| ||
Stock-based compensation expense |
| 726,000 |
| 622,000 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
| 8,731,000 |
| 2,191,000 |
| ||
Inventories |
| (2,807,000 | ) | (2,877,000 | ) | ||
Other assets |
| (788,000 | ) | (2,080,000 | ) | ||
Income taxes |
| (3,698,000 | ) | (433,000 | ) | ||
Accounts payable and accrued expenses |
| (5,301,000 | ) | (1,284,000 | ) | ||
Other long-term liabilities |
| (30,000 | ) |
|
| ||
Net cash provided by (used in) operating activities |
| (1,705,000 | ) | 838,000 |
| ||
Investing activities: |
|
|
|
|
| ||
Capital expenditures |
| (2,212,000 | ) | (2,442,000 | ) | ||
Patent expenditures |
| (494,000 | ) | (310,000 | ) | ||
Proceeds from sale of assets |
| 2,499,000 |
|
|
| ||
Net cash used in investing activities |
| (207,000 | ) | (2,752,000 | ) | ||
Financing activities: |
|
|
|
|
| ||
Proceeds from revolving credit agreement |
| 21,400,000 |
| 28,850,000 |
| ||
Payments on revolving credit agreement |
| (17,150,000 | ) | (19,350,000 | ) | ||
Payments on notes payable |
| (345,000 | ) | (317,000 | ) | ||
Payment of semi-annual cash dividend |
| (3,381,000 | ) | (3,185,000 | ) | ||
Purchase of treasury stock |
|
|
| (3,105,000 | ) | ||
Proceeds from exercise of common stock options |
| 971,000 |
| 912,000 |
| ||
Net cash provided by financing activities |
| 1,495,000 |
| 3,805,000 |
| ||
Increase (decrease) in cash and cash equivalents |
| (417,000 | ) | 1,891,000 |
| ||
Cash and cash equivalents at beginning of period |
| 869,000 |
| 156,000 |
| ||
Cash and cash equivalents at end of period |
| $ | 452,000 |
| $ | 2,047,000 |
|
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, 2006 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, 2006. Management believes the financial statements include all normal recurring adjustments necessary for a fair presentation of the results for the interim periods presented.
Recently Issued Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FAS 115” (SFAS No.159). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, including interim periods within that fiscal year. We do not expect the adoption of this statement to have a material affect on our results of operations or financial position.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for our 2008 fiscal year. We are in the process of evaluating the impact that this statement will have on our results of operations and financial position, however we currently do not expect that the adoption will have a material impact.
2. We adopted the provisions of SFAS No. 123 (revised 2004) (SFAS No. 123(R)), “Share-Based Payment” as of July 1, 2005 using the modified prospective method. Under this transition method, share-based compensation cost recognized in the periods ended March 31, 2007 and 2006 includes compensation cost for all share-based awards which were unvested as of July 1, 2005 as well as compensation cost for all share-based awards granted subsequent to July 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). 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. We have two current share-based compensation plans, which are described below.
Plan Descriptions
Our 2001 Employee Stock Incentive Plan (the Plan), which is shareholder-approved, permits the grant of share options and restricted shares to our employees for up to 1,125,000 shares, of which 150,000 shares were reserved for the grant of restricted stock awards. We believe that grants of stock options to employees generate an increased incentive for the employees to contribute to our future success and prosperity, thus enhancing our value for the benefit of our shareholders. The Plan provides for grants of stock options and
7
restricted stock for employees as may be determined by the Compensation Committee of the Board of Directors. No grantee may receive option grants in excess of 100,000 shares per year. The stock options are granted with an exercise price equal to or greater than the fair market value of our stock on the date of grant. Employee options granted under the Plan expire not more than ten years from the grant date with vesting determined by the Committee. For grants currently outstanding, vesting is over a three year period, with one-third of the grant becoming exercisable at the end of each of the three years. Option awards provide for accelerated vesting if there is a change in control, as defined in the Plan.
Our 2001 Non-Employee Director Stock Option Plan (the Director Plan), which is also shareholder-approved, permits the grant of share options to our non-employee directors for up to 135,000 shares. We believe that grants of stock options to non-employee directors encourage the directors to acquire a long term proprietary interest in our growth and performance, and generate an increased incentive for the directors to contribute to our future success and prosperity, thus enhancing the value of the Company for the benefit of its shareholders. The Director Plan provides for an annual grant of stock options for directors based on a fixed amount, which is currently 5,000 stock options per each non-employee director annually. The stock options are granted with an exercise price equal to the fair market value of our stock on the date of grant. Options granted under the Director Plan expire not more than seven years from the grant date. Vesting is over not less than a six-month period. As defined in the Director Plan, option awards provide for accelerated vesting if there is a change in control and upon the death of a director optionee.
Shares issued as a result of stock option exercises or restricted stock grants may be issued as new shares, funded from Treasury stock or may be shares purchased on the open market. We believe that we currently have adequate Treasury and authorized unissued shares to meet any requirements to issue shares during fiscal 2007. For both the Plan and the Director Plan, the current share authorization for issuance of grants terminates on November 1, 2011.
We also have a retirement stock award program for certain key executives that was originally authorized under the 1993 Long-Term Stock Ownership Incentive Plan. This retirement stock award program is further described in Note 10 to the consolidated financial statements in our Annual Report on Form 10-K for the year ended June 30, 2006.
Share-based Compensation Expense
The share-based compensation cost that has been charged against income for our plans was $726,000 and $785,000 for the nine months ended March 31, 2007 and 2006, respectively. The total income tax benefit recognized in the income statement for share-based compensation arrangements was $142,000 and $163,000 for those periods, and the net expense recorded was $585,000 and $622,000, which was $0.07 per basic share outstanding for both periods and $0.06 per diluted share outstanding for the nine months ended March 31, 2007 and $0.07 per diluted share outstanding for the nine months ended March 31, 2006.
As of March 31, 2007, the total compensation cost related to unvested share-based awards granted under our stock option plans not yet recognized was approximately $1,020,000. This cost will be amortized on a straight-line basis over a weighted average period of approximately 1.0 year and will be adjusted for subsequent changes in estimated forfeitures. The 294,999 unvested options outstanding at March 31, 2007 had a weighted-average fair value of $5.68.
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 for the first nine months of fiscal years 2007 and 2006. Expected volatilities are based on historical volatility of our 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.
8
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.
|
| 2007 YTD |
| 2006 YTD |
|
Risk free interest rate |
| 4.7% |
| 4.1% |
|
Expected dividend yield |
| 2.28% |
| 1.73% |
|
Weighted average expected volatility |
| 39% |
| 42% |
|
Expected term |
| 3.9 – 5.8 years |
| 3.7 – 6.0 years |
|
Weighted average expected term |
| 4.4 years |
| 4.5 years |
|
Weighted average grant date fair value |
| $4.95 |
| $7.32 |
|
Stock Option Activity
Information with respect to stock option activity under our plans is as follows:
|
|
|
|
|
| Weighted- |
|
|
| ||||||
|
|
|
| Weighted- |
| Average |
|
|
| ||||||
|
|
|
| Average |
| Remaining |
| Aggregate |
| ||||||
|
| Common |
| Exercise |
| Contractual |
| Intrinsic |
| ||||||
|
| Shares |
| Price |
| Term |
| Value |
| ||||||
Outstanding at July 1, 2005 |
| 1,009,971 |
|
| $ | 18.19 |
|
|
|
|
|
|
|
| |
Granted |
| 114,200 |
|
| $ | 21.02 |
|
|
|
|
|
|
|
| |
Exercised |
| (119,849 | ) |
| $ | 15.44 |
|
|
|
|
|
|
|
| |
Cancelled or expired |
| (13,633 | ) |
| $ | 20.83 |
|
|
|
|
|
|
|
| |
Outstanding at March 31, 2006 |
| 990,689 |
|
| $18.81 |
|
|
| 3.4 Years |
|
| $ | 6,015,000 |
| |
Outstanding at July 1, 2006 |
| 944,902 |
|
| $ | 18.98 |
|
|
|
|
|
|
|
| |
Granted |
| 187,000 |
|
| $ | 18.65 |
|
|
|
|
|
|
|
| |
Exercised |
| (82,500 | ) |
| $ | 11.99 |
|
|
|
|
|
|
|
| |
Cancelled or expired |
| (170,533 | ) |
| $ | 24.28 |
|
|
|
|
|
|
|
| |
Outstanding at March 31, 2007 |
| 878,869 |
|
| $18.53 |
|
|
| 3.6 Years |
|
| $ | 2,080,000 |
| |
Vested at March 31, 2007 |
| 583,870 |
|
| $18.16 |
|
|
| 3.1 Years |
|
| $ | 1,796,000 |
|
Options outstanding at March 31, 2007 are exercisable as follows: 583,870 currently, 160,476 within one year, 81,190 in two years and 53,333 thereafter. At March 31, 2006, 739,200 options were exercisable. As of March 31, 2007, we have 534,487 common shares reserved for our option and award plans available for future grants.
During the nine months ended March 31, 2007 and 2006, the following activity occurred under our plans:
|
| Nine Months Ended |
| ||||
|
| 2007 |
| 2006 |
| ||
Total intrinsic value of stock options exercised |
| $ | 686,000 |
| $ | 866,000 |
|
Total fair value of stock options vested |
| $ | 583,000 |
| $ | 730,000 |
|
9
3. The income tax benefit for the current quarter is based upon the estimated effective income tax rate for the full fiscal year.
4. Operating results for the first nine months of fiscal 2007 are not necessarily indicative of the performance for the entire year. Our business is historically seasonal with a higher level of sales in the fourth fiscal quarter.
5. The computation of basic and diluted earnings per share is as follows:
|
| Nine Months Ended |
| Three Months Ended |
| ||||||||
|
| March 31, |
| March 31, |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
| ||||
Net profit (loss) available to common shareholders |
| $ | (6,108,000 | ) | $ | (985,000 | ) | $ | 298,000 |
| $ | (878,000 | ) |
Denominator: |
|
|
|
|
|
|
|
|
| ||||
Weighted average shares |
| 8,920,521 |
| 8,856,525 |
| 8,948,133 |
| 8,839,721 |
| ||||
Effect of dilutive securities-common stock options |
|
|
|
|
| 92,426 |
|
|
| ||||
Weighted average shares |
| 8,920,521 |
| 8,856,525 |
| 9,040,559 |
| 8,839,721 |
| ||||
Net profit (loss) per share of common stock: |
|
|
|
|
|
|
|
|
| ||||
Basic |
| $ | (0.68 | ) | $ | (0.11 | ) | $ | 0.03 |
| $ | (0.10 | ) |
Diluted |
| $ | (0.68 | ) | $ | (0.11 | ) | $ | 0.03 |
| $ | (0.10 | ) |
There were outstanding options to purchase common stock at prices that exceeded the average market price for the income statement periods. These options have been excluded from the computation of diluted earnings per share for the three and nine month periods ended March 31, 2007 and 2006 and are as follows:
|
| Nine Months Ended |
| Three Months Ended |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Average exercise price per share |
| $ | 21.26 |
| $ | 25.22 |
| $ | 23.14 |
| $ | 25.22 |
|
Number of shares |
| 518,533 |
| 264,800 |
| 248,000 |
| 264,800 |
| ||||
In addition, employee stock options totaling 82,691 shares for the nine-month period ended March 31, 2007 and 141,226 and 149,108 shares, respectively, for the nine and three month periods ending March 31, 2006 were not included in the diluted weighted average shares calculation because the effects of these securities were anti-dilutive.
6. Accumulated other comprehensive income consists of the following:
|
| March 31, |
| March 31, |
| ||
|
| 2007 |
| 2006 |
| ||
Unrealized gain on derivative instrument: |
|
|
|
|
| ||
Beginning balance—July 1 |
| $ | 227,000 |
| $ | 345,000 |
|
Amortization to earnings |
| (89,000 | ) | (88,000 | ) | ||
Total accumulated comprehensive income |
| $ | 138,000 |
| $ | 257,000 |
|
10
7. The segment financial data presented herein presents our three reportable segments—the manufacture and sale of products which Protect and Direct; the manufacture and sale of products which Inform; and the manufacture and sale of Intersection Control products. The primary product lines within the Protect and Direct segment include energy-absorbing products such as crash cushions, truck-mounted attenuators, sand-filled barrels, barriers and 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 primary product lines within the Intersection Control segment include intelligent intersection control systems, pedestrian signals, video detection equipment and other transportation equipment. The products within this segment control traffic and ease traffic congestion, primarily related to intersections. Our segments are discussed in further detail in our Annual Report on Form 10-K for the year ended June 30, 2006.
The following table presents financial information about reported segments for the nine-month and three-month periods ended March 31, 2007 and 2006 along with the items necessary to reconcile the segment information to the totals reported in the consolidated financial statements.
|
| Protect and |
|
|
| Intersection |
| Unallocated |
|
|
| |||||
|
| Direct |
| Inform |
| Control |
| Corporate |
| Total |
| |||||
2007 |
|
|
|
|
|
|
|
|
|
|
| |||||
NINE MONTHS |
|
|
|
|
|
|
|
|
|
|
| |||||
Net sales from external |
| $ | 56,325,000 |
| $ | 16,618,000 |
| $ | 22,848,000 |
|
|
| $ | 95,791,000 |
| |
Operating profit (loss) |
| 10,487,000 |
| 2,151,000 |
| (12,966,000 | ) | $ | (6,152,000 | ) | (6,480,000 | ) | ||||
Unallocated interest and other |
|
|
|
|
|
|
| (3,372,000 | ) | (3,372,000 | ) | |||||
Total income (loss) before taxes |
| 10,487,000 |
| 2,151,000 |
| (12,966,000 | ) | (9,524,000 | ) | (9,852,000 | ) | |||||
Identifiable assets |
| 54,147,000 |
| 21,619,000 |
| 18,417,000 |
| 22,524,000 |
| 116,707,000 |
| |||||
THREE MONTHS |
|
|
|
|
|
|
|
|
|
|
| |||||
Net sales from external |
| $ | 19,797,000 |
| $ | 4,908,000 |
| $ | 6,270,000 |
|
|
| $ | 30,975,000 |
| |
Operating profit (loss) |
| 3,549,000 |
| 584,000 |
| (206,000 | ) | $ | (2,349,000 | ) | 1,578,000 |
| ||||
Unallocated interest and other |
|
|
|
|
|
|
| (1,098,000 | ) | (1,098,000 | ) | |||||
Total income (loss) before taxes |
| 3,549,000 |
| 584,000 |
| (206,000 | ) | (3,447,000 | ) | 480,000 |
| |||||
2006 |
|
|
|
|
|
|
|
|
|
|
| |||||
NINE MONTHS |
|
|
|
|
|
|
|
|
|
|
| |||||
Net sales from external |
| $ | 55,434,000 |
| $ | 17,222,000 |
| $ | 43,391,000 |
|
|
| $ | 116,047,000 |
| |
Operating profit (loss) |
| 9,684,000 |
| 1,678,000 |
| (3,687,000 | ) | $ | (5,738,000 | ) | 1,937,000 |
| ||||
Unallocated interest and other |
|
|
|
|
|
|
| (3,526,000 | ) | (3,526,000 | ) | |||||
Total income (loss) before taxes |
| 9,684,000 |
| 1,678,000 |
| (3,687,000 | ) | (9,264,000 | ) | (1,589,000 | ) | |||||
Identifiable assets |
| 51,814,000 |
| 21,029,000 |
| 51,450,000 |
| 15,629,000 |
| 139,922,000 |
| |||||
THREE MONTHS |
|
|
|
|
|
|
|
|
|
|
| |||||
Net sales from external |
| $ | 19,235,000 |
| $ | 4,754,000 |
| $ | 13,481,000 |
|
|
| $ | 37,470,000 |
| |
Operating profit (loss) |
| 3,678,000 |
| 481,000 |
| $ | (2,290,000 | ) | $ | (2,047,000 | ) | (178,000 | ) | |||
Unallocated interest and other |
|
|
|
|
|
|
| (1,238,000 | ) | (1,238,000 | ) | |||||
Total income (loss) before taxes |
| 3,678,000 |
| 481,000 |
| (2,290,000) |
| (3,285,000) |
| (1,416,000) |
|
11
Identifiable assets of the Intersection Control segment as of March 31, 2007 decreased to $18,417,000 from $51,450,000 as of March 31, 2006 due to $13,374,000 in non-cash asset impairment charges made in the fourth quarter of the fiscal year ended June 30, 2006 as well as due to the sale and write off of assets as part of the restructuring of this segment over the last four quarters.
8. Intangible assets consist of the following:
|
| March 31, 2007 |
| June 30, 2006 |
| ||||||||||||||||||||
|
| Gross |
|
|
| Net |
| Gross |
|
|
| Net |
| ||||||||||||
|
| Carrying |
| Accumulated |
| Intangible |
| Carrying |
| Accumulated |
| Intangible |
| ||||||||||||
|
| Amount |
| Amortization |
| Assets |
| Amount |
| Amortization |
| Assets |
| ||||||||||||
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Patents and licenses |
|
| $ | 3,629,000 |
|
|
| $ | 1,890,000 |
|
| $ | 1,739,000 |
| $ | 3,135,000 |
|
| $ | 1,758,000 |
|
| $ | 1,377,000 |
|
Technology and installed base |
|
| 2,491,000 |
|
|
| 1,247,000 |
|
| 1,244,000 |
| 2,491,000 |
|
| 1,097,000 |
|
| 1,394,000 |
| ||||||
Customer |
|
| 3,807,000 |
|
|
| 2,092,000 |
|
| 1,715,000 |
| 3,807,000 |
|
| 1,698,000 |
|
| 2,109,000 |
| ||||||
Trade names |
|
| 2,250,000 |
|
|
| 876,000 |
|
| 1,374,000 |
| 2,250,000 |
|
| 663,000 |
|
| 1,587,000 |
| ||||||
Other |
|
| 640,000 |
|
|
| 640,000 |
|
| — |
| 640,000 |
|
| 640,000 |
|
| — |
| ||||||
Total |
|
| $ | 12,817,000 |
|
|
| $ | 6,745,000 |
|
| $6,072,000 |
| $ | 12,323,000 |
|
| $ | 5,856,000 |
|
| $ | 6,467,000 |
| |
We paid $494,000 for patents and licenses in the first nine months of fiscal 2007, including $459,000 for a patent relating to a sensor product line in the Inform segment. Intangible amortization expense was $888,000 and $901,000 for the nine months ended March 31, 2007 and 2006, respectively. The estimated amortization expense for this fiscal year ended June 30, 2007 and for the four fiscal years subsequent to 2007 is as follows: $1,180,000, $1,131,000, $919,000, $807,000 and $708,000. 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 March 31, 2007 and June 30, 2006. For the Intersection Control segment, the remaining goodwill of $11,397,000 was written off in the fourth quarter of fiscal 2006.
9. 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 $3,249,000 in fiscal year 2007, $4,048,000 in fiscal years 2008 to 2009, $1,066,000 in fiscal years 2010 to 2011 and $3,854,000 thereafter, for an aggregate of $12,217,000. The annual minimum future rentals include lease obligations related to our Santa Fe Springs, California facility, for which we have accrued $980,000 as part of our restructuring accrual as of March 31, 2007.
12
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 typically varies (30 days to 1 year) by product. We accrue for product warranties when based on available information, it is probable that customers will make claims under warranties relating to products that have been sold, and a reasonable estimate of the costs can be made. Our estimated product warranty liability for the nine-month periods ended March 31 is as follows:
|
| 2007 |
| 2006 |
| ||
Beginning Balance—July 1 |
| $ | 927,000 |
| $ | 2,510,000 |
|
Current provisions, net |
| (216,000 | ) | (139,000 | ) | ||
Expenditures and settlements |
| (272,000 | ) | (391,000 | ) | ||
Ending balance—March 31 |
| $ | 439,000 |
| $ | 1,980,000 |
|
Legal
We are involved in several pending judicial proceedings for product liability claims 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 executives which are designed to retain the services of key employees and to provide for continuity of management in the event of a termination other than for cause or resulting from an actual or threatened change in control of the Company. Upon occurrence of a termination or a triggering event after a change in control, as defined, we would be liable for payment of benefits under these agreements, to a maximum amount of $4,886,000.
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 facilities, we have agreed to indemnify our lenders under such facilities against costs or losses resulting from changes in laws and regulations which would increase the lenders’ costs, and from any legal action brought against the lenders related to the use of loan proceeds. These indemnifications generally extend for the term of the credit facilities 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.
13
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 $748,000 at March 31, 2007 and $3,028,000 at June 30, 2006. Historically, customers have not drawn upon these instruments due to non-performance, and no amount has been accrued in the accompanying consolidated financial statements.
Other Commitments
We have standby letters of credit covering potential workers’ compensation liabilities and other liabilities. The total amount of standby letters of credit that were outstanding was $1,294,000 and $1,144,000 at March 31, 2007 and June 30, 2006, respectively. We have included $1,513,000 in accrued liabilities for potential workers’ compensation liabilities as of March 31, 2007.
We have certain non-cancelable royalty agreements, which contain certain minimum payments in the aggregate of $2,210,000 through fiscal year 2012. We have included $172,000 in accrued liabilities for current obligations relating to royalty agreements as of March 31, 2007.
10. We sold our automated traffic enforcement product line within the Intersection Control segment to Traffipax, Inc. during the first quarter of fiscal 2007 for total cash proceeds of $795,000 received through March 31, 2007. We transferred to Traffipax city and county contracts to provide red light enforcement and speed enforcement services, as well as related assets. Several of our employees were hired by Traffipax to service the transferred contracts. During the first nine months of fiscal 2007, we recognized a gain on the sale of assets of the automated traffic enforcement product line of $673,000.
During the first nine months of fiscal 2007, we received the final contingent proceeds of $282,000 relating to the sale of the weather forecasting product line within the Inform segment during the fourth quarter of fiscal 2006. We recognized a gain on the sale of assets of $282,000 during the first nine months of fiscal 2007.
During the first quarter of fiscal 2007, we sold a former captive manufacturing facility of the Protect and Direct segment located in South Bend, Indiana to Elkhart Plastics, Inc. Since June 30, 2005, we had been renting the facility to the buyer. Our net proceeds from the sale of this facility were $1,423,000 and we recognized a gain on the sale of assets of $236,000.
During the first quarter of fiscal 2006, we settled all claims arising from the 2003 acquisition of the Peek Traffic Corporation business with the Peek Traffic Group Limited and its affiliates (the Sellers) for $633,000 in cash, net of legal expenses. Also, as part of the settlement, the Sellers sold us 150,603 shares of our common stock for $3,105,000, or $20.62 per share. We had claimed damages from the Sellers of the Peek Traffic business arising from the Sellers’ breaches of representations and warranties in the asset purchase agreement and from certain liabilities of the Peek Traffic business that we did not specifically assume or were misrepresented to us.
11. During the fourth quarter of fiscal 2006, our Board of Directors approved a restructuring plan for our Intersection Control segment in order to reduce costs through the reduction of overhead by closing two facilities and through the reduction of headcount. Under the restructuring plan, we divested and discontinued certain low-margin and non-core product lines primarily manufactured in our leased facilities in Tecate, Mexico and Santa Fe Springs, California. These product lines include portable and permanent variable message signs, tunnel lighting and illuminated street signs. We moved the remaining intersection control family of products, including traffic controllers, traffic signals and pedestrian signals to our Palmetto, Florida and Bedford, Pennsylvania facilities. We adopted an outsourcing strategy for non-core manufacturing processes, but continue to perform final assembly and testing of products. The
14
manufacturing operations in Santa Fe Springs, California and Tecate, Mexico facilities ceased in the first quarter of fiscal 2007.
The implementation of the restructuring plan was completed during the second quarter of fiscal 2007 and we incurred no additional restructuring charges during the third quarter of fiscal 2007. During the second quarter of fiscal 2007, we incurred charges of $2,060,000 related to the restructuring plan, including $172,000 of employee severance costs, $661,000 of lease expense and $1,227,000 of shut-down and other related costs. During the first quarter of fiscal 2007, we incurred charges of $9,215,000 related to the restructuring plan, including $5,595,000 of restructuring charges recorded in operating expenses and $3,620,000 in inventory write-downs recorded in cost of sales. During the fourth quarter of fiscal 2006, we recorded $5,775,000 in restructuring charges, net of proceeds received on the sale of assets.
The remaining portion of the restructuring plan recorded in accrued expenses and other long-term liabilities is $1.6 million as of March 31, 2007, which consists of $0.2 million in employee severance and related benefit costs, $1.0 million in lease obligations over the next two years, and $0.4 million in facility exit costs, consulting expense and other related costs.
Activity related to the restructuring plan was as follows:
|
| Employee |
|
|
|
|
|
|
|
|
| |||||||||||||
|
| Severance |
|
|
| Asset |
| Facility Exit |
|
|
| |||||||||||||
|
| and Related |
| Lease |
| Sales and |
| Costs, Legal |
|
|
| |||||||||||||
|
| Costs |
| Obligations |
| Write-offs |
| and Other |
| Total |
| |||||||||||||
Accrual balance July 1, 2005 |
|
| $ | — |
|
|
| $ | — |
|
|
| $ | — |
|
|
| $ | — |
|
| $ | — |
|
Costs incurred |
|
| 179 |
|
|
| 90 |
|
|
| 4,571 |
|
|
| 935 |
|
| 5,775 |
| |||||
Cash proceeds (payments) |
|
| (179 | ) |
|
| (90 | ) |
|
| 1,500 |
|
|
| (601 | ) |
| 630 |
| |||||
Non-cash charges |
|
|
|
|
|
|
|
|
|
| (5,908 | ) |
|
|
|
|
| (5,908 | ) | |||||
Accrual balance June 30, 2006 |
|
| — |
|
|
| — |
|
|
| 163 |
|
|
| 334 |
|
| 497 |
| |||||
Costs incurred |
|
| 1,686 |
|
|
| 1,307 |
|
|
| 3,571 |
|
|
| 2,651 |
|
| 9,215 |
| |||||
Cash proceeds (payments) |
|
| (556 | ) |
|
| (130 | ) |
|
| (114 | ) |
|
| (1,540 | ) |
| (2,340 | ) | |||||
Non-cash charges |
|
|
|
|
|
|
|
|
|
| (3,620 | ) |
|
|
|
|
| (3,620 | ) | |||||
Accrual balance September 30, 2006 |
|
| 1,130 |
|
|
| 1,177 |
|
|
| — |
|
|
| 1,445 |
|
| 3,752 |
| |||||
Costs incurred |
|
| 172 |
|
|
| 661 |
|
|
|
|
|
|
| 1,227 |
|
| 2,060 |
| |||||
Cash proceeds (payments) |
|
| (699 | ) |
|
| (507 | ) |
|
|
|
|
|
| (2,020 | ) |
| (3,226 | ) | |||||
Non-cash charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Accrual balance December 31, 2006 |
|
| 603 |
|
|
| 1,331 |
|
|
|
|
|
|
| 652 |
|
| 2,586 |
| |||||
Costs incurred |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash proceeds (payments) |
|
| (370 | ) |
|
| (351 | ) |
|
|
|
|
|
| (217 | ) |
| (938 | ) | |||||
Non-cash charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Accrual balance March 31, 2007 |
|
| $ | 233 |
|
|
| $ | 980 |
|
|
| $ | — |
|
|
| $ | 435 |
|
| $ | 1,648 |
|
Remaining expected plan costs |
|
| $ | — |
|
|
| $ | — |
|
|
| $ | — |
|
|
| $ | — |
|
| $ | — |
|
Total expected plan costs |
|
| $ | 2,037 |
|
|
| $ | 2,058 |
|
|
| $ | 8,142 |
|
|
| $ | 4,813 |
|
| $ | 17,050 |
|
Employee severance and related costs include severance pay, related benefits and retention bonuses. The total workforce reduction associated with restructuring activities initiated during fiscal 2006 was approximately 400 employees.
15
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quixote Corporation (the Company, we, our or us) and its subsidiaries 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 operations are comprised of three reportable segments within the highway and transportation safety industry, concentrating on safety problems and designing products to provide transportation safety solutions. Our three reportable segments are: the manufacture and sale of highway and transportation safety products which Protect and Direct, the manufacture and sale of products and services which Inform, and the manufacture and sale of products which are used for Intersection Control. 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; computerized highway advisory radio transmitting systems; and other transportation equipment. The Intersection Control segment provides solutions for controlling intersections, including intelligent traffic control systems, pedestrian signals, video detection equipment and other transportation equipment.
Our products are sold principally through a distribution network to customers in the highway construction and safety business, state departments of transportation, county and local governments 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 large portion of our 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 approved highway safety projects on roads constructed or maintained with federal assistance. Seasonality affects our business with historically a higher level of sales in our fourth fiscal quarter.
Our results for the first nine months of fiscal 2007 were affected by the restructuring in our Intersection Control segment, as expected. Sales for the first nine months of fiscal 2007 increased modestly in our Protect and Direct segment driven by increased international sales. Sales for the Inform segment for the first nine months of fiscal 2007 increased compared to last year after excluding $1.5 million in comparable prior year sales related to the weather forecasting product line sold in the fourth quarter of fiscal 2006. Sales for the Intersection Control segment decreased significantly from the prior year primarily due to the sale and discontinuation of products related to our restructuring plan for the segment. As a result of the completion of our restructuring plan in the second quarter of this year, our overall cost structure improved, with gross profit for the current third quarter increasing to 34.5% from 29.5% for the third quarter last year. See Note 11 to the financial statements and FUTURE OUTLOOK for further information.
16
The following table sets forth selected key operating statistics relating to the Company’s financial results:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Revenues by Segment: |
|
|
|
|
|
|
|
|
| ||||
Protect and Direct |
| $ | 19,797,000 |
| $ | 19,235,000 |
| $ | 56,325,000 |
| $ | 55,434,000 |
|
Inform |
| 4,908,000 |
| 4,754,000 |
| 16,618,000 |
| 17,222,000 |
| ||||
Intersection Control |
| 6,270,000 |
| 13,481,000 |
| 22,848,000 |
| 43,391,000 |
| ||||
|
| $ | 30,975,000 |
| $ | 37,470,000 |
| $ | 95,791,000 |
| $ | 116,047,000 |
|
Geographic Revenues: |
|
|
|
|
|
|
|
|
| ||||
Domestic |
| $ | 25,055,000 |
| $ | 32,351,000 |
| $ | 78,836,000 |
| $ | 99,760,000 |
|
International |
| 5,920,000 |
| 5,119,000 |
| 16,955,000 |
| 16,287,000 |
| ||||
|
| $ | 30,975,000 |
| $ | 37,470,000 |
| $ | 95,791,000 |
| $ | 116,047,000 |
|
Operating Income (Loss) by Segment: |
|
|
|
|
|
|
|
|
| ||||
Protect and Direct |
| $ | 3,549,000 |
| $ | 3,678,000 |
| $ | 10,487,000 |
| $ | 9,684,000 |
|
Inform |
| 584,000 |
| 481,000 |
| 2,151,000 |
| 1,678,000 |
| ||||
Intersection Control |
| (206,000 | ) | (2,290,000 | ) | (12,966,000 | ) | (3,687,000 | ) | ||||
Unallocated Corporate |
| (2,349,000 | ) | (2,047,000 | ) | (6,152,000 | ) | (5,738,000 | ) | ||||
|
| $ | 1,578,000 |
| $ | (178,000 | ) | $ | (6,480,000 | ) | $ | 1,937,000 |
|
Gross profit percentage |
| 34.5 | % | 29.5 | % | 31.0 | % | 28.6 | % | ||||
Selling and administrative expenses as a percentage of sales |
| 27.3 | % | 25.6 | % | 27.0 | % | 23.7 | % | ||||
Diluted profit (loss) per share |
| $ | 0.03 |
| $ | (0.10 | ) | $ | (0.68 | ) | $ | (0.11 | ) |
Revenues
Our net sales for the third quarter of fiscal 2007 decreased $6,495,000, or 17%, to $30,975,000 from $37,470,000 for the third quarter last year. This was primarily due to the sale and discontinuation of several product lines in our Intersection Control segment related to the restructuring of this segment further discussed in Note 11 to the financial statements.
Our net sales for the first nine months of fiscal 2007 decreased $20,256,000, or 17%, to $95,791,000 from $116,047,000 for the same period last year primarily due to the restructuring of the Intersection Control segment.
Geographic—International sales for the third quarter of fiscal 2007 increased $801,000, or 16%, to $5,920,000, compared to $5,119,000 for the third quarter last year, as increased sales of Protect and Direct segment products more than offset decreased sales of Intersection Control products across most major regions. International sales for the Protect and Direct segment increased 38% over the third quarter last year primarily due to increased sales of Triton® water-filled barriers to the Asia-Pacific region. International sales of sensing systems for the Inform segment increased due to strong sales in Canada. Domestic sales for the third quarter of fiscal 2007 decreased 23% to $25,055,000 from $32,351,000 primarily due to decreased sales in the Intersection Control segment.
International sales for the first nine months of fiscal 2007 increased $668,000, or 4%, to $16,955,000, compared to $16,287,000 for the same period last year, as increased sales of Protect and Direct as well as Inform segment products were partially offset by decreased sales of Intersection Control products across
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most major regions. International sales for the Inform segment increased over the prior period due to sales of weather systems in Canada. International sales for the Protect and Direct segment increased over the prior period with increased sales across all major regions. Domestic sales for the first nine months of fiscal 2007 decreased 21% to $78,836,000 from $99,760,000 primarily due to decreased sales in the Intersection Control segment.
Protect and Direct—Net sales for the Protect and Direct segment for the third quarter of fiscal 2007 increased 3% to $19,797,000 from $19,235,000 for the third quarter last year primarily due to increased international sales. Sales of Triton® water-filled barriers, delineators and parts increased, which were partially offset by decreased sales of permanent crash cushions, sand-filled barrels and truck mounted attenuators (TMAs).
Net sales for the Protect and Direct segment for the first nine months of fiscal 2007 increased 2% to $56,325,000 from $55,434,000 for the same period last year. The increase was primarily due to increased sales of TMAs, delineators, anti-icing systems and parts. Sales of permanent crash cushions, sand-filled barrels and Triton® barriers decreased from the prior year nine-month period.
Inform—Net sales for the Inform segment for the third quarter of fiscal 2006 increased 3% to $4,908,000 from $4,754,000 for the third quarter last year, primarily due to increased sales of traffic sensing products, offset somewhat by decreased sales due to the sale of the weather forecasting product line at the end of fiscal 2006. Excluding $708,000 in sales related to the weather forecasting product line in the third quarter last year, sales for the Inform segment increased 21% over the third quarter last year.
Net sales for the Inform segment for the first nine months of fiscal 2007 decreased 4%, or $604,000, to $16,618,000 from $17,222,000 for the same period last year, primarily due to the sale of the weather forecasting line. Excluding $1,546,000 in sales related to the weather forecasting product line for the first nine months of last year, sales for the Inform segment increased 6% over the prior period. Sales of highway advisory radio products increased, offset somewhat by decreased sales of weather sensing systems and traffic sensing products.
Intersection Control—Net sales for the Intersection Control segment for the third quarter of fiscal 2007 decreased 53%, or $7,211,000, to $6,270,000 from $13,481,000 for the third quarter last year, primarily due to the sale and discontinuation of several product lines, including the portable and permanent variable message signs, tunnel lighting, illuminated street signs and automated traffic enforcement lines.
Net sales for the Intersection Control segment for the first nine months of fiscal 2007 decreased 47%, or $20,543,000, to $22,848,000 from $43,391,000 for the same period last year, primarily due to the sale and discontinuation of product lines.
Gross Profit Margin
Our gross profit margin for the third quarter of fiscal 2007 was 34.5% compared to 29.5% for the third quarter last year, primarily due to efficiencies in the restructured Intersection Control segment. The gross margin for the Protect and Direct segment decreased due to unfavorable product sales mix with strong sales of the lower margin Triton® barrier during the current third quarter. The gross profit margin for the Inform segment also decreased due to unfavorable product mix.
Our gross profit margin for the first nine months of fiscal 2007 was 31.0% compared to 28.6% for the same period last year. If the $3,620,000 in inventory write-offs incurred in the first quarter as part of the Intersection Control segment restructuring is excluded from cost of sales, our consolidated gross margin for the first nine months of fiscal 2007 increased to 34.8% from 28.6% last year. This improvement in gross margin was due to efficiencies related to the restructuring initiative in the Intersection Control segment. Gross margins improved in the Protect and Direct segment due to favorable product sales mix. Gross margins in the Inform segment remained consistent with the prior period.
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Selling and Administrative Expenses
Selling and administrative expenses for the third quarter of fiscal 2007 decreased $1,134,000, or 12%, to $8,471,000 from $9,605,000 for the third quarter last year. Selling and administrative expenses in the Intersection Control segment decreased 50% to $1,495,000 from $2,999,000 for the third quarter last year due to lower personnel costs and other savings as a result of the restructuring plan. Selling and administrative expenses in the Inform segment decreased primarily due to lower personnel-related expenses due to the sale of the weather forecasting product line. Selling and administrative expenses in the Protect and Direct segment increased from the third quarter last year in part due to expenditures relating to promoting international sales. See FUTURE OUTLOOK for additional information. Selling and administrative expenses increased as a percentage of sales to 27.3% for the third quarter of 2007 from 25.6% last year primarily due to the fixed cost nature of many of the expenses and the lower level of sales.
Selling and administrative expenses for the first nine months of fiscal 2007 decreased $1,626,000, or 6%, to $25,853,000 from $27,479,000 for the same period last year. Selling and administrative expenses in the Intersection Control segment decreased $2,760,000, or 33% due to savings as a result of the restructuring plan. Selling and administrative expenses in the Inform segment decreased due to lower personnel expenses. These decreases were partially offset by increased selling and administrative expenses in the Protect and Direct segment due to increased legal costs related to patent defense, increased bad debt expense and international expenditures. Selling and administrative expenses increased as a percentage of sales to 27.0% for the first nine months of 2007 from 23.7% last year due to the fixed cost nature of many of the expenses.
Gain on Sale of Assets
As further discussed in Note 10 to the financial statements, we recorded a net gain on the sale of assets of $598,000 in the third quarter of fiscal 2007, including a gain of $148,000 resulting from final contingent proceeds relating to the sale of the weather forecasting product line within the Inform segment and a gain of $450,000 resulting from final contingent proceeds relating to the sale of the automated traffic enforcement product line within the Intersection Control segment.
During the first nine months of fiscal 2007, we recorded a net gain on the sale of assets of $1,191,000, including a gain of $236,000 related to the sale of a building formerly used by the Protect and Direct segment, a gain of $673,000 related to the sale of the automated traffic enforcement product line within the Intersection Control segment and a gain of $282,000 resulting from contingent proceeds relating to the sale of the weather forecasting product line within the Inform segment.
Restructuring Costs
As further discussed in Note 11 to the financial statements, the restructuring plan for the Intersection Control segment was completed during the second quarter of fiscal 2007 and no restructuring costs were recorded in the third quarter of fiscal 2007.
The first nine months of fiscal 2007 includes $7,655,000 in restructuring costs for the Intersection Control segment. Included in the restructuring costs are $1,858,000 of employee severance costs, $1,968,000 of lease expense and $3,829,000 of shut-down and other related costs.
Gain on Legal Settlement
As further discussed in Note 10 to the financial statements, the first quarter of last year included a gain of $633,000 resulting from the settlement of claims with the seller of Peek Traffic.
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Research and Development
Research and development expenditures decreased to $1,222,000 for the third quarter of fiscal 2007 compared to $1,623,000 for the third quarter last year. The decrease of $401,000 was primarily due to decreased expenditures due to the restructuring of the Intersection Control segment and lower expenditures in the Protect and Direct segment on Safe-Hit products.
Research and development expenditures decreased to $3,849,000 for the first nine months of fiscal 2007 compared to $4,427,000 for the same period last year. The decrease of $578,000 was primarily due to decreased expenditures in the Intersection Control segment, although expenditures also decreased slightly in both the Protect and Direct and the Inform segments.
Operating Profit (Loss)
Operating profit for the third quarter of fiscal 2007 was $1,578,000, compared to an operating loss of $178,000 for the third quarter of fiscal 2006. Without the gain on sale of assets of $598,000, operating profit was $980,000 in the current third quarter compared to the operating loss of $178,000 for the third quarter last year. This improvement in operating profit is primarily due to manufacturing and operating efficiencies related to the restructuring of the Intersection Control segment. For the third quarter of fiscal 2007, operating profit for the Protect and Direct segment decreased 4% to $3,549,000 from $3,678,000 for the third quarter last year due primarily to lower gross margins. Operating profit for the Inform Group increased due to the gain on sale of assets, offset somewhat by lower gross margins. The Intersection Control segment had an operating loss of $206,000 compared to an operating loss of $2,290,000 for the third quarter last year due to manufacturing and operating efficiencies as a result of the restructuring plan and to a gain on sale of assets of the automated enforcement product line.
The operating loss for the first nine months of fiscal 2007 was $6,480,000, compared to operating profit of $1,937,000 for the first nine months of fiscal 2006. Without the special items including the $3,620,000 in inventory write-offs, the $7,655,000 of restructuring costs, the $1,191,000 gain on sale of assets and last year’s $633,000 gain on legal settlement, operating profit was $3,604,000 in the current nine-month period compared to operating profit of $1,304,000 for the same period last year. This improvement in operating profit is primarily due to manufacturing and operating efficiencies related to the restructuring of the Intersection Control segment. For the first nine months of fiscal 2007, operating profit for the Protect and Direct segment increased 8% to $10,487,000 from $9,684,000 for the same period last year due primarily to improved gross profit margins. Operating profit for the Inform segment was $2,151,000 compared to operating profit of $1,678,000 for the first nine months of last year due primarily to lower selling and administrative costs and due to the $282,000 gain on sale of assets. The operating loss for the Intersection Control segment increased to $12,966,000 from an operating loss of $3,687,000 for the first nine months of last year. Without the special items including the $3,620,000 in inventory write-offs, the $7,655,000 of restructuring costs, the $673,000 gain on sale of assets and last year’s $633,000 gain on legal settlement, the operating loss for the Intersection Control segment decreased to $2,365,000 in the current nine-month period from an operating loss of $4,320,000 for the same period last year due to manufacturing and operating efficiencies as a result of the restructuring plan.
Interest Expense
Interest expense for the third quarter of fiscal 2007 decreased to $1,098,000 from $1,238,000 for the third quarter last year. The decrease was due to the lower level of average debt outstanding. The interest rate on our $40 million in Convertible Senior Subordinated Notes is 7%. The interest rate on our bank credit facility is based on prime or LIBOR, plus a margin. Our overall weighted average interest rate was 6.9% as of March 31, 2007.
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Net interest expense for the first nine months of fiscal 2007 decreased to $3,372,000 from $3,526,000 for the same period last year. The decrease was due to the lower level of average debt outstanding. Net interest expense is expected to be approximately $4.5 million for fiscal 2007, which includes approximately $650,000 in amortization of deferred debt issue costs.
Provision for Income Taxes
The provision for income taxes for the third quarter of fiscal 2007 was $182,000 representing a 38% effective income tax rate. The income tax benefit for the first nine months of fiscal 2007 was $3,744,000.
Net Earnings (Loss)
Net profit for the third quarter of fiscal 2007 was $298,000, or $0.03 cents per diluted share, compared to a net loss of $878,000, or $0.10 cents per diluted share, for the third quarter last year. Without the $598,000 in gain on sale of assets, and applying a 38% effective tax rate, the net loss for the current third quarter was $73,000, or $0.01 per diluted share, compared to a net loss for the third quarter last year of $878,000, or $0.10 per diluted share.
The net loss for the first nine months of fiscal 2007 was $6,108,000, or $0.68 cents per diluted share, compared to a net loss of $985,000, or $0.11 cents per diluted share, for the same period last year. Without the special items including the $3,620,000 in inventory write-offs, the $7,655,000 of restructuring costs, the $1,191,000 in gain on sale of assets and last year’s $633,000 gain on legal settlement, and applying a 38% effective tax rate, net earnings for the current nine-month period were $144,000, or $0.02 per diluted share, compared to a net loss for the same period last year of $1,377,000, or $0.16 per diluted share.
Liquidity and Capital Resources
Our principal sources of funds historically have been cash flows from operations and borrowings from banks and other sources. We had cash and cash equivalents of $452,000 as of March 31, 2007 and access to additional funds of approximately $11 million under our secured bank credit agreement. We believe that this bank credit facility is an important source of liquidity. The credit agreement provides for a $30 million revolving credit facility with a $10 million sub-facility for letters of credit. The Company must maintain a minimum availability of $5 million under the revolving credit facility. Total availability is based on a formula of eligible accounts receivable, eligible inventory, machinery and equipment and real estate. We are also required to maintain a maximum senior leverage ratio. The covenants also limit the incurrence of additional indebtedness, acquisitions, liens and encumbrances and other matters customarily restricted in such agreements. We are in compliance with these covenants and expect to remain in compliance through fiscal 2007. The agreement currently expires in February 2009, but may be renewed one additional year on each anniversary date upon mutual consent of the Company and the bank.
Our outstanding borrowings were $55,492,000, or 56.1% of total capitalization, as of March 31, 2007, of which $10,250,000 was outstanding related to the bank credit facility. This compares to $51,587,000, or 51.3% of total capitalization, as of June 30, 2006, of which $6,000,000 was outstanding related to the bank credit facility. Included in long-term debt as of March 31, 2007 and June 30, 2006 was $40 million in 7% Convertible Senior Subordinated Notes due February 2025 and a $5 million five-year subordinated promissory note due May 2008. The amount of standby letters of credit outstanding was $1,294,000 as of March 31, 2007 and $1,144,000 as of June 30, 2006.
Cash Flows
Cash used in operations was $1,705,000 during the first nine months of fiscal 2007. This compares with $838,000 provided by operations in the first nine months of fiscal 2006. The cash used in operations in the
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first nine months of fiscal 2007 was primarily due to increased working capital, including increases in inventory and decreases in accounts payable and other accrued expenses, offset by increased collections of accounts receivable.
Investing activities used cash of $207,000 during the first nine months of fiscal 2007, compared to using cash of $2,752,000 in the first nine months of the prior year. Proceeds from the sale of assets provided cash of $2,499,000 during the first nine months of fiscal 2007. Expenditures during the first nine months of fiscal 2007 included $2,212,000 for capital expenditures.
Financing activities provided cash of $1,495,000 during the first nine months of fiscal 2007, compared to $3,805,000 during the first nine months of fiscal 2006. During the first nine months of 2007, we borrowed a net $4,250,000 against our outstanding revolving credit facility. In addition, we paid $345,000 on notes payable. The payment of our semi-annual cash dividend used cash of $3,381,000. During the first nine months of fiscal 2006 we paid $3,105,000 to purchase 150,603 shares of our common stock from the sellers of Peek Traffic, recorded as treasury stock.
For the remainder of fiscal 2007, we anticipate needing approximately $1.0 million in additional cash for capital expenditures primarily for the Protect and Direct segment including further investments in our new Beijing, China facility discussed further in FUTURE OUTLOOK. We may require additional investments in working capital to support growth. We may also need additional funds to repurchase our own common stock from time to time or to acquire businesses that complement our existing operations. As discussed in Note 11 and FUTURE OUTLOOK, we currently estimate that the remaining cash portion of the restructuring plan for the Intersection Control segment will be approximately $1.6 million over the next year. Future cash expenditures will be financed either through cash on-hand, cash generated from operations, from borrowings available under our bank credit facility or proceeds from sales of assets or product lines to be discontinued. We currently believe that these sources of cash should be sufficient for all planned operating and capital requirements in the near term. If needed and available on favorable terms, we may amend existing financing arrangements or may enter into other debt or equity financing arrangements.
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, 2006. The following table presents our contractual obligations to make future payments under contracts, such as debt and lease agreements, as of March 31, 2007:
|
|
| Less than |
|
|
|
|
| More than |
| ||||||||||
|
| Total |
| 1 Year |
| 1-3 Years |
| 3-5 Years |
| 5 Years |
| |||||||||
|
| (Dollar amounts in thousands) |
| |||||||||||||||||
Long-term debt(1) |
| $ | 55,492 |
|
| $ | 242 |
|
| $ | 5,000 |
| $ | 40,000 |
|
| $ | 10,250 |
|
|
Estimated interest payments(2) |
| 14,090 |
|
| 3,802 |
|
| 7,169 |
| 2,032 |
|
| 1,087 |
|
| |||||
Operating leases |
| 12,217 |
|
| 3,249 |
|
| 4,048 |
| 1,066 |
|
| 3,854 |
|
| |||||
Minimum royalty payments |
| 2,210 |
|
| 760 |
|
| 850 |
| 600 |
|
|
|
|
| |||||
Retirement award program |
| 844 |
|
| 90 |
|
| 139 |
| 93 |
|
| 522 |
|
| |||||
Purchase obligations |
| 10,733 |
|
| 10,733 |
|
|
|
|
|
|
|
|
|
| |||||
Total |
| $ | 95,586 |
|
| $ | 18,876 |
|
| $ | 17,206 |
| $ | 43,791 |
|
| $ | 15,713 |
|
|
(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.
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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 the applicable contract. The total amount of bid and performance related bonds that were available and undrawn as of March 31, 2007 was $748,000. We also have standby letters of credit covering potential workers’ compensation and other liabilities. The total standby exposure relating to letters of credit as of March 31, 2007 was $1,294,000.
We believe that the enactment of the federal transportation funding legislation, SAFETEA-LU, in August 2005 has improved prospects for increased spending for our products. However, we believe that domestic demand for our products has not yet fully benefited from opportunities developing as a result of SAFETEA-LU and an improving industry environment. Given our history as a late-stage benefactor of highway infrastructure spending, we remain optimistic that we have properly positioned our business for growth once spending increases the demand for our products. We also expect international sales to continue to be an important driver of our sales growth. However, it is difficult to predict to what extent we will see increased spending for our products and there can be no assurance that either domestic or international sales will continue to increase.
To meet increasing international sales demands and further penetrate emerging markets, we formed a new company in China and have leased an 16,000 square foot manufacturing facility in Beijing. Our investment in this new company is expected to be approximately $1 million, of which $300,000 to $400,000 is expected to impact earnings during our fourth quarter. We expect our Beijing facility to become operational later in our fiscal fourth quarter.
As further discussed in Note 11 to the financial statements, the restructuring plan for the Intersection Control segment is now complete. The remaining cash expenditures in connection with the restructuring plan are approximately $1.6 million. We expect the restructuring will result in annualized operating cost savings of approximately $5 to $6 million and therefore we expect the operating performance of this segment to improve significantly. However, there can be no assurance that we will achieve that level of savings. After the product rationalization, annualized revenues for the Intersection Control segment are estimated to be approximately $30 million for fiscal 2007 compared with $56 million for fiscal 2006.
We believe fiscal 2007 is a transitional year for us. As we enter our seasonally strong fourth quarter, we believe that we have made the needed investments to position our business for improved growth and profitability in the future when demand increases. We expect the operating results of the fourth quarter of fiscal 2007 to improve compared to the fourth quarter of last year after the completion of the restructuring plan, similar to the improvement for the current second and third quarters as compared to the prior year. We expect to see continued growth in sales and profitability for the Protect and Direct and the Inform segments. We are beginning to see bids for large contracts for the Intersection Control segment after a decline in bid activity over the past couple years. In January 2007, we were awarded a $20 million contract from the New York City Department of Transportation for traffic controllers. We believe that this award along with the completion of the restructuring plan are important steps in reaching profitability for the Intersection Control segment.
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We historically experience fluctuation in our gross profit margin from quarter to quarter primarily due to sales volume related to seasonality, variability in product mix and changes in our competitive environment. The gross profit margins of certain acquired product lines, primarily the traffic and intersection control product lines, are lower than our historical gross profit margin, which is currently adversely affecting our gross profit margin. We also experience rigorous price competition in our Intersection Control segment, and weather sensing system product line. We do not believe these trends will improve in the near future.
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, accrued restructuring costs 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, 2006 consolidated financial statements includes a summary of the significant accounting policies, methods and types of estimates used in the preparation of our consolidated financial statements. There have been no material changes in accounting policies, methods and types of estimates used by management during this fiscal year. In the opinion of management, we do not have any individual accounting policy or use any individual estimate that is critical to the preparation of our 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 believe the following significant accounting policies and methods used by us are the most important to the presentation of our financial statements:
Revenue Recognition: Revenues, net of sales incentives, are recognized when either services have been rendered or both title and risk of loss of products have been transferred to unaffiliated customers. Additionally, we ensure that collection of the resulting receivable is probable, persuasive evidence that an arrangement exists, and the revenue is fixed or determinable. Provision for estimated uncollectible amounts and credit memos is made based upon management’s analysis of bad debts and credit memos.
Inventories: Inventories are valued at the lower of cost (first-in, first-out method) or market. Actual costs are used to value raw materials and supplies. Standard costs, which approximate actual costs, are used to value finished goods and work-in-process. Standard costs include raw materials, direct labor and manufacturing overhead. Provision for potentially obsolete or slow-moving inventory is made based on management’s analysis of inventory levels, ages and salability.
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.
Amortized long-lived assets (including amortized intangible assets and property, plant and equipment) held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in relation to future undiscounted cash flows of underlying asset groups. The net carrying value of assets not recoverable is reduced to fair value. Fair values of amortized long-lived assets are determined based upon the performance of a fair
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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 at least annually. 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 present value techniques.
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.
Share-based Compensation Expense: We account for share-based compensation in accordance with the provisions of SFAS No. 123(R). Under the fair value recognition provisions of SFAS No. 123(R), share-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating stock price volatility, forfeiture rates and expected life.
Restructuring Charges: We account for restructuring activities in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” Generally, costs associated with the exit or disposal activity are recognized when the liability is incurred. Costs related to employee separation arrangements requiring future service beyond a specified minimum retention period are recognized over the service 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 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 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—including an amendment of FAS 115”
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(SFAS No.159). This statement permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, including interim periods within that fiscal year. We do not expect the adoption of this statement to have a material affect on our results of operations or financial position.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 will be effective for our 2008 fiscal year. We are in the process of evaluating the impact that this statement will have on our results of operations and financial position, however we currently do not expect that the adoption will have a material impact.
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, among others, uncertainties related to continued federal, state and municipal funding for highways and risks related to reductions in government expenditures; the successful completion, integration and rationalization of acquisitions; the ability to generate sufficient future cash flows to be in compliance with financing agreements; the introduction and acceptance of our products and services; an unfavorable change in product sales mix; seasonality along with the extent and timing of the award of large contracts; the cyclical nature of our governmental markets; competitive and pricing pressures; increasing raw material costs; excess manufacturing capacity; weather conditions and natural disasters; acts of war and terrorist activities; the possible impairment of goodwill and other intangible assets; and general economic conditions.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Item 7.A. of our Annual Report on Form 10-K for the year ended June 30, 2006 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 agreement. Our exposure to fluctuations in interest rates was reduced when we issued $40 million of fixed rated convertible debt and used the proceeds to pay down variable rate bank debt issued pursuant to our revolving credit agreement in the third quarter of fiscal 2005. We had managed our exposure to interest rate fluctuations beginning in fiscal 2004 through the use of derivative instruments in the form of
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non-trading interest rate swaps, but our interest rate swap agreement was liquidated in the third quarter of fiscal 2005.
Substantially all of our business is transacted in U. S. dollars. We continue to evaluate the use of derivative financial instruments to manage the effects of foreign currency exchange rates changes. We do not believe we are currently exposed to any material risk of loss from currency exchange fluctuations.
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 the evaluation as of June 30, 2006 and that our assessment for fiscal 2007 has not yet been completed, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as a result of the material weakness at the Santa Fe Springs and Tecate, Mexico facilities within our Intersection Control Segment as described below at paragraph (b), our disclosure controls and procedures were not effective as of the end of the period covered by this Quarterly Report on Form 10-Q, March 31, 2007. However, we performed analysis and other procedures to ensure that our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States. Accordingly, we believe that (i) the financial statements filed fairly present in all material respects the Company’s financial condition, results of operations and cash flow for the periods presented, and (ii) this report does not contain any untrue statement of a material fact or omit a material fact necessary to make the statements, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
(b) Management’s Report on Internal Controls Over Financial Reporting
Except as described below, there have been no changes in our internal control over financial reporting identified in connection with the evaluation that occurred during this last fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.
Based on our assessment of our internal control over financial reporting for the last fiscal year, we determined that a material weakness existed in our internal controls over certain financial reporting controls as of June 30, 2006. Specifically, a number of control breakdowns in the operations at our Santa Fe Springs, California and Tecate, Mexico facilities within our Intersection Control segment were identified. The control breakdowns were noted in financial reporting, revenue, expenditures, inventory and capital assets, which resulted in a few misstatements identified by our external auditors, Grant Thornton LLP. These control deficiencies represented a material weakness in internal control over financial reporting on the basis that there is more than a remote likelihood that a material misstatement of our annual or interim financial statements would not be prevented or detected by our internal control over financial reporting. Accordingly, we concluded that, as of June 30, 2006, our internal control over financial
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reporting was not effective based on the criteria set forth by Committee of Sponsoring Organizations of the Treadway Commission.
The manufacturing operations in the two facilities where control breakdowns were noted, Santa Fe Springs, California and Tecate, Mexico, ceased in the first quarter of fiscal 2007 as part of our restructuring activities. The Santa Fe Springs location still has some non-manufacturing operations; however, the primary accounting functions were transferred to another facility within the Intersection Control Segment during the second quarter of fiscal 2007. We believe that these actions have addressed and remediated this material control weakness. However, we have not completed this year’s internal control assessment.
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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.
(a) |
| Exhibits |
10(a) |
| Second Amendment to Amended and Restated Credit Agreement and Reaffirmation of Guaranties dated as of March 15, 2007 by and between Quixote Corporation and certain subsidiaries thereof and LaSalle Bank National Association and Revolving Loan Note dated as of March 15, 2007 from Quixote Corporation to LaSalle Bank National Association. |
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 |
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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 March 31, 2007 to be signed on its behalf by the undersigned thereunto duly authorized.
QUIXOTE CORPORATION | |||
DATED: | May 9, 2007 |
| /s/ DANIEL P. GOREY |
| DANIEL P. GOREY | ||
| Chief Financial Officer, Vice President and Treasurer | ||
| (Chief Financial & Accounting Officer) | ||
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Exhibits:
10(a) |
| Second Amendment to Amended and Restated Credit Agreement and Reaffirmation of Guaranties dated as of March 15, 2007 by and between Quixote Corporation and certain subsidiaries thereof and LaSalle Bank National Association and Revolving Loan Note dated as of March 15, 2007 from Quixote Corporation to LaSalle Bank National Association. |
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 |
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