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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

(Mark One)

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended December 31, 2011

 

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: 001-08762

 

 

ITERIS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

95-2588496

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1700 Carnegie Avenue, Suite 100

 

 

Santa Ana, California

 

92705

(Address of principal executive office)

 

(Zip Code)

 

(949) 270-9400

(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, as amended (the “Exchange Act”), during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

As of January 27, 2012, there were 34,133,124 shares of common stock outstanding.

 

 

 



Table of Contents

 

ITERIS, INC.

Quarterly Report on Form 10-Q
For the Three and Nine Months Ended December 31, 2011

 

Table of Contents

 

PART I.

FINANCIAL INFORMATION

3

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

3

 

 

 

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS AT DECEMBER 31, 2011 AND MARCH 31, 2011

3

 

 

 

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2011 AND 2010

4

 

 

 

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED DECEMBER 31, 2011 AND 2010

5

 

 

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

20

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

29

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

29

 

 

 

PART II.

OTHER INFORMATION

30

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

30

 

 

 

ITEM 1A.

RISK FACTORS

30

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

38

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

38

 

 

 

ITEM 4.

(REMOVED AND RESERVED)

39

 

 

 

ITEM 5.

OTHER INFORMATION

39

 

 

 

ITEM 6.

EXHIBITS

39

 

Unless otherwise indicated in this report, the “Company,” “we,” “us” and “our” refer to Iteris, Inc. and our wholly-owned subsidiary Meridian Environmental Technology, Inc.

 

Iteris®, Vantage®, VantageView™, VersiCam™, Abacus™, Vantage Vector™ and iPerform™ are among the trademarks of Iteris, Inc. Any other trademarks or trade names mentioned herein are the property of their respective owners.

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

 

Iteris, Inc.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except par value)

 

 

 

December 31,

 

March 31,

 

 

 

2011

 

2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

21,519

 

$

11,818

 

Trade accounts receivable

 

9,610

 

9,419

 

Costs in excess of billings on uncompleted contracts

 

5,434

 

4,070

 

Inventories

 

1,909

 

2,392

 

Deferred income taxes

 

2,822

 

2,927

 

Prepaid expenses and other current assets

 

618

 

392

 

Current assets of discontinued operation

 

 

2,850

 

Total current assets

 

41,912

 

33,868

 

Property and equipment, net

 

2,097

 

2,461

 

Deferred income taxes

 

6,962

 

10,807

 

Intangible assets, net

 

2,602

 

1,845

 

Goodwill

 

17,318

 

16,599

 

Other assets

 

210

 

203

 

Non-current assets of discontinued operation

 

 

4,822

 

Total assets

 

$

71,101

 

$

70,605

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Trade accounts payable

 

$

3,973

 

$

2,985

 

Accrued payroll and related expenses

 

2,787

 

3,538

 

Accrued liabilities

 

4,231

 

3,203

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

1,824

 

1,335

 

Current portion of long-term debt

 

1,092

 

2,324

 

Current liabilities of discontinued operation

 

 

611

 

Total current liabilities

 

13,907

 

13,996

 

Long-term debt

 

 

640

 

Deferred rent

 

792

 

1,058

 

Unrecognized tax benefits

 

406

 

587

 

Other non-current liabilities

 

642

 

1,028

 

Total liabilities

 

15,747

 

17,309

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, $0.10 par value, 70,000 shares authorized, 34,133 and 34,364 shares issued and outstanding at December 31, 2011 and March 31, 2011, respectively

 

3,413

 

3,436

 

Additional paid-in capital

 

137,865

 

137,938

 

Accumulated deficit

 

(85,924

)

(88,078

)

Total stockholders’ equity

 

55,354

 

53,296

 

Total liabilities and stockholders’ equity

 

$

71,101

 

$

70,605

 

 

See accompanying notes.

 

3



Table of Contents

 

Iteris, Inc.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

Net sales and contract revenues:

 

 

 

 

 

 

 

 

 

Net sales

 

$

6,598

 

$

6,529

 

$

21,234

 

$

21,470

 

Contract revenues

 

8,283

 

5,424

 

21,932

 

16,854

 

Total net sales and contract revenues

 

14,881

 

11,953

 

43,166

 

38,324

 

Costs of net sales and contract revenues:

 

 

 

 

 

 

 

 

 

Cost of net sales

 

3,263

 

3,130

 

10,135

 

10,191

 

Cost of contract revenues

 

6,154

 

3,929

 

15,693

 

11,308

 

Gross profit

 

5,464

 

4,894

 

17,338

 

16,825

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

4,371

 

4,120

 

13,501

 

12,285

 

Research and development

 

868

 

657

 

2,476

 

1,831

 

Amortization of intangible assets

 

141

 

24

 

343

 

74

 

Change in fair value of contingent acquisition consideration

 

(281

)

 

(639

)

 

Impairment of goodwill

 

 

7,970

 

 

7,970

 

Total operating expenses

 

5,099

 

12,771

 

15,681

 

22,160

 

Operating income (loss)

 

365

 

(7,877

)

1,657

 

(5,335

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

3

 

(7

)

4

 

13

 

Interest expense, net

 

(13

)

(38

)

(64

)

(120

)

Income (loss) from continuing operations before income taxes

 

355

 

(7,922

)

1,597

 

(5,442

)

Benefit (provision) for income taxes

 

263

 

836

 

(715

)

(187

)

Income (loss) from continuing operations

 

618

 

(7,086

)

882

 

(5,629

)

Gain on sale of discontinued operation, net of tax

 

129

 

 

1,244

 

 

Income (loss) from discontinued operation, net of tax

 

 

59

 

28

 

(59

)

Net income (loss)

 

$

747

 

$

(7,027

)

$

2,154

 

$

(5,688

)

 

 

 

 

 

 

 

 

 

 

Income (loss) per share from continuing operations - basic and diluted

 

$

0.02

 

$

(0.21

)

$

0.03

 

$

(0.16

)

Gain per share from sale of discontinued operation - basic and diluted

 

$

0.00

 

$

0.00

 

$

0.04

 

$

0.00

 

Income (loss) per share from discontinued operation - basic and diluted

 

$

0.00

 

$

0.00

 

$

0.00

 

$

0.00

 

Net income (loss) per share - basic and diluted

 

$

0.02

 

$

(0.20

)

$

0.06

 

$

(0.17

)

 

 

 

 

 

 

 

 

 

 

Shares used in basic per share calculations

 

34,217

 

34,332

 

34,337

 

34,331

 

Shares used in diluted per share calculations

 

34,271

 

34,332

 

34,443

 

34,331

 

 

See accompanying notes.

 

4



Table of Contents

 

Iteris, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

Net income (loss)

 

$

2,154

 

$

(5,688

)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Change in deferred income taxes

 

231

 

123

 

Depreciation of property and equipment

 

716

 

730

 

Stock-based compensation

 

237

 

286

 

Impairment of goodwill

 

 

7,970

 

Amortization of intangible assets

 

348

 

109

 

Change in fair value of contingent acquisition consideration

 

(639

)

 

Gain on sale of discontinued operation, net of tax

 

(1,244

)

 

Loss on disposal of property and equipment

 

1

 

8

 

Changes in operating assets and liabilities, net of effects of acquisition and sale of business segment:

 

 

 

 

 

Accounts receivable

 

(355

)

1,117

 

Net costs and estimated earnings in excess of billings

 

(694

)

(120

)

Inventories

 

624

 

(746

)

Prepaid expenses and other assets

 

86

 

115

 

Accounts payable and accrued expenses

 

379

 

410

 

Net cash provided by operating activities

 

1,844

 

4,314

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

Purchases of property and equipment

 

(295

)

(298

)

Cash paid for acquisitions

 

(977

)

 

Net proceeds from sale of business segment

 

11,446

 

 

Net cash provided by (used in) investing activities

 

10,174

 

(298

)

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

Payments on long-term debt

 

(1,872

)

(1,872

)

Deferred payment for prior acquisition

 

(112

)

(106

)

Repurchases of common stock

 

(396

)

 

Proceeds from stock option exercises

 

63

 

19

 

Net cash used in financing activities

 

(2,317

)

(1,959

)

Increase in cash and cash equivalents

 

9,701

 

2,057

 

Cash and cash equivalents at beginning of period

 

11,818

 

10,405

 

Cash and cash equivalents at end of period

 

$

21,519

 

$

12,462

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

Liabilities incurred for acquisition

 

$

971

 

$

 

 

See accompanying notes.

 

5



Table of Contents

 

Iteris, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

December 31, 2011

 

1.                                      Description of Business and Summary of Significant Accounting Policies

 

Description of Business

 

Iteris, Inc. (referred to collectively with our subsidiaries in these consolidated financial statements as “Iteris,” the “Company,” “we,” “our” and “us”) is a leader in the traffic management market focused on the development and application of advanced technologies and information solutions that reduce traffic congestion and improve the safety of surface transportation systems infrastructure. Additionally, we believe our products and services, in conjunction with sound traffic management, minimize the environmental impact of traffic congestion. By combining outdoor image processing, traffic engineering and information technology, we offer a broad range of Intelligent Transportation Systems (“ITS”) solutions to customers in the United States (“U.S.”) and internationally. Iteris was originally incorporated in Delaware in 1987.

 

Basis of Presentation

 

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position of Iteris as of December 31, 2011, the consolidated results of operations for the three and nine months ended December 31, 2011 and 2010 and the consolidated cash flows for the nine months ended December 31, 2011 and 2010. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the SEC. The results of operations for the three and nine months ended December 31, 2011 are not necessarily indicative of those to be expected for future quarterly periods or the entire fiscal year. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2011, which was filed with the SEC on June 1, 2011.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates made in the preparation of the consolidated financial statements include the allowance for doubtful accounts, projections of taxable income used to assess realizability of deferred tax assets, inventory and warranty reserves, costs to complete long-term contracts, indirect cost rates used in cost-plus contracts, contract reserves, the valuation of purchased intangible assets and goodwill, the valuation of debt and equity instruments, the valuation of contingent acquisition consideration and estimates of future cash flows used to assess the recoverability of long-lived assets and the impairment of goodwill.

 

Revenue Recognition

 

Net Sales

 

Product revenues and related costs of sales are recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the price to the customer is fixed or determinable, and (iv) collection of the receivable is reasonably assured. These criteria are typically met at the time of product shipment, but in certain circumstances, may not be met until receipt or acceptance by the customer. Accordingly, at the date revenue is recognized, the significant obligations or uncertainties concerning the sale have been resolved.

 

We recognize revenue from the sale of deliverables that are part of a multiple-element arrangement in accordance with applicable accounting guidance that establishes a selling price hierarchy permitting the use of an estimated selling price to determine the allocation of arrangement consideration to a deliverable in a multiple-element arrangement where neither vendor specific objective evidence (“VSOE”) nor third-party evidence (“TPE”) of fair value is available for that deliverable. In the absence of VSOE or TPE of the standalone selling price for one or more delivered or undelivered elements in a multiple-element arrangement, we are required to estimate the selling prices of those elements. Overall arrangement consideration is allocated to each element (both delivered and undelivered items) that has stand-alone value based on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or TPE or are based on our estimated selling prices.

 

6



Table of Contents

 

We account for multiple-element arrangements that consist only of software and software-related services in accordance with applicable accounting guidance for software and software-related transactions. For such transactions, revenue on arrangements that include multiple elements is allocated to each element based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements and the only undelivered element is post-contract customer support or maintenance, and VSOE of the fair value of such support or maintenance does not exist, revenue from the entire arrangement is recognized ratably over the support period. When the fair value of a delivered element has not been established, but VSOE of fair value exists for the undelivered elements, we use the residual method to recognize revenue if the fair value of all undelivered elements is determinable. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered element and is recognized as revenue.

 

Contract Revenues

 

Contract revenues are derived primarily from long-term contracts with governmental agencies. The majority of our contract revenues are recognized using the percentage of completion method of accounting, whereby costs incurred plus a portion of estimated fees or profits are determined based on the relationship of costs incurred to total estimated costs. Any anticipated losses on contracts are charged to earnings when identified. Changes in job performance and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Profit incentives are included in revenue when their realization is reasonably assured. Certain of our contract revenues are recognized as services are performed and amounts are earned, which is measured by time incurred or other contractual milestones or output measures. Contract revenues accounted for in this manner generally relate to certain cost-plus fixed fee or time-and-materials contracts for which no specific maximum contract values are stipulated.

 

Costs in Excess of Billings on Uncompleted Contracts

 

Costs in excess of billings on uncompleted contracts in the accompanying unaudited condensed consolidated balance sheets represent unbilled amounts earned and reimbursable under services sales arrangements. At any given period-end, a large portion of the balance in this account represents the accumulation of labor, materials and other costs that have not been billed due to timing, whereby the accumulation of each month’s costs and earnings are not administratively billed until the subsequent month. Also included in this account are amounts that become billable according to contract terms, which usually consider the passage of time, achievement of milestones or completion of the project. We expect such unbilled amounts will be billed and collected within the next twelve months.

 

Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts

 

Billings in excess of costs and estimated earnings on uncompleted contracts in the accompanying unaudited condensed consolidated balance sheets is comprised of cash collected from customers and billings to customers on contracts in advance of work performed, advance payments negotiated as a contract condition, estimated losses on uncompleted contracts, project-related legal liabilities and other project-related reserves. The majority of the unearned amounts are expected to be earned within the next twelve months.

 

We record provisions for estimated losses on uncompleted contracts in the period in which such losses become known. The cumulative effects of revisions to contract revenues and estimated completion costs are recorded in the accounting period in which the amounts become evident and can be reasonably estimated. These revisions can include such items as the effects of change orders and claims, warranty claims, liquidated damages or other contractual penalties, adjustments for audit findings on U.S. or other government contracts and contract closeout settlements.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash and cash equivalents and trade accounts receivable.

 

Cash and cash equivalents consist primarily of demand deposits and money market funds maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with high credit quality financial institutions and therefore have minimal credit risk.

 

Our accounts receivable are derived from revenues earned from customers located throughout North America, and to a lesser extent from customers in Europe, Asia, South America and the Middle East. We generally do not require collateral or other security from customers. We maintain an allowance for doubtful accounts for potential credit losses, which losses have historically been within management’s expectations.

 

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Table of Contents

 

Fair Values of Financial Instruments

 

The fair value of cash and cash equivalents, receivables, accounts payable and accrued expenses approximate carrying value because of the short period of time to maturity. The fair value of line of credit agreements and long-term debt approximate carrying value because the related effective rates of interest approximate current market rates available to us for debt with similar terms and similar remaining maturities.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash and short-term investments with initial maturities of ninety days or less.

 

Allowance for Doubtful Accounts

 

The collectability of our accounts receivable is evaluated through review of invoices outstanding greater than a certain period of time and ongoing credit evaluations of our customers’ financial condition. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, we will record an allowance against amounts due, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. We also maintain an allowance based on our historical collections experience. When we determine that collection is not likely, we write off accounts receivable against the allowance for doubtful accounts.

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.

 

Property and Equipment

 

Property and equipment are recorded at cost and are depreciated using the straight-line method over the estimated useful life ranging from three to eight years. Leasehold improvements are depreciated over the term of the related lease or the estimated useful life of the improvement, whichever is shorter.

 

Goodwill and Long-Lived Assets

 

Goodwill is tested for impairment on an annual basis in our fourth fiscal quarter or more frequently if indicators of impairment exist. The performance of the test involves a two-step process. The first step of the impairment test involves comparing the fair value of our reporting units with each respective reporting unit’s carrying amount, including goodwill. We determine the fair value of reporting units using the income approach with a reconciliation of the total reporting unit fair value to our total market capitalization. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the second step of the goodwill impairment test is performed to determine the amount of any impairment loss. The second step of the goodwill impairment test involves comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill and an impairment charge is recorded for any excess carrying amount over fair value. We monitor the indicators for goodwill impairment testing between annual tests. Certain adverse business conditions impacting one or more reporting units would cause us to test goodwill for impairment on an interim basis. We also evaluate long-lived assets for impairment which requires impairment evaluation on long-lived assets used in operations when indicators of impairment are present.  Reviews are performed to determine whether the carrying value of assets is impaired, based on a comparison of undiscounted expected future cash flows to the carrying value of the related net assets.  If this comparison indicates that there is impairment, the impaired asset is written down to fair value, which is typically calculated using discounted expected future cash flows and a discount rate based upon our weighted average cost of capital adjusted for risks associated with the related operations.  Impairment is based on the excess of the carrying amount over the fair value of those assets.

 

Income Taxes

 

We utilize the liability method of accounting for income taxes, whereby deferred taxes are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates. A valuation allowance is recorded when it is more likely than not that all or a portion of the deferred tax assets will not be realized.

 

We must review all of our tax positions and make a determination as to whether each position is more-likely-than-not to be sustained upon examination by taxing authorities. If a tax position meets the more-likely-than-not standard, then the related tax benefit is measured based on a cumulative probability analysis of the amount that is more-likely-than-not to be realized upon effective settlement or disposition of the underlying issue.

 

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Table of Contents

 

Stock-Based Compensation

 

We record stock-based compensation in the unaudited condensed consolidated statements of operations as an expense, based on the grant date fair values of our stock-based awards, whereby such fair values are amortized over the requisite service period. The fair value of our common stock option awards is estimated on the grant date using the Black-Scholes-Merton option-pricing formula, which considers, among other factors, the expected life of the award and the expected volatility of our stock price. The fair value of our restricted stock units is based on the closing market price of our common stock on the date of grant.

 

Research and Development Expenditures

 

Research and development expenditures are charged to expense in the period incurred.

 

Shipping and Handling Costs

 

Shipping and handling costs are included as cost of sales in the period during which the products ship.

 

Sales Taxes

 

Sales taxes are presented on a net basis (excluded from net sales and contract revenues) in the unaudited condensed consolidated statements of operations.

 

Warranty

 

We generally provide a one to three year warranty from the original invoice date on all products, materials and workmanship. Defective products will be either repaired or replaced, usually at our option, upon meeting certain criteria. We accrue a provision for the estimated costs that may be incurred for product warranties relating to a product as a component of cost of sales at the time revenue for that product is recognized. The accrued warranty reserve is included within accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

 

Repair and Maintenance Costs

 

We incur repair and maintenance costs in the normal course of business. Should the activity result in a permanent improvement to our property or equipment or one of our leased facilities, the cost is capitalized and amortized over its useful life or the remainder of the lease period, whichever is shorter. Non-permanent repair and maintenance costs are charged to expense as incurred.

 

Recent Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amends Accounting Standards Codification 820, Fair Value Measurements. ASU 2011-04 aims to eliminate certain differences that existed between U.S. and international fair value accounting concepts, and also clarifies existing guidance in U.S. GAAP. Additionally, among other disclosures, the ASU requires certain new quantitative and qualitative disclosures regarding unobservable fair value measurements. We will be required to adopt the amendments prescribed by ASU 2011-04 for our fiscal year beginning April 1, 2012. We do not expect that the adoption of ASU 2011-04 will have a material impact on our consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented; however, in December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which deferred this requirement and plans to reconsider it during the first half of calendar 2012. The amendments prescribed by ASU 2011-05 are currently scheduled to become effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Early adoption is permitted. We do not expect that the adoption of ASU 2011-05 will have a material impact on our consolidated financial statements.

 

In September 2011, the FASB issued ASU No. 2011-08, Testing for Goodwill Impairment (“ASU 2011-08”). With respect to performing their required annual test for goodwill impairment, ASU 2011-08 gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If a company concludes that this is the case, it must perform the two-step test in accordance with previously existing guidance. Otherwise, a company can skip the two-step test. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011. Early adoption is permitted. We do not expect that the adoption of ASU 2011-05 will have a material impact on our consolidated financial statements.

 

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2.                                      Supplemental Financial Information

 

Inventories

 

The following table presents details of our inventories:

 

 

 

December 31,

 

March 31,

 

 

 

2011

 

2011

 

 

 

(In thousands)

 

Materials and supplies

 

$

1,032

 

$

1,734

 

Work in process

 

131

 

84

 

Finished goods

 

746

 

574

 

 

 

$

1,909

 

$

2,392

 

 

Intangible Assets

 

The following table presents details of our intangible assets:

 

 

 

December 31, 2011

 

March 31, 2011

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

 

 

(In thousands)

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

Developed technology

 

$

1,856

 

$

(874

)

$

1,566

 

$

(719

)

Customer contracts / relationships

 

750

 

(90

)

500

 

(21

)

Other

 

1,110

 

(150

)

550

 

(31

)

Total

 

$

3,716

 

$

(1,114

)

$

2,616

 

$

(771

)

 

We do not have any intangible assets with indefinite useful lives. As of December 31, 2011, future estimated amortization expense is as follows:

 

Year Ending March 31:

 

 

 

(In thousands)

 

 

 

Remainder of 2012

 

$

161

 

2013

 

644

 

2014

 

627

 

2015

 

431

 

2016

 

360

 

Thereafter

 

379

 

 

 

$

2,602

 

 

If we acquire additional intangible assets in future periods, our future amortization expense will increase.

 

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Table of Contents

 

Goodwill

 

The following table presents activity related to the carrying value of our goodwill by reportable segment for the nine months ended December 31, 2011:

 

 

 

Roadway
Sensors

 

Transportation
Systems

 

Total

 

 

 

(In thousands)

 

Balance at March 31, 2011

 

$

8,214

 

$

8,385

 

$

16,599

 

Acquistion of Berkeley Transportation Systems, Inc.

 

 

796

 

796

 

Measurement period adjustments

 

 

(77

)

(77

)

Balance at December 31, 2011

 

$

8,214

 

$

9,104

 

$

17,318

 

 

The measurement period adjustment in the table above is due primarily to certain income tax-related adjustments pertaining to our acquisition of Meridian Environmental Technology, Inc. (“MET”) in January 2011.

 

Warranty Reserve Activity

 

The following table presents activity related to the warranty reserve:

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands)

 

Balance at beginning of period

 

$

279

 

$

297

 

Additions charged to cost of sales

 

114

 

110

 

Warranty claims

 

(110

)

(104

)

Balance at end of period

 

$

283

 

$

303

 

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is equal to net income (loss) for all periods presented in the accompanying unaudited condensed consolidated statements of operations.

 

Earnings Per Share

 

The following table sets forth the reconciliation of basic and diluted shares:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands)

 

Weighted average common shares used in basic per share calculations

 

34,217

 

34,332

 

34,337

 

34,331

 

Dilutive stock options

 

54

 

 

98

 

 

Dilutive restricted stock units

 

 

 

8

 

 

Weighted average common shares used in diluted per share calculations

 

34,271

 

34,332

 

34,443

 

34,331

 

 

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The following instruments were excluded for purposes of calculating weighted average common share equivalents in the calculation of diluted earnings per share amounts as their effect would have been anti-dilutive:

 

 

 

December 31,

 

December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands)

 

Stock options

 

2,110

 

3,173

 

2,144

 

1,690

 

Warrants

 

15

 

261

 

15

 

281

 

Restricted stock units

 

 

214

 

 

71

 

 

3.                                      Sale of Vehicle Sensors

 

On July 29, 2011, we completed the sale of substantially all of our assets used in connection with our Vehicle Sensors segment to Bendix Commercial Vehicle Systems LLC (“Bendix”), a member of Knorr-Bremse Group, pursuant to an Asset Purchase Agreement (the “Agreement”) signed on July 25, 2011.

 

Under the terms of the Agreement, upon the closing of the sale, Bendix paid us $14 million, subject to a $2 million holdback and adjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of the Vehicle Sensors segment. We are entitled to additional consideration in the form of the following performance and royalty-related earn-outs: Bendix is obligated to pay us an amount in cash equal to (i) 85% of revenue associated with royalties received under our license and distribution agreements with Audiovox Electronics Corporation and Valeo Schalter and Sensoren GmbH through December 31, 2017 and (ii) 30% of the amount, if any, by which the amount of revenue generated from the sale of our lane departure warning systems exceeds Bendix’s projection for such revenue for the two years following closing, each subject to certain reductions and limitations set forth in the Agreement.

 

Upon the closing of the sale and resolution of working capital adjustments (as described above), we recorded aggregate proceeds received of approximately $12.0 million. Legal and other professional fees of approximately $0.4 million that were directly related to the sale transaction were offset against the proceeds to calculate net proceeds from the sale of approximately $11.6 million.

 

The following table summarizes the assets and liabilities of the Vehicle Sensors segment as of the sale date (in thousands):

 

Cash

 

$

105

 

Accounts receivable

 

1,850

 

Inventories

 

1,147

 

Other current assets

 

31

 

Property and equipment, net

 

133

 

Goodwill

 

4,671

 

Total assets

 

7,937

 

Current liabilities

 

(691

)

Net assets

 

$

7,246

 

 

In comparing the above net assets to the net proceeds received, we recorded a gain on the sale of $4.3 million, or $1.1 million after tax, in the accompanying unaudited condensed consolidated statements of operations for the nine months ended December 31, 2011. The effective tax rate applicable to the gain was impacted by goodwill of $4.7 million for which there is no corresponding tax basis. During the three and nine months ended December 31, 2011, we also recorded a gain on the sale of approximately $189,000, or $129,000 after tax, related to certain performance and royalty-related earn-outs (as described above) that were achieved through December 31, 2011.

 

In accordance with applicable accounting guidance, we determined that the Vehicle Sensors segment, which constituted one of our operating segments, qualifies as a discontinued operation. The applicable financial results of the Vehicle Sensors segment have been reported as a discontinued operation in the unaudited condensed consolidated statements of operations for all periods presented. For the three months ended December 31, 2011 and 2010, Vehicle Sensors net sales classified as part of discontinued operation was $0 and $2.1 million, respectively. For the nine months ended December 31, 2011 and 2010, Vehicle Sensors net sales classified as part of discontinued operation were $3.2 million and $5.5 million, respectively. We have elected not to allocate any interest expense to discontinued operation. Additionally, the applicable net assets of the Vehicle Sensors segment are separately presented as assets and liabilities of discontinued operation in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2011.

 

We have entered into a short-term transitional services agreement with Bendix that is scheduled to terminate at the end of February 2012, pursuant to which we provide them certain ongoing logistical and administrative support services. Bendix pays us a fixed monthly amount for such support services, and also pays us an hourly amount for providing certain development-related services during the transition period.

 

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4.                                      Acquisition

 

In November 2011, we acquired all of the outstanding capital stock of Berkeley Transportation Systems, Inc. (“BTS”). BTS was a privately-held company based in Berkeley, California which specializes in transportation performance measurement. BTS’ Performance Measurement System leverages its real-time data collection, diagnostic, fusion and warehousing platform to aggregate and compute performance measures. This information is used to analyze how a transportation system is performing based on pre-determined measures of effectiveness such as stops, delays, and travel time. Our primary reasons for the acquisition were to add key technologies to complement our iPerform solution and strengthen our performance measurement and management initiative as a whole.

 

Our consolidated financial statements for the three and nine months ended December 31, 2011 include the results of operations of BTS commencing as of the acquisition date. On or shortly after the acquisition date, we paid a total of approximately $840,000 in cash to BTS. Additionally, we are also scheduled to pay (i) up to $250,000 at the 24-month anniversary of the closing of the acquisition, pursuant to a holdback provision, (ii) up to $500,000 at the 36-month anniversary of the closing of the acquisition, pursuant to a deferred payment provision, and (iii) up to $750,000 pursuant to an earn-out provision based on revenue and operating income achieved from BTS’ operations during the 18 months ending June 30, 2013. Our potential obligation pertaining to the various contingent consideration payments ranges from $0 to $1.5 million. Acquisition-related costs were not significant and are included in selling, general and administrative expenses in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended December 31, 2011.

 

Acquisition Accounting

 

We have accounted for this acquisition as a business combination in accordance with applicable accounting guidance. We measured the fair value of the consideration transferred (including contingent consideration) to determine the purchase price of the acquisition. We allocated the fair value of consideration transferred to tangible assets acquired, liabilities assumed and identifiable intangible assets acquired based on their estimated fair values at the acquisition date.

 

The acquisition is recorded as follows (in thousands):

 

Fair value of consideration transferred:

 

 

 

Cash paid on or shortly after acquisition date

 

$

840

 

Estimated fair value of contingent consideration

 

971

 

Total

 

1,811

 

 

 

 

 

Allocation:

 

 

 

Accounts receivable

 

(164

)

Other tangible assets

 

(375

)

Purchased intangible assets

 

(1,100

)

Liabilities

 

624

 

Goodwill

 

$

796

 

 

The excess of the fair value of the business over the aggregate fair values of identifiable assets acquired and liabilities assumed was recorded as goodwill. The primary factor that resulted in the recognition of goodwill was the acquisition of BTS’ assembled workforce, which is not a separately identifiable intangible asset. The goodwill is not expected to be deductible for income tax purposes.

 

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Table of Contents

 

Purchased Intangible Assets

 

The following table presents details of the intangible assets acquired:

 

 

 

Estimated
Useful Life

 

Amount

 

 

 

(In years)

 

(In thousands)

 

Backlog

 

3

 

$

330

 

Developed technology

 

6

 

290

 

Customer contracts / relationships

 

6

 

250

 

Other purchased intangible assets

 

5 - 7

 

230

 

 

 

 

 

$

1,100

 

 

Supplemental Pro Forma Data

 

The unaudited pro forma data below presents selected details of our results of operations as if the acquisition of BTS had occurred on April 1, 2010. The following data includes the amortization of purchased intangible assets. This pro forma data is presented for informational purposes only and does not purport to be indicative of the results of future operations or the results that would have occurred had the acquisition taken place on April 1, 2010.

 

 

 

Nine Months Ended

 

 

 

December 31,

 

 

 

2011

 

2010

 

 

 

(In thousands, except per share data)

 

Pro forma net sales and contract revenues

 

$

44,313

 

$

39,601

 

Pro forma net income (loss)

 

$

2,025

 

$

(6,031

)

Pro forma net income (loss) per share - basic and diluted

 

$

0.06

 

$

(0.18

)

 

5.                                      Fair Value Measurements

 

We measure fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurements are based on a three-tier hierarchy that prioritizes the inputs used to measure fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets for identical assets and liabilities; Level 2, defined as observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities or prices quoted in inactive markets; and Level 3, defined as unobservable inputs that are significant to the fair value of the asset or liability, and for which little or no market data exists, therefore requiring management to utilize its own assumptions to provide its best estimate of what market participants would use in valuing the asset or liability.

 

The liability for the estimated fair value of the contingent consideration in connection with our acquisitions of MET and BTS was determined using Level 3 inputs based on probabilistic calculations whereby we assigned estimated probabilities to achieving the earn-out targets and then discounted the total contingent consideration to net present value. The following table reconciles this liability measured at fair value on a recurring basis for the nine months ended December 31, 2011 (in thousands):

 

Balance at March 31, 2011

 

$

2,528

 

Fair value of BTS contingent consideration assumed at acquisition date

 

971

 

Change in fair value included in net income

 

(639

)

Balance at December 31, 2011

 

$

2,860

 

 

The change in the estimated fair value of this liability during the nine months ended December 31, 2011 resulted primarily from revisions to our estimates regarding both the probability of achieving certain earn-out targets and the amounts of certain future deferred payments.

 

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Table of Contents

 

The current portions of the liability at December 31, 2011 and March 31, 2011 were $2.2 million and $1.5 million, respectively, and were included within accrued liabilities in the accompanying unaudited condensed consolidated balance sheets. The remaining non-current portions of the liability are included within non-current liabilities in the accompanying unaudited condensed consolidated balance sheets. The change in the estimated fair value of the liability for the three and nine months ended December 31, 2011 is included as part of operating expenses in the accompanying unaudited condensed consolidated statements of operations.

 

Other than the above, we did not have any material financial assets or liabilities measured at fair value on a recurring basis using Level 3 inputs as of December 31, 2011 or March 31, 2011.

 

Our non-financial assets, such as goodwill, intangible assets and property and equipment, are measured at fair value on a non-recurring basis, generally when there is a transaction involving those assets such as a purchase transaction, a business combination or an adjustment for impairment. Other than goodwill, which was measured at fair value at December 31, 2010 as a result of an impairment charge, no non-financial assets were measured at fair value during the three and nine months ended December 31, 2011 and 2010.

 

6.                                      Revolving Line of Credit and Long-Term Debt

 

Revolving Line of Credit

 

We currently maintain a credit facility that provides for (i) a revolving line of credit, expiring on October 1, 2012, with borrowings of up to $12.0 million and (ii) a $7.5 million term note (discussed below). Interest on borrowed amounts under the revolving line of credit are payable monthly at a rate equal to the current stated prime rate (3.25% at December 31, 2011) up to the current stated prime rate plus 0.50%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. We are obligated to pay an unused line fee of 0.25% per annum applied to the average unused portion of the revolving line of credit during the preceding month. The revolving line of credit does not contain any early termination fees and is secured by substantially all of our assets. As of December 31, 2011, no amounts were borrowed under the revolving line of credit portion of the facility. Availability under this line of credit may be reduced or otherwise limited as a result of our obligations to comply with certain financial covenants.

 

Long-Term Debt — Bank Term Note

 

As of December 31, 2011, we had outstanding borrowings of approximately $1.1 million under the term note with our bank referenced above, which expires on May 1, 2013. Principal payments under this term note are required to be repaid in monthly installments of $152,000. Additionally, beginning on November 1, 2009, and on November 1 of each year thereafter, we are required to repay additional principal of up to $500,000, calculated based on certain financial measures, as further defined in the loan agreement. These additional principal payments effectively reduce the total number of monthly installments necessary to repay the term note. To date, we have made additional principal payments of $500,000 on each of November 1, 2011, 2010 and 2009. Interest on the term note is payable monthly at a rate equal to the current stated prime rate plus 0.50% up to the current stated prime rate plus 1.00%, depending on aggregate deposit balances maintained at the bank in relation to the total loan commitment under the credit facility. The term note contains no early termination fees and, along with the revolving line of credit under the same credit agreement, is secured by substantially all of our assets. We currently expect the remaining outstanding balance of this term note will be repaid in full by August 2012.

 

7.                                      Income Taxes

 

The following table sets forth our provision for income taxes, along with the corresponding effective tax rates:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands, except percentages)

 

Benefit (provision) for income taxes

 

$

263

 

$

836

 

$

(715

)

$

(187

)

Effective tax rate

 

(74.1

)%

(10.6

)%

44.8

%

3.4

%

 

Our effective tax rates in the three and nine months ended December 31, 2011 were favorably impacted by benefits from certain research and development credits that we claimed for the current and prior fiscal years, as well as from the recognition of approximately $271,000 of previously unrecognized tax benefits during the current quarter due to the expiration of certain federal and state statutes in various jurisdictions. Additionally, during the nine months ended December 31, 2011, the above favorable impacts partially offset the unfavorable impact that originated in the prior quarter from the recording of a valuation allowance against certain of our state net operating losses (“NOLs”). As a result of newly issued guidance from a state tax authority concerning the applicable carryforward period for NOLs, we recorded a valuation allowance of $734,000 against certain of our state NOLs. This resulted in additional income tax expense, net of a federal benefit, of $484,000 for the nine months ended December 31, 2011.

 

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As of March 31, 2011 (our prior fiscal year-end), we did not have any valuation allowance recorded against our deferred tax assets. A valuation allowance is required when it is more likely than not that all or a portion of a deferred tax asset will not be realized.

 

During the three and nine months ended December 31, 2010, our effective tax rates were impacted unfavorably by a portion of the charge recorded for the impairment of goodwill, amounting to $2.3 million, for which there is no corresponding tax basis. This unfavorable impact was partially offset by the impact of the recognition of approximately $238,000 during the three months ended December 31, 2010 of previously unrecognized tax benefits due to the expiration of certain federal and state statutes in various jurisdictions.

 

On an interim basis, we estimate what our anticipated annual effective tax rate will be, while also separately considering applicable discrete and other non-recurring items, and record a quarterly income tax provision in accordance with the anticipated annual rate. As the fiscal year progresses, we refine our estimates based on actual events and financial results during the year. This process can result in significant changes to our expected effective tax rate. When this occurs, we adjust our income tax provision during the quarter in which our estimates are refined so that the year-to-date provision reflects the expected annual effective tax rate. These changes, along with adjustments to our deferred taxes, among others, may create fluctuations in our overall effective tax rate from quarter to quarter.

 

8.                                      Commitments and Contingencies

 

Litigation and Other Contingencies

 

From time to time, we have been involved in litigation relating to claims arising out of our operations in the normal course of business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, is expected to have a material adverse effect on our consolidated results of operations, financial position or cash flows.

 

Related Party Transaction

 

In August 2009, MAXxess Systems, Inc. (“MAXxess”) executed a promissory note payable to Iteris for $274,000 for amounts previously owed to us under a sublease agreement for which we had previously fully reserved such amount. MAXxess is owned by an investor group that includes two of our directors. In September 2011, accrued interest of $16,000, along with $14,000 of the principal balance of the note, were paid off through the rendering of agreed-upon bona fide services by MAXxess to Iteris. As of December 31 2011, $260,000 in principal on the note remained outstanding and payable to Iteris. This balance continues to be fully reserved.

 

9.                                      Employee Benefit Plans

 

We currently administer three separate stock incentive plans. Of these plans, we may only grant future awards from the 2007 Omnibus Incentive Plan (the “2007 Plan”). The 2007 Plan allows for the issuance of stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and other stock-based awards. At December 31, 2011, there were 663,000 shares of common stock available for grant under the 2007 Plan.

 

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Table of Contents

 

Stock Options

 

A summary of activity with respect to our stock options for the nine months ended December 31, 2011 is as follows:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price
per Share

 

 

 

(In thousands)

 

 

 

Options outstanding at March 31, 2011

 

3,111

 

$

1.59

 

Granted

 

70

 

1.23

 

Exercised

 

(53

)

1.19

 

Expired

 

(833

)

1.30

 

Forfeited

 

(24

)

1.58

 

Options outstanding at December 31, 2011

 

2,271

 

$

1.69

 

 

Restricted Stock Units

 

A summary of activity with respect to our RSUs, which entitle the holder to receive one share of our common stock for each RSU upon vesting, for the nine months ended December 31, 2011 is as follows:

 

 

 

Number of
Shares

 

 

 

(In thousands)

 

Restricted stock units ouststanding at March 31, 2011

 

214

 

Restricted stock units vested

 

(51

)

Restricted stock units forfeited

 

(19

)

Restricted stock units ouststanding at December 31, 2011

 

144

 

 

Stock-Based Compensation Expense

 

The following table presents stock-based compensation expense that is included in each functional line item on our unaudited condensed consolidated statements of operations:

 

 

 

Three Months Ended
December 31,

 

Nine Months Ended
December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands)

 

Cost of net sales

 

$

4

 

$

3

 

$

10

 

$

8

 

Cost of contract revenues

 

5

 

9

 

21

 

26

 

Selling, general and administrative expense

 

46

 

76

 

180

 

221

 

Research and development expense

 

7

 

8

 

20

 

16

 

Income (loss) from discontinued operation, net of tax

 

 

4

 

6

 

15

 

 

 

$

62

 

$

100

 

$

237

 

$

286

 

 

At December 31, 2011, there was approximately $368,000 of unrecognized compensation expense related to unvested stock options and RSUs. This expense is currently expected to be recognized over a weighted average period of approximately 1.9 years. If there are any modifications or cancellations of the underlying unvested awards, we may be required to accelerate, increase or cancel any remaining unearned stock-based compensation expense. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional stock options, RSUs or other stock-based awards.

 

The grant date fair value per share of stock options granted in the nine months ended December 31, 2011 has been estimated using the following weighted average assumptions:

 

Expected life - years

 

7

 

Risk-free interest rate

 

1.8

%

Expected volatility of common stock

 

52

%

Dividend yield

 

 

Weighted-average grant date fair value per share

 

$

0.67

 

 

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Table of Contents

 

10.          Stock Repurchase Program

 

In August 2011, our board of directors approved a stock repurchase program covering up to $3 million of our common stock over 12 months. Under the program, we may repurchase shares from time to time in open-market and privately negotiated transactions and block trades and pursuant to a 10b5-1 trading plan during our closed trading windows. There is no guarantee as to the exact number of shares that will be repurchased. We may modify, terminate or extend the repurchase program at any time without prior notice. From inception of this program through December 31, 2011 we repurchased approximately 334,000 shares of our common stock at a weighted average price per share of $1.19. All repurchased shares have been retired and resumed their status as authorized and unissued shares of our common stock.

 

11.          Business Segment Information

 

As a result of the sale of substantially all of the assets used in connection with our Vehicle Sensors segment to Bendix in July 2011 (see Note 3), along with a reevaluation and reorganization of our operating segments in the first quarter of our fiscal year ending March 31, 2012, we now operate in two reportable segments: Roadway Sensors and Transportation Systems.

 

The Roadway Sensors segment includes our Vantage and VersiCam vehicle detection systems for traffic intersection control, incident detection and certain highway traffic data collection applications. This segment also includes our Pico compact video detection system, as well as our Abacus products.

 

The Transportation Systems segment includes transportation engineering and consulting services and the development of transportation management and traveler information systems for the ITS industry. This segment includes the operations of MET, which specializes in 511 advanced traveler information systems and offers Maintenance Decision Support System management tools that allow users to create solutions to meet roadway maintenance decision needs. Also included in this segment are the operations of BTS, which was acquired in November 2011 and specializes in transportation performance measurement (see Note 4).

 

The accounting policies of our reportable segments are the same as those described in the summary of significant accounting policies (Note 1). Certain corporate expenses, including interest and amortization of intangible assets, are not allocated to the segments. Unallocated corporate expenses in the current fiscal year also include costs related to the sale of our Vehicle Sensors segment and certain other corporate initiatives, as well as costs related to our recently announced iPerform information management solution. The reportable segments are each managed separately because they manufacture and distribute distinct products or provide services with different processes. All reported segment revenues are derived from external customers.

 

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Table of Contents

 

The following table sets forth selected unaudited consolidated financial information for our reportable segments for the three and nine months ended December 31, 2011 and 2010:

 

 

 

Roadway
Sensors

 

Transportation
Systems

 

Total

 

 

 

(In thousands)

 

Three Months Ended December 31, 2011

 

 

 

 

 

 

 

Product revenue

 

$

6,598

 

$

 

$

6,598

 

Service and other revenue

 

 

8,283

 

8,283

 

Segment income

 

373

 

249

 

622

 

 

 

 

 

 

 

 

 

Three Months Ended December 31, 2010

 

 

 

 

 

 

 

Product revenue

 

$

6,529

 

$

 

$

6,529

 

Service and other revenue

 

 

5,424

 

5,424

 

Impairment of goodwill

 

 

7,970

 

7,970

 

Segment income (loss)

 

797

 

(8,354

)

(7,557

)

 

 

 

 

 

 

 

 

Nine Months Ended December 31, 2011

 

 

 

 

 

 

 

Product revenue

 

$

21,234

 

$

 

$

21,234

 

Service and other revenue

 

 

21,932

 

21,932

 

Segment income

 

2,533

 

516

 

3,049

 

 

 

 

 

 

 

 

 

Nine Months Ended December 31, 2010

 

 

 

 

 

 

 

Product revenue

 

$

21,470

 

$

 

$

21,470

 

Service and other revenue

 

 

16,854

 

16,854

 

Impairment of goodwill

 

 

7,970

 

7,970

 

Segment income (loss)

 

3,377

 

(7,876

)

(4,499

)

 

The following table reconciles total segment income (loss) to unaudited consolidated income (loss) from continuing operations before income taxes:

 

 

 

Three Months Ended
December 31,

 

Nine Months Ended
December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(In thousands)

 

Segment income (loss):

 

 

 

 

 

 

 

 

 

Total income (loss) from reportable segments

 

$

622

 

$

(7,557

)

$

3,049

 

$

(4,499

)

Unallocated amounts:

 

 

 

 

 

 

 

 

 

Corporate and other expenses

 

(397

)

(296

)

(1,688

)

(762

)

Amortization of intangible assets

 

(141

)

(24

)

(343

)

(74

)

Change in fair value of contingent acquisition consideration

 

281

 

 

639

 

 

Other income (expense), net

 

3

 

(7

)

4

 

13

 

Interest expense, net

 

(13

)

(38

)

(64

)

(120

)

Income (loss) from continuing operations before income taxes

 

$

355

 

$

(7,922

)

$

1,597

 

$

(5,442

)

 

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Table of Contents

 

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

 

This report, including the following discussion and analysis, contains forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on our current expectations, estimates and projections about our business and our industry, and reflect management’s beliefs and certain assumptions made by us based upon information available to us as of the date of this report. When used in this report and the information incorporated herein by reference, the words “expect(s),” “feel(s),” “believe(s),” “should,” “will,” “may,” “anticipate(s),” “estimate(s)” and similar expressions or variations of these words are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding our anticipated growth, sales, revenue, expenses, profits, capital needs, competition, development plans, and manufacturing capabilities, the applications for and acceptance of our products and services, and the status of our facilities and product development. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that could cause our actual results to differ materially from those projected. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. We encourage you to carefully review and consider the various disclosures made by us which describe certain factors which could affect our business, including inRisk Factors” set forth in Part II, Item 1A of this report, before deciding to invest in our company or to maintain or increase your investment. We undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Overview

 

General. We are a leader in the traffic management market focused on the development and application of advanced technologies and information solutions that reduce traffic congestion and improve the safety of surface transportation systems infrastructure. Additionally, we believe our products and services, in conjunction with sound traffic management, minimize the environmental impact of traffic congestion. By combining outdoor image processing, traffic engineering and information technology, we offer a broad range of Intelligent Transportation Systems solutions to customers in the U.S. and internationally.

 

Acquisitions. In November 2011, we acquired all of the outstanding capital stock of Berkeley Transportation Systems, Inc. (“BTS”), a privately-held company based in Berkeley, California which specializes in transportation performance measurement. On or shortly after the acquisition date, we paid a total of approximately $840,000. Additionally, we are scheduled to pay up to a total of $1.5 million within 36 months after the acquisition date pursuant to holdback, deferred payment and earn-out provisions. Refer to Note 4 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report for additional discussion on this acquisition.

 

In January 2011, we acquired all of the capital stock of Meridian Environmental Technology, Inc. (“MET”) for an initial cash payment of approximately $1.6 million. MET specializes in 511 advanced traveler information systems and offers Maintenance Decision Support System management tools that allow users to create solutions to meet roadway maintenance decision needs. We also agreed to pay up to $1 million on each of the first two anniversaries of the closing of the acquisition, as well as up to an additional $2 million under a 24-month earn-out provision.

 

In April 2009, we completed the acquisition of certain assets of Hamilton Signal, Inc., which included the Abacus system, for an aggregate purchase price of approximately $518,000.

 

Divestiture. On July 29, 2011, we completed the sale of substantially all of our assets used in connection with our Vehicle Sensors segment to Bendix Commercial Vehicle Systems LLC (“Bendix”), a member of Knorr-Bremse Group, pursuant to an Asset Purchase Agreement signed on July 25, 2011. Upon closing, Bendix paid us $14 million, subject to a $2 million holdback and adjustments based upon the working capital of the Vehicle Sensors segment at closing, and Bendix assumed certain specified obligations and liabilities of the Vehicle Sensors segment. We are entitled to additional consideration in the form of certain performance and royalty-related earn-outs. As a result of the sale of substantially all of the assets of this segment, we no longer operate in the Vehicle Sensors segment. Refer to Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report for additional discussion on this transaction.

 

Business Segments. Subsequent to the sale of substantially all of the assets of our Vehicle Sensors segment, we now operate in two reportable segments: Roadway Sensors and Transportation Systems.

 

Roadway Sensors

 

Our Roadway Sensors segment product line uses advanced image processing technology to capture and analyze video images through sophisticated algorithms, enabling vehicle detection and transmission of both video images and data using various communication technologies.

 

·                  Our Vantage video detection systems detect vehicle presence at intersections, as well as vehicle count, speed and other traffic data used in traffic management systems. Our Vantage systems give traffic managers the ability to mitigate roadway congestion by modifying traffic signal timing or detecting incidents quickly. Our VantageView software supplements our Vantage video detection systems by providing an integrated platform to manage and “see” video detection assets remotely over a network connection. In October 2011, we announced the introduction of Vantage Vector vehicle detection solution, which, through sensor fusion, enhances our video detection capabilities with radar sensor technology.

 

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·                  VersiCam, our integrated camera and processor video detection system, is a cost-efficient video detection system for smaller intersections that require only a few detection points.

 

·                  Pico, our compact video detection system, was developed primarily to address international video detection needs, and was designed for easy installation and configuration.

 

·                  Our Abacus products take advantage of the large number of existing installed closed-circuit television video feeds monitoring roadways, signalized intersections, tunnels and bridges to allow for data collection and incident detection without the set-up and calibration generally required with other systems.

 

We believe that future growth domestically and internationally, particularly in developing countries, will be dependent in part on the continued adoption of above-ground video detection technologies, instead of traditional in-pavement loop technology, to manage traffic.

 

Transportation Systems

 

Our Transportation Systems segment includes transportation engineering and consulting services focused on the planning, design, development and implementation of software-based systems that integrate sensors, video surveillance, computers, and advanced communications equipment to enable public agencies to monitor, control and direct traffic flow, assist in the quick dispatch of emergency crews and distribute real-time information about traffic conditions. Our services include planning, design and implementation of surface transportation infrastructure systems. We perform analysis and study goods movement, commercial vehicle operations, travel demand forecasting and systems engineering, and identify mitigation measures to reduce traffic congestion. This segment also includes the activities of MET, which we acquired in January 2011, and which specializes in 511 advanced traveler information systems as well as Maintenance Decision Support System (“MDSS”) management tools that allow users to create solutions to meet roadway maintenance decision needs. The operations of BTS, which we acquired in November 2011, are also included in this segment. BTS specializes in transportation performance measurement and its Performance Measurement System leverages its real-time data collection, diagnostic, fusion and warehousing platform to aggregate and compute performance measures.

 

Our Transportation Systems segment is largely dependent upon governmental funding and is affected by state and local budgetary issues. We believe the overall expansion of our Transportation Systems segment in the future will at least in part be dependent on the passage of a new Federal Highway Bill. Congress is currently working on such a bill and has recently agreed to extend the current funding levels under the previously expired Federal Highway Bill through March 2012. Continued delays in the enactment of such a new Federal Highway Bill, and until such time as a bill becomes law, will prolong the uncertainty regarding the allotment of transportation funds in federal, state and local budgets. We believe that prolonged uncertainty has adversely impacted, and may continue to adversely impact, our net sales and contract revenues and our overall financial performance in future periods.

 

Critical Accounting Policies and Estimates

 

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” is based on our unaudited consolidated financial statements included herein, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates and assumptions, including those related to the collectibility of accounts receivable, the valuation of inventories, the recoverability of long-lived assets and goodwill, the realizability of deferred tax assets, accounting for stock-based compensation, the valuation of equity instruments, the valuation of contingent acquisition consideration, warranty reserves and other contingencies. We base these estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions are inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

 

The accounting policies that affect our more significant judgments and estimates used in the preparation of our unaudited condensed consolidated financial statements are those relating to revenue recognition, accounts receivable, inventory, intangible assets, goodwill, warranty, income taxes, and stock-based compensation. These policies are described in further detail in our Annual Report on Form 10-K for the fiscal year ended March 31, 2011 (“fiscal 2011”). There have been no significant changes in our critical accounting policies and estimates during the three and nine months ended December 31, 2011 as compared to what was previously disclosed in our Annual Report on Form 10-K for fiscal 2011.

 

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Table of Contents

 

Recent Accounting Pronouncements

 

Refer to Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements, included in Part I, Item 1 of this report for a discussion of recent accounting pronouncements.

 

Results of Operations

 

The following table sets forth statement of operations data as a percentage of total net sales and contract revenues for the periods indicated:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

December 31,

 

December 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

Net sales and contract revenues:

 

 

 

 

 

 

 

 

 

Net sales

 

44.3

%

54.6

%

49.2

%

56.0

%

Contract revenues

 

55.7

 

45.4

 

50.8

 

44.0

 

Total net sales and contract revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

 

 

Costs of net sales and contract revenues:

 

 

 

 

 

 

 

 

 

Cost of net sales

 

21.9

 

26.2

 

23.5

 

26.6

 

Cost of contract revenues

 

41.4

 

32.9

 

36.4

 

29.5

 

Gross profit

 

36.7

 

40.9

 

40.2

 

43.9

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

29.4

 

34.5

 

31.3

 

32.1

 

Research and development

 

5.8

 

5.5

 

5.7

 

4.8

 

Amortization of intangible assets

 

0.9

 

0.2

 

0.8

 

0.2

 

Change in fair value of contingent acquisition consideration

 

(1.9

)

 

(1.5

)

 

Impairment of goodwill

 

 

66.7

 

 

20.8

 

Total operating expenses

 

34.3

 

106.8

 

36.3

 

57.8

 

Operating income (loss)

 

2.5

 

(65.9

)

3.8

 

(13.9

)

Non-operating income (expense):

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

0.0

 

(0.1

)

0.0

 

0.0

 

Interest expense, net

 

(0.1

)

(0.3

)

(0.1

)

(0.3

)

Income (loss) from continuing operations before income taxes

 

2.4

 

(66.3

)

3.7

 

(14.2

)

Benefit (provision) for income taxes

 

1.8

 

7.0

 

(1.7

)

(0.5

)

Income (loss) from continuing operations

 

4.2

 

(59.3

)

2.0

 

(14.7

)

Gain on sale of discontinued operation, net of tax

 

0.9

 

 

2.9

 

 

Income (loss) from discontinued operation, net of tax

 

 

0.5

 

0.1

 

(0.2

)

Net income (loss)

 

5.0

%

(58.8

)%

5.0

%

(14.8

)%

 

Analysis of Quarterly Results of Operations

 

Net Sales and Contract Revenues. Net sales are comprised of sales from our Roadway Sensors segment. Contract revenues consist of revenues from our Transportation Systems segment.

 

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Table of Contents

 

The following tables present details of our net sales and contract revenues for the three and nine months ended December 31, 2011 and 2010:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

December 31,

 

 

 

%

 

 

 

2011

 

2010

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Net sales

 

$

6,598

 

$

6,529

 

$

69

 

1.1

%

Contract revenues

 

8,283

 

5,424

 

2,859

 

52.7

 

Total net sales and contract revenues

 

$

14,881

 

$

11,953

 

$

2,928

 

24.5

%

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

December 31,

 

Increase

 

%

 

 

 

2011

 

2010

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Net sales

 

$

21,234

 

$

21,470

 

$

(236

)

(1.1

)%

Contract revenues

 

21,932

 

16,854

 

5,078

 

30.1

 

Total net sales and contract revenues

 

$

43,166

 

$

38,324

 

$

4,842

 

12.6

%

 

We have historically had a diverse customer base. For the nine months ended December 31, 2011 and 2010, no individual customer represented greater than 10% of our total net sales and contract revenues.

 

Net Sales

 

Net sales for the nine months ended December 31, 2011 were marginally lower than the corresponding period in the prior year due primarily to certain international customer orders in the prior year which did not recur in the current year.

 

Contract Revenues

 

Our contract revenues are primarily dependent upon the continued availability of funding at the local, state and federal levels from the various agencies and departments of transportation. Contract revenues for the three and nine months ended December 31, 2011 increased compared to the corresponding periods in the prior year due in part to several significant project wins in the last two quarters, one of which contains significant sub-consulting content. Additionally, we recognized $1.7 million and $3.7 million of total revenues in the three and nine months ended December 31, 2011, respectively, derived from our acquisitions of MET and BTS.

 

Going forward, we plan to continue to pursue larger contracts that may contain significant sub-consulting content, which will likely contribute to variability in the timing and amount of our contract revenues from period to period. We also intend to continue to expand our foreign operations by pursuing additional international opportunities in the Middle East and other regions. Among other factors, we believe the ability of our Transportation Systems segment to grow and successfully win and service new contracts will be highly dependent upon our continued success in recruiting and retaining qualified personnel, as well as upon government funding initiatives in the markets we serve.

 

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Table of Contents

 

Gross Profit.  The following tables present details of our gross profit for the three and nine months ended December 31, 2011 and 2010:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

December 31,

 

 

 

%

 

 

 

2011

 

2010

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Total gross profit

 

$

5,464

 

$

4,894

 

$

570

 

11.6

%

Total gross profit as a % of total net sales and contract revenues

 

36.7

%

40.9

%

 

 

 

 

Gross profit as a % of net sales

 

50.5

%

52.1

%

 

 

 

 

Gross profit as a % of contract revenues

 

25.7

%

27.6

%

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

 

 

 

 

December 31,

 

 

 

%

 

 

 

2011

 

2010

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Total gross profit

 

$

17,338

 

$

16,825

 

$

513

 

3.0

%

Total gross profit as a % of total net sales and contract revenues

 

40.2

%

43.9

%

 

 

 

 

Gross profit as a % of net sales

 

52.3

%

52.5

%

 

 

 

 

Gross profit as a % of contract revenues

 

28.4

%

32.9

%

 

 

 

 

 

Our total gross profit as a percentage of total net sales and contract revenues decreased for the three and nine months ended December 31, 2011 as compared to the corresponding periods in the prior year primarily as a result of our product and service mix. Our net sales (derived from our Roadway Sensors segment) represented approximately 44% and 49% of our total net sales and contract revenues for the three and nine months ended December 31, 2011, respectively, as compared to 55% and 56%, respectively, for the corresponding prior year periods. Our net sales generally carry higher margins than our contract revenues derived primarily from our consulting services.

 

Gross profit as a percent of net sales (“gross margin”) decreased for the three months ended December 31, 2011 as compared to the corresponding period in the prior year primarily due to higher materials costs in the current quarter, along with higher reserve for excess and obsolete inventories. Our gross margin can fluctuate in any specific quarter or year based on, among other factors, customer and product mix, competitive pricing requirements, product warranty costs and provisions for excess and obsolete inventories, as well as shifts of engineering resources from development activities to sustaining activities, which we record as cost of goods sold.

 

We recognize the majority of our contract revenues and related gross profit using percentage of completion contract accounting, and the underlying mix of contract activity affects the related gross profit recognized in any given period. Gross profit as a percent of contract revenues for the nine months ended December 31, 2011 was lower than the comparable prior year period primarily due to lower margins stemming from seasonality due to the decrease in revenues from certain of our MDSS and weather forecasting services in the spring and summer time periods. Also, the overall mix of contract revenues in the current year periods, particularly the current quarter, contained a significant proportion of lower-margin sub-consulting content. We expect to experience variability in our Transportation Systems segment in future periods due to our contract mix and related sub-consulting content, as well as factors such as paid holidays and our ability to efficiently utilize our workforce, which will cause fluctuations in our margins from contract revenues from period to period.

 

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Table of Contents

 

Selling, General and Administrative Expense.  The following tables present selling, general and administrative expense for the three and nine months ended December 31, 2011 and 2010:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

December 31, 2011

 

December 31, 2010

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

 

 

 

 

 

 

 

 

Sales and

 

 

 

Sales and

 

 

 

 

 

 

 

 

 

Contract

 

 

 

Contract

 

 

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

2,922

 

19.6

%

$

2,820

 

23.6

%

$

102

 

3.6

%

Facilities, insurance and supplies

 

497

 

3.3

 

493

 

4.1

 

4

 

0.8

 

Travel and conferences

 

459

 

3.1

 

342

 

2.9

 

117

 

34.2

 

Professional and outside services

 

325

 

2.2

 

311

 

2.6

 

14

 

4.5

 

Other

 

168

 

1.1

 

154

 

1.3

 

14

 

9.1

 

Selling, general and administrative

 

$

4,371

 

29.4

%

$

4,120

 

34.5

%

$

251

 

6.1

%

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

December 31, 2011

 

December 31, 2010

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

 

 

 

 

 

 

 

 

Sales and

 

 

 

Sales and

 

 

 

 

 

 

 

 

 

Contract

 

 

 

Contract

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

9,330

 

21.6

%

$

8,579

 

22.4

%

$

751

 

8.8

%

Facilities, insurance and supplies

 

1,419

 

3.3

 

1,616

 

4.2

 

(197

)

(12.2

)

Travel and conferences

 

1,247

 

2.9

 

1,010

 

2.6

 

237

 

23.5

 

Professional and outside services

 

1,225

 

2.8

 

925

 

2.4

 

300

 

32.4

 

Other

 

280

 

0.6

 

155

 

0.4

 

125

 

80.6

 

Selling, general and administrative

 

$

13,501

 

31.3

%

$

12,285

 

32.1

%

$

1,216

 

9.9

%

 

The overall increases in selling, general and administrative expense for the three and nine months ended December 31, 2011 as compared to the corresponding periods in the prior year were primarily due to (i) higher salary, travel and headcount-related expenses as we have added certain key sales and marketing personnel and added personnel as a result of the MET and BTS acquisitions and (ii) legal and professional services related to the sale of our Vehicle Sensors segment and certain other corporate initiatives. Additionally, in the nine months ended September 30, 2010, we realized approximately $250,000 in reversals of previously recorded bad debt expense (included in the “Other” category in the table above) primarily as a result of collecting certain large accounts receivable balances. In prior periods, we had recorded an estimated allowance for doubtful accounts against these receivables given the uncertainty of collection at that time. In the future, our operating results in any given period may be favorably or adversely impacted as a result of our estimates of the realization of our accounts receivable.

 

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Table of Contents

 

Research and Development Expense.  The following tables present research and development expense for the three and nine months ended December 31, 2011 and 2010:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

December 31, 2011

 

December 31, 2010

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

 

 

 

 

 

 

 

 

Sales and

 

 

 

Sales and

 

 

 

 

 

 

 

 

 

Contract

 

 

 

Contract

 

Increase

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

(Decrease)

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

610

 

4.1

%

$

478

 

4.0

%

$

132

 

27.6

%

Facilities, development and supplies

 

224

 

1.5

 

116

 

1.0

 

108

 

92.8

 

Other

 

34

 

0.2

 

63

 

0.5

 

(29

)

(45.8

)

Research and development

 

$

868

 

5.8

%

$

657

 

5.5

%

$

211

 

32.1

%

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

December 31, 2011

 

December 31, 2010

 

 

 

 

 

 

 

 

 

% of Net

 

 

 

% of Net

 

 

 

 

 

 

 

 

 

Sales and

 

 

 

Sales and

 

 

 

 

 

 

 

 

 

Contract

 

 

 

Contract

 

 

 

%

 

 

 

Amount

 

Revenues

 

Amount

 

Revenues

 

Increase

 

Change

 

 

 

(In thousands, except percentages)

 

Salary and personnel-related

 

$

1,732

 

4.0

%

$

1,282

 

3.3

%

$

450

 

35.1

%

Facilities, development and supplies

 

594

 

1.4

 

415

 

1.1

 

179

 

43.1

 

Other

 

150

 

0.3

 

134

 

0.3

 

16

 

12.2

 

Research and development

 

$

2,476

 

5.7

%

$

1,831

 

4.8

%

$

645

 

35.2

%

 

Research and development expenses for the three and nine months ended December 31, 2011 were higher than the corresponding periods in the prior year primarily due to (i) the allocation of additional resources to various development projects in our Roadway Sensors segment, including our recently announced Vantage Vector vehicle detection sensor, (ii) development costs related to our recently announced iPerform information management solution and (iii) the addition of headcount and other expenses in the current year period related to MET and BTS.

 

Fair Value of Contingent Acquisition Consideration.  During the three and nine months ended December 31, 2011, we recorded net decreases of $281,000 and $639,000, respectively, to the liability for the estimated fair value of the contingent consideration related to our acquisitions of MET and BTS. The decreases resulted primarily from revisions to our estimates regarding both the probability of achieving certain earn-out targets and the amounts of certain future deferred payments. In future periods, the estimated fair value of this liability may increase or decrease as we reevaluate our estimates based on the relevant facts and circumstances and the related financial performance attributable to MET and BTS.

 

26



Table of Contents

 

Income Taxes.  The following tables present our provision for income taxes for the three and nine months ended December 31, 2011 and 2010:

 

 

 

Three Months Ended