UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

For the quarterly period ended June 30,  2012

 

or

 

For the transition period from __________to __________

 

Commission File Number  1-6720

 

A. T. CROSS COMPANY
(Exact name of registrant as specified in its charter)

Registrant's telephone number, including area code (401) 333-1200

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

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 (S232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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).

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of July 28, 2012:

 

 

---

 

PART I - FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

See notes to condensed consolidated financial statements.

---

 

A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

 

 

 

 

A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)

 

 

 

 

 

See notes to condensed consolidated financial statements.

---

 

A. T. CROSS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

 

 

 

See notes to condensed consolidated financial statements.

 

 

---

 

 

NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X.  Accordingly, they do not include all of the information and footnotes required by US GAAP for financial statements.  The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes.  In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of items of a normal and recurring nature) necessary to present fairly the financial position as of June 30, 2012, the results of operations and comprehensive income for the three-month and six-month periods ended June 30, 2012 and July 2, 2011, and the cash flows for the six-month periods ended June 30, 2012 and July 2, 2011.  The results of operations for the six-month period ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year.  The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.  Subsequent events have been evaluated to the date of issuance of these financial statements.  These financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2011, which includes consolidated financial statements and notes thereto for the years ended December 31, 2011,  January 1, 2011 and January 2, 2010.  The Company operates on a 52/53 week fiscal year, ending on the last Saturday closest to December 31, and consists of 13 week fiscal quarters.

 

NOTE B - Inventory
During the fourth quarter of 2011, the Company changed its method of accounting for domestic writing instrument inventories from determining cost using the last-in, first-out (“LIFO”) method to determining cost using the first-in, first-out (“FIFO”) method.  All of the Company’s inventories are now valued at the lower of cost, determined using the FIFO method, or market.  The Company believes this change is preferable as it provides uniformity across the Company’s operations with respect to the method for inventory accounting, better reflects the current value of inventories on the Consolidated Balance Sheet and improves comparability with the Company’s peers.

 

The change in accounting method from LIFO to FIFO for domestic writing instrument inventories has been applied retrospectively by adjusting the financial statement amounts for the prior periods presented to reflect the value of domestic writing instrument inventories on a FIFO basis.  The effect of the change on the condensed consolidated statements of income and the condensed consolidated statement of cash flows for the quarter and six months ended July 2, 2011, was not significant.

 

The components of inventory are as follows: 

 

 

---

 

NOTE C - Income Taxes
In the first six months of 2012 the effective tax rate was 31.2%.  In the first six months of 2011 the effective tax rate was 32.6%.

 

NOTE D - Segment Information
The Company has two reportable business segments: Cross Accessory Division ("CAD") and Cross Optical Group ("COG").  The Company evaluates segment performance based upon operating profit or loss.  Following is the segment information for the Company:

---

 

 

NOTE E - Warranty Costs
CAD’s Cross-branded writing instruments are sold with a full warranty of unlimited duration against mechanical failure.  CAD's accessories are sold with a one-year warranty against mechanical failure and defects in workmanship and timepieces are warranted for a period of two years.  Costa and Native sunglasses are sold with a lifetime warranty against defects in materials and workmanship.  Estimated warranty costs are accrued at the time of sale.  The most significant factors in the estimation of warranty cost liabilities include the operating efficiency and related cost of the service department, unit sales and the number of units that are eventually returned for warranty repair.  The current portion of accrued warranty costs was $0.5 million at June 30, 2012 and December 31, 2011, and was recorded in accounts payable, accrued expenses and other liabilities.  The following chart reflects the activity in aggregate accrued warranty costs: 

 

 

 

NOTE F - Line of Credit

The Company maintains a $40 million revolving line of credit with Bank of America, N.A. (the “Bank”).  Under the line of credit agreement, the Bank agreed to make loans to the Company in an aggregate amount not to exceed $40 million, including up to $10 million equivalent in Eurocurrency loans denominated in pounds sterling or Euro (“Eurocurrency Loans”) and up to $30 million of other committed loans to the Company (“Committed Loans”) at any time.  As part of the aggregate availability, the Bank may also issue up to $7.5 million in letters of credit.  Subject to the limits on availability and the other terms and conditions of this credit agreement, amounts may be borrowed, repaid and reborrowed without penalty.  This credit facility matures and amounts outstanding must be paid by July 28, 2013.

 

The interest rate for the Committed Loans will be, at the Company's option, either (i) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin or (ii) the higher of the federal funds rate plus 50 basis points or the Bank's prime rate plus an applicable margin.  The interest rate for any Eurocurrency Loans will be an interest settlement rate for deposits in pounds sterling or Euro plus an applicable margin.  The applicable margin for LIBOR and Eurocurrency loans will be an amount between 1.75% and 2.25%, and the applicable margin for federal funds or the Bank's prime rate will be an amount between 0.25% and 0.75%, which will vary from time to time based upon the Company's consolidated leverage ratio.

 

Under the line of credit agreement, the Company has agreed to comply with certain affirmative and negative covenants.  The most restrictive covenant requires the Company to maintain a maximum ratio of consolidated funded indebtedness to consolidated adjusted EBITDA over any four-quarter period.  The agreement requires the Company to maintain a minimum consolidated tangible net worth, computed at each year end, a maximum level of capital expenditures, each of which is calculated in accordance with the agreement.  Amounts due under the credit agreement are guaranteed by certain domestic and foreign subsidiaries of the Company.  Amounts due are also secured by a pledge of the assets of the Company and those of certain of its domestic subsidiaries.

---

 

 

At June 30, 2012, the outstanding balance of the Company's line of credit was $18.2 million, bearing an interest rate of approximately 2.0%, and the unused and available portion, according to the terms of the agreement, was $21.8 million.  At December 31, 2011, the outstanding balance of the Company's line of credit was $21.2 million, bearing an interest rate of approximately 2.0%, and the unused and available portion, according to the terms of the agreement, was $18.8 million. 

 

NOTE G - Employee Benefit Plans
The following table illustrates the components of net periodic benefit cost:

 

 

 

The Company contributed  $3.7 million to its defined benefit pension plans in the first six months of 2012, $2.5 million of which was an additional voluntary contribution.  The Company expects to contribute $6.0 million to its defined benefit pension plans in 2012, $3.5 million to meet minimum required contributions and the $2.5 million additional voluntary contribution.  Additionally, the Company expects to contribute $0.9 million to its defined contribution retirement plans in 2012.

 

NOTE H - Goodwill and Other Intangible Assets

Goodwill and indefinite-lived intangible assets are not amortized but are subject to annual impairment tests, more frequently if events or circumstances occur that would indicate a potential decline in their fair value.  The Company has identified two reporting units, consisting of the CAD and COG segments.  The Company performs the assessments annually during the fourth quarter or on an interim basis if potential impairment indicators arise.  The fair value of the reporting unit's goodwill is determined using established income and market valuation approaches and the fair value of other indefinite-lived intangible assets, consisting of two COG segment trade names, is determined using a forward relief from royalty method.  For further discussion about impairment analysis, see the "Impairment Analysis" section of Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Form 10-K for the fiscal year ended December 31, 2011.

 

At June 30, 2012 and December 31, 2011, the approximate $15.3 million carrying value of goodwill, $11.9 million of which is expected to be tax deductible, related entirely to the COG segment.  Other intangibles consisted of the following:

---

 

 

 

 

Amortization expense for the three and six month periods ended June 30, 2012 was approximately $0.2 million and $0.4 million, respectively.  The estimated future amortization expense for other intangibles remaining as of June 30, 2012 is as follows:

 

 

 

NOTE I - Financial Instruments

The Company is exposed to market risks arising from adverse changes in foreign exchange and interest rates.  In the normal course of business, the Company manages these risks through a variety of strategies, including the use of derivatives.  Certain derivatives are designated as cash flow hedges and qualify for hedge accounting treatment, while others do not qualify and are marked to market through earnings.  Gains or losses from derivatives used to manage foreign exchange are classified as selling, general and administrative expenses.

   

For cash flow hedges, changes in fair value are deferred in accumulated other comprehensive loss within shareholders' equity until the underlying hedged item is recognized in net income.  For fair value hedges, changes in fair value are recognized immediately in earnings, consistent with the underlying hedged item.  Hedging transactions are limited to an underlying exposure.  As a result, any change in the value of the derivative instruments would be substantially offset by an opposite change in the value of the underlying hedged items.  Hedging ineffectiveness and a net earnings impact occur when the change in the value of the hedge does not offset the change in the value of the underlying hedged item.  Ineffectiveness of the Company's hedges is not material.  If the derivative instrument is terminated, the Company continues to defer the related gain or loss and include it as a component of the cost of the underlying hedged item.  Upon determination that the underlying hedged item will not be part of an actual transaction, the Company recognizes the related gain or loss in the statement of income immediately.

 

The Company also uses derivatives that do not qualify for hedge accounting treatment.  The Company accounts for such derivatives at market value with the resulting gains and losses reflected in the statements of income.

 

The Company enters into arrangements with one financial institution that it believes is creditworthy and generally settles such arrangements on a net basis.  In addition, the Company performs a quarterly

---

 

assessment of counterparty credit risk, including a review of credit ratings, credit default swap rates and potential nonperformance of the counterparty.  Based on the most recent quarterly assessment of counterparty credit risk, the Company considers this risk to be low.

 

Foreign Exchange

The Company enters into derivatives, primarily forward foreign exchange contracts with terms of no more than one year, to manage risk associated with exposure to certain foreign currency denominated balance sheet positions, primarily intercompany accounts receivable.  Gains or losses resulting from the translation of certain foreign currency balance sheet positions are recognized in the statement of income as incurred.  Foreign currency derivatives had a total notional value of $19.6 million as of June 30, 2012 and $39.4 million as of December 31, 2011.  Gains and losses on the derivatives were generally offset by changes in U.S. dollar value of the underlying hedged items.

 

Interest Rates

In 2010, the Company entered into a forward interest rate swap agreement with an initial notional amount of $15.0 million and a term of three years.  This swap effectively fixes the interest rate on a portion of the Company’s line of credit at approximately 1.2%.  The item being hedged is the first interest payment to be made on $15.0 million of principal expected to occur each month beginning March 31, 2011.  The Company measures hedge ineffectiveness using the “hypothetical” derivative method.  This swap has been designated a cash flow hedge and the effect of the mark-to-market valuation is recorded as an adjustment, net of tax, to accumulated other comprehensive loss.  From inception to June 30, 2012, the effect of the mark-to-market valuation, net of tax, was $0.1 million and was included as a component of accumulated other comprehensive loss.

 

Fair Value Measurements

The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities.  Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment.  The three levels are defined as follows:

 

 

The fair values of our financial assets and liabilities are categorized as follows:

 

---

 

 

 

 

 

 

Accounts receivable are recorded at net realizable value, which approximates fair value.  Accounts payable, included in accounts payable, accrued expenses and other current liabilities, are recorded at historical cost, which approximates fair value due to the short-term nature of the liabilities.  Long-term debt is recorded at historical cost, which approximates fair value since the interest rate varies with prevailing market rates similar to level 2 categorized items.

 

The effective portion of the pre-tax gains (losses) on our derivative instruments for the three and six month periods ended June 30, 2012 and July 2, 2011 are categorized in the following table:

 

 

 

 

 

 

NOTE J - Short-Term  Investments

At June 30, 2012, the Company had short-term investments of $0.1 million classified as trading securities.  Realized and unrealized gains or losses on these short-term investments are included in other

---

 

income.  The amount of unrealized gain on these short-term investments was not material at June 30, 2012.

 

NOTE K - New Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) which simplifies how companies test goodwill for impairment.  The ASU permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in the goodwill accounting standard.  The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted.  We do not expect the new ASU to have a material effect on our financial position, results of operations or cash flows.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income (ASU 2011-05), to require an entity to present the total 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.  ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity.  In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220) - Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05 (ASU 2011-12), which defers the effective date of only those changes in ASU 2011-05 that relate to the presentation of reclassification adjustments.  ASU 2011-05 is effective for us in our first quarter of fiscal 2012 and should be applied retrospectively.  The adoption of ASU 2011-05 and ASU 2011-12 did not have a material impact on our financial position, results of operations or cash flows.

 

In May 2011, the Financial Accounting Standards Board (FASB) updated the accounting guidance related to fair value measurements. This amendment results in convergence of fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards (IFRS).  We complied with this amendment beginning in the first quarter of fiscal 2012. 

 

NOTE L - Commitments and Contingencies
The Company was named as one of approximately ninety defendants in a contribution suit brought by CCL/Unilever relating to the J.M. Mills Landfill Site (the “Site”), which is part of the Peterson/Puritan Superfund Site in Cumberland, Rhode Island.  These complaints alleged that the Company was liable under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for contribution for Site investigation costs.  The Company has reached settlement of the case and paid a settlement amount of approximately $0.2 million in 2010.

 

The Company expects that the Federal Environmental Protection Agency ("EPA") will select a remedy for the Site in 2012.  At that time, the EPA will initiate an administrative process (the "Special Notice Process") pursuant to CERCLA whereby the EPA will request that those entities that the EPA contends arranged for the disposal of hazardous materials at the Site (the PRPs), undertake the selected remedy at the Site.  The EPA contends that the Company is a PRP at the Site.  During the Special Notice Process, the Company and the other PRPs will engage in negotiations with the EPA regarding the remedy, and among themselves regarding the contribution of each PRP to overall remediation costs.  Neither the cost of the remedy nor the identity of all PRPs is known at this time.  Therefore it is not possible to assess the outcome of the Special Notice Process as it may relate to the Company's contribution to remediation costs.

---

 

 

The Pension Benefit Guaranty Corporation (“PBGC”) has asserted that it believes that the Company has had a triggering event under Section 4062(e) of ERISA, which, had such an event occurred, could lead to an acceleration of funding contributions to the Company’s defined benefit plan.  Specifically, during 2010, the PBGC has asserted that the Company closed a facility in the USA when it completed the transfer of a significant portion of its manufacturing operations offshore.  The Company maintains that the facility did not close, and therefore no triggering event occurred. Discussions are ongoing.  Notwithstanding the foregoing, the Company intends to ensure that its defined benefit plan remains viable and healthy and intends to continue to make all legally required contributions under the plan.  The Company further believes that it has sufficient liquidity to meet any required contributions to the Plan, and in fact, has made additional voluntary contributions of $4 million to the plan since October 2011.

 

The Company is involved in various other litigation and legal matters that have arisen in the ordinary course of business.  To its knowledge, management believes that the ultimate resolution of any of those existing matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.

---

 

Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

A.T. Cross Company is a designer and marketer of branded personal accessories including writing instruments, reading glasses, personal and business accessories and sunglasses.  The Company has been operating in a difficult economic environment in mature as well as competitive categories.  The Company has challenged itself to build upon its unique attributes in order to develop a vibrant, diversified and forward-looking company poised for sustainable growth and long-term profit. 

 

Cross Accessory Division ("CAD")

The Company has been a manufacturer and marketer of fine quality writing instruments since 1846.  Sold primarily under the Cross brand, ball-point, fountain and selectip rolling ball pens and mechanical pencils are offered in a variety of styles and finishes.  Cross also manufactures and markets a line of FranklinCovey^® entry level price point refillable writing instruments.  Also under the Cross brand, CAD offers a variety of personal and business accessories including leather goods, reading glasses, watches, desk sets, cufflinks, and stationery.  This segment typically records its highest sales and operating income in the fourth quarter of the fiscal year. 

 

Cross Optical Group ("COG")

The Company’s COG segment consists of its wholly-owned subsidiary Cross Optical Group, Inc.  This business designs, manufactures and markets high-quality, high-performance polarized sunglasses under the brand names Costa and Native.  This segment typically records its highest sales and operating income in the second quarter of the fiscal year. 

 

Results of Operations Second Quarter 2012 Compared to Second Quarter 2011

 

In the second quarter of 2012, the Company reported net income of $3.7 million, or $0.30 per basic and $0.28 per diluted share, compared to net income of $3.2 million, or $0.26 per basic and $0.24 per diluted share in the second quarter of 2011. 

 

The following chart details net sales performance:

 

 

 

Consolidated net sales were $48.8 million in the second quarter of 2012 compared to $47.8 million in the second quarter of 2011.  The effect of foreign exchange was unfavorable to consolidated second quarter 2012 sales results by approximately 100 basis points. 

 

CAD sales decreased 7.5% in the second quarter of 2012 compared to the second quarter of 2011 due to the adverse economic conditions affecting its European, Middle Eastern and African markets.  Sales increased in the Americas and Asian markets during the second quarter by 10.2% and 3.0%, respectively.

 

---

 

COG grew by 11.2%, led by the Costa brand which increased 14.6% compared to the prior year second quarter.

 

The following chart details gross profit margins for both segments as well as the consolidated gross profit margins:

 

 

Consolidated gross margins were 57.0% in the second quarter, 40 basis points lower than the same period last year. 

 

Consolidated operating expenses for the second quarter of 2012 were $22.2 million, or 45.6% of sales, as compared to $22.5 million, or 47.2% of sales a year ago; a decrease of 160 basis points.  The CAD segment operating expenses were 6.9% lower than the prior year’s second quarter.  The COG segment’s operating expenses were 6.4% higher than last year and were directly related to the higher sales volume in the second quarter of 2012.

 

In the second quarter of 2012, the effective tax rate was 30.9%.  In the second quarter of 2011, the effective tax rate was 32.6%. 

 

Results of Operations First Six Months 2012 Compared to First Six Months 2011

 

In the first six months of 2012, the Company reported net income of $5.2 million, or $0.42 per basic and $0.40 per diluted share, compared to net income of $4.4 million, or $0.36 per basic and $0.34 per diluted share in the first six months of 2011. 

 

The following chart details net sales performance:

 

 

 

Consolidated net sales were $90.8 million in the first six months of 2012 compared to $87.6 million in the first six months of 2011.  The effect of foreign exchange was not material to consolidated first six months 2012 sales results. 

 

CAD sales decreased 5.7% in the first six months of 2012 compared to the first six months of 2011 due to the adverse economic conditions affecting its European, Middle Eastern and African markets.  During this same period, sales in Asia increased by 6.4% and Americas sales increased by 3.6%. 

 

---

 

COG grew by 14.0%, led by the Costa brand which increased 17.2% compared to the prior year first six months.

 

The following chart details gross profit margins for both segments as well as the consolidated gross profit margins:

 

 

 

Consolidated gross margin for the first six months of 2012 of 56.6% was 120 basis points less than the first six months of 2011.  CAD gross margin declined 190 basis points due to inflation factors affecting 2012 that were not present in 2011.  In addition, the sale of certain discontinued products at low margins during the period affected gross margin.  COG gross margin of 58.9% was 80 basis points lower than 2011 due largely to shift in product mix from the Native line to Costa and Costa RX products.  The Company expects the full year consolidated gross margin to be 55.0%

 

Consolidated operating expenses for the first six months of 2012 were $43.4 million, or 47.8% of sales, as compared to $43.6 million, or 49.9% of sales a year ago; a decrease of 210 basis points.  The CAD segment operating expenses were 7.4% lower than the prior year’s first six months due to strong cost controls put in place to mitigate the sales decline.  The COG segment’s operating expenses were 10.2% higher than last year.  These increases were directly related to the higher sales volume in the first six months of 2012 compared to 2011.

 

In the first six months of 2012, the effective tax rate was 31.2%.  In the first three months of 2011, the effective tax rate was 32.6%. 

 

Liquidity and Sources of Capital

 

Historically, the Company's sources of liquidity and capital resources have been its cash and cash equivalents (“cash”), short-term investments, cash generated from operations and amounts available under the Company's line of credit.  These sources have been sufficient in the past to support the Company's routine operating requirements, capital projects, contributions to the retirement plans, stock repurchase programs and debt service.  The Company expects its future cash needs in 2012 will be met by these historical sources of liquidity and capital.

 

The Company's cash and short-term investment balance of $22.7 million at June 30, 2012 decreased $3.3 million from December 31, 2011.  The most significant factors affecting the Company's cash balance are discussed in this section.

 

Inventory was $40.3 million at June 30, 2012, an increase of $3.8 million since December 31, 2011.  CAD inventory increased $2.8 million and COG inventory levels increased by $1.0 million from year end 2011.  The increase in CAD inventory was to support anticipated higher sales volumes, as CAD typically records its highest sales in the second half.

 

---

 

The Company contributed  $3.7 million to its defined benefit pension plans in the first six months of 2012, $2.5 million of which was an additional voluntary contribution.  The Company expects to contribute $6.0 million to its defined benefit pension plans in 2012, $3.5 million to meet minimum required contributions and the $2.5 million additional voluntary contribution.  Additionally, the Company expects to contribute $0.9 million to its defined contribution retirement plans in 2012.

 

The Company has a $40 million secured line of credit with a bank.  Under this agreement, the Company has the option to borrow at various interest rates depending upon the type of borrowings made and the Company's consolidated leverage ratio.  At June 30, 2012, the outstanding balance of the Company's line of credit was $18.2 million, bearing an interest rate of approximately 2.0%, and the unused and available portion, according to the terms of the agreement, was $21.8 million.  At December 31, 2011, the outstanding balance of the Company's line of credit was $21.2 million, bearing an interest rate of approximately 2.0%, and the unused and available portion, according to the terms of the agreement, was $18.8 million.  The Company was in compliance with its various debt covenants as of June 30, 2012.  The agreement requires the Company to maintain a minimum consolidated tangible net worth, computed at each year end, a maximum level of capital expenditures and a minimum ratio of adjusted EBITDA to required debt service payments over any four-quarter period, each of which is calculated in accordance with the agreement:

 

 

The Company believes that existing cash and cash provided by operations, supplemented as appropriate by the Company's borrowing arrangements, will be adequate to finance its foreseeable operating and capital requirements, the stock repurchase plan and contributions to the retirement plans.  Should operating cash flows in 2012 not materialize as projected, the Company has a number of planned alternatives to ensure that it will have sufficient cash to meet its operating needs.  These alternatives include implementation of strict cost controls on discretionary spending and delaying non-critical research and development, capital projects and completion of the stock repurchase plan.

 

At June 30, 2012, cash and short-term investments available for domestic operations was approximately $9.5 million, while cash held offshore was approximately $13.2 million.

 

Critical Accounting Policies

 

There have been no changes to our critical accounting policies and estimates from the information provided in Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our Form 10-K for the fiscal year ended December 31, 2011.

---

 

Forward-Looking Statements

 

Statements contained herein that are not historical fact are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  In addition, words such as "believes," "anticipates," "expects," “intends,” "will" and similar expressions are intended to identify forward-looking statements, including but not limited to statements related to the availability of sources of cash; anticipated compliance with laws and regulations (including but not limited to environmental laws); and anticipated sufficiency of available working capital.  The Company cautions that a number of important factors could cause the Company's actual results for fiscal 2012 and beyond to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company.  Forward-looking statements involve a number of risks and uncertainties.  For a discussion of certain of other of those risks, see "Risk Factors" in Item 1A of the Company's 2011 Annual Report on Form 10-K.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for a complete discussion of the Company's market risk.  There have been no material changes to the market risk information included in the Company's 2011 Annual Report on Form 10-K.

 

Item 4.  Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have evaluated our disclosure controls and procedures as of June 30, 2012 and have concluded that these disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.  These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the first six months of 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

---

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

Refer to Item 3 in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 2011 for a complete discussion of the Company's legal proceedings.  No material developments have occurred in the Legal Proceedings described in such Item 3.

 

The Company is involved in various other litigation and legal matters that have arisen in the ordinary course of business.  To its knowledge, management believes that the ultimate resolution of any of those existing matters will not have a material adverse effect on the Company's consolidated financial position or results of operations.

 

Item 1A.  Risk Factors.

 

Refer to Item 1A in the Company's Form 10-K Annual Report for the fiscal year ended December 31, 2011 for a complete discussion of the risk factors which could materially affect the Company's business, financial condition or future results. 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

Issuer Purchases of Equity Securities:

 

 

In 2008, the Company's Board of Directors authorized management to repurchase up to 1.0 million shares of the Company's outstanding Class A common stock, depending on market conditions.  On February 22, 2012, the Company’s Board of Directors authorized a 700,000 shares increase to the 2008 program.  Cumulatively, through June 30, 2012, the Company purchased approximately 0.9 million shares under this plan for approximately $5.1 million at an average price per share of $5.80.

 

Item 3.  Defaults Upon Senior Securities.

 

None

 

Item 4.  Mine Safety Disclosures

None

 

Item 5.  Other Information.

 

---

 

None

 

Item 6.  Exhibits.

 

---

 

SIGNATURES

 

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

---

 

 

 

---