Document And Entity Information
v4.2.117.0
Document And Entity Information
 9 Months Ended
Sep. 30, 2011
Nov. 01, 2011
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2011
Document Fiscal Period Focus Q3  
Document Fiscal Year Focus 2011  
Entity Registrant Name COMMUNICATIONS SYSTEMS INC  
Entity Central Index Key 0000022701  
Current Fiscal Year End Date --12-31  
Entity Filer Category Smaller Reporting Company  
Entity Common Stock, Shares Outstanding   8,465,840

Condensed Consolidated Balance Sheets
v4.2.117.0
Condensed Consolidated Balance Sheets (USD $)
Sep. 30, 2011
Dec. 31, 2010
ASSETS    
Cash and cash equivalents $ 20,084,605 $ 16,787,558
Investments 18,780,107 21,698,905
Trade accounts receivable, less allowance for doubtful accounts of $283,000 and $500,000, respectively 21,403,472 17,544,136
Inventories 26,012,133 24,498,935
Prepaid income taxes 570,567 296,586
Other current assets 954,437 908,102
Deferred income taxes 3,616,487 4,469,941
TOTAL CURRENT ASSETS 91,421,808 86,204,163
PROPERTY, PLANT AND EQUIPMENT, net 13,424,106 13,214,067
OTHER ASSETS:    
Investments 4,458,186 4,588,267
Goodwill 5,320,707 4,560,217
Prepaid pensions 326,178 349,575
Other assets 1,762,620 153,938
TOTAL OTHER ASSETS 11,867,691 9,651,997
TOTAL ASSETS 116,713,605 109,070,227
LIABILITIES AND STOCKHOLDERS' EQUITY    
Current portion of long-term debt 420,131 399,209
Accounts payable 4,070,190 5,385,558
Accrued compensation and benefits 5,043,674 3,951,401
Other accrued liabilities 3,376,121 1,669,776
Dividends payable 1,288,875 1,263,434
TOTAL CURRENT LIABILITIES 14,198,991 12,669,378
LONG TERM LIABILITIES:    
Long-term compensation plans 257,572 1,738,105
Income taxes payable 683,081 678,395
Deferred income taxes 1,113,730 585,317
Long term debt - mortgage payable 1,684,574 2,002,339
TOTAL LONG-TERM LIABILITIES 3,738,957 5,004,156
COMMITMENTS AND CONTINGENCIES    
STOCKHOLDERS' EQUITY    
Preferred stock, par value $1.00 per share; 3,000,000 shares authorized; none issued    
Common stock, par value $.05 per share; 30,000,000 shares authorized; 8,461,032 and 8,422,890 shares issued and outstanding, respectively 423,051 421,144
Additional paid-in capital 35,419,658 34,491,370
Retained earnings 63,320,527 56,769,816
Accumulated other comprehensive loss, net of tax (387,579) (285,637)
TOTAL STOCKHOLDERS' EQUITY 98,775,657 91,396,693
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 116,713,605 $ 109,070,227

Condensed Consolidated Balance Sheets (Parenthetical)
v4.2.117.0
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2011
Dec. 31, 2010
Condensed Consolidated Balance Sheets [Abstract]    
Trade accounts receivable, allowance for doubtful accounts $ 283,000 $ 500,000
Preferred stock, par value $ 1.00 $ 1.00
Preferred stock, shares authorized 3,000,000 3,000,000
Preferred stock, shares issued 0 0
Common stock, par value $ 0.05 $ 0.05
Common stock, shares authorized 30,000,000 30,000,000
Common stock, shares issued 8,461,032 8,422,890
Common stock, shares outstanding 8,461,032 8,422,890

Condensed Consolidated Statements Of Income And Comprehensive Income (Loss)
v4.2.117.0
Condensed Consolidated Statements Of Income And Comprehensive Income (Loss) (USD $)
 3 Months Ended 9 Months Ended
Sep. 30, 2011
Sep. 30, 2010
Sep. 30, 2011
Sep. 30, 2010
Condensed Consolidated Statements Of Income And Comprehensive Income (Loss) [Abstract]        
Sales from operations $ 41,984,570 $ 33,323,793 $ 118,437,057 $ 89,864,628
Costs and expenses:        
Cost of sales 25,429,300 18,013,809 70,097,713 50,755,575
Selling, general and administrative expenses 10,071,408 9,005,699 29,189,378 26,492,580
Goodwill impairment 0 0 1,271,986 0
Total costs and expenses 35,500,708 27,019,508 100,559,077 77,248,155
Operating income 6,483,862 6,304,285 17,877,980 12,616,473
Other income and (expenses):        
Investment and other income 138,990 92,363 275,852 177,788
Gain (loss) on sale of assets 5,310 9,763 (4,674) 1,143
Interest and other expense (53,256) (51,854) (149,107) (160,305)
Other income, net 91,044 50,272 122,071 18,626
Income before income taxes 6,574,906 6,354,557 18,000,051 12,635,099
Income tax expense 2,845,269 2,355,163 7,627,910 4,889,452
Net income 3,729,637 3,999,394 10,372,141 7,745,647
Other comprehensive income (loss), net of tax:        
Additional minimum pension liability adjustments (8,534) (17,009) (26,952) (30,590)
Unrealized gains (losses) on available-for-sale securities (5,094) 11,779 (30,510) 13,259
Foreign currency translation adjustment (112,581) 149,786 (44,480) (60,059)
Total other comprehensive income (loss), net of tax (126,209) 144,556 (101,942) (77,390)
Comprehensive net income $ 3,603,428 $ 4,143,950 $ 10,270,199 $ 7,668,257
Basic net income per share: $ 0.44 $ 0.48 $ 1.23 $ 0.92
Diluted net income per share: $ 0.44 $ 0.48 $ 1.22 $ 0.92
Average Basic Shares Outstanding 8,460,625 8,398,496 8,442,812 8,376,542
Average Dilutive Shares Outstanding 8,530,187 8,414,865 8,500,022 8,401,212
Dividends per share $ 0.15 $ 0.15 $ 0.45 $ 0.44

Condensed Consolidated Statement Of Changes In Stockholders' Equity
v4.2.117.0
Condensed Consolidated Statement Of Changes In Stockholders' Equity (USD $)
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Total
BALANCE at Dec. 31, 2010 $ 421,144 $ 34,491,370 $ 56,769,816 $ (285,637) $ 91,396,693
BALANCE, Shares at Dec. 31, 2010 8,422,890        
Net income     10,372,141   10,372,141
Issuance of common stock under Employee Stock Purchase Plan 332 104,377     104,709
Issuance of common stock under Employee Stock Purchase Plan, Shares 6,649        
Issuance of common stock to Employee Stock Ownership Plan 1,125 314,902     316,027
Issuance of common stock to Employee Stock Ownership Plan, Shares 22,493        
Issuance of common stock under Non-Employee Stock Option Plan 450 72,450     72,900
Issuance of common stock under Non-Employee Stock Option Plan, Shares 9,000        
Tax benefit from non-qualified stock options   23,227     23,227
Share based compensation   413,332     413,332
Shareholder dividends     (3,821,430)   (3,821,430)
Other comprehensive income       (101,942) (101,942)
BALANCE at Sep. 30, 2011 $ 423,051 $ 35,419,658 $ 63,320,527 $ (387,579) $ 98,775,657
BALANCE, Shares at Sep. 30, 2011 8,461,032        

Condensed Consolidated Statements Of Cash Flows
v4.2.117.0
Condensed Consolidated Statements Of Cash Flows (USD $)
 9 Months Ended
Sep. 30, 2011
Sep. 30, 2010
CASH FLOWS FROM OPERATING ACTIVITIES:    
Net income $ 10,372,141 $ 7,745,647
Adjustments to reconcile net income to net cash provided by (used in) operating activities:    
Depreciation and amortization 1,571,423 1,418,065
Share-based compensation 413,332 39,093
Deferred income taxes 973,817 (474,900)
Goodwill impairment 1,271,986 0
Gain (loss) on sale of assets 4,674 (1,143)
Excess tax benefit from stock based payments (23,227)  
Changes in assets and liabilities:    
Trade receivables (3,664,939) (5,315,719)
Inventories (609,224) 302,888
Prepaid income taxes (273,981) 337,274
Other assets 21,595 (508,666)
Accounts payable (1,357,506) (421,603)
Accrued compensation and benefits (99,861) 56,473
Other accrued expenses (288,821) 247,625
Income taxes payable (59,368) 1,552,228
Net cash provided by operating activities 8,252,041 4,977,262
CASH FLOWS FROM INVESTING ACTIVITIES:    
Capital expenditures (1,635,893) (1,190,886)
Purchases of investments (16,156,015) (17,110,186)
Acquisition of business, net of cash acquired (2,408,910)  
Proceeds from the sale of fixed assets 8,055 27,593
Proceeds from the sale of investments 19,174,385 10,176,299
Net cash used in investing activities (1,018,378) (8,097,180)
CASH FLOWS FROM FINANCING ACTIVITIES:    
Cash dividends paid (3,795,989) (3,598,544)
Mortgage principal payments (296,844) (277,300)
Proceeds from issuance of common stock 177,609 100,337
Excess tax benefit from stock based payments 23,227  
Net cash used in financing activities (3,891,997) (3,775,507)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH (44,619) (31,841)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,297,047 (6,927,266)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,787,558 21,293,448
CASH AND CASH EQUIVALENTS AT END OF PERIOD 20,084,605 14,366,182
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:    
Income taxes paid 6,996,908 3,473,805
Interest paid 121,615 153,249
Dividends declared not paid 1,269,155 1,259,940
Acquisition costs in accrued expenses $ 1,681,367  

Summary Of Significant Accounting Policies
v4.2.117.0
Summary Of Significant Accounting Policies
 9 Months Ended
Sep. 30, 2011
Summary Of Significant Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Description of Business

 

Communications Systems, Inc. (herein collectively called "CSI" or the "Company") is a Minnesota corporation organized in 1969 which operates directly and through its subsidiaries located in the United States, Costa Rica, the United Kingdom and China. CSI is principally engaged through its Suttle and Austin Taylor business units in the manufacture and sale of modular connecting and wiring devices for voice and data communications, digital subscriber line filters, and structured wiring systems and through its Transition Networks business unit in the manufacture of media and rate conversion products for telecommunications networks. CSI also provides through its JDL Technologies ("JDL") business unit IT solutions including network design, computer infrastructure installations, IT service management, change management, network security and network operations services.

 

Financial Statement Presentation

 

The condensed consolidated balance sheets and condensed consolidated statement of changes in stockholders' equity as of September 30, 2011 and 2010 and the related condensed consolidated statements of income and comprehensive income (loss), and the condensed consolidated statements of cash flows for the periods ended September 30, 2011 and 2010 have been prepared by Company management . In the opinion of management, all adjustments (which include only normal recurring adjustments except where noted) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 2011 and 2010 and for the periods then ended have been made.

 

Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted. We recommend these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's December 31, 2010 Annual Report to Shareholders on Form 10-K. The results of operations for the periods ended September 30, 2011 are not necessarily indicative of operating results for the entire year.

 

The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosure of contingent assets and liabilities at the balance sheet date, and the reported amounts of revenues and expenses during the reporting period. The estimates and assumptions used in the accompanying condensed consolidated financial statements are based upon management's evaluation of the relevant facts and circumstances as of the time of the financial statements. Actual results could differ from those estimates.

 

Except to the extent updated or described below, the significant accounting policies set forth in Note 1 to the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2010, appropriately represent, in all material respects, the current status of accounting policies, and are incorporated herein by reference.

 

Cash Equivalents and Investments

 

For purposes of the condensed consolidated balance sheets and statements of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents. As of September 30, 2011, the Company had $20.1 million in cash and cash equivalents. Of this amount, $1.1 million was invested in short-term money market funds that are not considered to be bank deposits and are not insured or guaranteed by the Federal Deposit Insurance Corporation ("FDIC") or other government agency. These money market funds seek to preserve the value of the investment at $1.00 per share; however, it is possible to lose money investing in these funds.

 

The remainder of the Company's cash and cash equivalents is deposited at banks. The FDIC insures deposits at banks up to $250,000 per account. The Company's cash and cash equivalents are held at large, well-established financial institutions and the Company believes any risk associated with uninsured balances is remote.

 

The Company had $23.2 million in investments, which consist of certificates of deposit that were purchased in the public markets and are classified as available-for-sale at September 30, 2011. Of the $23.2 million in investments, $18.8 million mature in 12 months or less and are classified as current assets. Available-for-sale investments are reported at fair value with unrealized gains and losses net of tax excluded from operations and reported as a separate component of stockholders' equity (See Accumulated Other Comprehensive Income (Loss) below).

 

Revenue Recognition

 

The Company's manufacturing operations (Suttle, Transition Networks and Austin Taylor) recognize revenue when the earnings process is complete, evidenced by persuasive evidence of an agreement, delivery has occurred or services have been rendered, the price is fixed or determinable, and collectability is reasonably assured. Revenue is recognized for domestic and international sales at the shipping point or delivery to customers, based on the related shipping terms. Risk of loss transfers at the point of shipment or delivery to customers, and the Company has no further obligation after this time. Sales are made directly to customers and through distributors. Payment terms for distributors are consistent with the terms of the Company's direct customers. The Company records a provision for sales returns, sales incentives and warranty costs at the time of the sale based on historical experience and current trends.

 

JDL generally records revenue on hardware, software and related equipment sales and installation contracts when the revenue recognition criteria are met and products are installed and accepted by the customer. JDL records revenue on service contracts on a straight-line basis over the contract period, unless evidence suggests the revenue is earned in a different pattern. Each contract is individually reviewed to determine when the earnings process is complete.

 

Accumulated Other Comprehensive Income (Loss)

 

The components of accumulated other comprehensive income (loss), net of tax, are as follows:

 

 

September 30, 2011

  

December 31, 2010

Foreign currency translation

$

(1,317,010)

  

$

(1,272,530)

Unrealized gain (loss) on available-for-sale investments

(16,452)

    

14,058

Minimum pension liability

  

945,883

    

972,835

 

$

(387,579)

  

$

(285,637)

Stock-Based Compensation
v4.2.117.0
Stock-Based Compensation
 9 Months Ended
Sep. 30, 2011
Stock-Based Compensation [Abstract]  
Stock-Based Compensation

NOTE 2 - STOCK-BASED COMPENSATION

 

Employee Stock Purchase Plan

 

Under the Company's Employee Stock Purchase Plan ("ESPP") employees are able to acquire shares of common stock at 90% of the price at the end of each current quarterly plan term. The most recent term ended September 30, 2011. The ESPP is considered compensatory under current rules. At September 30, 2011, after giving effect to the shares issued as of that date, 70,072 shares remain available for purchase under the ESPP.

 

2011 Executive Incentive Compensation Plan

 

On March 28, 2011 the Board adopted and on May 19, 2011 the Company's shareholders approved the Company's 2011 Executive Incentive Compensation Plan ("2011 Incentive Plan"). The 2011 Incentive Plan authorizes incentive awards to officers, key employees and non-employee directors in the form of options (incentive and non-qualified), stock appreciation rights, restricted stock, restricted stock units, performance stock units ("deferred stock"), performance cash units, and other awards in stock, cash, or a combination of stock and cash. Up to 1,000,000 shares of our Common Stock may be issued pursuant to awards under the 2011 Incentive Plan. Through September 30, 2011, the only awards that have been made under the 2011 Incentive Plan are those described in following paragraphs.

 

The 2011 Incentive Plan permits equity awards to non-employee directors either in the form of restricted stock grants or non-qualified stock option awards, or both. On March 28, 2011, the Compensation Committee and the Board determined that, subject to receiving shareholder approval of the 2011 Incentive Plan, each non-employee director elected or re-elected at the May 19, 2011 Annual Shareholders Meeting (the "2011 Shareholders Meeting") would be issued shares of restricted stock having a value of $40,000 based on the closing price of the Company's common stock on May 19, 2011 and also determined this restricted stock would vest after one year and be subject to restrictions on resale for one additional year. At the 2011 Shareholders Meeting, the Company's shareholders approved the 2011 Incentive Plan and, effective as of that date, the Company awarded 2,226 shares of restricted stock to each of the Company's six non-employee directors for a total of 13,356 shares. In addition, on August 11, 2011, the Company's Board awarded a 2,226 share restricted stock grant to the Company's former chief executive officer, who began service as a non-employee director after retiring as chief executive officer on May 19, 2011.

During the third quarter of 2011, stock options were awarded covering 6,640 shares to key executive employees, which options expire seven years from the date of award and vest 25% each year beginning one year after the date of award. The Company also granted deferred stock awards of 3,450 shares to key employees during the third quarter under the Company's performance unit plan for performance over the 2011 to 2013 period. The actual number of shares of deferred stock earned by the respective employees, if any, will be determined based on achievement against cumulative performance goals for the three years ending December 31, 2013 and the number of shares earned will be paid in the first quarter of 2014 to those key employees still with the Company at that time.

 

At September 30, 2011, 974,328 shares remained available to be issued under the 2011 Incentive Plan.

 

Stock Option Plan for Directors

 

Shares of common stock are reserved for issuance to non-employee directors under options granted by the Company prior to 2011 under its Stock Option Plan for Non-Employee Directors (the "Director Plan").  Under the Director Plan nonqualified stock options to acquire 3,000 shares of common stock were automatically granted to each non-employee director concurrent with annual meetings of shareholders in 2010 and earlier years, with the exercise price of options granted being the fair market value of the common stock on the date of the respective shareholder meetings.  Options granted under the Director Plan expire 10 years from date of grant.   

 

No options have been granted under the Director Plan in 2011. The Director Plan was amended as of May 19, 2011 to prohibit automatic option grants in 2011 and future years to fulfill a commitment made by the Company in connection with seeking shareholder approval of the 2011 Incentive Plan at the 2011 Annual Meeting of Shareholders that, if shareholder approval was received, it would amend the Director Plan to prohibit any future option awards under that plan.

 

Stock Plan

 

Under the Company's 1992 Stock Plan ("the Stock Plan"), shares of common stock may be issued pursuant to stock options, restricted stock or deferred stock grants to officers and key employees. Exercise prices of stock options under the Stock Plan cannot be less than fair market value of the stock on the date of grant. Rules and conditions governing awards of stock options, restricted stock and deferred stock are determined by the Compensation Committee of the Board of Directors, subject to certain limitations in the Stock Plan.

 

During the first quarter of 2011, stock options were awarded covering 89,610 shares to key executive employees, which options expire seven years from the date of award and vest 25% each year beginning one year after the date of award. 

 

During the first quarter of 2011, key employees were granted 16,092 shares of deferred stock based on achievement against performance goals in 2010 under the Company's performance unit plan. The deferred stock will be paid out in the first quarter of 2014 to key employees still employed by the Company at that time. The Company also granted deferred stock awards of 73,972 shares to key employees under the Company's performance unit plan for performance over the 2011 to 2013 period. The actual number of shares of deferred stock earned by the respective employees, if any, will be determined based on achievement against cumulative performance goals for the three years ending December 31, 2013 and the number of shares earned will be paid in the first quarter of 2014 to those key employees still employed by the Company at that time. During the first quarter, the Company also granted deferred stock awards of up to 11,618 shares to executive employees that will be earned under the Company's short-term incentive plan if actual revenue growth equals or exceeds 150% of the revenue growth target for 2011. The number of shares earned by the respective executive employees, if any, will be paid out in the first quarter of 2012.

 

At September 30, 2011 the only shares that are available for issuance under the Stock Plan are the 191,292 shares reserved for issuance under the stock options and deferred stock awards described in the two preceding paragraphs. When seeking approval of the 2011 Incentive Plan at the 2011 Shareholders Meeting, the Company committed to prohibit the issuance of any future equity awards under the Stock Plan on or after May 19, 2011, other than the 191,292 reserved shares which are available to be issued as deferred stock awards or options.

 

Changes in Stock Options Outstanding
 
The following table summarizes changes in the number of outstanding stock options under the Director Plan and Stock Plan over the period December 31, 2010 to September 30, 2011.  All stock options outstanding at December 31, 2010 are exercisable and 17,635 of the options awarded during the nine month period ended September 30, 2011 are exercisable.  
       

Weighted average

  

Weighted average

       

exercise price

  

remaining

   

Options

  

per share

  

contractual term

Outstanding – December 31, 2010

  

162,000

  

$

9.49

  

5.33 years

Awarded

  

96,250

    

14.16

    

Exercised

  

(9,000)

    

8.10

    

Canceled

  

(12,430)

    

11.23

    

Outstanding – September 30, 2011

  

236,820

    

11.35

  

5.43 years

 
The aggregate intrinsic value of all options (the amount by which the market price of the stock on the last day of the period exceeded the market price of the stock on the date of grant) outstanding at September 30, 2011 was $495,000.  The intrinsic value of all options exercised during the nine months ended September 30, 2011 was $61,000. Net cash proceeds from the exercise of all stock options were $73,000 and $0 for the nine months ended September 30, 2011 and 2010, respectively. 
 
Changes in Deferred Stock Outstanding 
 
The following table summarizes the changes in the number of deferred stock shares under the Stock Plan and 2011 Incentive Plan over the period December 31, 2010 to September 30, 2011: 
       

Weighted Average

       

Grant Date

   

Shares

  

Fair Value

Outstanding – December 31, 2010

  

-

  

$

-

Granted

  

105,132

    

15.15

Vested

  

(2,083)

    

15.40

Canceled

  

(5,833)

    

15.27

Outstanding – September 30, 2011

  

97,216

    

15.14

 
Compensation Expense

Share-based compensation expense recognized for the nine month period ended September 30, 2011 was $413,000 before income taxes and $269,000 after income taxes. Share-based compensation expense recognized for the nine month period ended September 30, 2010 was $39,000 before income taxes and $25,000 after income taxes. Unrecognized compensation expense for the Company's plans was $623,000 at September 30, 2011. Excess tax benefits from the exercise of stock options included in financing cash flows for the nine month periods ended September 30, 2011 and 2010 were $23,000 and $0, respectively. Share-based compensation expense is recorded as a part of selling, general and administrative expenses.

Inventories
v4.2.117.0
Inventories
 9 Months Ended
Sep. 30, 2011
Inventories [Abstract]  
Inventories

NOTE 3 - INVENTORIES

 

Inventories summarized below are priced at the lower of first-in, first-out cost or market:

 

September 30, 2011

  

December 31, 2010

           

Finished goods

$

14,183,482

  

$

13,684,884

Raw and processed materials

 

11,828,651

  

 

10,814,051

Total

$

26,012,133

  

$

24,498,935

Acquisition
v4.2.117.0
Acquisition
 9 Months Ended
Sep. 30, 2011
Acquisition [Abstract]  
Acquisition

NOTE 4 – ACQUISITION

 

On July 27, 2011, the Company acquired Patapsco Designs Limited of the UK ("Patapsco"). The purchase price totals $5,031,000, with cash acquired totaling $862,000. The purchase price includes initial consideration of $3,271,000, deferred consideration of $491,000 to be paid out no later than 18 months from the acquisition date, $656,000 in working capital adjustments, and $613,000 in contingent consideration. The Company has agreed to pay consideration up to $818,000 contingent upon the Patapsco business meeting gross margin and other non-financial targets, with the consideration to paid out no later than two years from the acquisition date. Although the maximum contingent consideration is $818,000, the Company has recognized $613,000 as the estimated fair value of the contingent consideration at the date of acquisition. This contingent consideration has been calculated based on the exchange rate at the date of acquisition and actual payments may differ based on fluctuations in the exchange rate between the dollar and the pound. At September 30, 2011, the Company had estimated liabilities of $1,681,000 related to outstanding consideration payments.

 

The estimated assets and liabilities of Patapsco were recorded in the consolidated balance sheet within the Transition Networks segment at September 30, 2011. The preliminary purchase price allocation was based on estimates of the fair value of assets acquired and liabilities assumed and included total assets of $5,864,000, including estimated goodwill of $2,032,000 and estimated intangibles of $1,616,000, and total liabilities of $833,000. All balances recorded are estimated amounts; the purchase price allocation will be finalized subsequent to the third quarter as the valuation of identifiable assets and liabilities is completed. The pro forma impact of Patapsco was not significant to the Company's results for the three and nine months ended September 30, 2011.

Goodwill And Other Intangible Assets
v4.2.117.0
Goodwill And Other Intangible Assets
 9 Months Ended
Sep. 30, 2011
Goodwill And Other Intangible Assets [Abstract]  
Goodwill And Other Intangible Assets

NOTE 5 – GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill is required to be evaluated for impairment on an annual basis and between annual tests upon the occurrence of certain events or circumstances. A two-step process is performed to analyze whether or not goodwill has been impaired. Step one is to test for potential impairment, and requires that the fair value of the reporting unit be compared to its book value including goodwill. If the fair value is higher than the book value, no impairment is recognized. If the fair value is lower than the book value, a second step must be performed. The second step is to measure the amount of impairment loss, if any, and requires that a hypothetical purchase price allocation be done to determine the implied fair value of goodwill. This fair value is then compared to the carrying value of goodwill. If the implied fair value is lower than the carrying value, an impairment adjustment must be recorded.

 

During our fiscal quarter ended June 30, 2011, based on greater than expected decline in actual and forecasted profitability of legacy products in our Suttle business unit, as well as, significant project delays that occurred related to Suttle's new technologies, we concluded that that these events and circumstances were indicators to require us to perform an interim goodwill impairment analysis of our Suttle business unit. This analysis included the determination of the reporting unit's fair value primarily using discounted cash flows modeling. Based on the step one and step two analysis, considering Suttle's reduced earnings and cash flow forecasts, the Company determined that Suttle's goodwill was fully impaired and recorded a goodwill impairment for the Suttle segment of $1,272,000.

 

The changes in the carrying amount of goodwill for the nine months ended September 30, 2011 by segment is as follows:

 

    Suttle Transition Networks Total
         
January 1, 2010    $        1,271,986  $        3,288,231  $        4,560,217
                               -  
December 31, 2010              1,271,986            3,288,231            4,560,217
         
Impairment loss            (1,271,986)            (1,271,986)
Acquisition                2,032,476            2,032,476
         
September 30, 2011    $                    -    $        5,320,707  $        5,320,707
         
Gross goodwill    $        1,271,986  $        5,320,707  $        6,592,693
Accumulated impairment loss    $      (1,271,986)            (1,271,986)
Balance at September 30, 2011    $                    -    $        5,320,707  $        5,320,707

Warranty
v4.2.117.0
Warranty
 9 Months Ended
Sep. 30, 2011
Warranty [Abstract]  
Warranty

NOTE 6 – WARRANTY

 

We provide reserves for the estimated cost of product warranties at the time revenue is recognized. We estimate the costs of our warranty obligations based on our warranty policy or applicable contractual warranty, historical experience of known product failure rates, and use of materials and service delivery costs incurred in correcting product failures. Management reviews the estimated warranty liability on a quarterly basis to determine its adequacy. The actual warranty expense could differ from the estimates made by the Company based on product performance.

 

The following table presents the changes in the Company's warranty liability for the nine month periods ended September 30, 2011 and 2010, respectively, the majority of which relates to a five-year obligation to provide for potential future liabilities for network equipment sales.

 

 

2011

  

2010

Beginning Balance

$

616,000

  

$

648,000

Actual warranty costs paid

 

(180,000)

  

 

(154,000)

Amounts charged to expense

 

197,000

    

86,000

Ending balance

$   

633,000

  

$

580,000

Contingencies
v4.2.117.0
Contingencies
 9 Months Ended
Sep. 30, 2011
Contingencies [Abstract]  
Contingencies

NOTE 7 – CONTINGENCIES

 

In the ordinary course of business, the Company is exposed to legal actions and claims and incurs costs to defend against these actions and claims. Company management is not aware of any outstanding or pending legal actions or claims that would materially affect the Company's financial position or results of operations.

Income Taxes
v4.2.117.0
Income Taxes
 9 Months Ended
Sep. 30, 2011
Income Taxes [Abstract]  
Income Taxes

NOTE 8 – INCOME TAXES

 

In the preparation of the Company's consolidated financial statements, management calculates income taxes based upon the estimated effective rate applicable to operating results for the full fiscal year. This includes estimating the current tax liability as well as assessing differences resulting from different treatment of items for tax and book accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. These assets and liabilities are analyzed regularly and management assesses the likelihood that deferred tax assets will be recovered from future taxable income.

  

At September 30, 2011 there was $517,000 of net uncertain tax benefit positions that would reduce the effective income tax rate if recognized. The Company records interest and penalties related to income taxes as income tax expense in the Condensed Consolidated Statements of Income.

 

The Company is subject to U.S. federal income tax as well as income tax of multiple state and foreign jurisdictions. The tax years 2008-2010 remain open to examination by the Internal Revenue Service and the years 2007-2010 remain open to examination by various state tax departments. The tax years from 2008-2009 remain open in Costa Rica.

 

The Company's effective income tax rate was 42.4% for the first nine months of 2011. The effective tax rate differs from the federal tax rate of 35% due to state income taxes, return to provision adjustments, foreign losses not deductible for U.S. income tax purposes, provisions for interest charges, settlement of uncertain income tax positions, acquisition-related costs and goodwill impairment not deductible for U.S. income tax purposes. The foreign operating losses may ultimately be deductible in the countries in which they have occurred; however the Company has not recorded a deferred tax asset for these losses due to uncertainty regarding the eventual realization of the benefit. The effect of the foreign operations is an overall rate increase of approximately 1.5% for the nine months ended September 30, 2011. Additionally, the effect of the goodwill impairment is an overall rate increase of 2.4% for the nine months ended September 30, 2011. There were no additional uncertain tax positions identified in the third quarter of 2011. The Company's effective income tax rate for the nine months ended September 30, 2010 was 38.7%, and differed from the federal tax rate due to state income taxes, foreign losses not deductible for U.S. income tax purposes, return to provision adjustments, provisions for interest charges, and settlement of uncertain tax positions.

Segment Information
v4.2.117.0
Segment Information
 9 Months Ended
Sep. 30, 2011
Segment Information [Abstract]  
Segment Information

NOTE 9 – SEGMENT INFORMATION

 

The Company classifies its businesses into four segments as follows:

 

  • Suttle manufactures and sells U.S. standard modular connecting and wiring devices for voice and data communications, digital subscriber line filters, and structured wiring systems;
  • Transition Networks designs and markets data transmission, computer network and media conversion products;
  • JDL Technologies, Inc. provides IT services including network design, computer infrastructure installations, IT service management, change management, network security and network operations services;
  • Austin Taylor Communications LTD manufactures British-standard telephone equipment and equipment enclosures for the U.K and international markets.

 

Our non-allocated corporate general and administrative expenses are categorized as "Other" in the Company's segment reporting. Management has chosen to organize the enterprise and disclose reportable segments based on our products and services. There are no material inter-segment revenues.

 

Information concerning the Company's continuing operations in the various segments for the three and nine month periods ended September 30, 2011 and 2010 is as follows:

 

SEGMENT INFORMATION - THREE MONTHS          
             
    Transition JDL Austin    
  Suttle Networks Technologies Taylor Other Total
Three months ended September 30, 2011:            
Sales  $       9,557,670  $      27,573,925  $        3,872,368  $        980,607  $                      -  $        41,984,570
Cost of sales           7,233,772          14,845,981            2,403,383            946,164                          -  $        25,429,300
Gross profit           2,323,898          12,727,944            1,468,985              34,443                          -            16,555,270
Selling, general and            
  administrative expenses           1,690,716            6,017,085               522,104            436,995           1,404,508  $        10,071,408
Goodwill impairment                          -                           -                           -                        -                          -                            -
Operating income (loss)  $          633,182  $        6,710,859  $           946,881  $      (402,552)  $     (1,404,508)  $          6,483,862
             
Depreciation and amortization  $          245,870  $           184,712  $             23,621  $          12,095  $            70,984  $             537,282
             
Capital expenditures  $          255,232  $           348,129  $               4,572  $          29,105  $            29,942  $             666,980
             
Assets at September 30, 2011  $     22,573,483  $      38,084,903  $        2,616,360  $     2,265,011  $     51,173,848  $      116,713,605
             
    Transition JDL Austin    
  Suttle Networks Technologies Taylor Other Total
Three months ended September 30, 2010:            
Sales  $       9,069,600  $      18,991,587  $        4,463,475  $        799,131  $                      -  $        33,323,793
Cost of sales           6,634,125            8,400,497            2,302,883            676,304                          -  $        18,013,809
Gross profit           2,435,475          10,591,090            2,160,592            122,827                          -            15,309,984
Selling, general and            
  administrative expenses           1,730,506            5,452,714               346,899            324,672           1,150,908  $          9,005,699
Operating income (loss)  $          704,969  $        5,138,376  $        1,813,693  $      (201,845)  $     (1,150,908)  $          6,304,285
             
Depreciation and amortization  $          187,636  $           158,071  $             11,709  $            8,952  $            73,669  $             440,037
             
Capital expenditures  $            (3,387)  $           193,763  $                       -  $          20,961  $            84,063  $             295,400
             
Assets at September 30, 2010  $     19,677,651  $      31,467,598  $        4,205,027  $     2,919,046  $     50,128,264  $      108,397,586

SEGMENT INFORMATION - NINE MONTHS          
             
    Transition JDL Austin    
  Suttle Networks Technologies Taylor Other Total
Nine months ended September 30, 2011:            
Sales  $     27,504,276  $      76,507,810  $      11,654,074  $     2,770,897  $                    -  $   118,437,057
Cost of sales         20,662,922          40,265,114            6,680,401         2,489,276                        -  $     70,097,713
Gross profit           6,841,354          36,242,696            4,973,673            281,621                        -         48,339,344
Selling, general and            
  administrative expenses           5,125,669          17,246,437            1,523,049         1,044,941          4,249,282  $     29,189,378
Goodwill impairment           1,271,986                             -                        -             1,271,986
Operating income (loss)  $          443,699  $      18,996,259  $        3,450,624  $      (763,320)  $    (4,249,282)  $     17,877,980
             
Depreciation and amortization  $          707,534  $           526,474  $             80,927  $          36,225  $         220,263  $       1,571,423
             
Capital expenditures  $          838,033  $           699,235  $             15,947  $          43,693  $           38,985  $       1,635,893
             
    Transition JDL Austin    
  Suttle Networks Technologies Taylor Other Total
Nine months ended September 30, 2010:            
Sales  $     28,121,860  $      49,863,982  $        9,384,330  $     2,494,456  $                    -  $     89,864,628
Cost of sales         20,612,293          22,686,238            5,199,168         2,257,876                        -  $     50,755,575
Gross profit           7,509,567          27,177,744            4,185,162            236,580                        -         39,109,053
Selling, general and            
  administrative expenses           5,364,176          15,772,091            1,055,247            853,435          3,447,631  $     26,492,580
Operating income (loss)  $       2,145,391  $      11,405,653  $        3,129,915  $      (616,855)  $    (3,447,631)  $     12,616,473
             
Depreciation and amortization  $          623,479  $           456,335  $             88,517  $          29,679  $         220,055  $       1,418,065
             
Capital expenditures  $          501,425  $           473,015  $             16,947  $          35,354  $         164,145  $       1,190,886

Pensions
v4.2.117.0
Pensions
 9 Months Ended
Sep. 30, 2011
Pensions [Abstract]  
Pensions

NOTE 10 – PENSIONS

 

The Company's U.K. based subsidiary Austin Taylor maintains defined benefit pension plans that cover seven active employees. The Company does not provide any other post-retirement benefits to its employees. Components of net periodic benefit cost of the pension plans were:

 

Nine months Ended September 30

2011

2010

Service cost

35,000

27,000

Interest cost

196,000

194,000

Expected return on plan assets

(185,000)

(168,000)

$

46,000

$

53,000

Net Income Per Share
v4.2.117.0
Net Income Per Share
 9 Months Ended
Sep. 30, 2011
Net Income Per Share [Abstract]  
Net Income Per Share

NOTE 11 – NET INCOME PER SHARE

 

Basic net income per common share is based on the weighted average number of common shares outstanding during each year. Diluted net income per common share takes into effect the dilutive effect of potential common shares outstanding. The Company's only potential common shares outstanding are stock options and shares associated with the long-term incentive compensation plans, which resulted in a dilutive effect of 69,562 shares and 57,210 shares for the respective three and nine month periods ended September 30, 2011. The dilutive effect of stock options for the three and nine month periods ended September 30, 2010 was 16,369 shares and 24,670 shares, respectively. The Company calculates the dilutive effect of outstanding options using the treasury stock method. All options were included because the exercise price was greater than the average market price of common stock during the period and deferred stock awards totaling 78,943 shares were not included because of unmet performance conditions.

Fair Value Measurements
v4.2.117.0
Fair Value Measurements
 9 Months Ended
Sep. 30, 2011
Fair Value Measurements [Abstract]  
Fair Value Measurements

NOTE 12 – FAIR VALUE MEASUREMENTS


The accounting guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows:

 

Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.

 

Level 2 – Observable inputs such as quoted prices for similar instruments and quoted prices in markets that are not active, and inputs that are directly observable or can be corroborated by observable market data. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.

 

Level 3 – Significant inputs to pricing that have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation, such as the complex and subjective models and forecasts used to determine the fair value of financial instruments.

 

The Company's assets and liabilities that are measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, respectively, include money market funds within cash and cash equivalents of $1,074,000 and $9,624,000 classified as Level 1 within the hierarchy and certificate of deposits within investments of $23,238,000 and $26,287,000 classified as Level 2. The Company does not have any assets or liabilities classified as Level 3 within the hierarchy. There were no transfers between levels during the nine months ended September 30, 2011.

Subsequent Events
v4.2.117.0
Subsequent Events
 9 Months Ended
Sep. 30, 2011
Subsequent Events [Abstract]  
Subsequent Events

NOTE 13 – SUBSEQUENT EVENTS

 

On October 28, 2011, the Company entered into a new $10,000,000 line of credit agreement with Wells Fargo Bank.  Interest on borrowings on the credit line is at the LIBOR rate plus 1.1%. The credit agreement expires October 31, 2013 and is secured by assets of the Company.