Elecsys 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(X)  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended   January 31, 2013.

(   )  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from _____________ to ______________.

Commission File Number  0-22760

ELECSYS CORPORATION

       (Exact name of Registrant as Specified in its Charter)

Kansas	48-1099142
(State or other jurisdiction of	(I.R.S. Employer
Incorporation or organization)	Identification No.)
846 N. Mart-Way Court Olathe, Kansas	66061
(Address of principal executive offices)	(Zip Code)

(913) 647-0158

(Registrant's telephone number, including area code)

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

Yes [X]          No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted in its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]          No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

[ ] Large accelerated filer          [ ] Accelerated filer          [ ] Non-accelerated filer          [X] Smaller Reporting Company

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ]          No [X]

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  Common stock, $0.01 par value – 3,896,996 shares outstanding as of February 28, 2013.

Page 1

ELECSYS CORPORATION AND SUBSIDIARY

FORM 10-Q

Quarter Ended January 31, 2013

INDEX

		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	Consolidated Financial Statements
Condensed Consolidated Statements of Operations - Three and nine months ended January 31, 2013 and 2012 (Unaudited)		3
Condensed Consolidated Balance Sheets - January 31, 2013 (Unaudited) and April 30, 2012		4
Condensed Consolidated Statements of Stockholders’ Equity – Nine months ended January 31, 2013 (Unaudited) and the year ended April 30, 2012		5
Condensed Consolidated Statements of Cash Flows - Nine months ended January 31, 2013 and 2012 (Unaudited)		6
Notes to Condensed Consolidated Financial Statements (Unaudited)		7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	35
ITEM 4.	Controls and Procedures	35
PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings	36
ITEM 1A.	Risk Factors	36
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
ITEM 3.	Defaults Upon Senior Securities	37
ITEM 4.	Mine Safety Disclosure	37
ITEM 5.	Other Information	37
ITEM 6.	Exhibits	37
Signatures		38
Exhibit Index		39

Page 2

PART I – FINANCIAL INFORMATION

ITEM 1. Consolidated Financial Statements.

Elecsys Corporation and Subsidiary

Condensed Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

	Three Months Ended January 31,						Nine Months Ended January 31,
	2013			2012			2013			2012
Sales	$	7,458		$	5,218		$	17,853		$	17,024
Cost of products sold		4,655			3,228			11,250			10,933
Gross margin		2,803			1,990			6,603			6,091
Selling, general and administrative expenses:
Research and development expense		411			374			1,245			1,084
Selling and marketing expense		529			517			1,636			1,602
General and administrative expense		717			626			2,105			2,061
Total selling, general and administrative expenses		1,657			1,517			4,986			4,747
Operating income		1,146			473			1,617			1,344
Financial income (expense):
Interest expense		(15	)		(31	)		(51	)		(127	)
Other income, net		(2	)		--			(3	)		(1	)
		(17	)		(31	)		(54	)		(128	)
Net income before income tax expense		1,129			442			1,563			1,216
Income tax expense		413			180			595			462
Net income	$	716		$	262		$	968		$	754
Net income per share information:
Basic	$	0.18		$	0.07		$	0.25		$	0.20
Diluted	$	0.18		$	0.07		$	0.25		$	0.19
Weighted average common shares outstanding:
Basic		3,914			3,789			3,895			3,789
Diluted		3,925			3,906			3,904			3,919

See Notes to Condensed Consolidated Financial Statements.

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Elecsys Corporation and Subsidiary

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	January 31, 2013			April 30, 2012
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	24		$	136
Accounts receivable, less allowances of $30 and $165, respectively		3,406			2,631
Inventories, net		5,773			5,940
Prepaid expenses		151			61
Income tax refund claims receivable		--			13
Deferred taxes		650			752
Total current assets		10,004			9,533
Property and equipment:
Land		1,737			1,737
Building and improvements		3,395			3,395
Equipment		3,698			3,513
Total property and equipment, gross		8,830			8,645
Accumulated depreciation		(3,579	)		(3,350	)
Total property and equipment, net		5,251			5,295
Goodwill		1,942			1,942
Intangible assets, net		1,735			1,886
Other assets, net		48			51
Total assets	$	18,980		$	18,707
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,135		$	825
Accrued expenses		1,168			1,393
Income taxes payable		112			5
Current maturities of long-term debt		184			181
Total current liabilities		2,599			2,404
Deferred taxes		476			485
Long-term debt, less current maturities		2,665			3,554
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares authorized; issued and outstanding – none		--			--
Common stock, $.01 par value, 10,000,000 shares authorized; issued and outstanding –  3,900,410 at January 31, 2013 and 3,884,012 at April 30, 2012		39			39
Additional paid-in capital		11,314			11,166
Treasury shares, at cost; 33,502 shares		(140	)		--
Retained earnings		2,027			1,059
Total stockholders' equity		13,240			12,264
Total liabilities and stockholders' equity	$	18,980		$	18,707

See Notes to Condensed Consolidated Financial Statements.

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Elecsys Corporation and Subsidiary

Condensed Consolidated Statements of Stockholders' Equity

(In thousands)

	Common Stock (# of shares)			Common Stock		Additional Paid-In Capital		Treasury Stock			Retained Earnings (Accumulated Deficit)			Total Stockholders’ Equity
Balance at April 30, 2011		3,789		$	38	$	10,999	$	--		$	(160	)	$	10,877
Net income		--			--		--		--			1,219			1,219
Exercise of stock options		95			1		76		--			--			77
Share-based compensation expense		--			--		91		--			--			91
Balance at April 30, 2012		3,884		$	39	$	11,166	$	--		$	1,059		$	12,264
Net income		--			--		--		--			968			968
Exercise of stock options		47			--		59		--			--			59
Issue of restricted stock		3			--		--		--			--			--
Stock repurchases		(34	)		--		--		(140	)		--			(140	)
Share-based compensation expense		--			--		89		--			--			89
Balance at January 31, 2013 (unaudited)		3,900		$	39	$	11,314	$	(140	)	$	2,027		$	13,240

See Notes to Condensed Consolidated Financial Statements.

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Elecsys Corporation and Subsidiary

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine months ended January 31,
	2013			2012
Cash Flows from Operating Activities:
Net income	$	968		$	754
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation expense		89			69
Depreciation		258			272
Amortization		154			166
Provision for doubtful accounts		23			27
Loss on disposal of equipment		--			6
Deferred income taxes		93			(108	)
Changes in operating assets and liabilities:
Accounts receivable		(798	)		128
Inventories		167			(387	)
Income tax payable/receivable		120			(21	)
Accounts payable		310			9
Accrued expenses		(225	)		(176	)
Other		(90	)		(21	)
Net cash provided by operating activities		1,069			718
Cash Flows from Investing Activities:
Purchases of property and equipment		(214	)		(260	)
Net cash (used in) investing activities		(214	)		(260	)
Cash Flows from Financing Activities:
Principal payments on note payable to bank		(750	)		(750	)
Purchases of common stock for repurchase program		(140	)		--
Proceeds from the exercise of stock options		59			--
Principal payments on long-term debt		(136	)		(113	)
Net cash (used in) financing activities		(967	)		(863	)
Net (decrease) in cash and cash equivalents		(112	)		(405	)
Cash and cash equivalents at beginning of period		136			460
Cash and cash equivalents at end of period	$	24		$	55
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	$	53		$	138
Cash paid during the period for income taxes		382			577

See Notes to Condensed Consolidated Financial Statements.

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Elecsys Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements

January 31, 2013

(Unaudited)

1.  NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

Nature of Operations

Elecsys Corporation (“the Company”) provides innovative machine to machine (“M2M”) communication technology solutions, data acquisition and management systems, and custom electronic equipment for critical industrial applications worldwide. The Company’s primary markets include energy production and distribution, agriculture, safety and security systems, water management, and transportation.  The Company’s Proprietary products and services encompass rugged remote monitoring, industrial data communication, mobile computing, and radio frequency identification (“RFID”) technologies that are deployed wherever high quality and reliability are essential. The Company develops, manufactures, and supports proprietary technology and products for various markets under several premium brand names.  In addition to its Proprietary products, the Company designs and manufactures rugged and reliable custom electronic assemblies and integrated display modules for multiple original equipment manufacturers (“OEMs”) in a variety of industries worldwide.

The Company’s sales are made to customers within the United States and several international markets.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Elecsys International Corporation.  All significant intercompany balances and transactions have been eliminated in consolidation.

Comprehensive Income

The Company has no components of other comprehensive income, therefore comprehensive income equals net income.

Fair Value of Financial Instruments

The carrying amount of financial instruments, including cash, accounts receivable, accounts payable, and the current portion of long-term debt approximates fair value because of the short-term nature of these items.

The carrying value of the Company’s long-term debt approximates fair value as the Industrial Revenue Bonds include a variable interest rate component.  The Industrial Revenue Bonds interest rate was reset in September 2011.

Recent Accounting Pronouncements

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income, effective for interim periods and years beginning after December 15, 2011.  The issuance of ASU 2011-5 is intended to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The guidance in ASU 2011-5 supersedes the presentation options in ASC Topic 220 and facilitates convergence of U.S. generally accepted accounting principles and International Financial Reporting Standards by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity and requiring that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  The Company adopted this standard at the beginning of its 2013 fiscal year without any impact on its financial statements.

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In September 2011 the FASB issued ASC Topic 350, Intangibles – Goodwill and Other, which amends the existing standards related to annual and interim goodwill impairment tests.  Current guidance requires companies to test goodwill for impairment, at least annually, using a two-step process. The updated guidance provides companies with the option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under this option, companies are no longer required to calculate the fair value of a reporting unit unless they determine, based on that qualitative assessment, that it is more likely than not that the reporting unit’s fair value is less than its carrying amount.  The new guidance includes examples of the types of events and circumstances to consider in conducting the qualitative assessment. The revised standard is effective for annual and interim goodwill impairment test performed for fiscal years beginning after December 15, 2011.  However, early adoption is allowed and the Company elected to adopt this standard beginning with the annual goodwill impairment test in January 2012.  The revised standard did not have a material effect on the Company’s financial statements or results of operations.

Revenue Recognition

The Company derives revenue from the manufacture of production units of electronic assemblies, liquid crystal displays, and its Proprietary products including its remote monitoring equipment, RFID technology and solutions and its mobile computing products.  The Company also derives revenue from repairs and non-warranty services, engineering design services, remote monitoring services and maintenance contracts.  Production and repaired units are billed to the customer when they are shipped.  Remote monitoring services and maintenance contracts are billed and the revenue recognized at the end of the month the services are provided or maintenance periods are completed.  Customers that utilize the Company’s engineering design services are billed and revenue is recognized when the design services or tooling have been completed.  The Company requires its customers to provide a binding purchase order to verify the manufacturing services to be provided.  Typically, the Company does not have any post-shipment obligations, including customer acceptance requirements.  The Company does provide training and installation services to its customers and those services are billed and the revenue recognized at the end of the month the services are completed.  Revenue recognized is net of any sales taxes, tariffs, or duties remitted to any governmental authority.

Accounts Receivable

Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables, considering a customer’s financial condition and credit history, and considering current economic conditions. Receivables are written off when deemed uncollectible. Recoveries of receivables previously written off are recorded when received.  The majority of the customer accounts are considered past due after the invoice becomes older than the customer’s credit terms (30 days for the majority of customers).  Interest is not charged on past due accounts for the majority of the Company’s customers.

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Inventories

Inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or fair value.  The Company’s industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand, as well as other market considerations.  Provisions for estimated excess and obsolete inventory are based on quarterly reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from customers.  Inventories are reviewed in detail on a quarterly basis utilizing multiple annual time horizons ranging from 24-months to 60-months.  Individual part numbers that have not been used in each of the time horizons are examined by manufacturing personnel for obsolescence, excess and fair value.  Parts that are not identified for common use or are unique to a former customer or application are categorized as obsolete and are included in the provision for estimated excess and obsolete inventory.  If actual market conditions or customers’ product demands are less favorable than those projected, additional inventory write-downs may be required.

Property and Equipment

Property and equipment are recorded at cost.  Depreciation is computed using the straight-line method over the following estimated useful lives:

Description	Years
Building and improvements	39
Equipment	3-8

Goodwill

Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired.  The Company does not amortize goodwill, but rather reviews its carrying value for impairment annually (January 31) and whenever an impairment indicator is identified.  The goodwill impairment test involves a two-step approach.  The first step is to identify whether potential impairment of goodwill exists. If impairment of goodwill is determined to exist, the second step of the goodwill impairment test measures the amount of the impairment using a fair value-based approach.  No impairment indicators were identified as of January 31, 2013.

Intangible Assets

Intangible assets consist of patents, trademarks, copyrights, customer relationships and capitalized software.  Intangible assets are amortized over their estimated useful lives using the straight-line method.  The useful lives of the Company’s intangible assets range from 5 – 15 years.

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Impairment of Long-Lived Intangible Assets

Long-lived assets, including amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets.  If the sum of the expected future undiscounted cash flows is less than the carrying amount, the Company would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the long-lived assets and intangibles.

Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes, as measured by the enacted tax rates which will be in effect when these differences are expected to reverse.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.  In assessing the realizability of deferred income tax assets, the Company considers whether it is “more likely than not,” according to the criteria of ASC Topic 740, that some portion or all of the deferred income tax assets will be realized.  The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.  ASC Topic 740 requires that the Company recognize the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority.

Warranty Reserve

The Company has established a warranty reserve for rework, product warranties and customer refunds.  The Company provides a limited warranty for a period of one year from the date of receipt of products by customers and the Company offers extended warranties for additional purchase by its customers.  The standard warranties require the Company to repair or replace defective products at no cost to the customer or refund the customer’s purchase price.  The warranty reserve is based on historical experience and analysis of specific known and potential warranty issues.  The product warranty liability reflects management’s best estimate of probable liability under the product warranties.

Shipping and Handling Costs

Shipping and handling costs that are billed to our customers are recognized as revenues in the period that the product is shipped.  Shipping and handling costs that are incurred by the Company are recognized as cost of sales in the period that the product is shipped.

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Subsequent Events

The Company evaluates all subsequent events and transactions for potential recognition or disclosure in its financial statements.  There are no matters which require disclosure.

2.  BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Elecsys International Corporation.  All significant intercompany balances and transactions have been eliminated.  The condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three-month and nine-month periods ended January 31, 2013 are not necessarily indicative of the results that may be expected for the year ending April 30, 2013.

The balance sheet at April 30, 2012 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes included in the Company’ annual report on Form 10-K for the year ended April 30, 2012.

3.  INTANGIBLE ASSETS AND GOODWILL

The Company’s total intangible assets consist of the following (in thousands):

					January 31, 2013					April 30, 2012
Intangible Asset Description	Estimated Useful Lives				Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Patents, trademarks and copyrights		10	–	15	$	852	$	(388	)	$	852	$	(336	)
Customer relationships		5	–	15		1,040		(433	)		1,040		(386	)
Trade name		15				530		(191	)		530		(165	)
Technologies		13	–	15		475		(150	)		475		(124	)
					$	2,897	$	(1,162	)	$	2,897	$	(1,011	)

Amortization expense for the nine-month periods ended January 31, 2013 and 2012 was approximately $154,000 and $163,000 in each respective period.

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Estimated amortization expense for the next five fiscal years ending April 30 is as follows (in thousands):

Year	Amounts
2013 (remaining)	$	50
2014		202
2015		187
2016		166
2017		166

The carrying amount of the Company’s goodwill at January 31, 2013 and April 30, 2012 was approximately $1,942,000.  There were no changes in the carrying amount of goodwill for the three-month and nine-month periods ended January 31, 2013.

The Company has evaluated the performance related contingent consideration provisions of the asset purchase agreement for its MBBS, S.A. (“MBBS”) acquisition in fiscal year 2010.  As of January 31, 2013, the Company has determined that based on the terms of the agreement and current projections, no contingent consideration is expected to be due in the MBBS transaction.

4.  INVENTORY

Inventories are stated at the lower of cost or fair value, using the first-in, first-out (FIFO) method.  Inventories, net of reserves of approximately $668,000 and $677,000 for the periods ended January 31, 2013 and April 30, 2012, respectively, are summarized by major classification as follows (in thousands):

	January 31, 2013		April 30, 2012
Raw material	$	2,473	$	2,684
Work-in-process		998		707
Finished goods		2,302		2,549
	$	5,773	$	5,940

5.  STOCKHOLDERS’ EQUITY

Stock Repurchase Plan

On December 17, 2012, the Company announced a share repurchase program by which the Company planned to repurchase up to 10% of the Company’s outstanding common shares, or approximately 400,000 shares, from time to time at prevailing market prices through the open market or privately negotiated transactions.  The program has no expiration date and purchases are funded from available cash resources.

For accounting purposes, the common stock repurchased under the Repurchase Plan is recorded based upon the settlement date of the applicable trade.  Such repurchased shares are held in treasury and are presented using the cost method.

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For the nine-month period ended January 31, 2013, the Company repurchased 33,502 shares at a cost of approximately $140,000 (average cost of $4.17 per share).

Stock-Based Compensation

At January 31, 2013, the Company had two equity-based compensation plans from which stock-based compensation awards are granted to eligible employees and consultants of the Company.  These stock-based compensation plans include the: (i) 1991 Stock Option Plan (the “1991 Plan”) and (ii) 2010 Equity Incentive Plan (the “2010 Plan”).

According to the terms of the Company’s original 1991 stock option plan for which the Company originally reserved 675,000 shares of common stock, both incentive stock options and non-qualified stock options to purchase common stock of the Company may be granted to key employees, directors and consultants to the Company, at the discretion of the Board of Directors. Incentive stock options were not granted at prices that were less than the fair market value on the date of grant.  Non-qualified options may be granted at prices determined appropriate by the Board of Directors of the Company, but have not been granted at less than market value on the date of grant.  Generally, these options become exercisable and vest over one to five years and expire within 10 years of the date of grant.  The 1991 Plan also provides for accelerated vesting if there is a change in control of the Company.  As of January 31, 2013, there were options remaining outstanding to acquire 126,750 shares of common stock under the 1991 Plan.

The 2010 Plan is an omnibus plan that allows for equity awards including stock options (including incentive stock options and non-qualified options), stock appreciation rights, restricted shares, restricted share units, performance shares, performance units, and other equity-based awards payable in cash or stock to officers, directors, key employees and other service providers.  Under the 2010 Plan, the Company has the ability to grant up to 380,000 shares of common stock.  The number of shares granted to eligible participants will be determined by the Board of Directors on an annual basis based on Company and individual performance and a Compensation Committee analysis.  The awards under the 2010 Plan will include vesting provisions that will require participants (other than non-employee directors) to remain at the Company for a defined period of time.  Options and stock appreciation rights will expire 10 years after the grant date.  The 2010 Plan also includes a change of control provision which allows for accelerated vesting if there is a change of control of the Company.  As of January 31, 2013, there were options outstanding to acquire 109,000 shares of common stock and 11,007 shares of common stock awards granted under the 2010 Plan and still subject to restriction.

 The Company accounts for its stock-based compensation plan in accordance with ASC Topic 718, Compensation-Stock Compensation.  ASC Topic 718 requires the measurement and recognition of compensation expense for all stock-based payment awards based on estimated fair value.  It further requires companies to estimate the fair value of stock-based payment awards on the date of the grant using an option pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model, which uses the following weighted-average assumptions for the nine-month periods ended January 31, 2013 and 2012.

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	Nine Months Ended January 31, 2013				Nine Months Ended January 31, 2012
Risk-free interest rate		2.97%				2.97%
Expected life, in years		6				6
Expected volatility		65.52	–	80.48%		73.43	–	73.61%
Dividend yield		0.0%				0.0%
Forfeiture rate		9.20%				9.60%

The Company uses historical data to estimate option exercises and employee terminations used in the model.  Expected volatility is based on monthly historical fluctuations of the Company’s common stock using the closing market value for the number of months of the expected term immediately preceding the grant.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant for a bond with a similar term.

The Company receives a tax deduction for certain stock option exercises and disqualifying stock dispositions generally for the excess of the price at which the options are sold over the exercise prices of the options.  In accordance with ASC Topic 718, the Company reports any tax benefit from the exercise of stock options as financing cash flows.  For the nine-month periods ended January 31, 2013 and 2012, there were no exercises of stock options which triggered tax benefits.

At January 31, 2013, there was approximately $206,000 of unrecognized compensation cost related to share-based payments that is expected to be recognized over a weighted-average period of 1.78 years.

The following tables represent equity award activity for the nine-month period ended January 31, 2013:

Stock Options	Number of Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contract Life
Outstanding options at April 30, 2012		234,250	$	3.78		5.32	Years
Granted		49,000	$	3.74		9.50	Years
Exercised		47,500	$	1.25
Forfeited		--		--
Outstanding options at January 31, 2013		235,750	$	4.28		6.55	Years
Outstanding exercisable at January 31, 2013		138,583	$	4.26		4.91	Years

Page 14

Restricted Stock	Number of Shares		Weighted- Average Price		Weighted- Average Remaining Contract Life
Outstanding awards at April 30, 2012		7,200	$	5.01		9.00	Years
Granted		6,207	$	4.35		9.25	Years
Issued		2,400	$	5.01
Forfeited		--		--
Outstanding awards at January 31, 2013		11,007	$	4.64		9.14	Years
Outstanding vested at January 31, 2013		--	$	--

Shares available for future equity awards to employees, officers, directors and consultants of the Company under the existing 1991 Plan and 2010 Plan were 26,750 and 257,593, respectively, at January 31, 2013.  At January 31, 2013 the aggregate intrinsic value of options and restricted stock outstanding was approximately $184,000, and the aggregate intrinsic value of exercisable options was approximately $135,000.  The Company recognized share-based compensation expense of $89,000 for the nine-month period ended January 31, 2013 and $69,000 for the nine-month period ended January 31, 2012.  The weighted-average fair value of the options and restricted stock granted in the nine-month period ended January 31, 2012 was $2.67 per stock option and $4.35 per restricted share.

The following table summarizes information about equity awards outstanding at January 31, 2013:

			Options Outstanding						Options Exercisable
Range of Exercise Prices			Number Outstanding at January 31, 2013		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Number Exercisable at  January 31, 2013		Weighted- Average Exercise Price
$3.01	-	$4.00		135,000	5.38	years	$	3.61		102,833	$	3.72
$4.01	-	$5.00		25,000	9.30	years	$	4.35		--		--
$5.01	-	$6.00		65,000	8.06	years	$	5.17		25,000	$	5.26
$6.01	-	$7.00		--	--			--		--		--
$7.01	-	$8.00		10,750	5.61	years	$	7.05		10,750	$	7.05
Total				235,750	6.55	years	$	4.28		138,583	$	4.26

Page 15

6.  NET INCOME PER SHARE

The following table presents the calculation of basic and diluted income per share (in thousands):

	Three Months Ended January 31,				Nine Months Ended January 31,
	2013		2012		2013		2012
Numerator:
Net income	$	716	$	262	$	968	$	754
Denominator:
Weighted average common shares Outstanding – basic		3,914		3,789		3,895		3,789
Effect of dilutive options outstanding		11		117		9		130
Weighted average common shares outstanding – diluted		3,925		3,906		3,904		3,919

Options to purchase 223,750 and 188,417 shares of common stock as of the three-month periods ended January 31, 2013 and 2012, respectively, were anti-dilutive and therefore were not included in the computation of diluted earnings per share.  For the nine-month periods ended January 31, 2013 and 2012, options to purchase 201,750 and 75,750 shares, respectively, were anti-dilutive and were not included in the computation of diluted earnings per share.

7.  PLEDGED ASSETS, NOTES PAYABLE AND LONG-TERM DEBT

As of January 31, 2013, the Company had two credit agreements including an operating line of credit and Industrial Revenue Bonds that are secured by its production and headquarters facility in Olathe, Kansas.

The Company’s $6,000,000 operating line of credit provides the Company and its wholly-owned subsidiary with short-term financing for their working capital requirements. The line of credit’s borrowing capacity is calculated as a specified percentage of accounts receivable and inventory on a monthly basis and was amended on October 26, 2012 to extend the expiration date of the line of credit to October 30, 2014 and remove the interest rate floor.  The total amount of borrowing base for the line of credit as of January 31, 2013 was approximately $5,117,000, all of which was available.  It is secured by accounts receivable and inventory and accrues interest at a performance-based rate that is based on the prime rate (3.25% at January 31, 2013) plus/minus 0.5%.  The interest rate actually assessed is determined by the Company’s debt-to-tangible net worth ratio and was 2.75% on January 31, 2013.  The previous loan agreement contained an interest rate floor of 3.5%.  The loan agreement has various covenants, including a financial covenant pertaining to the maintenance of total tangible net worth and a required debt service coverage ratio.  The borrowings outstanding on the line of credit are presented on the balance sheet as long-term in accordance with the terms of the line of credit.

Page 16

The following table is a summary of the Company’s long-term debt and related current maturities (in thousands):

	January 31, 2013		April 30, 2012
Industrial Revenue Bonds, Series 2006A, 5-year adjustable interest rate based on the yield on 5-year United States Treasury Notes, plus .45% (1.89% as of January 31, 2013), due in monthly principal and interest payments beginning October 1, 2006 through maturity  on September 1, 2026, secured by real estate.  Effective September 1, 2011, the 5-year adjustable interest rate was reset to 1.89% for the next five years.	$	2,849	$	2,985
Operating line of credit, $6,000,000 limit on borrowing capacity, prime rate (3.25% at October 31, 2012) plus/minus 0.5% performance based interest, due in full on October 30, 2014, secured by accounts receivable and inventory.  The interest rate as of January 31, 2013 was 2.75%		--		750
		2,849		3,735
Less current maturities		184		181
Total long-term debt	$	2,665	$	3,554

The approximate aggregate amount of principal to be paid on the long-term debt and line of credit during each of the next five fiscal years ending April 30 is as follows (in thousands):

Year	Amount
2013 (remaining)	$	46
2014		185
2015		188
2016		192
2017		196
Thereafter		2,042
	$	2,849

Page 17

8.  SEGMENT REPORTING

The Company operates and measures the sales and gross margins of two primary business segments, Custom Electronic Manufacturing Services (“EMS”) and Proprietary products (“Proprietary”).   The EMS business segment consists primarily of custom electronic assemblies, engineering services, custom liquid crystal displays and other interface technologies. The Proprietary business segment is made up of remote monitoring hardware and messaging services, ultra-rugged handheld computers, peripherals and maintenance contract revenues, and RFID solutions.  The following table (in thousands) presents segment revenues and gross margins which the Company evaluates in determining overall operating performance and the allocation of resources.  Other segment information such as components of the Statement of Operations below the gross margin total and assets or other balance sheet information are not presented.  As the Company’s operations of the two segments are so intertwined, the Company’s chief operating decision maker (Elecsys International Corporation’s President) does not review that financial information at a segment reporting level and that information is also not readily available.

	Three Months Ended January 31, 2013
	EMS		Proprietary		Total
Total sales	$	4,424	$	3,034	$	7,458
Segment gross margin	$	1,226	$	1,577	$	2,803

	Three Months Ended January 31, 2012
	EMS		Proprietary		Total
Total sales	$	2,665	$	2,553	$	5,218
Segment gross margin	$	723	$	1,267	$	1,990

	Nine Months Ended January 31, 2013
	EMS		Proprietary		Total
Total sales	$	9,968	$	7,885	$	17,853
Segment gross margin	$	2,574	$	4,029	$	6,603
Goodwill	$	--	$	1,942	$	1,942

	Nine Months Ended January 31, 2012
	EMS		Proprietary		Total
Total sales	$	9,748	$	7,276	$	17,024
Segment gross margin	$	2,346	$	3,745	$	6,091
Goodwill	$	--	$	1,942	$	1,942

Page 18

The following table reconciles total revenues to the products and services offered by the Company (in thousands).

	Three Months Ended January 31,				Nine Months Ended January 31,
	2013		2012		2013		2012
Products and services:
Electronic manufacturing	$	4,382	$	2,614	$	9,800	$	9,595
Remote monitoring solutions		1,357		1,527		4,208		4,786
Industrial data communications		113		355		624		628
Mobile data acquisition		1,484		570		2,765		1,543
Other services:
EMS related services		42		51		168		153
Proprietary product related services		80		101		287		319
Total sales	$	7,458	$	5,218	$	17,853	$	17,024

9.  WARRANTY

The Company provides a limited warranty for a period of one year from the date of a customer’s receipt of its products, or one year from the installation date for some of its products, and will also provide an extended warranty for additional purchase price to the customer.  The Company’s standard warranties require the Company to repair or replace defective products at no cost to the customer or refund the customer’s purchase price.  The Company’s product warranty liability reflects management’s best estimate of probable liability under product warranties.  Management determines the liability based on known product failures (if any), historical experience, and other currently available evidence.

The following table presents changes in the Company’s warranty liability, which is included in accrued expenses on the balance sheets (in thousands):

	Nine Months Ended January 31,
	2013			2012
Warranty reserve balance at beginning of period	$	163		$	165
Expense accrued, including adjustments		(3	)		147
Warranty costs incurred		(62	)		(125	)
Warranty reserve balance at end of period	$	98		$	187

Page 19

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

Elecsys Corporation provides innovative machine to machine (M2M) communication technology solutions, data acquisition and management systems, and custom electronic equipment for critical industrial applications worldwide. Our primary markets include energy production and distribution, agriculture, transportation, safety and security systems, and water management.  Our Proprietary products and services encompass remote monitoring, industrial data communication, and mobile data acquisition technologies that are deployed wherever high quality and reliability are essential. We develop, manufacture, and support proprietary technology and products for various markets under several premium brand names.  In addition to our Proprietary products, we design and manufacture rugged and reliable custom electronic assemblies and integrated display modules for multiple original equipment manufacturers (OEMs) in a variety of industries worldwide.

On October 26, 2012, the Company amended the expiration date of its operating line of credit to October 30, 2014 and removed the interest rate floor.   The $6,000,000 line of credit provides the Company with short-term financing for working capital requirements and is secured by accounts receivable and inventory.  The Company’s borrowing capacity under this line is calculated as a specified percentage of accounts receivable and inventory and totaled approximately $5,117,000 as of January 31, 2013. The line of credit accrues interest at a performance-based rate that is based on the prime rate (3.25% at January 31, 2013) plus/minus 0.5%.  The interest rate is determined by the Company’s debt-to-tangible net worth ratio and was 2.75% on January 31, 2013 which was the lowest rate allowed under the terms of the operating line of credit.  The previous loan agreement contained an interest rate floor of 3.5%.  The loan agreement has various covenants, including a financial covenant pertaining to the maintenance of total tangible net worth and a required debt service coverage ratio.  There were no outstanding borrowings on the line of credit as of January 31, 2013.

On December 17, 2012, the Company announced a share repurchase program by which the Company planned to repurchase up to 10% of the Company’s outstanding common shares, or approximately 400,000 shares, from time to time at prevailing market prices through the open market or privately negotiated transactions. ��The program has no expiration date and purchases are funded from available cash resources.  For the nine-month period ended January 31, 2013, the Company repurchased 33,502 shares at a cost of approximately $140,000 (average cost of $4.17 per share).

Page 20

Results of Operations

Three Months Ended January 31, 2013 Compared With Three Months Ended January 31, 2012.

The following table sets forth, for the periods presented, certain statements of operations data of the Company:

	Three Months Ended
	(In thousands, except per share data)
	January 31, 2013					January 31, 2012
Sales		7,458		100.0	%		5,218		100.0	%
Cost of products sold		4,655		62.4	%		3,228		61.9	%
Gross margin		2,803		37.6	%		1,990		38.1	%
Selling, general and administrative expenses		1,657		22.2	%		1,517		29.1	%
Operating income		1,146		15.4	%		473		9.0	%
Financial expense		(17	)	(0.2	%)		(31	)	(0.5	%)
Income before income tax expense		1,129		15.1	%		442		8.5	%
Income tax expense		413		5.5	%		180		3.5	%
Net income	$	716		9.6	%	$	262		5.0	%
Net income per share – basic	$	0.18				$	0.07
Net income per share – diluted	$	0.18				$	0.07

Sales for the three months ended January 31, 2013 were approximately $7,458,000, which was an increase of $2,240,000, or 42.9%, from $5,218,000 in sales for the three months ended January 31, 2012.

	Three Months Ended
	(In thousands)
	January 31, 2013				January 31, 2012
EMS sales	$	4,424	59.3	%	$	2,665	51.1	%
Proprietary product sales		3,034	40.7	%		2,553	48.9	%
Total Sales		7,458	100.0	%		5,218	100.0	%

Proprietary products.  Sales of our Proprietary products and services were $3,034,000 for the three-month period ended January 31, 2013, which was a $481,000, or 18.8%, increase from sales of $2,553,000 in the prior year period.

Sales of our wireless remote monitoring solutions were approximately $1,357,000 for the three-month period ended January 31, 2013, which was a decrease of $170,000, or 11.1%, from $1,527,000 during the three-month period ended January 31, 2012.  This decrease in sales was the result of fewer shipments to current customers.  We continue to focus on sales, marketing, and new product development of wireless remote monitoring equipment.  Recurring data management services revenue continues to grow as a function of the growing population of monitoring units deployed in the field.  Overall, data management services revenue totaled approximately $255,000, an increase of $40,000, or 18.6%, from data management services revenue of $215,000 reported in the comparable period of the prior fiscal year.  We anticipate that over the next few quarters, revenues from our wireless remote monitoring solutions will increase from the current period as a result of new products and our expansion into new industrial markets.  Although some of our targeted markets and potential new customers may remain cautious regarding their capital investments, we expect that our continued investment in sales, marketing, and new product development will produce additional revenues over the next few fiscal quarters and into the next fiscal year.

Page 21

Sales of our industrial data communication solutions were approximately $113,000 for the three-month period ended January 31, 2013, which was a $242,000, or 68.2%, decrease from total sales of $355,000 for the three-month period ended January 31, 2012.  The decrease is the direct result of lower equipment sales during the period as compared to the comparable period of the prior year.  We continue to increase our sales and marketing efforts to the existing customer base and have are actively pursuing new applications and customers for the Director series products.  With this additional focus and effort, we expect revenues from our industrial communication products to grow over the next few quarters as we invest in new product development and continue our marketing efforts.

Sales of our mobile data acquisition solutions, including our Radix handheld computer hardware, peripherals, maintenance contract revenues, and RFID solutions, were approximately $1,484,000 for the three-month period ended January 31, 2013. Total sales increased approximately $914,000, or 160.4%, as compared to the prior year period reported revenues of approximately $570,000.  The increase in revenues was primarily driven by an increase in shipments of the Radix FW950 and peripherals to a large domestic customer and continued sales to international partners.  The increase in Radix sales was partially offset by decreases in shipments of RFID tags.  We believe that improving economic conditions in specific markets and increased sales of Radix products will provide an overall increase in sales in this area over the next few quarters.  Recurring maintenance contract revenues decreased for the three-month period ended January 31, 2013 approximately $11,000, or 5.5%, as a result of customers not electing to purchase maintenance plans after their initial warranty periods expired.

EMS.  Sales for the EMS business segment were approximately $4,424,000, an increase of $1,759,000, or 66.0%, from $2,665,000 in the prior year period.  The increase in EMS sales was the result of increased orders from our existing customers due to growth in their businesses.  We continue our focus on increasing EMS gross margins by targeting specific markets that will likely benefit from our proprietary technologies.  We have increased our investment in EMS sales and marketing and expect these activities will generate moderate growth in EMS sales and margins in the longer term.  The prolonged uncertainty regarding future economic conditions could likely have an impact in the near term and likely could affect current scheduled orders as well as future bookings.  This could adversely influence EMS sales over the next few quarters.

Page 22

Total consolidated backlog at January 31, 2013 was approximately $9,576,000, an increase of $1,671,000, or 21.1%, from a total backlog of $7,905,000 on April 30, 2012 and a decrease of approximately $377,000, or 3.8%, from a total backlog of $9,953,000 on January 31, 2012.  EMS orders usually specify several deliveries scheduled over a defined and extended period of time.  Typically, orders for our Proprietary products are completed and shipped to the customer soon after orders are received.  Certain larger Proprietary product orders may have specific deliveries scheduled over a longer period of time.  We anticipate that the amount of our total backlog relative to our revenues will fluctuate as our mix of Proprietary products and EMS sales varies.

The following table presents the backlog by business segment for the periods ended January 31, 2013, April 30, 2012, and January 31, 2012 (in thousands).

	January 31, 2013		April 30, 2012		January 31, 2012
EMS	$	8,988	$	7,750	$	9,438
Proprietary products		588		155		515
Total backlog	$	9,576	$	7,905	$	9,953

Gross margin for the three-month period ended January 31, 2013 was 37.6% of sales, or $2,803,000, compared to 38.1% of sales, or $1,990,000, for the three-month period ended January 31, 2012.  The $813,000 increase of gross margin dollars was the direct result of the increase in overall sales volume led by the increase in EMS sales.  The slight decrease in overall gross margin percentage was due to a lower percentage of the higher margin proprietary product revenues in the current period.

	Three Months Ended
	(In thousands)
	January 31, 2013				January 31, 2012
Gross margin – EMS	$	1,226	27.7	%	$	723	27.1	%
Gross margin – Proprietary products		1,577	52.0	%		1,267	49.6	%
Total gross margin	$	2,803	37.6	%	$	1,990	38.1	%

Gross margin for the Proprietary products business segment was approximately 52.0% of sales, or $1,577,000, for the three-month period ended January 31, 2013 as compared to 49.6% of sales, or $1,267,000, for the three-month period ended January 31, 2012.  The increase in gross margin for the Proprietary products was mainly due to the overall increase in Proprietary product sales from the previous year period and the specific product mix.

The gross margin for the EMS business segment was $1,226,000, or 27.7% of sales, for the three-month period ended January 31, 2013 compared to $723,000, or 27.1% of sales, for the prior year period.  The increase of EMS gross margin dollars and percentage resulted from an increase in sales volumes during the period coupled with our continued focus on improving EMS gross margins.

We expect that consolidated gross margins over the next few quarters will continue in the current range of 34% to 39%.  This expectation is based on our forecasted sales volume and the mix of Proprietary products and EMS products and services which impacts our manufacturing efficiency and gross margins.  We continue to work to increase our EMS margins through productivity improvements and new OEM production opportunities and also anticipate increases in Proprietary product revenues as a percentage of our overall total sales volume.

Page 23

Selling, general and administrative (“SG&A”) expenses totaled approximately $1,657,000 for the three-month period ended January 31, 2013.  This was an increase of $140,000 as compared to the total SG&A expenses of $1,517,000 for the three-month period ended January 31, 2012.  SG&A expenses were 22.2% of sales for the current fiscal quarter of 2013 as compared to 29.1% of sales for the comparable period for fiscal 2012.

	Three Months Ended
	(In thousands)
	January 31, 2013				January 31, 2012
Research & development expenses	$	411	5.5	%	$	374	7.2	%
Selling & marketing expenses		529	7.1	%		517	9.9	%
General & administrative expenses		717	9.6	%		626	12.0	%
Total selling, general and administrative expenses	$	1,657	22.2	%	$	1,517	29.1	%

Research and development expenses increased $37,000, to $411,000, during the fiscal quarter as compared to the prior year period. This increase was primarily driven by higher engineering personnel expenses of approximately $77,000 as a result of our increased investment in new product design slightly offset by lower product support costs as compared to the previous year period.

Selling and marketing expenses were $529,000 for the three-month period ended January 31, 2013 and $517,000 for the three-month period ended January 31, 2012.  The increase of $12,000 was primarily the result of a $19,000 increase in advertising and marketing costs and a small decrease in travel and personnel costs.

General and administrative expenses increased approximately $91,000 from the comparable period of the prior year.  The increase was due to growth of personnel and personnel related expenses of $38,000, as well as increases in professional fees and general office costs.

Total SG&A expenses over the next few quarters are expected to increase slightly over the previous periods as a result of our continued investments in personnel, new product development, systems and capabilities.

Page 24

Operating income for the three-month period ended January 31, 2013 was approximately $1,146,000, an increase of $673,000 from operating income of $473,000 reported for the three-month period ended January 31, 2012.

Financial expense, including interest, was $17,000 and $31,000 for the three-month periods ended January 31, 2013 and 2012, respectively.  The decrease of $14,000 resulted from lower total outstanding borrowings compared to the previous fiscal year period in addition to the reduction of the interest rate on the Industrial Revenue Bonds in early September 2011.  During the three-month period ended January 31, 2013, there were no additional net borrowings on the operating line of credit.  As of January 31, 2013, there was $2,849,000 outstanding in current and long-term borrowings (Industrial Revenue Bonds) compared to $3,031,000 at January 31, 2012.  We may utilize the operating line of credit in the near term to fund increases in production activity when necessary but seek to minimize our interest expense when possible.

Income tax expense for the three-month period ended January 31, 2013 was approximately $413,000 compared to income tax expense of $180,000 for the three-month period ended January 31, 2012.  The effective income tax rate was 36.6% and 40.7% for the three-month periods ended January 31, 2013 and 2012, respectively.  The decrease in the effective tax rate was due to the recognition of certain income tax adjustments during the current period.

As a combined result of the above factors, our net income was $716,000, or $0.18 per diluted share, for the three-month period ended January 31, 2013 as compared to net income of $262,000, or $0.07 per diluted share, reported for the three-month period ended January 31, 2012.

Page 25

Nine Months Ended January 31, 2013 Compared With Nine Months Ended January 31, 2012.

The following table sets forth, for the periods presented, certain statements of operations data of the Company:

	Nine Months Ended
	(In thousands, except per share data)
	January 31, 2013					January 31, 2012
Sales		17,853		100.0	%		17,024		100.0	%
Cost of products sold		11,250		63.0	%		10,933		64,2	%
Gross margin		6,603		37.0	%		6,091		35.8	%
Selling, general and administrative expenses		4,986		27.9	%		4,747		27.9	%
Operating income		1,617		9.1	%		1,344		7.9	%
Financial expense		(54	)	(0.3	%)		(128	)	(0.8	%)
Income before income taxes		1,563		8.7	%		1,216		7.1	%
Income tax expense		595		3.3	%		462		2.7	%
Net income	$	968		5.4	%	$	754		4.4	%
Net income per share – basic	$	0.25				$	0.20
Net income per share – diluted	$	0.25				$	0.19

Sales for the nine months ended January 31, 2013 were approximately $17,853,000, an increase of $829,000, or 4.9%, from $17,024,000 for the comparable period of fiscal 2012.

	Nine Months Ended
	(In thousands)
	January 31, 2013				January 31, 2012
EMS sales	$	9,968	55.8	%	$	9,748	57.3	%
Proprietary product sales		7,885	44.2	%		7,276	42.7	%
Total Sales		17,853	100.0	%		17,024	100.0	%

Proprietary products.  Sales of our Proprietary products and services were $7,885,000 for the nine-month period ended January 31, 2013, which was a $609,000, or 8.4%, increase from sales of $7,276,000 in the prior year period.

Sales of our wireless remote monitoring solutions were approximately $4,208,000 for the nine-month period ended January 31, 2013, which was a decrease of $578,000, or 12.1%, from $4,786,000 during the nine-month period ended January 31, 2012.  The overall decrease in sales was driven by a reduction in customer orders received and shipped during the year to date period.  We continue to focus on sales, marketing, and new product development of wireless remote monitoring equipment.  Data management services revenue continues to grow as a function of the growing population of monitoring units deployed in the field.  Overall, recurring data management services revenue totaled approximately $737,000, an increase of $128,000, or 21.0%, from data management services revenue of $609,000 reported in the comparable period of the prior fiscal year.  We anticipate that over the next few quarters, revenues from our wireless remote monitoring solutions will continue to grow steadily from the current period as a result of new products and our expansion into new industrial markets.  Although some of our targeted markets and potential new customers remain cautious regarding their capital investments, we expect that our continued investment in both sales and marketing and new product development will produce additional revenues over the next few fiscal quarters and into the next fiscal year.

Page 26

Sales of our industrial data communication solutions were approximately $624,000 for the nine-month period ended January 31, 2013, which was a slight $4,000, or 0.6%, decrease over the total sales of $628,000 for the nine-month period ended January 31, 2012.  We have increased our sales and marketing efforts to the existing customer base and are actively pursuing new customers and applications for the Director series products.  With this additional focus and effort, we expect revenues from our industrial communication products to grow over the next few quarters as we invest in new product development and continue our marketing efforts.

Sales of our mobile data acquisition solutions, including our Radix handheld computer hardware, peripherals, maintenance contract revenues, and RFID solutions, were approximately $2,765,000 for the nine-month period ended January 31, 2013. Total sales increased approximately $1,222,000, or 79.2%, as compared to the prior year period reported revenues of approximately $1,543,000.  The increase in revenues was primarily driven by an increase in shipments of the Radix FW950 and peripherals to our international partners combined with some significant domestic projects.  We believe that improving economic conditions in specific markets and increased sales of Radix products will provide an overall increase in sales over the next few quarters.  Recurring maintenance contract revenues posted a decrease for the nine-month period ended January 31, 2013 of approximately $57,000, or 8.8%, as a result of customers not electing to purchase maintenance plans after their initial warranty periods expired

EMS.  Sales for the EMS business segment were approximately $9,968,000, an increase of $220,000, or 2.3%, from $9,748,000 in the prior year period.  The increase in EMS sales was the result of increased orders from our existing customers due to growth in their businesses.  We continue our focus on increasing EMS gross margins by targeting specific markets that are likely to benefit from our proprietary technologies.  We have increased our investment in EMS sales and marketing and expect these activities will lead to moderate growth in EMS sales and margins in the longer term.  The prolonged uncertainty regarding future economic conditions could likely have an impact in the near term and likely could affect current scheduled orders as well as future bookings.  These could adversely influence EMS sales over the next few quarters.

Page 27

Gross margin for the nine-month period ended January 31, 2013 was 37.0% of sales, or $6,603,000, compared to 35.8% of sales, or $6,091,000, for the nine-month period ended January 31, 2012.  The increase of gross margin dollars and gross margin percentage was the direct result of higher overall sales volumes and a favorable product mix during the period.

	Nine Months Ended
	(In thousands)
	January 31, 2013				January 31, 2012
Gross margin – EMS	$	2,574	25.8	%	$	2,346	24.1	%
Gross margin – Proprietary products		4,029	51.1	%		3,745	51.5	%
Total gross margin	$	6,603	37.0	%	$	6,091	35.6	%

Gross margin for the Proprietary products business segment was approximately 51.1% of sales, or $4,029,000, for the nine-month period ended January 31, 2013 as compared to 51.5% of sales, or $3,745,000, for the nine-month period ended January 31, 2012.  The increase in gross margin dollars for the Proprietary products was mainly due to the increase in Proprietary product sales volumes.  The slight decrease in gross margin percentage was the impact of the specific mix of Proprietary product sales during the nine-month period ended January 31, 2013 versus the nine-month period ended January 31, 2012.

The gross margin for the EMS business segment was $2,574,000, or 25.8% of sales, compared to $2,346,000, or 24.1% of sales, for the prior year period.  The increase of EMS gross margin dollars and percentage resulted from the increase in sales volumes during the period as well as our continued focus on improving EMS gross margins and the elimination of less profitable accounts.

We expect that consolidated gross margins over the next few quarters will likely remain in the range of 34% to 39%.  This expectation is based on our forecasted sales volume and the sales mix of Proprietary products and EMS products and services which impacts our manufacturing efficiency and gross margins.  We continue to work to increase our EMS margins through productivity improvements and new OEM production opportunities and also anticipate increases in Proprietary product revenues as a percentage of our overall total sales volume.

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Selling, general and administrative (“SG&A”) expenses totaled approximately $4,986,000 for the nine-month period ended January 31, 2013.  This was an increase of $239,000, or 5.0%, from the total SG&A expenses of $4,747,000 for the nine-month period ended January 31, 2012.  SG&A expenses were 27.9% of sales for the nine-month periods ended January 31, 2013 and 2012.

	Nine Months Ended
	(In thousands)
	January 31, 2013				January 31, 2012
Research & development expenses	$	1,245	7.0	%	$	1,084	6.4	%
Selling & marketing expenses		1,636	9.2	%		1,602	9.4	%
General & administrative expenses		2,105	11.8	%		2,061	12.1	%
Total selling, general and administrative expenses	$	4,986	27.9	%	$	4,747	27.9	%

Research and development expenses increased $161,000, to $1,245,000, during the fiscal year-to-date period as compared to the prior year-to-date period. This increase was primarily driven by higher engineering personnel expenses of approximately $129,000 as a result of our increased investment in new product design and an increase of $69,000 in other product development costs.  These increases were somewhat offset by lower professional design services of $26,000 and a $20,000 decrease in recruiting expenses.

Selling and marketing expenses were $1,636,000 for the nine-month period ended January 31, 2013 and $1,602,000 for the nine-month period ended January 31, 2012.  The increase of $34,000 was primarily the result of an increase in travel costs of $32,000 along with minor changes in personnel costs, advertising and promotion expenses, and commissions.  

General and administrative expenses increased slightly by approximately $44,000, or 2.1%, from the comparable period of the prior year.  The increase was due to increases in personnel and personnel related expenses of approximately $49,000 marginally offset by decreases in travel costs, general office expenses, and professional fees.

Total SG&A expenses over the next few quarters are expected to increase slightly over the previous periods as a result of our continued investments in personnel, new product development, systems and capabilities.

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Operating income for the nine-month period ended January 31, 2013 was approximately $1,617,000, an increase of $273,000 from operating income of $1,344,000 reported for the nine-month period ended January 31, 2012.

Financial expense, including interest, was $54,000 and $128,000 for the nine-month periods ended January 31, 2013 and 2012, respectively.  The decrease of $74,000 resulted from lower total outstanding borrowings compared to the previous fiscal year period in addition to the reduction of the interest rate on the Industrial Revenue Bonds in early September 2011.  During the nine-month period ended January 31, 2013, there were no additional net borrowings on the operating line of credit and the Company made payments of $750,000 that eliminated the outstanding balance.  As of January 31, 2013, there was also $2,849,000 outstanding in current and long-term borrowings (Industrial Revenue Bonds) compared to $3,031,000 at January 31, 2012.  We may utilize the operating line of credit in the near term to fund increases in production activity when necessary but seek to minimize our interest expense when possible.

Income tax expense for the nine-month period ended January 31, 2013 was approximately $595,000.  For the nine-month period ended January 31, 2012, income tax expense was approximately $462,000.  The increase in income tax expense of $133,000 was the result of higher income during the current year-to-date period.  The effective income tax rate was 38.1% and 38.0% for the nine-month periods ended January 31, 2013 and 2012, respectively.  The minor change in the effective tax rate was due to the recognition of certain income tax adjustments and the benefit derived from the domestic manufacturing deduction.

As a combined result of the above factors, our net income was $968,000, or $0.25 per diluted share, for the nine-month period ended January 31, 2013 as compared to net income of $754,000, or $0.19 per diluted share, reported for the nine-month period ended January 31, 2012.

Liquidity and Capital Resources

Cash and cash equivalents decreased $112,000 to $24,000 as of January 31, 2013 compared to $136,000 at April 30, 2012.  This decrease was primarily the result of the cash generated from operating activities including increases in accounts payable and accounts receivable and reductions in inventory and accrued expenses.  The cash generated from operating activities was offset by purchases of equipment and cash used in financing activities including debt payments and purchases of common stock through our stock repurchase program.

Operating activities.  Our consolidated working capital increased approximately $278,000 during the nine-month period ended January 31, 2013.  The increase was primarily due to an increase in current assets, primarily accounts receivable, offset slightly by an increase in current liabilities.  Cash generated from operating activities was used in the reduction of debt during the period, purchases of equipment, and repurchases of common stock.  Operating cash receipts totaled approximately $17,078,000 and $17,179,000 during the nine-month periods ended January 31, 2013 and 2012, respectively.  The decrease in operating cash receipts is primarily the result of an increase in accounts receivable offset by a reduction in accrued expenses as compared to the prior year. Total cash disbursements for operations, which include purchases of inventory and operating expenses, were approximately $16,009,000 for the nine-month period ended January 31, 2013 and $16,461,000 for the nine-month period ended January 31, 2012.

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Investing activities.  Cash used in investing activities totaled $214,000 and $230,000 during the nine-month periods ended January 31, 2013 and 2012, respectively, as we purchased slightly more equipment in fiscal 2012.

Financing activities.  As of January 31, 2013, we had a $6,000,000 operating line of credit that provided us and our wholly-owned subsidiary with short-term financing for our working capital requirements. The line of credit was amended on October 26, 2012 to extend the expiration date to October 30, 2014 and remove the interest rate floor.  The line of credit’s borrowing capacity is calculated as a specified percentage of accounts receivable and inventory on a monthly basis and expires on October 30, 2014.  As of January 31, 2013, there were no borrowings outstanding on the operating line of credit. The total amount of borrowing base for the line of credit as of January 31, 2013 was approximately $5,117,000.  It is secured by accounts receivable and inventory and accrues interest at a performance-based rate that is based on the prime rate (3.25% at January 31, 2013) plus/minus 0.5%.  The interest rate actually assessed is determined by our debt-to-tangible net worth ratio. The rate as of January 31, 2013 of 2.75% was the lowest rate allowed under the amended terms of the operating line of credit.  The previous loan agreement contained an interest rate floor of 3.5%.  The loan agreement has various covenants, including a financial covenant pertaining to the maintenance of total tangible net worth and a required debt service coverage ratio.  As of January 31, 2013 we were in compliance will all covenants.    For the nine-month period ended January 31, 2013 there were no additional net borrowings on the operating line of credit.  Total payments on the line of credit were $750,000 for the nine-month period while payments on long-term debt totaled approximately $136,000.  Cash used in purchases of common stock during the period for the stock repurchase program totaled $140,000.  Effective September 1, 2011, the 5-year adjustable interest rate on our Industrial Revenue Bonds was reset to 1.89% through September 1, 2016.  For the nine-month period ended January 31, 2012, financing activities included $750,000 of cash used in payment on the line of credit and $113,000 in payments on long-term debt.

Although there can be no assurances, we believe that existing cash, the cash expected to be generated from our operations, amounts available under our line of credit, and amounts available from trade credit, will be sufficient to finance our anticipated working capital needs, our capital expenditures, and our scheduled debt repayment for the foreseeable future.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  We cannot ensure that actual results will not differ from those estimates.  We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition.  We derive revenue from the manufacture of production units of electronic assemblies, liquid crystal displays, and our Proprietary products including our remote monitoring equipment, RFID technology and solutions and our mobile computing products.  We also derive revenue from repairs and non-warranty services, engineering design services, remote monitoring services and maintenance contracts.  Production and repaired units are billed to the customer after they are shipped.  Remote monitoring services and maintenance contracts are billed and the revenue recognized at the end of the month the services or maintenance periods are completed.  For customers that utilize our engineering design services, we bill the customer and recognize revenue after the design services or tooling have been completed.  We require our customers to provide a binding purchase order to verify the manufacturing services to be provided and to ensure payment.  Typically, we do not have any post-shipment obligations that would include customer acceptance requirements.  We do provide training and installation services to our customers and those services are billed and the revenue recognized at the end of the month the services are completed.  Revenue recognized is net of sales taxes, tariffs, or duties remitted to any governmental authority.

Inventory Valuation.  Our inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or fair value.  Our industry is characterized by rapid technological change, short-term customer commitments and rapid changes in demand, as well as other market considerations.  We make provisions for estimated excess and obsolete inventory based on our quarterly reviews of inventory quantities on hand and the latest forecasts of product demand and production requirements from our customers.  We review our inventory in detail on a quarterly basis utilizing multiple annual time horizons ranging from 24-months to 60-months.  Individual part numbers that have not been used within each of the time horizons are examined by manufacturing personnel for obsolescence, excess and fair value.  Parts that are not identified for common use or are unique to a former customer or application are categorized as obsolete and are discarded as part of our quarterly inventory write-down.  If actual market conditions or our customers’ product demands are less favorable than those projected, additional inventory write-downs may be required.

Allowance for Doubtful Accounts.  Accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis.  We determine the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history, and current economic conditions.  Receivables are written off when deemed uncollectible.  Recoveries of receivables previously written off are recorded when received.  The majority of the customer accounts are considered past due after the invoice becomes older than the customer’s credit terms (30 days for the majority of customers).  Interest is not charged on past due accounts for the majority of our customers.

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Warranty Reserve.  We have established a warranty reserve for rework, product warranties and customer refunds.  We provide a limited warranty for a period of one year from the date of receipt of our products by our customers.  Our customers may also elect to purchase an extended warranty.  Our standard warranties require us to repair or replace defective products at no cost to the customer or refund the customer’s purchase price.  The warranty reserve is based on historical experience and analysis of specific known and potential warranty issues.  The product warranty liability reflects management’s best estimate of probable liability under our product warranties.

Goodwill.  Goodwill is initially measured as the excess of the cost of an acquired business over the fair value of the identifiable net assets acquired.  We do not amortize goodwill, but rather review our carrying value for impairment annually (January 31), and whenever an impairment indicator is identified.  The goodwill impairment test involves a two-step approach.  The first step is to identify if potential impairment of goodwill exists. If impairment of goodwill is determined to exist, the second step of the goodwill impairment test measures the amount of the impairment using a fair value-based approach.

Intangible Assets.  Intangible assets consist of patents, trademarks, copyrights, customer relationships, and capitalized software.  Intangible assets are amortized over their estimated useful lives using the straight-line method.  The useful lives of the intangible assets range from 5 – 15 years.

Impairment of Long-Lived Intangible Assets.  Long-lived assets, including amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets may not be fully recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans, or changes in anticipated future cash flows. If an impairment indicator is present, we evaluate recoverability by a comparison of the carrying amount of the assets to future undiscounted cash flows expected to be generated by the assets.  If the sum of the expected future undiscounted cash flows is less than the carrying amount, we would recognize an impairment loss. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the long-lived assets and intangibles.

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Forward Looking Statements

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including, but not limited to, statements on strategy, operating forecasts, and our working capital requirements and availability.  In addition, from time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing.  Such forward-looking statements may be included in, but are not limited to, various filings made by the Company with the Securities and Exchange Commission, press releases or oral statements made by or with the approval of an authorized executive officer of the Company.  Forward-looking statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as "may," "expect," "anticipate," "estimate," or "continue" or the negative thereof or other variations thereon or comparable terminology.  Actual results could differ materially from those projected or suggested in any forward-looking statements as a result of a wide variety of factors and conditions, including, but not limited to, an inability on the part of the Company to successfully market and grow its products and services, the Company’s dependence on its top customers, reliance on certain key management personnel, an inability to grow the Company’s customer base, an inability to integrate, manage and grow any acquired business or underlying technology, potential growth in costs and expenses, an inability to refinance the Company’s existing debt on terms comparable to those now in existence, potential deterioration of business or economic conditions for the Company’s customers’ products, price competition from larger and better financed competitors, and the factors and conditions described in the discussion of "Results of Operations" and “Liquidity and Capital Resources” as contained in Management's Discussion and Analysis of Financial Condition and Results of Operation of this report, as well as those included in other documents the Company files from time to time with the Securities and Exchange Commission, including the Company's quarterly reports on Form 10-Q, annual report on Form 10-K, and current reports on Form 8-K.  Holders of the Company's securities are specifically referred to these documents with regard to the factors and conditions that may affect future results.  The reader is cautioned that the Company does not have a policy of updating or revising forward-looking statements and thus he or she should not assume that silence by management of the Company over time means that actual events are bearing out as estimated in such forward-looking statements.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information required under this item.

ITEM 4. Controls and Procedures

Evaluation of disclosure controls and procedures

The Company maintains disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.  The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of such disclosure controls and procedures for this report.  Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of January 31, 2013.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during its last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. Legal Proceedings.

None.

ITEM 1A. Risk Factors.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information required under this item.

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

The following table sets forth our stock repurchase activity during the three-month period ended January 31, 2013.

ISSUER PURCHASES OF EQUITY SECURITIES
Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
From: November 1, 2012 To: November 30, 2012		--	$	--		--		393,291
From: December 1, 2012 To: December 31, 2012		--	$	--		--		393,291
From: January 1, 2013 To: January 31, 2013		33,502	$	4.17		33,502		359,789
Total		33,502	$	4.17		33,502		359,789

On December 17, 2012, the Company announced a share repurchase program by which the Company planned to repurchase up to 10% of the Company’s outstanding common shares, or approximately 400,000 shares, from time to time at prevailing market prices through the open market or privately negotiated transactions.  The program has no expiration date and purchases are funded from available cash resources.  For the three-month period ended January 31, 2013, the Company repurchased 33,502 shares at a cost of approximately $140,000 (average cost of $4.17 per share).

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ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosure

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibits

See Exhibit Index following the signature page.

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SIGNATURES

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

	ELECSYS CORPORATION
March 11, 2013	/s/ Karl B. Gemperli
Date	Karl B. Gemperli
	President and Chief Executive Officer (Principal Executive Officer)
March 11, 2013	/s/ Todd A. Daniels
Date	Todd A. Daniels
	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Item	Description
10.1	Third Amendment to Secured Loan Agreement dated October 26, 2012 with UMB Bank, N.A.
31.1	Rule 13a-14(a)/15d-14(a) Certification of President and Chief Executive Officer (Principal Executive Officer).
31.2	Rule 13a-14(a)/15d-14(a) Certification of Vice President and Chief Financial Officer (Principal Financial and Accounting Officer).
32.1	Section 1350 Certification of President and Chief Executive Officer (Principal Executive Officer).
32.2	Section 1350 Certification of Vice President and Chief Financial Officer (Principal Financial and Accounting Officer).
101	The following information from Elecsys Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2013, formatted in Extensible Business Reporting Language (XBRL):
	(i)	the Consolidated Balance Sheet,
	(ii)	the Consolidated Statement of Operations,
	(iii)	the Consolidated Statement of Stockholders’ Equity,
	(iv)	the Consolidated Statement of Cash Flows, and
	(v)	the Notes to the Consolidated Financial Statements.

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