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 July 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 001-15057
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 – 3,873,813 shares outstanding as of August 31, 2013.
ELECSYS CORPORATION AND SUBSIDIARY
FORM 10-Q
Quarter Ended July 31, 2013
INDEX
PART I – FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements.
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
| | | Three Months Ended July 31, | |
| | | 2013 | | | 2012 | |
| Revenues | | $ | 6,774 | | | $ | 4,257 | |
| Cost of revenues | | | 4,566 | | | | 2,868 | |
| Gross margin | | | 2,208 | | | | 1,389 | |
| | | | | | | | | |
| Selling, general and administrative expenses: | | | | | | | | |
| Research and development expense | | | 426 | | | | 406 | |
| Selling and marketing expense | | | 508 | | | | 524 | |
| General and administrative expense | | | 821 | | | | 687 | |
| Total selling, general and administrative expenses | | | 1,755 | | | | 1,617 | |
| | | | | | | | | |
| Operating (loss) income | | | 453 | | | | (228 | ) |
| | | | | | | | | |
| Financial expense: | | | | | | | | |
| Interest expense | | | (15 | ) | | | (21 | ) |
| Total financial expense | | | (15 | ) | | | (21 | ) |
| | | | | | | | | |
| Net (loss) income before income tax (benefit) expense | | | 438 | | | | (249 | ) |
| | | | | | | | | |
| Income tax (benefit) expense | | | 174 | | | | (88 | ) |
| | | | | | | | | |
| Net (loss) income | | $ | 264 | | | $ | (161 | ) |
| | | | | | | | | |
| Net (loss) income per share information: | | | | | | | | |
| Basic | | $ | 0.07 | | | $ | (0.04 | ) |
| Diluted | | $ | 0.07 | | | $ | (0.04 | ) |
| | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | |
| Basic | | | 3,894 | | | | 3,885 | |
| Diluted | | | 3,944 | | | | 3,885 | |
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Balance Sheets
(In thousands, except share data)
| | | July 31, 2013 | | | April 30, 2013 | |
| | | (Unaudited) | | | | |
| ASSETS | | | | | | |
| Current assets: | | | | | | |
| Cash and cash equivalents | | $ | 1,478 | | | $ | 1,464 | |
| Accounts receivable, less allowances of $57 and $35, respectively | | | 2,269 | | | | 2,538 | |
| Inventories, net | | | 6,837 | | | | 6,238 | |
| Prepaid expenses | | | 126 | | | | 61 | |
| Income tax refund claims receivable | | | -- | | | | 106 | |
| Deferred taxes | | | 693 | | | | 689 | |
| Total current assets | | | 11,403 | | | | 11,096 | |
| | | | | | | | | |
| Property and equipment: | | | | | | | | |
| Land | | | 1,737 | | | | 1,737 | |
| Building and improvements | | | 3,395 | | | | 3,395 | |
| Equipment | | | 3,802 | | | | 3,696 | |
| Total property and equipment, gross | | | 8,934 | | | | 8,828 | |
| Accumulated depreciation | | | (3,516 | ) | | | (3,429 | ) |
| Total property and equipment, net | | | 5,418 | | | | 5,399 | |
| | | | | | | | | |
| Goodwill | | | 1,942 | | | | 1,942 | |
| Intangible assets, net | | | 1,634 | | | | 1,685 | |
| Other assets, net | | | 46 | | | | 47 | |
| Total assets | | $ | 20,443 | | | $ | 20,169 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable | | $ | 1,375 | | | $ | 1,390 | |
| Accrued expenses | | | 1,457 | | | | 1,408 | |
| Income taxes payable | | | 68 | | | | 1 | |
| Current maturities of long-term debt | | | 186 | | | | 185 | |
| Total current liabilities | | | 3,086 | | | | 2,984 | |
| | | | | | | | | |
| Deferred taxes | | | 625 | | | | 637 | |
| Long-term debt, less current maturities | | | 2,572 | | | | 2,619 | |
| | | | | | | | | |
| 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 – 3,889,368 at July 31, 2013 and 3,897,832 at April 30, 2013 | | | 40 | | | | 40 | |
| Additional paid-in capital | | | 11,488 | | | | 11,429 | |
| Treasury stock, at cost; 75,681 shares at July 31, 2013 and 59,414 shares at April 30, 2013 | | | (374 | ) | | | (282 | ) |
| Retained earnings | | | 3,006 | | | | 2,742 | |
| Total stockholders' equity | | | 14,160 | | | | 13,929 | |
| Total liabilities and stockholders' equity | | $ | 20,443 | | | $ | 20,169 | |
See Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
| | | Common Stock (# of shares) | | | Common Stock | | | Additional Paid-In Capital | | | Treasury Stock | | | Retained Earnings | | | Total Stockholders’ Equity | |
| Balance at April 30, 2012 | | | 3,884 | | | $ | 39 | | | $ | 11,166 | | | $ | -- | | | $ | 1,059 | | | $ | 12,264 | |
| Net income | | | -- | | | | -- | | | | -- | | | | -- | | | | 1,683 | | | | 1,683 | |
| Exercise of stock options | | | 70 | | | | 1 | | | | 152 | | | | -- | | | | -- | | | | 1,539 | |
| Issue of restricted stock | | | 3 | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| Stock repurchases | | | (59 | ) | | | -- | | | | -- | | | | (282 | ) | | | -- | | | | (282 | ) |
| Share-based compensation expense | | | -- | | | | -- | | | | 111 | | | | -- | | | | -- | | | | 111 | |
| Balance at April 30, 2013 | | | 3,898 | | | $ | 40 | | | $ | 11,429 | | | $ | (282 | ) | | $ | 2,742 | | | $ | 13,929 | |
| Net income | | | -- | | | | -- | | | | -- | | | | -- | | | | 264 | | | | 264 | |
| Exercise of stock options | | | 3 | | | | -- | | | | 13 | | | | -- | | | | -- | | | | 13 | |
| Issue of restricted stock | | | 4 | | | | -- | | | | -- | | | | -- | | | | -- | | | | -- | |
| Stock repurchases | | | (16 | ) | | | -- | | | | -- | | | | (92 | ) | | | -- | | | | (92 | ) |
| Share-based compensation expense | | | -- | | | | -- | | | | 46 | | | | -- | | | | -- | | | | 46 | |
| Balance at July 31, 2013 (unaudited) | | | 3,889 | | | $ | 40 | | | $ | 11,488 | | | $ | (374 | ) | | $ | 3,006 | | | $ | 14,160 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
See Notes to Condensed Consolidated Financial Statements.
Elecsys Corporation and Subsidiary Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
| | | Three months ended July 31, | |
| | | 2013 | | | 2012 | |
| Cash Flows from Operating Activities: | | | | | | |
| Net income (loss) | | $ | 264 | | | $ | (161 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | |
| Share-based compensation expense | | | 46 | | | | 27 | |
| Depreciation | | | 94 | | | | 85 | |
| Amortization | | | 51 | | | | 51 | |
| Provision for doubtful accounts | | | 22 | | | | 12 | |
| Deferred income taxes | | | (16 | ) | | | 53 | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Accounts receivable | | | 247 | | | | 919 | |
| Inventories | | | (599 | ) | | | 56 | |
| Income tax payable/receivable | | | 173 | | | | (140 | ) |
| Accounts payable | | | (15 | ) | | | 46 | |
| Accrued expenses | | | 49 | | | | (153 | ) |
| Other | | | (64 | ) | | | (14 | ) |
| Net cash provided by operating activities | | | 252 | | | | 781 | |
| | | | | | | | | |
| Cash Flows from Investing Activities: | | | | | | | | |
| Purchases of property and equipment | | | (113 | ) | | | (46 | ) |
| Net cash (used in) investing activities | | | (113 | ) | | | (46 | ) |
| | | | | | | | | |
| Cash Flows from Financing Activities: | | | | | | | | |
| Principal payments on note payable to bank | | | -- | | | | (750 | ) |
| Purchases of common stock for repurchase program | | | (92 | ) | | | -- | |
| Proceeds from the exercise of stock options | | | 13 | | | | -- | |
| Principal payments on long-term debt | | | (46 | ) | | | (44 | ) |
| Net cash (used in) financing activities | | | (125 | ) | | | (794 | ) |
| Net increase (decrease) in cash and cash equivalents | | | 14 | | | | (59 | ) |
| Cash and cash equivalents at beginning of period | | | 1,464 | | | | 136 | |
| Cash and cash equivalents at end of period | | $ | 1,478 | | | $ | 77 | |
| | | | | | | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | |
| Cash paid during the period for interest | | $ | 14 | | | $ | 22 | |
| Cash paid (received) during the period for income taxes | | | 17 | | | | (1 | ) |
See Notes to Condensed Consolidated Financial Statements.
Elecsys Corporation and Subsidiary Notes to Condensed Consolidated Financial Statements
July 31, 2013
(Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING 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.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during the three-month period ended July 31, 2013, which are of material significance, or have potential material significance, to the Company.
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, as well as 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.
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 July 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.
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.
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 period ended July 31, 2013 are not necessarily indicative of the results that may be expected for the year ending April 30, 2014.
The balance sheet at April 30, 2013 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, 2013.
3. INTANGIBLE ASSETS AND GOODWILL
The Company’s total intangible assets consist of the following (in thousands):
| | | | | | July 31, 2013 | | | April 30, 2013 | |
| Intangible Asset Description | | Estimated Useful Lives | | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
| Patents, trademarks and copyrights | | | 10 | - | 15 | | | $ | 852 | | | $ | (422 | ) | | $ | 852 | | | $ | (404 | ) |
| Customer relationships | | | 5 | - | 15 | | | | 1,040 | | | | (465 | ) | | | 1,040 | | | | (449 | ) |
| Trade name | | | | 15 | | | | | 530 | | | | (209 | ) | | | 530 | | | | (200 | ) |
| Technologies | | | 13 | - | 15 | | | | 475 | | | | (167 | ) | | | 475 | | | | (159 | ) |
| | | | | | | $ | 2,897 | | | $ | (1,263 | ) | | $ | 2,897 | | | $ | (1,212 | ) |
Amortization expense for the three-month periods ended July 31, 2013 and 2012 was approximately $51,000 in each respective period.
Estimated amortization expense for the next five fiscal years ending April 30 is as follows (in thousands):
| Year | | Amounts | |
| 2014 (remaining) | | $ | 151 | |
| 2015 | | | 187 | |
| 2016 | | | 166 | |
| 2017 | | | 166 | |
| 2018 | | | 90 | |
The carrying amount of the Company’s goodwill at July 31, 2013 and April 30, 2013 was approximately $1,942,000. There were no changes in the carrying amount of goodwill for the three-month period ended July 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 July 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 $677,000 and $682,000 for the periods ended July 31, 2013 and April 30, 2013, respectively, are summarized by major classification as follows (in thousands):
| | | July 31, 2013 | | | April 30, 2013 | |
| Raw material | | $ | 2,825 | | | $ | 2,395 | |
| Work-in-process | | | 1,602 | | | | 1,409 | |
| Finished goods | | | 2,410 | | | | 2,434 | |
| | | $ | 6,837 | | | $ | 6,238 | |
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.
For the three-month period ended July 31, 2013, the Company repurchased 16,267 shares at a cost of approximately $92,000 (average cost of $5.66 per share).
Stock-Based Compensation
At July 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 July 31, 2013, there were options remaining outstanding to acquire 104,000 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 July 31, 2013, there were options outstanding to acquire 158,167 shares of common stock and 11,146 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 three-month periods ended Jul 31, 2013 and 2012:
| | | Three Months Ended July 31, 2013 | | | Three Months Ended July 31, 2012 | |
| Risk-free interest rate | | | 2.97% | | | | 2.97% | |
| Expected life, in years | | | 6 | | | | 6 | |
| Expected volatility | | | 82.59 | - | 82.61% | | | | 65.52 | - | 78.85% | |
| Dividend yield | | | 0.0% | | | | 0.0% | |
| Forfeiture rate | | | 11.40% | | | | 9.70% | |
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 three-month periods ended July 31, 2013 and 2012, there were no exercises of stock options which triggered tax benefits.
At July 31, 2013, there was approximately $361,000 of unrecognized compensation cost related to share-based payments that is expected to be recognized over a weighted-average period of 2.22 years.
The following tables represent equity award activity for the three-month period ended July 31, 2013:
| Stock Options | | Number of Shares | | | Weighted- Average Exercise Price | | Weighted- Average Remaining Contract Life |
| Outstanding options at April 30, 2013 | | | 205,500 | | | $ | 4.28 | | 6.54 Years |
| Granted | | | 60,000 | | | $ | 5.86 | | 9.83 Years |
| Exercised | | | 3,333 | | | $ | 4.00 | | |
| Forfeited | | | -- | | | | -- | | |
| Outstanding options at July 31, 2013 | | | 262,167 | | | $ | 4.64 | | 7.10 Years |
| | | | | | | | | | |
| Outstanding exercisable at July 31, 2013 | | | 136,917 | | | $ | 4.42 | | 5.20 Years |
| Restricted Stock | | Number of Shares | | | Weighted- Average Price | |
| Outstanding awards at April 30, 2013 | | | 11,007 | | | $ | 4.64 | |
| Granted | | | 4,608 | | | $ | 5.86 | |
| Issued | | | 4,469 | | | $ | 4.70 | |
| Forfeited | | | -- | | | | -- | |
| Outstanding awards at July 31, 2013 | | | 11,146 | | | $ | 5.12 | |
| | | | | | | | | |
| Outstanding vested at July 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 27,000 and 19,651, respectively, at July 31, 2013. At July 31, 2013 the aggregate intrinsic value of options and restricted stock outstanding was approximately $499,000, and the aggregate intrinsic value of exercisable options was approximately $260,000. The Company recognized share-based compensation expense of $46,000 for the three-month period ended July 31, 2013 and $27,000 for the three-month period ended July 31, 2012. The weighted-average fair value of the options and restricted stock granted in the three-month period ended July 31, 2013 was $4.19 per stock option and per restricted share.
The following table summarizes information about equity awards outstanding at July 31, 2013:
| | | | Options Outstanding | | | Options Exercisable | |
Range of Exercise Prices | | | Number Outstanding at July 31, 2013 | | | Weighted- Average Remaining Contractual Life | | | Weighted- Average Exercise Price | | | Number Exercisable at July 31, 2013 | | | Weighted- Average Exercise Price | |
| $3.01 | - | $4.00 | | | | 125,250 | | | 5.24 years | | | $ | 3.57 | | | | 80,333 | | | $ | 3.69 | |
| $4.01 | - | $5.00 | | | | 24,167 | | | 8.81 years | | | $ | 4.35 | | | | 7,500 | | | $ | 4.35 | |
| $5.01 | - | $6.00 | | | | 115,000 | | | 8.73 years | | | $ | 5.54 | | | | 38,333 | | | $ | 5.21 | |
| $6.01 | - | $7.00 | | | | -- | | | -- | | | | -- | | | | -- | | | | -- | |
| $7.01 | - | $8.00 | | | | 10,750 | | | 5.11 years | | | $ | 7.05 | | | | 10,750 | | | $ | 7.05 | |
| Total | | | | 262,167 | | | 7.10 years | | | $ | 4.64 | | | | 136,917 | | | $ | 4.42 | |
6. NET INCOME (LOSS) PER SHARE
The following table presents the calculation of basic and diluted income (loss) per share (in thousands):
| | | Three Months Ended July 31, | |
| | | 2013 | | | 2012 | |
| Numerator: | | | | | | |
| Net (loss) income | | $ | 264 | | | $ | (161 | ) |
| | | | | | | | | |
| Denominator: | | | | | | | | |
| Weighted average common shares outstanding – basic | | | 3,894 | | | | 3,885 | |
| Effect of dilutive options outstanding | | | 50 | | | | -- | |
| Weighted average common shares outstanding – diluted | | | 3,944 | | | | 3,885 | |
Options to purchase 120,750 and 259,250 shares of common stock as of the three-month periods ended July 31, 2013 and 2012, respectively, were anti-dilutive and therefore were not included in the computation of diluted earnings per share.
7. PLEDGED ASSETS, NOTES PAYABLE AND LONG-TERM DEBT
As of July 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. The total amount of borrowing base for the line of credit as of July 31, 2013 was approximately $4,587,000, 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 July 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 July 31, 2013. 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. When an amount is outstanding, the borrowings on the line of credit are presented on the balance sheet as long-term in accordance with the terms of the line of credit.
The following table is a summary of the Company’s long-term debt and related current maturities (in thousands):
| | | July 31, 2013 | | | April 30, 2013 | |
| 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. | | $ | 2,758 | | | $ | 2,804 | |
| | | | | | | | | |
| Operating line of credit, $6,000,000 limit on borrowing capacity, prime rate (3.25% at July 31, 2013) 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 July 31, 2013 was 2.75% | | | -- | | | | -- | |
| | | | 2,758 | | | | 2,804 | |
| Less current maturities | | | 186 | | | | 185 | |
| Total long-term debt | | $ | 2,572 | | | $ | 2,619 | |
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 | |
| 2014 (remaining) | | $ | 139 | |
| 2015 | | | 189 | |
| 2016 | | | 192 | |
| 2017 | | | 196 | |
| 2018 | | | 200 | |
| Thereafter | | | 1,842 | |
| | | $ | 2,758 | |
8. SEGMENT REPORTING
The Company operates and measures the revenues 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 July 31, 2013 | |
| | | EMS | | | Proprietary | | | Total | |
| | | | | | | | | | |
| Total revenues | | $ | 4,308 | | | $ | 2,466 | | | $ | 6,774 | |
| | | | | | | | | | | | | |
| Segment gross margin | | $ | 983 | | | $ | 1,225 | | | $ | 2,208 | |
| | | | | | | | | | | | | |
| Goodwill | | $ | -- | | | $ | 1,942 | | | $ | 1,942 | |
| | | Three Months Ended July 31, 2012 | |
| | | EMS | | | Proprietary | | | Total | |
| | | | | | | | | | | | | |
| Total revenues | | $ | 2,554 | | | $ | 1,703 | | | $ | 4,257 | |
| | | | | | | | | | | | | |
| Segment gross margin | | $ | 610 | | | $ | 779 | | | $ | 1,389 | |
| | | | | | | | | | | | | |
| Goodwill | | $ | -- | | | $ | 1,942 | | | $ | 1,942 | |
The following table reconciles total revenues to the products and services offered by the Company (in thousands).
| | | Three Months Ended July 31, | |
| | | 2013 | | | 2012 | |
| Products and services: | | | | | | |
| Electronic manufacturing | | $ | 4,247 | | | $ | 2,483 | |
| Remote monitoring solutions | | | 1,526 | | | | 954 | |
| Industrial data communications | | | 243 | | | | 216 | |
| Mobile data acquisition | | | 662 | | | | 434 | |
| Other services: | | | | | | | | |
| EMS related services | | | 61 | | | | 71 | |
| Proprietary product related services | | | 35 | | | | 99 | |
| Total sales | | $ | 6,774 | | | $ | 4,257 | |
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):
| | | Three Months Ended July 31, | |
| | | 2013 | | | 2012 | |
| Warranty reserve balance at beginning of period | | $ | 90 | | | $ | 163 | |
| Expense accrued, including adjustments | | | 25 | | | | 9 | |
| Warranty costs incurred | | | (21 | ) | | | (24 | ) |
| Warranty reserve balance at end of period | | $ | 94 | | | $ | 148 | |
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 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 July 31, 2013, the Company repurchased 16,267 shares at a cost of approximately $92,000 (average cost of $5.66 per share).
Results of Operations
Three Months Ended July 31, 2013 Compared With Three Months Ended July 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) | |
| | | July 31, 2013 | | | July 31, 2012 | |
| Revenues | | | 6,774 | | | | 100.0 | % | | | 4,257 | | | | 100.0 | % |
| Cost of revenues | | | 4,566 | | | | 67.4 | % | | | 2,868 | | | | 67.4 | % |
| Gross margin | | | 2,208 | | | | 32.6 | % | | | 1,389 | | | | 32.6 | % |
| Selling, general and administrative expenses | | | 1,755 | | | | 25.9 | % | | | 1,617 | | | | 38.0 | % |
| Operating income (loss) | | | 453 | | | | 6.7 | % | | | (228 | ) | | | (5.4 | )% |
| Financial expense | | | (15 | ) | | | (0.2 | %) | | | (21 | ) | | | (0.5 | %) |
| Income (loss) before income taxes | | | 438 | | | | 6.5 | % | | | (249 | ) | | | (5.9 | )% |
| Income tax expense (benefit) | | | 174 | | | | 2.5 | % | | | (88 | ) | | | (2.1 | )% |
| Net income (loss) | | $ | 264 | | | | 4.0 | % | | $ | (161 | ) | | | (3.8 | )% |
| Net income (loss) per share – basic | | $ | 0.07 | | | | | | | $ | (0.04 | ) | | | | |
| Net income (loss) per share – diluted | | $ | 0.07 | | | | | | | $ | (0.04 | ) | | | | |
Revenues for the three months ended July 31, 2013 were approximately $6,774,000, which was an increase of $2,517,000, or 59.1%, from revenues of $4,257,000 for the three months ended July 31, 2012.
| | | Three Months Ended | |
| | | (In thousands) | |
| | | July 31, 2013 | | | July 31, 2012 | |
| EMS revenues | | $ | 4,308 | | | | 63.6 | % | | $ | 2,554 | | | | 60.0 | % |
| Proprietary product revenues | | | 2,466 | | | | 36.4 | % | | | 1,703 | | | | 40.0 | % |
| Total Sales | | | 6,774 | | | | 100.0 | % | | | 4,257 | | | | 100.0 | % |
Proprietary products. Revenues from our Proprietary products and services were $2,466,000 for the three-month period ended July 31, 2013, which was a $763,000, or 44.8%, increase from sales of $1,703,000 in the prior year period.
Sales of our wireless remote monitoring solutions were approximately $1,526,000 for the three-month period ended July 31, 2013, which was an increase of $572,000, or 60.0%, from $954,000 during the three-month period ended July 31, 2012. The increase in revenues for the period was due to an overall increase in customer orders received and shipped including some initial orders for a new remote monitoring product for a new industrial equipment market. 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 $276,000, an increase of $40,000, or 16.9%, from data management services revenue of $236,000 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 continued interest in our M2M solutions, our introduction of new products, and our expansion into new industrial markets. The previously announced $1.25 million order from the Al Rushaid Group, our partner in Saudi Arabia, is also expected to impact revenues over the next two fiscal quarters.
Sales of our industrial data communication solutions were approximately $243,000 for the three-month period ended July 31, 2013, which was a $27,000, or 12.5%, increase from total sales of $216,000 for the three-month period ended July 31, 2012. The increase is the direct result of a larger number of 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 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, and maintenance contract revenues, were approximately $662,000 for the three-month period ended July 31, 2013. Total revenues increased approximately $228,000, or 52.5%, as compared to the prior year period reported revenues of approximately $434,000. The increase in revenues was primarily driven by an increase in shipments of the Radix FW950/960 and peripherals to one of our largest international partners and additional sales to one of our large established domestic customers. Recurring maintenance contract revenues decreased for the three-month period ended July 31, 2013 approximately $10,000, or 5.1%, as a result of customers not electing to purchase maintenance plans after their initial warranty periods expired. We believe that sales of Radix products and services over the next few quarters will be consistent with the current period.
EMS. Sales for the EMS business segment were approximately $4,308,000, an increase of $1,754,000, or 68.7%, from $2,554,000 in the prior year period. The increase in EMS sales was primarily the result of increased orders from existing customers due to growth in their businesses, as well as the addition of several new customers during the period. We continue our focus on increasing EMS gross margins by targeting specific markets that will likely benefit from our proprietary technologies, and we expect that recent increases in our investments in EMS sales and marketing will generate moderate growth in EMS sales and margins in the longer term.
Total consolidated backlog at July 31, 2013 was approximately $8,657,000, an increase of $164,000, or 1.9%, from a total backlog of $8,493,000 on April 30, 2013 and an increase of approximately $482,000, or 5.9%, from a total backlog of $8,175,000 on July 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 July 31, 2013, April 30, 2013, and July 31, 2012 (in thousands).
| | | July 31, 2013 | | | April 30, 2013 | | | July 31, 2012 | |
| EMS | | $ | 6,794 | | | $ | 7,963 | | | $ | 7,647 | |
| Proprietary products | | | 1,863 | | | | 530 | | | | 528 | |
| Total backlog | | $ | 8,657 | | | $ | 8,493 | | | $ | 8,175 | |
Gross margin for the three-month period ended July 31, 2013 was 32.6% of sales, or $2,208,000, compared to 32.6% of sales, or $1,389,000, for the three-month period ended July 31, 2012. The $819,000 increase in gross margin dollars was the direct result of the increase in overall sales volume led by the increase in EMS sales. The gross margin percentage remained unchanged between the year-over-year periods which were primarily due to the revenue mix between EMS and proprietary product revenues.
| | | Three Months Ended | |
| | | (In thousands) | |
| | | July 31, 2013 | | | July 31, 2012 | |
| Gross margin – EMS | | $ | 983 | | | | 22.8 | % | | $ | 610 | | | | 23.9 | % |
| Gross margin – Proprietary products | | | 1,225 | | | | 49.7 | % | | | 779 | | | | 45.7 | % |
| Total gross margin | | $ | 2,208 | | | | 32.6 | % | | $ | 1,389 | | | | 32.6 | % |
Gross margin for the proprietary products business segment was approximately 49.7% of proprietary product sales, or $1,225,000, for the three-month period ended July 31, 2013 as compared to 45.7% of sales, or $779,000, for the three-month period ended July 31, 2012. The increase in gross margin dollars and percentage for the proprietary products was mainly due to the overall increase in proprietary product revenues and a change in the product mix from the previous year period.
The gross margin for the EMS business segment was $983,000, or 22.8% of sales, for the three-month period ended July 31, 2013 compared to $610,000, or 23.9% of sales, for the prior year period. The increase of EMS gross margin dollars was primarily the result of the increase in EMS revenues for the period. The decrease in EMS gross margin percentage was due to the mix of shipments between various customers.
We expect that consolidated gross margins over the next few quarters will increase slightly to within the 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 impact our manufacturing efficiency and gross margins.
Selling, general and administrative (“SG&A”) expenses totaled approximately $1,755,000 for the three-month period ended July 31, 2013. This was an increase of $138,000 as compared to total SG&A expenses of $1,617,000 for the three-month period ended July 31, 2012. SG&A expenses were 25.9% of sales for the current fiscal quarter of 2014 as compared to 38.0% of sales for the comparable period for fiscal 2013.
| | | Three Months Ended | |
| | | (In thousands) | |
| | | July 31, 2013 | | | July 31, 2012 | |
| Research & development expenses | | $ | 426 | | | | 6.3 | % | | $ | 406 | | | | 9.5 | % |
| Selling & marketing expenses | | | 508 | | | | 7.5 | % | | | 524 | | | | 12.3 | % |
| General & administrative expenses | | | 821 | | | | 12.1 | % | | | 687 | | | | 16.1 | % |
| Total selling, general and administrative expenses | | $ | 1,755 | | | | 25.9 | % | | $ | 1,617 | | | | 38.0 | % |
Research and development expenses increased $20,000, to $426,000, during the fiscal quarter as compared to the prior year period. This increase was primarily driven by higher engineering personnel expenses of approximately $54,000 as a result of our increased investment in engineering personnel focused on new product development and design, slightly offset by lower product support costs compared to the previous year period.
Selling and marketing expenses were $508,000 for the three-month period ended July 31, 2013 and $524,000 for the three-month period ended July 31, 2012. The $16,000 decrease was the result of changes in sales personnel from the previous year period which included reductions in personnel costs and travel expenses, slightly offset by an increase in sales commissions of $29,000 due to the increase in revenues for the period.
General and administrative expenses increased approximately $134,000 from the comparable period of the prior year. The increase was due to growth of personnel related expenses, including equity-based compensation, increases in professional fees, and public company expenses.
Total SG&A expenses over the next few quarters are expected to slightly increase over the previous periods as a result of our continued investments in personnel, new product development, systems, and capabilities.
Operating income for the three-month period ended July 31, 2013 was approximately $453,000, an increase of $681,000 from an operating loss of $228,000 reported for the three-month period ended July 31, 2012.
Financial expense, including interest, was $15,000 and $21,000 for the three-month periods ended July 31, 2013 and 2012, respectively. The decrease of $6,000 resulted from lower total outstanding borrowings compared to the previous fiscal year period. During the three-month period ended July 31, 2013, there were no borrowings on the operating line of credit. As of July 31, 2013, there was $2,758,000 outstanding in current and long-term borrowings (Industrial Revenue Bonds) compared to $2,804,000 at July 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 July 31, 2013 was approximately $174,000 compared to an income tax benefit of $88,000 for the three-month period ended July 31, 2012. The effective income tax rate was 39.7% and 35.3% for the three-month periods ended July 31, 2013 and 2012, respectively. The increase in the effective tax rate was due to the recognition of certain income tax adjustments during the prior year period.
As a combined result of the above factors, our net income was $264,000, or $0.07 per diluted share, for the three-month period ended July 31, 2013 as compared to a net loss of $161,000, or $0.04 per diluted share, reported for the three-month period ended July 31, 2012.
Liquidity and Capital Resources
Cash and cash equivalents increased $14,000 to $1,478,000 as of July 31, 2013 compared to $1,464,000 at April 30, 2013. This increase was primarily the result of the cash generated from operating activities due to collections of accounts receivable. The cash generated from operating activities was used for purchases of equipment and financing activities including debt payments and purchases of common stock through our stock repurchase program.
Operating activities. Our consolidated working capital increased approximately $219,000 during the three-month period ended July 31, 2013. The increase was primarily due to an increase in current assets, primarily inventory, offset slightly by an increase in current liabilities. Operating cash receipts totaled approximately $7,043,000 and $5,188,000 during the three-month periods ended July 31, 2013 and 2012, respectively. The increase in operating cash receipts is primarily the result of an increase in revenues and collections of accounts receivable. Total cash disbursements for operations, which include purchases of inventory and operating expenses, were approximately $6,791,000 for the three-month period ended July 31, 2013 and $4,407,000 for the three-month period ended July 31, 2012.
Investing activities. Cash used in investing activities totaled $113,000 and $46,000 during the three-month periods ended July 31, 2013 and 2012, respectively, as we purchased more equipment in the first quarter of fiscal 2014.
Financing activities. As of July 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’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 July 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 July 31, 2013 was approximately $4,587,000. 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 July 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 July 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 July 31, 2013 we were in compliance will all covenants. For the three-month period ended July 31, 2013 there were no borrowings on the operating line of credit. Total payments on long-term debt totaled approximately $46,000 while purchases of common stock during the period for the stock repurchase program totaled $92,000. There were also some stock options exercised during the three-month period ended July 31, 2013, which totaled approximately $13,000. For the three-month period ended July 31, 2012, financing activities included $750,000 of cash used in payment on the line of credit and $44,000 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.
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.
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.
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.
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 July 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.
None.
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.
| Unregistered Sales of Equity Securities and Use of Proceeds |
The following table sets forth our stock repurchase activity during the three-month period ended July 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: May 1, 2013 To: May 31, 2013 | | | 7,804 | | | $ | 5.68 | | | | 67,218 | | | | 326,073 | |
From: June 1, 2013 To: June 30, 2013 | | | 2,862 | | | $ | 5.88 | | | | 70,080 | | | | 323,211 | |
From: July 1, 2013 To: July 31, 2013 | | | 5,601 | | | $ | 6.68 | | | | 75,681 | | | | 317,610 | |
| Total | | | 16,267 | | | $ | 6.08 | | | | | | | | | |
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 July 31, 2013, the Company repurchased 16,267 shares at a cost of approximately $92,000 (average cost of $5.66 per share).
| Defaults Upon Senior Securities |
None.
Not applicable.
None.
See Exhibit Index following the signature page.
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.
| September 9, 2013 | /s/ Karl B. Gemperli |
| Date | Karl B. Gemperli |
| | President and Chief Executive Officer |
| | (Principal Executive Officer) |
| September 9, 2013 | /s/ Todd A. Daniels |
| Date | Todd A. Daniels |
| | Vice President and Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
| Item | Description |
| | | |
| 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 July 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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