Elecsys 10-Q 2014 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, 2014.

(   )  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 – 3,817,168 shares outstanding as of March 3, 2014.

Page 1

ELECSYS CORPORATION AND SUBSIDIARY

FORM 10-Q

Quarter Ended January 31, 2014

INDEX

		Page
PART I - FINANCIAL INFORMATION
ITEM 1.	Consolidated Financial Statements
Condensed Consolidated Statements of Operations -
Three and nine months ended January 31, 2014 and 2013 (Unaudited)		3
Condensed Consolidated Balance Sheets -
January 31, 2014 (Unaudited) and April 30, 2013		4
Condensed Consolidated Statements of Stockholders’ Equity –
Nine months ended January 31, 2014 (Unaudited) and the year ended April 30, 2013		5
Condensed Consolidated Statements of Cash Flows -
Nine months ended January 31, 2014 and 2013 (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
		34
ITEM 4.	Controls and Procedures
		34
PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings	35
ITEM 1A.	Risk Factors	35
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
ITEM 3.	Defaults Upon Senior Securities	36
ITEM 4.	Mine Safety Disclosure	36
ITEM 5.	Other Information	36
ITEM 6.	Exhibits	36
Signatures		37
Exhibit Index		38

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,
	2014			2013			2014			2013
Revenues	$	7,683		$	7,458		$	21,787		$	17,853
Cost of revenues		4,761			4,655			13,629			11,250
Gross margin		2,922			2,803			8,158			6,603
Selling, general and administrative expenses:
Research and development expense		475			411			1,398			1,245
Selling and marketing expense		760			529			1,927			1,636
General and administrative expense		796			717			2,373			2,105
Total selling, general and administrative expenses		2,031			1,657			5,698			4,986
Operating income		891			1,146			2,460			1,617
Financial income (expense):
Interest expense		(14	)		(15	)		(43	)		(51	)
Other income, net		(1	)		(2	)		(4	)		(3	)
		(15	)		(17	)		(47	)		(54	)
Net income before income tax expense		876			1,129			2,413			1,563
Income tax expense		307			413			927			595
Net income	$	569		$	716		$	1,486		$	968
Net income per share information:
Basic	$	0.15		$	0.18		$	0.39		$	0.25
Diluted	$	0.14		$	0.18		$	0.38		$	0.25
Weighted average common shares outstanding:
Basic		3,814			3,914			3,856			3,895
Diluted		3,953			3,925			3,947			3,904

See Notes to Condensed Consolidated Financial Statements.

Page 3

Elecsys Corporation and Subsidiary

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	January 31, 2014			April 30, 2013
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	250		$	1,464
Accounts receivable, less allowances of $78         and $35, respectively		3,090			2,538
Inventories, net		7,840			6,238
Prepaid expenses		143			61
Income tax receivable		-			106
Deferred taxes		744			689
Total current assets		12,067			11,096
Property and equipment:
Land		1,737			1,737
Building and improvements		3,395			3,395
Equipment		4,109			3,696
Total property and equipment, gross		9,241			8,828
Accumulated depreciation		(3,704	)		(3,429	)
Total property and equipment, net		5,537			5,399
Goodwill		1,942			1,942
Intangible assets, net		1,534			1,685
Other assets, net		44			47
Total assets	$	21,124		$	20,169
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,281		$	1,390
Accrued expenses		1,425			1,408
Income taxes payable		242			1
Current maturities of long-term debt		188			185
Total current liabilities		3,136			2,984
Deferred taxes		593			637
Long-term debt, less current maturities		2,478			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 –  3,817,068 at January 31, 2014 and 3,897,832 at April 30, 2013		40			40
Additional paid-in capital		11,634			11,429
Treasury stock, at cost;  158,181 shares at January 31, 2014 and 59,414 shares at April 30, 2013		(985	)		(282	)
Retained earnings		4,228			2,742
Total stockholders' equity		14,917			13,929
Total liabilities and stockholders' equity	$	21,124		$	20,169

See Notes to Condensed Consolidated Financial Statements.

Page 4

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		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		-			-		153
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		-			-		-		-			1,486		1,486
Exercise of stock options		14			-		63		-			-		63
Issue of restricted stock		4			-		-		-			-		-
Stock repurchases		(99	)		-		-		(703	)		-		(703	)
Share-based compensation      expense		-			-		142		-			-		142
Balance at January 31, 2014 (unaudited)		3,817		$	40	$	11,634	$	(985	)	$	4,228	$	14,917

See Notes to Condensed Consolidated Financial Statements.

Page 5

Elecsys Corporation and Subsidiary

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

	Nine months ended January 31,
	2014			2013
Cash Flows from Operating Activities:
Net income	$	1,486		$	968
Adjustments to reconcile net income to net cash  (used in) provided by operating activities:
Share-based compensation expense		142			89
Depreciation		290			258
Amortization		154			154
Provision for doubtful accounts		45			23
Deferred income taxes		(99	)		93
Changes in operating assets and liabilities:
Accounts receivable		(597	)		(798	)
Inventories		(1,602	)		167
Income tax payable/receivable		347			120
Accounts payable		(109	)		310
Accrued expenses		17			(225	)
Other		(82	)		(90	)
Net cash (used in) provided by operating activities		(8	)		1,069
Cash Flows from Investing Activities:
Purchases of property and equipment		(428	)		(214	)
Net cash (used in) investing activities		(428	)		(214	)
Cash Flows from Financing Activities:
Principal payments on note payable to bank		-			(750	)
Purchases of common stock for repurchase program		(703	)		(140	)
Proceeds from the exercise of stock options		63			59
Principal payments on long-term debt		(138	)		(136	)
Net cash (used in) financing activities		(778	)		(967	)
Net (decrease) in cash and cash equivalents		(1,214	)		(112	)
Cash and cash equivalents at beginning of period		1,464			136
Cash and cash equivalents at end of period	$	250		$	24
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest	$	43		$	53
Cash paid during the period for income taxes		679			382

See Notes to Condensed Consolidated Financial Statements.

Page 6

Elecsys Corporation and Subsidiary

Notes to Condensed Consolidated Financial Statements

January 31, 2014

(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, transportation, safety and security systems, and water management.  The Company’s products and services encompass remote monitoring, industrial data communication, mobile data acquisition, and wireless communication technologies that are deployed wherever high quality and reliability are essential. The Company develops, manufactures, and supports proprietary M2M technology and products for multiple markets and applications under several premium brand names.  In addition to its proprietary products, the Company designs and manufactures rugged and reliable custom solutions for original equipment manufacturers (“OEMs”) in a variety of industries.

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 nine-month period ended January 31, 2014, which are of material significance, or have potential material significance, to the Company.

Page 7

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:

Page 8

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, 2014.

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.

Page 9

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 and nine-month periods ended January 31, 2014 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.

Page 10

3.           INTANGIBLE ASSETS AND GOODWILL

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

					January 31, 2014					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	$	(456	)	$	852	$	(404	)
Customer relationships		5	–	15		1,040		(496	)		1,040		(449	)
Trade name			15			530		(227	)		530		(200	)
Technologies		13	–	15		475		(184	)		475		(159	)
					$	2,897	$	(1,363	)	$	2,897	$	(1,212	)

Amortization expense for the nine-month periods ended January 31, 2014 and 2013 was approximately $154,000 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)	$	51
2015		187
2016		166
2017		166
2018		90

The carrying amount of the Company’s goodwill at January 31, 2014 and April 30, 2013 was approximately $1,942,000.  There were no changes in the carrying amount of goodwill for the nine-month period ended January 31, 2014.

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, 2014, 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.

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4.           INVENTORY

Inventories are stated at the lower of cost or fair value, using the first-in, first-out (FIFO) method.  Inventories are summarized by major classification as follows (in thousands):

	January 31, 2014			April 30, 2013
Raw material	$	3,838		$	3,077
Work-in-process		1,612			1,409
Finished goods		2,992			2,434
		8,442			6,920
Reserves		(602	)		(682	)
	$	7,840		$	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 January 31, 2014, the Company repurchased 27,407 shares at a cost of approximately $220,000 (average cost of $8.03 per share).  For the nine-month period ended January 31, 2014, the Company repurchased 98,767 shares at a cost of approximately $703,000 (average cost of $7.14 per share).

Stock-Based Compensation

At January 31, 2014, 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 the fair 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, 2014, there were options remaining outstanding to acquire 93,000 shares of common stock under the 1991 Plan.

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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, 2014, there were options outstanding to acquire 167,967 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 nine-month periods ended January 31, 2014 and 2013:

	Nine Months Ended January 31, 2014			Nine Months Ended January 31, 2013
Risk-free interest rate		2.97%			2.97%
Expected life, in years		6			6
Expected volatility	82.59	–	83.23%	65.52	–	80.48%
Dividend yield		0.0%			0.0%
Forfeiture rate		11.40%			9.20%

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.

Page 13

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 period ended January 31, 2014, exercises of stock options triggered tax benefits totaling approximately $61,000.  There were no exercises of stock options which triggered tax benefits for the nine-month period ended January 31, 2013.

At January 31, 2014, there was approximately $340,000 of unrecognized compensation cost related to share-based payments that is expected to be recognized over a weighted-average period of 2.10 years.

The following tables represent equity award activity for the nine-month period ended January 31, 2014:

Stock Options	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Contract Life (Years)
Outstanding options at April 30, 2013		205,500	$	4.28	6.54
Granted		70,000	$	6.71	9.58
Exercised		13,533	$	4.62		-
Forfeited		1,000	$	3.88		-
Outstanding options at January 31, 2014		260,967	$	4.92	6.74
Outstanding exercisable at January 31, 2014		141,634	$	4.28	4.93

Restricted Stock	Number of Shares
Outstanding awards at April 30, 2013		11,007
Granted		4,608
Issued		4,469
Forfeited		-
Outstanding awards at January 31, 2014		11,146
Outstanding vested at January 31, 2014		-

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 189,651, respectively, at January 31, 2014.  At January 31, 2014 the aggregate intrinsic value of options and restricted stock outstanding was approximately $2,320,000, and the aggregate intrinsic value of exercisable options was approximately $1,268,000.  The Company recognized share-based compensation expense of $142,000 for the nine-month period ended January 31, 2014 and $89,000 for the nine-month period ended January 31, 2013.  The weighted-average fair value of the options and restricted stock granted in the nine-month period ended January 31, 2014 was $4.84 per stock option and $5.86 per restricted stock award.

Page 14

The following table summarizes information about equity awards outstanding at January 31, 2014:

			Options Outstanding					Options Exercisable
Range of Exercise Prices			Number Outstanding at January 31, 2014		Weighted- Average Remaining Contractual Life  (Years)	Weighted- Average Exercise Price		Number Exercisable at  January 31, 2014		Weighted- Average  Exercise Price
$3.01	-	$4.00		104,250	4.59	$	3.54		88,250	$	3.63
$4.01	-	$5.00		23,967	8.30	$	4.35		7,300	$	4.35
$5.01	-	$6.00		115,000	8.22	$	5.54		38,334	$	5.21
$7.01	-	$8.00		7,750	4.61	$	7.05		7,750	$	7.05
$10.01	-	$11.00		10,000	9.86	$	11.83		-		-
Total				260,967	6.74	$	4.92		141,634	$	4.28

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,
	2014		2013		2014		2013
Numerator:
Net income	$	569	$	716	$	1,486	$	968
Denominator:
Weighted average common shares   Outstanding – basic		3,814		3,914		3,856		3,895
Effect of dilutive options outstanding		139		11		91		9
Weighted average common shares   outstanding – diluted		3,953		3,925		3,947		3,904

Options to purchase 10,000 and 223,750 shares of common stock as of the three-month periods ended January 31, 2014 and 2013, 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, 2014 and 2013, options to purchase 10,000 and 201,750 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, 2014, 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.

Page 15

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 16, 2013 to extend the expiration date of the line of credit to October 30, 2015.  The total amount of borrowing base for the line of credit as of January 31, 2014 was approximately $4,726,000, 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, 2014) 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, 2014.  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):

	January 31, 2014		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 October 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.	$	2,666	$	2,804
Operating line of credit, $6,000,000 limit on borrowing capacity, prime rate (3.25% at January 31, 2014) plus/minus 0.5% performance based interest, due in full on October 30, 2015, secured by accounts receivable and inventory.  The interest rate as of January 31, 2014 was 2.75%		-		-
		2,666		2,804
Less current maturities		188		185
	$	2,478	$	2,619

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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)	$	47
2015		189
2016		192
2017		196
2018		200
Thereafter		1,842
	$	2,666

8.           SEGMENT REPORTING

The Company operates and measures the revenues and gross margins of two primary business segments, custom solutions for Original Equipment Manufacturers (“OEM”) and Proprietary M2M products (“Proprietary”).   The OEM solutions business segment consists primarily of custom electronic assemblies, engineering services, liquid crystal displays and data communication technologies. The Proprietary products business segment is made up of remote monitoring hardware and data services, industrial data communication solutions, and ultra-rugged handheld computers, peripherals and maintenance contract revenues.  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.

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	Three Months Ended January 31, 2014
	OEM		Proprietary		Total
Total revenues	$	3,032	$	4,651	$	7,683
Gross margin	$	698	$	2,224	$	2,922

	Three Months Ended January 31, 2013
	OEM		Proprietary		Total
Total revenues	$	4,424	$	3,034	$	7,458
Gross margin	$	1,226	$	1,577	$	2,803

	Nine Months Ended January 31, 2014
	OEM		Proprietary		Total
Total revenues	$	10,930	$	10,857	$	21,787
Gross margin	$	2,772	$	5,386	$	8,158
		��
Goodwill	$	-	$	1,942	$	1,942

	Nine Months Ended January 31, 2013
	OEM		Proprietary		Total
Total revenues	$	9,968	$	7,885	$	17,853
Gross margin	$	2,574	$	4,029	$	6,603
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 January 31,				Nine Months Ended January 31,
	2014		2013		2014		2013
Products and services:
OEM solutions	$	2,984	$	4,382	$	10,757	$	9,800
Remote monitoring solutions		3,926		1,357		8,260		4,208
Industrial data communications		333		113		829		624
Mobile data acquisition		265		1,484		1,439		2,765
Other services:
OEM related services		48		42		173		168
Proprietary product related services		127		80		329		287
Total sales	$	7,683	$	7,458	$	21,787	$	17,853

Page 18

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,
	2014			2013
Warranty reserve balance at beginning of period	$	90		$	163
Expense accrued, including adjustments		92			(3	)
Warranty costs incurred		(67	)		(62	)
Warranty reserve balance at end of period	$	115		$	98

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 products and services encompass remote monitoring, industrial data communication, mobile data acquisition, and wireless communication technologies that are deployed wherever high quality and reliability are essential. We develop, manufacture, and support proprietary M2M technology and products for multiple markets and applications under several premium brand names.  In addition to our proprietary products, we design and manufacture rugged and reliable custom solutions for multiple original equipment manufacturers (“OEMs”) in a variety of industries.

On December 17, 2012, the Company announced a share repurchase program through 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, 2014, the Company repurchased 27,407 shares at a cost of approximately $220,000 (average cost of $8.03 per share).  For the nine-month period ended January 31, 2014, the Company repurchased 98,767 shares at a cost of approximately $705,000 (average cost of $7.14 per share).

On October 16, 2013, the Company amended the expiration date of its operating line of credit to October 30, 2015.   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 $4,726,000 as of January 31, 2014. The line of credit accrues interest at a performance-based rate that is based on the prime rate (3.25% at January 31, 2014) plus/minus 0.5%.  The interest rate, determined by the Company’s debt-to-tangible net worth ratio, was 2.75% on January 31, 2014, which is the lowest rate allowed under the terms of the operating line of credit.  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, 2014.

Page 20

Results of Operations

Three Months Ended January 31, 2014 Compared With Three Months Ended January 31, 2013.

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, 2014					January 31, 2013
Revenues	$	7,683		100.0	%	$	7,458		100.0	%
Cost of revenues		4,761		62.0	%		4,655		62.4	%
Gross margin		2,922		38.0	%		2,803		37.6	%
Selling, general and administrative expenses		2,031		26.4	%		1,657		22.2	%
Operating income		891		11.6	%		1,146		15.4	%
Financial expense		(15	)	(0.2	%)		(17	)	(0.2	%)
Income before income taxes		876		11.4	%		1,129		15.1	%
Income tax expense		307		4.0	%		413		5.5	%
Net income	$	569		7.4	%	$	716		9.6	%
Net income per share – basic	$	0.15				$	0.18
Net income per share – diluted	$	0.14				$	0.18

Revenues for the three months ended January 31, 2014 were approximately $7,683,000, which was an increase of $225,000, or 3.0%, from revenues of $7,458,000 for the three months ended January 31, 2013.

	Three Months Ended
	(In thousands)
	January 31, 2014				January 31, 2013
OEM revenues	$	3,032	39.5	%	$	4,424	59.3	%
Proprietary product revenues		4,651	60.5	%		3,034	40.7	%
Total Sales	$	7,683	100.0	%	$	7,458	100.0	%

Proprietary products.  Revenues from our proprietary products and services were $4,651,000 for the three-month period ended January 31, 2014, which was a $1,617,000, or 53.3%, increase from sales of $3,034,000 in the prior year period.

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Sales of our wireless remote monitoring solutions were approximately $3,926,000 for the three-month period ended January 31, 2014, which was an increase of $2,569,000, or 189.3%, from $1,357,000 during the three-month period ended January 31, 2013.  The increase in revenues for the period was primarily due to shipments made towards the previously announced Al Rushaid Group order to Saudi Arabia, continuing shipments of our recently released remote monitoring product for the commercial transportation industry, and an overall increase in customer orders received and shipped for our mature M2M remote monitoring products.  Recurring data management services revenue continues to grow as a function of the growing population of monitoring units deployed in the field.  Data management services revenue totaled approximately $307,000, an increase of $52,000, or 20.4%, from data management services revenue of $255,000 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 compared to the equivalent periods of the prior year.  These increases will be driven by continued customer demand for our existing M2M solutions, our introduction of new products, and our expansion into new industrial markets.  We also expect a positive impact on revenues in the fourth quarter from final shipments that will complete the previously announced order from the Al Rushaid Group.

Sales of our industrial data communication solutions were approximately $333,000 for the three-month period ended January 31, 2014, which was a $220,000, or 194.7%, increase from total sales of $113,000 for the three-month period ended January 31, 2013.  The increase resulted from of our active pursuit of new customers and new applications for the Director series products.  We have expanded our sales and marketing efforts and have invested in additional product development initiatives in order to expand sales and market penetration of our industrial data communication solutions.  This additional focus and investment is expected to grow revenues for this  product line over the next several quarters.

Sales of our mobile data acquisition solutions, including our Radix handheld computer hardware, peripherals, and maintenance contract revenues, were approximately $265,000 for the three-month period ended January 31, 2014. Total revenues decreased approximately $1,219,000, compared to prior year reported revenues of approximately $1,484,000.  The decrease in revenues was principally the result of a large shipment and deployment of Radix FW960 handheld computers and peripherals to a specific domestic customer that was completed during the prior year period and that was not repeated this year.  Recurring maintenance contract revenues decreased slightly for the three-month period ended January 31, 2014 by approximately $3,000, or 1.5%.  We believe that sales of Radix products and services over the next few quarters will be consistent with the current period.

OEM solutions.  Sales for the OEM business segment were approximately $3,032,000, a decrease of $1,392,000, or 31.5%, from $4,424,000 in the prior year period.  The decrease in OEM sales was primarily the result of an overall decrease in shipments to existing customers due to the seasonality of our customers’ businesses, their current inventory levels, and the impact of new product introductions made the previous year.  We expect that our continuing efforts to target potential customers who will benefit from our M2M technologies combined with our continuing investment in sales and marketing to OEMs, will generate moderate growth in OEM sales and margins in the longer term.

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On January 31, 2014, total backlog scheduled for delivery over the subsequent twelve months was approximately $10,637,000, an increase of $2,144,000, or 25.2%, from a backlog of $8,493,000 on April 30, 2013 and an increase of approximately $1,061,000, or 11.1%, from a backlog of $9,576,000 on January 31, 2013.  Orders received from OEMs typically specify multiple production deliveries scheduled over a defined and extended period of time.  Typically, orders for our proprietary M2M 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 backlog relative to our revenues will fluctuate as our mix of proprietary products and custom OEM sales varies.

The following table presents the total twelve-month backlog by business segment for the periods ended January 31, 2014, April 30, 2013, and January 31, 2013 (in thousands).

	January 31, 2014		April 30, 2013		January 31, 2013
OEM	$	9,145	$	7,963	$	8,988
Proprietary products		1,492		530		588
Total backlog	$	10,637	$	8,493	$	9,576

Gross margin for the three-month period ended January 31, 2014 was 38.0% of sales, or $2,922,000, compared to 37.6% of sales, or $2,803,000, for the three-month period ended January 31, 2013.  The increase in both gross margin dollars and percentage was the direct result of the increase in proprietary product sales, primarily led by sales of remote monitoring products, slightly offset by a decrease in OEM revenues.

	Three Months Ended
	(In thousands)
	January 31, 2014				January 31, 2013
Gross margin – OEM	$	698	23.0	%	$	1,226	27.7	%
Gross margin – Proprietary products		2,224	47.8	%		1,577	52.0	%
Total gross margin	$	2,922	38.0	%	$	2,803	37.6	%

Gross margin for the proprietary M2M products business segment was approximately 47.8% of sales, or $2,224,000, for the three-month period ended January 31, 2014 as compared to 52.0% of sales, or $1,577,000, for the three-month period ended January 31, 2013.  The increase in gross margin dollars for the proprietary products resulted primarily from the increase in remote monitoring product sales volume.  The gross margin percentage decrease resulted from the revenue mix of proprietary product sales as compared to the previous year period.

The gross margin for the OEM business segment was $698,000, or 23.0% of sales, for the three-month period ended January 31, 2014 compared to $1,226,000, or 27.7% of sales, for the prior year period.  The decrease of OEM gross margin dollars and gross margin percentage was the result of the overall decrease in OEM revenues for the period as well as the impact of the product mix of shipments between various customers.

We expect that consolidated gross margins over the next few quarters will continue within the range of 36% to 41%.  This expectation is based on our forecasted sales volumes and the mix of proprietary and OEM products and services which impacts our manufacturing efficiency and gross margins.

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Selling, general and administrative (“SG&A”) expenses totaled approximately $2,031,000 for the three-month period ended January 31, 2014.  This was an increase of $374,000 as compared to total SG&A expenses of $1,657,000 for the three-month period ended January 31, 2013.  SG&A expenses were 26.4% of sales for the current fiscal quarter of 2014 as compared to 22.2% of sales for the comparable period for fiscal 2013.

	Three Months Ended
	(In thousands)
	January 31, 2014				January 31, 2013
Research & development expenses	$	475	6.2	%	$	411	5.5	%
Selling & marketing expenses		761	9.9	%		529	7.1	%
General & administrative expenses		795	10.4	%		717	9.6	%
Total selling, general and     administrative expenses	$	2,031	26.4	%	$	1,657	22.2	%

Research and development expenses increased $64,000, to $475,000, during the fiscal quarter as compared to the prior year period. This increase was mostly driven by higher engineering personnel related expenses resulting from our increased investment in engineering resources and our continuing focus on new product development and design.

Selling and marketing expenses were $761,000 for the three-month period ended January 31, 2014 and $529,000 for the three-month period ended January 31, 2013.  The $232,000 increase resulted mainly from increases in sales commissions, for both domestic and international sales, of $180,000 due to the increase in revenues during the period.  Additionally, increases in marketing and advertising costs of $18,000 and an increase in the number of sales and marketing personnel, which added approximately $35,000 in expenses for the period.

General and administrative expenses increased approximately $78,000 from the comparable period of the prior year.  The increase was due to growth of corporate expenses of approximately $45,000 which includes professional fees and public company related costs.  Personnel related expenses, including equity-based compensation, and an increase in general office related expenses combined to provide the remaining increase in general and administrative expenses.

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 business development personnel, new product development, systems, and capabilities, but will likely decline as a percentage of total revenues.

Page 24

Operating income for the three-month period ended January 31, 2014 was approximately $891,000, a decrease of $255,000 from an operating income of $1,146,000 reported for the three-month period ended January 31, 2013.

Financial expense, including interest, was $15,000 for the three-month period ended January 31, 2014 and $17,000 for the three-month period ended January 31, 2013.  During the three-month period ended January 31, 2014, there were no net borrowings on the operating line of credit.  As of January 31, 2014, there was $2,666,000 outstanding in current and long-term borrowings (Industrial Revenue Bonds) compared to $2,849,000 at January 31, 2013.  We may utilize the operating line of credit in the near term to fund increases in production activity when necessary or to meet operating capital requirements, but seek to minimize our interest expense whenever possible.

Income tax expense for the three-month period ended January 31, 2014 was approximately $307,000 compared to an income tax expense of $413,000 for the three-month period ended January 31, 2013.  The effective income tax rate was 35.0% and 36.6% for the three-month periods ended January 31, 2014 and 2013, respectively.  The slight decrease in the effective tax rate was due to the recognition of certain income tax adjustments during the current year period.

As a combined result of the above factors, our net income was $569,000, or $0.14 per diluted share, for the three-month period ended January 31, 2014 as compared to net income of $716,000, or $0.18 per diluted share, reported for the three-month period ended January 31, 2013.

Nine Months Ended January 31, 2014 Compared With Nine Months Ended January 31, 2013.

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, 2014					January 31, 2013
Revenues	$	21,787		100.0	%	$	17,853		100.0	%
Cost of revenues		13,629		62.6	%		11,250		63.4	%
Gross margin		8,158		37.4	%		6,603		36.6	%
Selling, general and administrative expenses		5,698		26.2	%		4,986		32.0	%
Operating income		2,460		11.2	%		1,617		4.5	%
Financial expense		(47	)	(0.2	%)		(54	)	(0.4	%)
Income before income taxes		2,413		11.0	%		1,563		4.2	%
Income tax expense		927		4.4	%		595		1.7	%
Net income	$	1,486		6.6	%	$	968		2.4	%
Net income per share – basic	$	0.39				$	0.25
Net income per share – diluted	$	0.38				$	0.25

Page 25

Revenues for the nine months ended January 31, 2014 were approximately $21,787,000, which was an increase of $3,934,000, or 22.0%, from revenues of $17,853,000 for the nine months ended January 31, 2013.

	Nine Months Ended
	(In thousands)
	January 31, 2014				January 31, 2013
OEM revenues	$	10,930	50.2	%	$	9,968	55.8	%
Proprietary product revenues		10,857	49.8	%		7,885	44.2	%
Total Sales	$	21,787	100.0	%	$	17,853	100.0	%

Proprietary products.  Revenues from our proprietary products and services were $10,857,000 for the nine-month period ended January 31, 2014, which was a $2,972,000, or 37.7%, increase from sales of $7,885,000 for the nine-month period ended January 31, 2013.

Sales of our wireless remote monitoring solutions were approximately $8,260,000 for the nine-month period ended January 31, 2014, which was an increase of $4,052,000, or 96.3%, from $4,208,000 during the nine-month period ended January 31, 2013.  The increase in revenues for the nine-month period ended January 31, 2014, was the result of a number of factors including shipments made towards the previously announced Al Rushaid Group order to Saudi Arabia, continuing shipments of our recently released remote monitoring product for the commercial transportation industry, and an overall increase in customer orders received and shipped for our mature M2M remote monitoring products.  Overall, data management services revenue totaled approximately $864,000, an increase of $127,000, or 17.2%, from data management services revenue of $737,000 reported in the comparable period of the prior fiscal year.  Recurring data management services revenue continues to grow as a function of the growing population of monitoring units deployed in the field.  We anticipate that over the next few quarters, revenues from our wireless remote monitoring solutions will increase as compared to equivalent periods in prior years.  These increases will be driven by continued customer demand for our exisiting M2M solutions, our introduction of new products, and our expansion into new industrial markets.  We also expect a positive impact on revenues in the fourth quarter from final shipments that will complete the previously announced order from the Al Rushaid Group.

Sales of our industrial data communication solutions were approximately $829,000 for the nine-month period ended January 31, 2014, which was a $205,000, or 32.9%, increase from total sales of $624,000 for the same period of the prior fiscal year.  The increase resulted from our active pursuit of new customers and new applications for the Director series products.  We have expanded our sales and marketing efforts and have invested in additional product development initiatives in order to expand sales and market penetration of our industrial data communication solutions.  This additional focus and investment is expected to grow revenues for this product line over the next several quarters.

Page 26

Sales of our mobile data acquisition solutions, including our Radix handheld computer hardware, peripherals, and maintenance contract revenues, were approximately $1,439,000 for the nine-month period ended January 31, 2014. Total revenues decreased approximately $1,326,000, or 48.0%, as compared to the prior year period reported revenues of approximately $2,765,000.  The decrease in revenues resulted from fewer overall shipments to one of our largest international partners compared to the prior year period.  Additionally, we experienced a decrease in shipments since a large shipment and deployment of Radix FW960 handheld computers and peripherals to a specific domestic customer was completed during the prior year period and was not repeated this year.  Recurring maintenance contract revenues decreased slightly for the nine-month period ended January 31, 2014 approximately $49,000, or 7.6%.  We believe that sales of Radix products and services over the next few quarters will be consistent with the current quarter.

OEM solutions.  Sales for the OEM business segment were approximately $10,930,000, an increase of $962,000, or 9.7%, from $9,968,000 in the prior year period.  The increase in OEM sales was primarily the result of increased orders from existing customers due to growth in their businesses this year, their buildup of inventory, as well as the addition of several new OEM customers.  We expect that our continuing investment in OEM sales and marketing, including our efforts to target potential customers who will benefit from our M2M solutions and  technologies, will generate moderate growth in OEM sales and margins in the longer term.

Gross margin for the nine-month period ended January 31, 2014 was 37.4% of sales, or $8,158,000, compared to 37.0% of sales, or $6,603,000, for the nine-month period ended January 31, 2013.  The $1,555,000 increase in gross margin dollars and the slight gross margin percentage increase was the result of both the increase in overall sales volumes in each business segment as well as a shift in product mix within each business segment.

	Nine Months Ended
	(In thousands)
	January 31, 2014				January 31, 2013
Gross margin – OEM	$	2,772	25.4	%	$	2,574	25.8	%
Gross margin – Proprietary products		5,386	49.6	%		4,029	51.1	%
Total gross margin	$	8,158	37.4	%	$	6,603	37.0	%

Gross margin for the proprietary M2M products business segment was approximately 49.6% of sales, or $5,386,000, for the nine-month period ended January 31, 2014 as compared to 51.1% of sales, or $4,029,000, for the nine-month period ended January 31, 2013.  The increase in gross margin dollars for the proprietary products resulted primarily from  the overall increase in proprietary product revenues.  The slight decrease in gross margin percentage was chiefly due to changes in the product mix from the previous year period.

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The gross margin for the OEM solutions business segment was $2,772,000, or 25.4% of sales, for the nine-month period ended January 31, 2014 compared to $2,574,000, or 25.8% of sales, for the prior year period.  The increase of OEM gross margin dollars was essentially the result of the increase in OEM revenues while the slight reduction in gross margin percentage was primarily the impact of the mix of shipments between various customers.

We expect that consolidated gross margins over the next few quarters will continue within the range of 36% to 41%.  This expectation is based on our forecasted sales volume and the mix of proprietary and OEM products and services which impact our manufacturing efficiency and gross margins.

Selling, general and administrative (“SG&A”) expenses totaled approximately $5,698,000 for the nine-month period ended January 31, 2014.  This was an increase of $712,000 as compared to total SG&A expenses of $4,986,000 for the nine-month period ended January 31, 2013.  SG&A expenses were 26.2% of sales for the current fiscal year-to-date period of 2014 as compared to 27.9% of sales for the comparable period for fiscal 2013.

	Nine Months Ended
	(In thousands)
	January 31, 2014				January 31, 2013
Research & development expenses	$	1,398	6.4	%	$	1,245	7.0	%
Selling & marketing expenses		1,927	8.8	%		1,636	9.2	%
General & administrative expenses		2,373	10.9	%		2,105	11.8	%
Total selling, general and     administrative expenses	$	5,698	26.2	%	$	4,986	27.9	%

Research and development expenses increased $153,000, to $1,398,000, during the fiscal year to date period as compared to the prior year.  This increase was the result of higher engineering personnel expenses of approximately $157,000 resulting from our increased investment in engineering resources and our continuing focus on new product development and design, slightly offset by lower product support costs compared to the previous year period.

Selling and marketing expenses were $1,927,000 for the nine-month period ended January 31, 2014 and $1,636,000 for the nine-month period ended January 31, 2013.  The $291,000 increase was the result of an increase of approximately $300,000 in internal and external sales commissions due to the increase in revenues and increases in personnel costs of $24,000 resulting from additional sales and marketing personnel.  The sales office we established in the United Arab Emirates to lead our ongoing sales and marketing efforts in the Middle East resulted in a $15,000 increase in foreign sales office costs and a $60,000 reduction in travel expenses from the previous year period.

General and administrative expenses increased approximately $268,000 from the comparable period of the prior year.  The increase was due to growth of personnel related expenses, including equity-based compensation, of approximately $135,000, increases in professional fees of approximately $46,000, and increases in general office costs which include administration travel costs, telephone expenses, and information technology fees.

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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.

Operating income for the nine-month period ended January 31, 2014 was approximately $2,460,000, an increase of $843,000 from operating income of $1,617,000 reported for the nine-month period ended January 31, 2013.

Financial expense, including interest, was $47,000 and $54,000 for the nine-month periods ended January 31, 2014 and 2013, respectively.  The decrease of $7,000 resulted from lower total outstanding borrowings compared to the previous fiscal year period.  As of January 31, 2014, there were no net borrowings outstanding on the operating line of credit.  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, 2014 was approximately $927,000 compared to income tax expense of $595,000 for the nine-month period ended January 31, 2013.  The effective income tax rate was 38.4% and 38.1% for the nine-month periods ended January 31, 2014 and 2013, respectively.  The slight increase in the effective tax rate was due to the recognition of certain income tax adjustments during the previous year period.

As a combined result of the above factors, our net income was $1,486,000, or $0.38 per diluted share, for the nine-month period ended January 31, 2014 as compared to net income of $968,000, or $0.25 per diluted share, reported for the nine-month period ended January 31, 2013.

Liquidity and Capital Resources

Cash and cash equivalents decreased $1,214,000 to $250,000 as of January 31, 2014 compared to $1,464,000 at April 30, 2013.  This decrease in cash resulted mainly from inventory purchases, purchases of equipment, and purchases of common stock through our stock repurchase program.

Operating activities.  Our consolidated working capital increased approximately $819,000 during the nine-month period ended January 31, 2014.  The increase resulted largely from an increase in current assets, mostly inventory, offset slightly by an increase in current liabilities.  Operating cash receipts totaled approximately $21,235,000 and $17,078,000 during the nine-month periods ended January 31, 2014 and 2013, respectively.  The increase in operating cash receipts is primarily due to increased revenues and collections of accounts receivable. Total cash disbursements for operations, which include purchases of inventory and operating expenses, were approximately $21,243,000 for the nine-month period ended January 31, 2014 and $16,009,000 for the nine-month period ended January 31, 2013.

Investing activities.  Cash used in investing activities totaled $428,000 and $214,000 during the nine-month periods ended January 31, 2014 and 2013, respectively, as we purchased more equipment in the current year-to-date period of fiscal 2014 as compared to the prior year to increase efficiency and expand production capacity.

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Financing activities.  As of January 31, 2014, we had a $6,000,000 operating line of credit that provided us and our wholly-owned operating 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, 2015.  As of January 31, 2014, 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, 2014 was approximately $4,726,000.  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, 2014) 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, 2014 of 2.75% was the lowest rate allowed under the amended terms of the operating line of credit.  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, 2014 we were in compliance will all covenants.    Total payments on long-term debt totaled approximately $138,000 while purchases of common stock during the period for the stock repurchase program totaled $703,000.  Several stock options were exercised during the nine-month period ended January 31, 2014, which provided cash of approximately $63,000.  For the nine-month period ended January 31, 2013, financing activities included $750,000 of cash used in payment on the line of credit, $136,000 used in payments on long-term debt, $140,000 used for common stock purchases for the stock repurchase program, and $59,000 of cash provided by the exercise of stock options.

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 from our vendors, will be sufficient to finance our anticipated working capital needs, our capital expenditures, and our scheduled debt repayments 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, 2014.

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, 2014.

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, 2013 To: November 30, 2013		27,407	$	8.03		158,181		235,110
From: December 1, 2013 To: December 31, 2013		-		-		158,181		235,110
From: January 1, 2014 To: January 31, 2014		-		-		158,181		235,110
Total		27,407	$	8.03

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, 2014, the Company repurchased 27,407 shares at a cost of approximately $220,000 (average cost of $8.03 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 10, 2014	/s/ Karl B. Gemperli
Date		Karl B. Gemperli
		President and Chief Executive Officer
		(Principal Executive Officer)
March 10, 2014	/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

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, 2014, 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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