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| ASY > SEC Filings for ASY > Form 10KSB on 23-Jul-2008 | All Recent SEC Filings |
23-Jul-2008
Annual Report
Overview
Elecsys is a publicly traded company that provides electronic manufacturing services, custom LCDs, ultra-rugged mobile computing devices, and wireless remote monitoring solutions to numerous industries worldwide. We operate our business through three wholly-owned subsidiaries, DCI, Inc. ("DCI"), Radix Corporation ("Radix") and NTG, Inc. ("NTG").
DCI provides electronic design and manufacturing services for original equipment manufacturers ("OEMs") in the aerospace, transportation, communications, safety, security and other industrial product markets. DCI has specialized expertise and capabilities to design and efficiently manufacture custom electronic assemblies which integrate a variety of specialized interface technologies, such as custom LCDs, keypads, and touchscreens with circuit boards and other electronic components. DCI seeks to become an extension of the OEM's organization by providing key expertise that enables rapid development and manufacture of electronic products from product conception through volume production.
Radix designs, develops, and implements ultra-rugged handheld computing solutions for tough environments where data integrity is paramount. Its field-proven products, which include handheld computers, printers, peripherals, and application software, are deployed in over 70 countries in applications that include utilities, transportation logistics, traffic and parking enforcement, route accounting/deliveries, and inspection and maintenance. Radix has built a reputation for reliability and support over its lengthy history. Our flexibility to custom configure solutions tailored to specific requirements has provided opportunities to expand our product offerings into new industries.
NTG designs, markets, and provides remote monitoring solutions for the oil and gas pipeline industry as well as other industries that require remote monitoring. NTG's wireless remote monitoring devices utilize the existing cellular and satellite infrastructure and its Watchdog CP Web Monitor to provide full time, wireless status monitoring and alarm notification regarding the performance of multiple types of systems over the internet. This highly reliable network, combined with its internet-based front-end, provides NTG's customers with active monitoring and control of a large population of field-deployed remote monitoring devices.
On December 19, 2006, the Company announced that its NTG subsidiary had acquired the product lines, technology, customer base and intellectual property, including a pending patent application, of Advanced Monitoring & Control, Inc. ("AMCI") for approximately $90,000 plus additional royalty payments. The entire purchase price was allocated to the customer list. AMCI was a competitor of NTG in the business of remote monitoring of oil and gas pipelines as well as other various remote monitoring applications.
The Company renewed and increased its operating line of credit to $5,000,000 on August 15, 2007. This line of credit provides the Company and its subsidiaries with short-term financing for their working capital requirements. On April 11, 2008, the Company and its financial institution amended the agreement, increasing the total amount available under the operating line of credit to $6,000,000 and modifying its variable interest rate. The line of credit now accrues interest at the prime rate with a minimum interest rate of 5.50% (5.50% at April 30, 2008). The line of credit is secured by accounts
receivable and inventory and expires on August 14, 2008. Its borrowing capacity is calculated as a specified percentage of accounts receivable and inventory. The line of credit contains various covenants, including certain financial performance covenants pertaining to the maintenance of debt to net worth and minimum net worth ratios. As of April 30, 2008 the Company was in violation of its minimum tangible net worth covenant as a result of acquiring a significant amount of intangible assets in the Radix transaction. The Company received a waiver of the covenant from its financial institution for the period ended April 30, 2008. There were $3,836,000 and $1,525,000 in borrowings outstanding on the credit facility as of April 30, 2008 and 2007, respectively.
On September 18, 2007, the Company, through its newly formed and wholly owned subsidiary, Radix Corporation, acquired the assets and assumed certain liabilities of Radix International Corporation and its subsidiary of Salt Lake City, Utah. The Company acquired approximately $4.56 million in tangible assets, including accounts receivable and inventory, as well as all of the intellectual property and intangible assets owned by Radix International Corporation and its subsidiary. In the transaction, the Company's new subsidiary assumed accounts payable of $2.2 million due to the Company's DCI subsidiary, assumed an additional amount of approximately $2.3 million in liabilities, and incurred acquisition costs of over $50,000. The transaction also includes contingent consideration based on the annual revenues of the acquired business over the next five years. The revenue-based contingency is limited to approximately $2.2 million and is subject to certain considerations that may impact the total amount to be paid.
Results of Operations
The following table sets forth for the periods presented, certain statement of operations data (in thousands) of the Company:
Years Ended
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April 30, 2008 April 30, 2007
Sales $23,418 100.0% $19,809 100.0%
Cost of products sold 15,182 64.8% 13,958 70.5%
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Gross margin 8,236 35.2% 5,851 29.5%
Selling, general and Administrative expenses 6,526 27.9% 4,323 21.8%
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Operating income 1,710 7.3% 1,528 7.7%
Interest expense (491) (2.1%) (310) (1.6%)
Gain on sale of property -- 0.0% 324 1.6%
Other income, net 20 0.1% 11 0.1%
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Net income before taxes 1,239 5.3% 1,553 7.8%
Income tax expense 551 2.4% 507 2.5%
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Net income $688 2.9% $1,046 5.3%
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Net income per share - Basic $0.21 $0.32
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Net income per share - Diluted $0.20 $0.31
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Sales for the fiscal year ended April 30, 2008 were approximately
$23,418,000, an increase of $3,609,000, or 18.2%, from $19,809,000 for fiscal
2007.
DCI. Sales at DCI were approximately $16,477,000, a decrease of $2,422,000,
or 12.8%, from $18,899,000 from the prior year. The sales from the prior year
included $4,454,000 in sales to the former Radix Corporation. Sales to the
former Radix Corporation totaled approximately $872,000 for the period from May
1, 2007 to September 17, 2007. External sales reported at DCI no longer include
sales made to our Radix subsidiary after September 18, 2007. Overall, sales to
outside customers at DCI, excluding sales to both NTG and Radix in both
comparable periods, were $15,605,000 for the year ended April 30, 2008, an
increase of $1,160,000, or 8.0%, from the $14,445,000 for the year ended April
30, 2007. The increase in sales at DCI to outside customers resulted from
increased shipments to existing and new customers. We expect sales volumes to
outside customers at DCI to decrease slightly over the next two fiscal quarters,
and we expect growth to occur in the second half of the 2009 fiscal year. This
expectation is based upon scheduled shipments to customers currently recorded in
our backlog, combined with anticipated future bookings.
Radix. Sales at the Company's newest subsidiary, Radix, totaled
approximately $3,249,000 since the acquisition date of September 18, 2007. The
revenues were mainly the result of sales of rugged hand held computer hardware
and peripherals as well as maintenance contract revenues. We anticipate
increasing revenues at Radix over the next few quarters as integration efforts
are completed and the investments made in sales, marketing, and support
initiatives begin to mature.
NTG. Sales volumes at NTG were $3,692,000 for the year ended April 30, 2008
an increase of $2,783,000, or 306%, from the year ended April 30, 2007. The
increase in sales at NTG resulted from shipments of new products and equipment
upgrades of $3,276,000 during the period and additional network messaging
service revenues which totaled $262,000 for the period. Sales at NTG are
expected to continue increasing next quarter as compared to the previous year
period as a result of anticipated demand for both our digital cellular and
satellite-based WatchdogCP products.
Total consolidated backlog at April 30, 2008 was approximately $5,166,000, a decrease of approximately $5,237,000, or 50.3%, from a total backlog of $10,403,000 on April 30, 2007 and a decrease of $1,934,000 from a total backlog of $7,100,000 on January 31, 2008. As of April 30, 2007, the backlog of orders at DCI included approximately $3,668,000 in orders from the former Radix International Corporation that are no longer reported in consolidated backlog. The amount of total consolidated backlog at April 30, 2008, includes purchase orders in place from our customers at each of the three subsidiaries that are scheduled for shipment in future periods but excludes any intercompany purchase orders. The following table presents total backlog by subsidiary for the periods ended April 30, 2008 and 2007 (in thousands):
April 30, 2008 April 30, 2007
------------------- -------------------
DCI, Inc. $7,888 $9,688
NTG, Inc. 108 820
Radix Corporation 589 --
Less intercompany backlog (3,419) (105)
------------------- -------------------
Total $5,166 $10,403
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Gross margin for the year ended April 30, 2008, was 35.2% of sales, or $8,236,000, compared to 29.5% of sales, or $5,851,000, for the year ended April 30, 2007. The increase in gross margin of
approximately $2,385,000 is primarily the result of increased sales volumes at
NTG and the additional sales from Radix. Due to the proprietary nature of their
products, these subsidiaries generate higher gross margins than DCI.
DCI. DCI's gross margin was approximately $5,360,000, or 32.5%, for the
period as compared to approximately $5,514,000, or 29.2%, for the comparable
period of the prior year primarily as a result of product mix to its outside
customers.
Radix. The gross margin at Radix for the year ended April 30, 2008 was
approximately $1,380,000 or 42.5%.
NTG. The gross margin at NTG was approximately $1,496,000, or 40.5%, for
the year ended April 30, 2008 as compared to approximately $337,000, or 37.1%,
for the year ended April 30, 2007. The increase in gross margin at NTG was due
to the increased sales volumes with NTG's products and an increase in messaging
services, which includes the AMCI customer accounts added as part of the AMCI
asset acquisition.
We expect that consolidated gross margins over the next few quarters will
remain in the range of 30% to 35%.
Selling, general and administrative ("SG&A") expenses increased $2,203,000, or 50.9%, to $6,526,000 in the year ended April 30, 2008 from $4,323,000 in the fiscal year ended April 30, 2007. SG&A expenses were 27.9% of sales for the fiscal year ended April 30, 2008 as compared to 21.8% of sales for the fiscal year ended April 30, 2007.
DCI. SG&A expenses at DCI increased $36,000 from the prior year period. During the prior year period, DCI's SG&A expenses included moving and relocation expenses of approximately $100,000. Excluding those moving and relocation expenses, the increase in SG&A expenses in the current period was mainly due to increases in personnel and personnel-related expenses in the administration and engineering departments resulting from our growth. Radix. The addition of Radix also added approximately $1,712,000 in SG&A expenses during the period, contributing to the overall increase in operating expenses. Included in Radix's SG&A expenses were approximately $160,000 specifically related to the costs of the transaction and the move of product integration, engineering, and service operations to Olathe, Kansas facility. NTG. SG&A expenses at NTG increased $339,000 from the prior year period as a result of royalty payments to AMCI combined with increased personnel costs and increased marketing and travel expenses. Elecsys Corporation. Corporate expenses were approximately $116,000 higher than fiscal 2007 as a result of higher accounting and consulting expenses. Excluding the effects of only having a partial year of expenses at Radix as a result of the timing of the Radix acquisition, we anticipate that our SG&A expenses will decrease slightly over the near term as the current period contained moving, relocation and legal expenses related to the Radix transaction that are not expected to be recurring. We will continue to invest in the continuing growth at DCI as well as intensify our investment in product development, marketing, and sales at both NTG and Radix.
Interest expense was $491,000 and $310,000 for the fiscal years ended April 30, 2008 and 2007, respectively. This increase of $181,000 was the direct result of interest expense on our operating line of credit during the period that resulted from an increase in the average amount outstanding on the line of credit as a result of using the line of credit to finance our growth and operations, an increase in total overall outstanding borrowings and increases in the variable interest rates on the Company's borrowings
during the period. As of April 30, 2008, there was $3,836,000 outstanding on the line of credit and an additional $4,179,000 in outstanding long-term borrowings.
Income from operations before income taxes totaled $1,239,000 for the year ended April 30, 2008. During the fiscal year ended April 30, 2007, the Company reported income from operations before income taxes of $1,553,000 which included a gain on the sale of its Lenexa facility of approximately $324,000, net of selling expenses.
Income tax expense totaled approximately $551,000 and $507,000 for the years ended April 30, 2008 and 2007, respectively. The increase of $44,000 was the result of $97,000 of adjustments to income tax expenses due to the impact of FIN 48 which was partially offset by lower taxable income as compared to fiscal 2007. The Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48") at the beginning of the fiscal year. FIN 48 requires that the Company recognize the financial statement benefit, or liability, 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. The Company recognized an additional $97,000 of income tax liability for accrued income taxes, penalties and interest related to its tax positions.
As a result of the above, net income was $688,000, or $0.20 per diluted share, for the fiscal year ended April 30, 2008 as compared to net income of $1,046,000, or $0.31 per diluted share, as reported for the year ended April 30, 2007.
Liquidity and Capital Resources
Cash and cash equivalents decreased $146,000 to $357,000 as of April 30,
2008 compared to $503,000 at April 30, 2007. This decrease was the result of
cash used for new production equipment, increases in inventory and accounts
receivable, a decrease in accounts payable which were partially offset by cash
borrowed for the assets and liabilities purchased for the Radix acquisition as
well as borrowings on our operating line of credit. In the Radix acquisition,
the Company assumed accounts payable of $2.2 million due to the Company's DCI
subsidiary, assumed an additional amount of approximately $2.3 million in
liabilities, and incurred acquisition costs of over $50,000.
Operating activities. Our consolidated working capital decreased approximately $2,171,000 from $4,546,000 in consolidated working capital at the end of the 2007 fiscal year to $2,375,000 at the end of the 2008 fiscal year due to increases in current liabilities primarily associated with the Radix asset acquisition and in our efforts to build up product inventory at both Radix and NTG to meet anticipated demand. Total accounts receivable also increased from the prior year with an increase in sales in the last fiscal quarter from both NTG and Radix. Operating cash receipts during the fiscal year ended April 30, 2008 totaled over $21,150,000 while cash disbursements for operations, which includes purchases of inventory and operating expenses, were approximately $24,743,000. The Company utilizes its line of credit when necessary in order to pay suppliers and meet operating cash requirements.
Investing activities. The $603,000 of cash used in investing activities during the year ended April 30, 2008 was primarily the result of the purchases of new production equipment to increase production capacity and improve productivity at our DCI subsidiary.
Financing activities. For the year ended April 30, 2008, cash provided by financing activities totaled $2,573,000 and included the addition of a new $550,000 loan to meet financing obligations under the acquisition agreement with Radix International Corporation. Also during the period, total borrowings on our operating line of credit were $5,028,000 which was primarily utilized to finance the operations of our subsidiaries. Payments on the operating line of credit during the year ending April 30, 2008 were approximately $2,717,000 which resulted in an outstanding balance on the line of credit of $3,836,000 as of April 30, 2008.
The Company increased its operating line of credit to $5,000,000 on August 15, 2007 and amended the agreement on April 11, 2008. The amendment increased the operating line of credit to $6,000,000 and modified its variable interest rate. The line of credit now accrues interest at the prime rate with a minimum interest rate of 5.50% (5.50% at April 30, 2008) and has an interest rate floor of 5.50%. The line of credit is secured by accounts receivable and inventory and is available for working capital. It expires on August 14, 2008 and its borrowing capacity is calculated as a specified percentage of accounts receivable and inventory. The line of credit contains various covenants, including certain financial performance covenants pertaining to the maintenance of debt to net worth and minimum net worth ratios. As of April 30, 2008 the Company was in violation of its minimum tangible net worth covenant as a result of the Radix transaction in which the amount of intangible assets was significant. The Company received a waiver of the covenant from its financial institution for the period ended April 30, 2008. There were $3,836,000 in borrowings outstanding on the credit facility as of April 30, 2008.
Although there can be no assurances, we believe that existing cash, the cash expected to be generated from the operations of our subsidiaries, amounts available under our line of credit, and amounts available from trade credit, will be sufficient to finance our currently anticipated working capital needs, our capital expenditures for the foreseeable future, and our scheduled debt repayments.
The following table summarizes our contractual obligations as of April 30, 2008 (in thousands):
For Fiscal Years Ending April 30,
Total 2009 2010 2011 2012 2013 Thereafter
--------- --------- --------- -------- -------- ------- ------------
Contractual obligations:
Series A IRB Bonds
(Building Debt) $3,508 $115 $121 $128 $134 $142 $2,868
Interest payments 2,322 212 202 195 186 178 1,349
Operating leases 292 121 119 51 1 -- --
Radix Note 454 176 193 85 -- -- --
Land Note 217 18 20 22 23 25 109
--------- --------- --------- -------- -------- ------- ------------
Total $6,793 $642 $655 $481 $344 $345 $4,326
========= ========= ========= ======== ======== ======= ============
Amount available at Amount owed at
Other obligations: April 30, 2008 April 30, 2008 Expiration
----------------------- ------------------- -----------------------
Line of credit $6,000,000 $3,836,000 August 14, 2008
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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 assure you 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, remote monitoring equipment and ultra-rugged handheld computers and peripherals. 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 after 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. Typically, we do not have any post-shipment obligations that would include customer acceptance requirements, training, installation or other services.
Inventory Valuation. Our inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or market 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 a 24-month time horizon. Individual part numbers that have not had any usage in a 24-month time period 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. The reserve balance is analyzed for adequacy along with the inventory review each quarter.
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 30 days. 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 and 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 its carrying value for impairment annually (April 30), and whenever an impairment indicator is identified. Our . . .
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