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| ELSE > SEC Filings for ELSE > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
CRITICAL ACCOUNTING ESTIMATES
Management uses estimates and assumptions in preparing our financial statements in accordance with generally accepted accounting principles. These estimates affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. There are no significant accounting estimates described in the notes to the financial statements that are critical at this time. A more in-depth description of our accounting estimates can be found in the interim financial statements included in this report and in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2007.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three-month period ended September 30, 2008 decreased $210,000, or 10.3%, when compared to net sales for the same period in 2007. Net sales for the nine-month period ended September 30, 2008 increased $168,000, or 3.2%, when compared to net sales for the same period in 2007.
For the three months ended September 30, 2008 compared to the same period in 2007, the Controls Division had a decrease in net sales of $245,000, or 12.7%, and ADS contributed an increase in net sales of $35,000, or 31.3%.
For the nine months ended September 30, 2008 compared to the same period in 2007, the Controls Division contributed an increase in net sales of $117,000, or 2.4%, and ADS contributed an increase in net sales of $51,000, or 13.9%.
The Controls Division has experienced a decrease in net sales for the third quarter of 2008 due in large part to fluctuations of commodity grain and feed product prices worldwide. We have also witnessed a slowing of capital spending on plant construction and expansion projects in 2008, which has affected all product categories. The recent turmoil in the equity markets has resulted in a slowdown in spending across all of our major market segments, which management expects to continue into 2009. The bulk of our sales volume is derived from the Speed Monitoring product lines to the grain, feed, biofuels, power generation, and mining industries, as well as other key industrial markets and equipment builders. Products sold into these markets include shaft speed sensors and switches, ratemeters and counters, motor controllers, vibration switches, and position monitors. In our sales and marketing efforts, we are developing additional channel partners in the form of distributors and independent representatives both domestically and internationally and expect to continue adding sales partners in key locations. We may also consider acquiring compatible businesses as part of our growth strategy.
The Controls Division has integrated our sensors for bearing temperature, belt misalignment, and shaft speed with a programmable logic controller and touch screen interface to create a complete system for hazard monitoring. By doing this, we are enabling our customers to locate which part of the material handling system is operating incorrectly, typically in under ten seconds. This is done by using visual diagrams on the touch screen. We have received very positive feedback from customers and installed the first three systems at customer sites during the third quarter.
The ADS Division increase in net sales for the third quarter of 2008 is due to an increase in the sales of the ExpertScan product, which includes the on-line web module developed in 2007. ExpertScan currently permits automated data collection from surveys, electronic forms, and other paper forms. The new web capability enables ExpertScan to automatically create an electronic version of a new or existing ExpertScan document, thereby allowing a combination of paper and electronic data collection using the same form.
Cost of Goods Sold
Our cost of goods sold increased $28,000, or 4.1%, for the three months ended September 30, 2008 compared to the same period in 2007. For the nine-month period ended September 30, 2008, the cost of goods sold increased $169,000, or 9.2%, compared to the same period in 2007. This increase was primarily a result of increased material costs and the additional costs for the Electro Sentry systems.
Gross Profit
Gross margin for the three-month period ended September 30, 2008 was 61.3% versus 66.7% for the same period in 2007. For the nine-month periods ended September 30, 2008 and 2007, gross margins were 62.8% and 64.9%, respectively. The primary cause of the decrease in the gross margin was due to the new Electro Sentry systems, which contained a significant amount of development items. The remaining variances were due to expenses rising slightly faster than sales over the three and nine-month periods ending September 30, 2008 versus the same periods last year.
Operating Expenses
Total operating expenses decreased $38,000, or 4.8%, for the three months ended September 30, 2008 when compared to the same period of 2007. Of this decrease, the Controls Division contributed a decrease of $8,000, or 1.2%, and ADS decreased by $30,000, or 23.6%.
For the nine months ended September 30, 2008 when compared to the same period of 2007, operating expenses increased $166,000, or 7.1%. Of this increase, the Controls Division contributed an increase of $190,000, or 9.6%, offset by a decrease in ADS of $24,000, or 6.7%.
Selling and marketing costs decreased $8,000, or 2.2%, for the three months ended September 30, 2008 when compared to the same period in 2007. For the nine months ended September 30, 2008, selling and marketing costs increased $114,000, or 11.0%, when compared to the same period in 2007. Of the decrease for the three months ended September 30, 2008, ADS contributed a decrease of $10,000, or 21.3%, offset by an increase in the Controls Division of $2,000, or .6%. Of the increase for the nine months ended September 30, 2008, the Controls Division contributed an increase of $110,000, or 12.1%, and ADS had an increase of $4,000, or 3.1%. For the three months ended September 30, 2008, the decrease in ADS expenses was due to a decrease in salaries and wages and benefit expense due to a reduction in staff, offset by an increase in sales commissions. The increase in the Controls Division was due to an increase in salaries and wages and benefit expense because of a new hire, raises for existing employees, advertising, and travel expenses, offset by decreases in sales representative commissions, contractor personnel, and sales literature, graphic arts services, and direct mail expenses. For the nine months ended September 30, 2008, sales representative commissions, advertising, sales literature, media production, travel, tradeshow, salaries and wages for new hires, benefit expenses - offset by decreases in contract personnel which were replaced by new hires - and product launch expenses are the predominant expenses that increased in the Controls Division. The increase in selling and marketing costs at ADS was due to increased wages due to additional personnel, sales commissions, and advertising, offset by reduced expenses in direct mail expenses and computer supplies.
General and administrative costs decreased $43,000, or 14.2%, for the three
months ended September 30, 2008 compared to the same period in 2007. For the
nine months ended September 30, 2008, general and administrative costs increased
$6,000, or 0.7%, when compared to the same period in 2007. Of the decrease for
the three months ended September 30, 2008, the Controls Division contributed a
decrease of $26,000, or 9.6%, and ADS contributed a decrease of $17,000, or
53.1%. The increase for the nine months ended September 30, 2008 was driven by
an increase in costs of $31,000, or 3.9%, from the Controls Division, offset by
a decrease in ADS costs of $25,000, or 30.5%. For the three months ended
September 30, 2008, the decrease in general and administrative costs from the
Controls Division was due to decreases in contract personnel which were replaced
by new hires, legal and professional fees mostly related to Sarbanes-Oxley
Section 404 compliance documentation and testing, and a decline in allowance for
doubtful accounts, offset by increases in depreciation on the upgrade of the
enterprise software and related hardware, salaries and wages for new hires, and
computer supplies and maintenance. The decrease in ADS was due to decreases in
contract personnel, legal and professional fees mostly related to Sarbanes-Oxley
Section 404 compliance documentation and testing, and computer maintenance. For
the nine months ended September 30, 2008, the increase in general and
administrative costs from the Controls Division was due to increases in
depreciation on the upgrade of the enterprise software and related hardware,
salaries and wages for new hires, charitable contributions, computer supplies
and maintenance, and general repairs and maintenance, offset by decreases in
contract personnel which were replaced by new hires, legal and professional fees
mostly related to Sarbanes-Oxley Section 404 compliance documentation and
testing, and a decline in allowance for doubtful accounts. The decrease in ADS
was due to decreases in contract personnel expenses, legal and professional fees
mostly related to Sarbanes-Oxley Section 404 compliance documentation and
testing, and a decline in the allowance for doubtful accounts, offset by an
increase in computer supplies and maintenance.
Research and development costs increased $13,000, or 9.9%, for the three months ended September 30, 2008 compared to the same period in 2007. For the nine months ended September 30, 2008, research and development costs increased $46,000, or 10.9%, when compared to the same period in 2007. Of the increase for the three months ended September 30, 2008, the Controls Division contributed an increase of $16,000, or 19.3%, offset by a decrease in ADS of $3,000, or 6.3%. Of the increase for the nine months ended September 30, 2008, the Controls Division contributed an increase of $49,000, or 18.0%, offset by a decrease in ADS of $3,000, or 2.0%. For the three months ended September 30, 2008, the increase in the Controls Division was due to lab materials, prototypes, legal fees related to trademark/patents, and increases in wages and benefits. The decrease in ADS was due to a decrease in wages. For the nine months ended September 30, 2008, the increase in the Controls Division was due to lab materials, prototypes, travel, legal fees related to trademark/patents, and increases in wages and benefits, offset by a decrease in lab testing fees for product certification. The decrease in ADS was due to a decrease in wages and computer supplies, offset by an increase in contract personnel.
Non-Operating Income
Non-operating income decreased by $33,000, or 49.3%, for the three-month period ended September 30, 2008 compared to the same period for 2007. For the nine months ended September 30, 2008, non-operating income decreased $125,000, or 66.5%, when compared to the same period in 2007. The decrease for both the three and nine-month periods ended September 30, 2008 is driven by a decrease in interest income and INV's recognized loss on a $35,000 investment in Minn Shares, Inc. (MSHS). Minn Shares, Inc. has been liquidated and we do not believe that we will receive any additional return of our investment.
Interest income decreased $35,000, or 54.7%, when comparing the three months ended September 30, 2008 to the same period in 2007. For the nine months ended September 30, 2008, interest income decreased $100,000, or 53.2%, when compared to the same period in 2007. These decreases were due to the decreased interest rate on Treasury Bills, which was 1.774% at September 30, 2008, compared to 4.795% at September 30, 2007.
Income Before Income Taxes
Income before income taxes decreased $233,000, or 37.1%, to an income before tax of $395,000 for the three-month period ended September 30, 2008 compared to the same period in 2007. For the nine-month period ended September 30, 2008 income before income tax decreased $292,000, or 23.7%, when compared to the same period in 2007.
The Controls Division had income before income taxes of $387,000 for the three months ended September 30, 2008 compared to $652,000 for the same period in 2007, a decrease of $265,000, or 40.6%. For the nine months ended September 30, 2008, the Controls Division had income before income taxes of $1,022,000 compared to $1,275,000 for the same period in 2007, a decrease of $253,000, or 19.8%. The decrease in income before income taxes for the three months ended September 30, 2008 was mainly due to a decrease in net sales (due in large part to fluctuations of commodity grain and feed product prices worldwide), a decrease in the gross margin (primarily due to the new Electro Sentry systems), an increase in the percentage of operating expenses to net sales (from 34.9% of net sales in 2007 to 39.5% of net sales in 2008), and a decrease in interest income (due to the decrease in interest rates on Treasury Bills). The decrease in net income before income taxes for the nine months ended September 30, 2008 was primarily due to a decrease in the gross margin, an increase in the percentage of operating expenses to net sales (from 40.8% of net sales in 2007 to 43.7% of net sales in 2008) and a decrease in interest income.
ADS had income before income taxes of $34,000 for the three months ended September 30, 2008 compared to a net loss before income taxes of $24,000 for same period in 2007, an increase of $58,000, or 241.6%. This increase in income before income taxes was due primarily to an increase in sales (due to the increased sales of ExpertScan which includes the on-line module developed in 2007) and a decrease in the percentage of operating expenses to net sales (from 113.4% of net sales in 2007 to 66.0% of net sales in 2008). For the nine months ended September 30, 2008, ADS had income before income taxes of $35,000 compared to loss before income taxes of $33,000 for the same period in 2007, an increase of $68,000, or 206.1%. This increase in income before income taxes was due primarily to an increase in sales and a decrease in the percentage of operating expenses to net sales (from 97.5% of net sales in 2007 to 79.9% of net sales in 2008).
INV'S income before taxes was a loss of $26,000 for the three-month period ended September 30, 2008 compared to a breakeven quarter for the three-month period ended September 30, 2007. INV's income before taxes decreased $107,000 to a loss before income taxes of $116,000 for the nine months ended September 30, 2008 compared to the same period in 2007. This decrease was primarily due to the decrease in interest rates on Treasury Bills and the recognized loss on an investment held by the Company (see "Non-Operating Income").
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $5,617,000 at September 30, 2008, $5,779,000 at December 31, 2007, and $5,562,000 at September 30, 2007.
Cash provided by operating activities was $231,000 and $563,000 for the nine months ended September 30, 2008 and 2007, respectively. The decrease was primarily a result of our net operating income adjusted for depreciation expense on capital assets, accounts receivable, inventories, accrued expenses, accrued income tax activity, and realized loss on an investment.
Cash provided by investing activities was $5,000 for the nine-month period ended September 30, 2008 and cash used in investing activities was $86,000 for the same period in 2007. The increase was primarily due to purchases of property and equipment of $86,000 in 2007, while there were no purchases in 2008.
Cash used in financing activities was $398,000 and $366,000 for the nine months ended September 30, 2008 and 2007, respectively. During the nine-month periods ended September 30, 2008 and 2007, the Company paid aggregate dividends of $404,000 and $403,000, respectively. In 2007, an officer exercised a stock option which provided cash of $32,000. There were no such exercises of stock options in 2008. During the nine-month periods ended September 30, 2008 and 2007, the Company had $6,000 and $5,000, respectively, in stock purchases under the Employee Stock Purchase Plan.
Our ongoing cash requirements will be primarily for capital expenditures, acquisitions, research and development in both the production monitoring and character recognition divisions, and working capital. Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements through at least the next 12 months.
INV's primary investments are 343,267 shares of Rudolph Technologies, Inc. ("Rudolph"), listed on the Nasdaq stock market, and 551,759 shares of PPT Vision, Inc. ("PPT"), listed on the Pink Sheets. The Rudolph investment is accounted for using the available for sale method. The PPT investment is accounted for under the equity method of accounting. These stocks are subject to fluctuations in market price and could have a negative effect on our liquidity.
Off-balance Sheet Arrangements
As of September 30, 2008, the Company had no off-balance sheet arrangements or transactions.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements relating to management's beliefs with respect to the spending slowdown in our market segments; our ongoing development of additional sales channel partners; our expectation to continue adding sales partners in key locations; the possibility of acquiring compatible businesses as part of our growth strategy; management's intention that we not become an investment company; our expected use of cash on hand; our cash requirements; and the sufficiency of our cash flows. Any statement that is not based solely upon historical facts, including strategies for the future and the outcome of events that have not yet occurred, is considered a forward-looking statement.
All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements, other than as required by law. It is important to note that our actual results could differ materially from those in such forward-looking statements. The forward-looking statements we make in this Quarterly Report are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including those detailed in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2007, filed with the Securities and Exchange Commission.
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