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| ELSE > SEC Filings for ELSE > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management's estimates and assumptions. An 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-K for the fiscal year ended December 31, 2008.
RESULTS OF OPERATIONS
Net Sales
Net sales for the three months ended March 31, 2009 decreased $560,000, or 30.5%, when compared to net sales for the same period in 2008.
For the three months ended March 31, 2009 compared to the same period in 2008, the Production Monitoring Division had a decrease in net sales of $513,000, or 30.1%, and the AutoData Systems Division had a decrease in net sales of $47,000, or 34.3%.
The Production Monitoring Division decrease was due in large part to the fluctuations of commodity grain and feed product prices worldwide, which has decreased the demand for biofuels, and the delay in plant construction and expansion. The slowing of capital spending on plant construction and expansion projects that started in the last half of 2008 has continued into the first quarter of 2009. The continuing turmoil in the equity markets that resulted in a slowdown in spending across all of our major market segments has impacted sales for the first quarter. Management expects these trends to continue into the second and, possibly, the third quarter of 2009. While customers have shown an interest in the new Electro Sentry product, the aforementioned slowing of capital spending has negatively impacted sales of the product. The bulk of our sales volume, has historically been, 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. Energy production applications in both fossil fuel and biofuels applications continue to show growth in the application of our products.
AutoData Systems decrease in net sales was due in part to the declining economic conditions. New potential customers are delaying the purchase of new systems. After the bidding process has been completed, the turnaround time for receipt of purchase orders has increased due to longer approval cycles.
Cost of Goods Sold
Our cost of goods sold decreased $146,000, or 21.9%, for the three months ended March 31, 2009 compared to the same period in 2008. This decrease was primarily a direct result of decreased sales.
Gross Profit
Gross margin for the three months ended March 31, 2009 was 59.3% versus 63.7% for the same period in 2008. The decrease in gross margin was due to an increase in relative sales volume of lower margin items within the Production Monitoring Division.
Operating Expenses
Total operating expenses decreased $90,000, or 10.0%, for the three months ended March 31, 2009 when compared to the same period of 2008. Of this decrease, the Production Monitoring Division had a decrease of $70,000, or 9.0%, and AutoData Systems Division had a decrease of $20,000, or 16.0%.
Selling and marketing costs decreased $68,000, or 16.7%, for the three months ended March 31, 2009 when compared to the same period in 2008. Of this decrease, the Production Monitoring Division had a decrease of $51,000, or 14.3%, and AutoData Systems Division had a decrease of $17,000, or 33.3%. Sales representative commissions, marketing and advertising, travel, and trade show are the predominant expenses that decreased in the Production Monitoring Division. Marketing efforts are continuing to be directed to our core industries. However, the Company has started to direct marketing efforts to industries, such as the alternative energy industry and water utilities, that are receiving funds in connection with the recently enacted economic stimulus package. The decrease in AutoData Systems Division selling and marketing costs was due to decreased expenses related to salaries and wage expense due to a reduction in staff.
General and administrative costs decreased $20,000, or 6.2%, for the three months ended March 31, 2009 compared to the same period in 2008. Of this decrease, the Production Monitoring Division contributed a decrease of $22,000, or 7.2%, offset by an increase in the AutoData Systems Division of $2,000, or 10.5%. The decrease in general and administrative costs from the Production Monitoring Division was due to a reduction in the cost of computer supplies and a decrease in stock handling fees, which fees are being allocated evenly throughout the year in 2009, whereas all such fees had been expensed in the first quarter of 2008, offset by an increase in legal and professional fees, due to the timing of year end work. The increase in the AutoData Systems Division general and administrative costs was due to an increase in legal and professional fees, due to the timing of year end work, and last year's adjustment for the decline in the allowance for doubtful accounts. The increase was offset by a decrease in stock handling fees, which fees are being allocated evenly throughout the year in 2009, whereas all such fees had been expensed in the first quarter of 2008.
Research and development costs decreased $2,000, or 1.2%, for the three months ended March 31, 2009 compared to the same period in 2008. Of this decrease, the Production Monitoring Division contributed an increase of $3,000, or 2.6%, offset by a decrease in the AutoData Systems Division of $5,000, or 9.1%. The increase in the Production Monitoring Division research and development costs was due to increased lab testing and legal fees for trademark and patent expenses, offset by a decrease in lab materials and prototypes. During 2008, the development of the Electro-Sentry system substantially increased both lab material and prototype expenses. We do not expect the lab material and prototype expenses to increase significantly during the remainder of 2009, although that is dependent on the products developed. The decrease in the AutoData Systems Division was due to a decrease in contractor expenses.
Non-Operating Income
Non-operating income decreased by $36,000, or 87.8%, for the three months ended March 31, 2009 compared to the same period for 2008. This decrease was due primarily to a decrease in the amount of interest income earned.
Interest income decreased $36,000, or 92.3%, when comparing the three months ended March 31, 2009 to the same period in 2008. This decrease was due to the decreased interest rate on Treasury Bills when comparing the three months ended March 31, 2009 to the same period in 2008. The interest rate on Treasury Bills at March 31, 2009 was 0.301% compared to 2.07% at March 31, 2008.
Income (Loss) Before Income Taxes
The Company had a loss before income taxes of $48,000 for the quarter ended March 31, 2009, representing a decrease in income before income taxes of $360,000, or 115.4%, when compared to an income before income taxes of $312,000 for the quarter ended March 31, 2008.
The Production Monitoring Division had income before income taxes of $23,000 for the three months ended March 31, 2009 compared to $333,000 for the same period in 2008, a decrease of $310,000, or 93.1%. Decreased sales for the division and decreased gross margin contributed to the decrease in net income before income taxes.
The AutoData Systems Division had a loss before income taxes of $23,000 for the three months ended March 31, 2009 compared to a loss before income taxes of $1,000 for the same period in 2008, an increased loss of $22,000, or 2,200%. This increase in the loss before income taxes was due to decreased sales offset by a slight increase in gross margin on product sales.
ESI Investment Company had a loss before income taxes of $48,000 compared to a loss before income taxes of $20,000 for the same period in 2008, an increased loss of $28,000, or 140.0%. This increase in the loss before income taxes was a result of the lower interest rate available on Treasury Bills in 2009 as compared to 2008.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $480,000 at March 31, 2009, $5,529,000 at December 31, 2008, and $5,530,000 at March 31, 2008.
Cash provided by operating activities of $56,000 for the quarter ended March 31, 2009 and cash used in operating activities of $120,000 for the quarter ended March 31, 2008, was primarily the result of depreciation expense on capital assets, accounts receivables, inventories, accounts payable, accrued expenses, income taxes receivable and accrued income taxes.
Cash used in investing activities was $4,974,000 for the three month period ended March 31, 2009 and cash provided by investing activities was $3,000 for the three month period ended March 31, 2008. This significant increase in cash used by investing activities was due to purchases of six month Treasury Bills in the aggregate amount of $4,972,000 in 2009, while there were no such purchases in 2008.
Cash used in financing activities was $131,000 and $132,000 for the three months ended March 31, 2009 and March 31, 2008, respectively. During the quarter ended March 31, 2009 and 2008, we had $4,000 and $3,000, respectively, in stock purchases under the Employee Stock Purchase Plan. We paid dividends of $135,000 in each quarter.
Our ongoing cash requirements will be primarily for capital expenditures, research and development in both the Production Monitoring and AutoData 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.
Our 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. The Rudolph stock is subject to fluctuations in market price and could have a negative effect on our liquidity.
Off-balance Sheet Arrangements
As of March 31, 2009, 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 the Company's 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 marketing efforts; our intention to hold our Treasury Bills until maturity; our expectations with respect to lab material and prototype expenses for our Electro-Sentry product; 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. 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 the accuracy of management's assumptions with respect to industry trends, fluctuations in industry conditions, particularly commodity grain and feed product prices, caused by the downturn in the global economy, a prolonged slowdown in plant construction and expansion projects, the impact of any prolonged recessionary conditions or worsening of the global economy, the impact of the recently enacted economic stimulus package, the accuracy of management's assumptions regarding expenses and our cash needs and those listed in the "Cautionary Statements" of the MD&A in our Annual Report on Form 10-K for the year ended December 31, 2008.
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