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| ELSE > SEC Filings for ELSE > Form 10-Q on 12-Aug-2009 | All Recent SEC Filings |
12-Aug-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-month period ended June 30, 2009 decreased $445,000, or 26.1%, when compared to net sales for the same period in 2008. Net sales for the six-month period ended June 30, 2009 decreased $1,005,000, or 28.3%, when compared to net sales for the same period in 2008.
For the three months ended June 30, 2009 compared to the same period in 2008, the Production Monitoring Division had a decrease in net sales of $406,000, or 25.8%, and the AutoData Systems Division had a decrease in net sales of $39,000, or 29.1%.
For the six months ended June 30, 2009 compared to the same period in 2008, the Production Monitoring Division had a decrease in net sales of $919,000, or 28.1%, and the AutoData Systems Division had a decrease in net sales of $86,000, or 31.7%.
The Production Monitoring Division decrease was due in large part to 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 through the second quarter of 2009. This slowdown in sales has been across all of our major markets, and has had a particularly significant effect on original equipment manufacturers (OEM) equipment builders. 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. Towards the end of the second quarter, we sold several Electro-Sentry systems that are due to be installed during the third quarter. 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 fossil fuel and other power generation applications continue to show growth in the application of our products.
The AutoData Systems Division decrease in net sales for the second quarter of 2009 was due in part to the continuation of the economic downturn. 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. We have started to see a gradual shortening of the length of the approval cycle. We are cautiously optimistic that this will continue into the third and fourth quarters of 2009.
Cost of Goods Sold
Our cost of goods sold decreased $103,000, or 16.5%, for the three months ended June 30, 2009 compared to the same period in 2008. For the six-month period ended June 30, 2009, the cost of goods sold decreased $249,000, or 19.3%, compared to the same period in 2008. This decrease was primarily a result of decreased sales.
Gross Profit
Gross margin for the three-month period ended June 30, 2009 was 58.6% versus 63.4% for the same period in 2008. For the six-month periods ended June 30, 2009 and 2008, gross margins were 59.0% and 63.6%, respectively. The decrease in gross margin was due to an increase in relative sales volume of lower margin, higher-priced items within the Production Monitoring Division.
Operating Expenses
Total operating expenses decreased $77,000, or 9.2%, for the three months ended June 30, 2009 when compared to the same period of 2008. Of this decrease, the Production Monitoring Division had a decrease of $65,000, or 9.0%, and the AutoData Systems Division had a decrease of $12,000, or 10.7%.
For the six months ended June 30, 2009 when compared to the same period of 2008, operating expenses decreased $167,000, or 9.6%. Of this decrease, the Production Monitoring Division had a decrease of $135,000, or 9.0%, and the AutoData Systems Division had a decrease of $32,000, or 13.5%.
Selling and marketing costs decreased $71,000, or 18.6%, for the three months ended June 30, 2009 when compared to the same period in 2008. For the six months ended June 30, 2009, selling and marketing costs decreased $139,000, or 17.6%, when compared to the same period in 2008. Of the decrease for the three months ended June 30, 2009, the Production Monitoring Division had a decrease of $59,000, or 17.4%, and the AutoData Systems Division had a decrease of $12,000, or 27.9%. Of the decrease for the six months ended June 30, 2009, the Production Monitoring Division had a decrease of $110,000, or 15.8%, and the AutoData Systems Division had a decrease of $29,000, or 30.9%. Sales representative commissions, advertising, travel, and tradeshow are the predominant expenses that decreased in the Production Monitoring Division based on discretionary cost reductions and a decline in sales. Marketing efforts are continuing to be directed to our core industries. However, the Company continues to direct marketing efforts to industries, such as the alternative energy industry and water utilities, that are receiving funds in connection with the economic stimulus package. The decrease in selling and marketing costs at the AutoData Systems Division was due to decreased wages due to a reduction in staff, commission expense and advertising.
General and administrative costs decreased $13,000, or 4.3%, for the three months ended June 30, 2009 compared to the same period in 2008. For the six months ended June 30, 2009, general and administrative costs decreased $33,000, or 5.3%, when compared to the same period in 2008. Of the decrease for the three months ended June 30, 2009, the Production Monitoring Division had a decrease of $10,000, or 3.6%, and the AutoData Systems Division had a decrease of $3,000, or 13.0%. Of the decrease for the six months ended June 30, 2009, the Production Monitoring Division had a decrease in costs of $32,000, or 5.5%, and the AutoData Systems Division had a decrease of $1,000, or 2.4%. For the three months ended June 30, 2009, the decrease in general and administrative expenses from the Production Monitoring Division was due to decreases in computer supplies and maintenance, charitable contributions, and legal and professional fees, offset by increases in employee benefits, doubtful account writeoffs, and stock handling fees. The stock handling fees are being allocated evenly throughout the year in 2009, whereas all such fees had been expensed in the first quarter of 2008. The decrease in the AutoData System Division was due to decreases in legal and professional fees, computer supplies and maintenance. For the six months ended June 30, 2009, the decrease in general and administrative expenses from the Production Monitoring Division was due to decreases in computer supplies and maintenance, charitable contributions, and stock handling fees, offset by increases in employee benefits, doubtful account writeoffs, and legal and professional fees. The decrease in the AutoData System Division was due to decreases in computer supplies and maintenance and stock handling fees, offset by an increase in legal and professional fees and last year's adjustment for the decline in the allowance for doubtful accounts.
Research and development costs increased $7,000, or 4.6%, for the three months ended June 30, 2009 compared to the same period in 2008. For the six months ended June 30, 2009, research and development costs increased $5,000, or 1.5%, when compared to the same period in 2008. Of the increase for the three months ended June 30, 2009, the Production Monitoring Division contributed an increase of $4,000, or 3.7%, and the AutoData Systems Division contributed an increase of $3,000, or 6.5%. Of the increase for the six months ended June 30, 2009, the Production Monitoring Division contributed an increase of $7,000, or 3.2%, offset by a decrease in the AutoData Systems Division of $2,000, or 2.0%. For the three months ended June 30, 2009, the increase in the Production Monitoring Division was due to an increase in lab materials and lab testing, offset by a decrease in legal fees related to trademark/patents. For the six months ended June 30, 2009, the increase in the Production Monitoring Division was due to an increase in lab testing and legal fees related to trademark/patents, offset by decreases in prototype expenses. 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 increase in the AutoData Systems Division was due to an increase in salary and wages, offset by a decrease in contract personnel.
Non-Operating Income
Non-operating income increased by $19,000, or 158.3%, for the three-month period ended June 30, 2009 compared to the same period for 2008. For the six months ended June 30, 2009, non-operating income decreased $17,000, or 58.6%, when compared to the same period in 2008. The increase for the three-month period ended June 30, 2009 was due to a decrease in recognized losses of investments, offset by a decrease in interest income. During the three months ended June 30, 2008, ESI Investment Company recognized a loss of $35,000 on its investment in Minn Shares, Inc. (MSHS); there was no loss recognition during the same period in 2009. Minn Shares, Inc. has been liquidated and we do not believe that we will receive any additional return on our investment. The decrease for the six-month period ended June 30, 2009 was due to a decrease in interest income, offset by a decrease in recognized losses of investments. During the six months ended June 30, 2008, ESI Investment Company recognized a loss of $35,000 on its investment in Minn Shares, Inc. (MSHS); there was no loss recognition during the same period in 2009.
Interest income decreased $16,000, or 80.0%, when comparing the three months ended June 30, 2009 to the same period in 2008. For the six months ended June 30, 2009, interest income decreased $52,000, or 88.1%, when compared to the same period in 2008. These decreases were due to the decreased interest rate on Treasury Bills, which was .301% at June 30, 2009, compared to 1.675% at June 30, 2008.
Income Before Income Taxes
We had a loss before income taxes of $12,000 for the three months ended June 30, 2009, representing a decrease in income before income taxes of $246,000, or 105.1%, when compared to income before income taxes of $234,000 for the three months ended June 30, 2008. We had a loss before income taxes of $60,000 for the six months ended June 30, 2009, representing a decrease in income before income taxes of $606,000, or 111.0%, when compared to income before income taxes of $546,000 for the six months ended June 30, 2008.
The Production Monitoring Division had income before income taxes of $4,000 for the three months ended June 30, 2009 compared to $251,000 for the same period in 2008, a decrease of $247,000, or 98.4%. For the six months ended June 30, 2009, the Production Monitoring Division had a loss before income taxes of $24,000 compared to an income before income taxes of $533,000 for the same period in 2008, a decrease of $557,000, or 104.5%. This decrease in income before income taxes was mainly due to a decrease in sales and gross margin.
The AutoData Systems Division had a loss before income taxes of $19,000 for the three months ended June 30, 2009 compared to an income before income taxes of $2,000 for same period in 2008, a decrease of $21,000, or 1050.0%. For the six months ended June 30, 2009, AutoData Systems had a loss before income taxes of $42,000 compared to income before income taxes of $1,000 for the same period in 2008, a decrease of $43,000, or 4300.0%. This decrease in income before income taxes was due primarily to a decrease in sales.
ESI Investment Company had income before taxes of $3,000 for the three-month period ended June 30, 2009 compared to a loss before taxes of $19,000 for the three-month period ended June 30, 2008, an increase of $22,000, or 115.8%. ESI Investment Company had income before taxes of $6,000 for the six-month period ended June 30, 2009 compared to income before income taxes of $12,000 for the same period in 2008, a decrease of $6,000, or 50.0%. The increase for the three-month period ended June 30, 2009 was due to a decrease in recognized losses of investments (See "Non-Operating Income"), offset by a decrease in interest income from Treasury Bills. The decrease for the six-month period ended June 30, 2009 was due to a decrease interest income on Treasury Bills, offset by a decrease in recognized losses of investments (See "Non-Operating Income").
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $489,000 at June 30, 2009, $5,529,000 at December 31, 2008, and $5,507,000 at June 30, 2008.
Cash provided by operating activities was $200,000 for the six months ended June 30, 2009 and cash used in operating activities was $9,000 for the same period in 2008. The increase was primarily the result of our net operating loss for the six months ended June 30, 2009, adjusted for depreciation expense on capital assets, accounts receivable, inventories, accounts payable, accrued income tax activity, and realized loss on an investment.
Cash used in investing activities was $4,974,000 for the six-month period ended June 30, 2009 and cash provided by investing activities was $3,000 for the same period in 2008. The significant increase in cash used by investing activities was due to purchases of six month Treasury Bills of $4,972,000 in 2009, while there were no such purchases in 2008.
Cash used in financing activities was $266,000 for the six months ended June 30, 2009 and 2008. During the six-month periods ended June 30, 2009 and 2008, the Company paid aggregate dividends of $270,000 and $269,000, respectively. During the six-month periods ended June 30, 2009 and 2008, we had $4,000 and $3,000, respectively, in stock purchases under the Employee Stock Purchase Plan.
Our ongoing cash requirements will be primarily for capital expenditures, possible acquisitions of companies that have related product lines or technologies, research and development in both the Production Monitoring and AutoData Systems 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 June 30, 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 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 expectations with respect to purchase order approval cycles; 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, 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 stimulus packages, 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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