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ESYS > SEC Filings for ESYS > Form 10-Q on 12-Dec-2011All Recent SEC Filings

Show all filings for ELECSYS CORP

Form 10-Q for ELECSYS CORP


12-Dec-2011

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operation.

Overview

Elecsys Corporation provides innovative data acquisition systems, machine to machine ("M2M") communication technology solutions, and custom electronic equipment for critical industrial applications worldwide. Our primary markets include energy production and distribution, agriculture, safety and security systems, water management, aerospace, military, and transportation. Our proprietary equipment and services encompass rugged remote monitoring, wireless industrial communication, cyber security, mobile computing, and radio frequency identification ("RFID") technologies that are deployed wherever high quality and reliability are essential. We develop, manufacture, and support proprietary technology and products for various markets under several premium brand names. In addition to our proprietary products, we design and manufacture rugged and reliable custom electronic assemblies and integrated liquid crystal displays ("LCDs") for multiple original equipment manufacturers ("OEMs") in a variety of industries worldwide.

On September 1, 2011, the interest rate on the Company's Industrial Revenue Bonds was reset in accordance with the bond terms. The interest rate for the next five years, until September 1, 2016, was set at 1.89%.

On October 28, 2011, the Company amended the expiration date of its operating line of credit to October 30, 2013. 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 $4,689,000 as of October 31, 2011. The line of credit accrues interest at a performance-based rate that is based on the prime rate (3.25% at October 31, 2011) plus/minus 0.5% and has an interest rate floor of 3.50%. The interest rate is determined by the Company's debt-to-tangible net worth ratio and was 3.5% on October 31, 2011 which was 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. The $1,400,000 in borrowings outstanding on the line of credit as of October 31, 2011 is presented on the balance sheet as long-term in accordance with the terms of the line of credit.

Page 21

Results of Operations

Three Months Ended October 31, 2011 Compared With Three Months Ended October 31,
2010.

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)
                                                       October 31, 2011             October 31, 2010
Sales                                              $   6,133           100.0 %    $   5,479       100.0 %
Cost of products sold                                  4,036            65.8 %        3,750        68.4 %
Gross margin                                           2,097            34.2 %        1,729        31.6 %
Selling, general and administrative expenses           1,614            26.3 %        1,475        26.9 %
Operating income                                         483             7.9 %          254         4.7 %
Interest expense                                         (39 )          (0.7 %)         (75 )      (1.4 %)
Other income, net                                         (1 )          (0.0 %)          --         0.0 %
Income before income tax expense                         443             7.2 %          179         3.3 %
Income tax expense                                       165             2.8 %           78         1.4 %
Net income                                         $     278             4.4 %    $     101         1.9 %
Net income per share - basic                       $    0.07                      $    0.03
Net income per share - diluted                     $    0.07                      $    0.03

Sales for the three months ended October 31, 2011 were approximately $6,133,000, an increase of $654,000, or 11.9%, from $5,479,000 for the comparable period of fiscal 2011.

Proprietary products. Sales of our proprietary products and services were $2,361,000 for the three-month period ended October 31, 2011, which was a $106,000, or 4.7%, increase from sales of $2,255,000 in the prior year period.

Sales of our wireless remote monitoring and secure industrial communication solutions were approximately $1,799,000 for the three-month period ended October 31, 2011, which was an increase of $522,000, or 40.9%, from $1,277,000 during the three-month period ended October 31, 2010. The overall increase in sales of remote monitoring equipment and services was driven by the increase in customer orders received and shipped due to our continued focus on sales, marketing, and new product development as well as an increase in our recurring data management services. Data management services revenue continues to grow as a function of the growing population of monitoring units deployed in the field. Overall, data management services revenue totaled approximately $201,000, an increase of $39,000, or 24.1%, from data management services revenue of $162,000 reported in the comparable period of the prior fiscal year. We are experiencing robust interest and demand from new and existing customers for our current offering of M2M solutions and expect similar demand for new products currently being developed. We expect that sales of our wireless remote monitoring and secure industrial communication solutions for the second half of the fiscal year will continue to increase as compared to the first six months of fiscal 2012.

Page 22

Sales of our Radix rugged handheld computer hardware, peripherals and related services, including maintenance contract revenues and our RFID solutions, were approximately $430,000, a decrease of $471,000, or 52.3%, from the prior year period. We made fewer shipments of Radix computer hardware and eXtremeTAG RFID tags during the period which led to a sales decrease of approximately $386,000. Overall poor international economic conditions dramatically impacted sales to many of our largest international Radix customers. However, we expect sales of the Radix FW950, its related peripherals and product enhancements, which have been positively received by the market, and our eXtremeTAG RFID solutions to improve over the next few quarters. We continue to aggressively market the Radix computer hardware and our eXtremeTAG RFID solutions in both domestic and international markets. Recurring maintenance contract revenues posted a decrease for the three-month period ended October 31, 2011 of approximately $75,000, or 25.7%, as a result of fewer Radix units covered under maintenance contracts that was largely the result of continuing budgetary constraints at many of our municipal customers that led them to discontinue their maintenance plans. Maintenance contract revenues will likely continue to produce steady but relatively flat sales over the next few quarters as compared to comparable periods in the prior fiscal year.

EDMS. Sales for the EDMS business segment were approximately $3,772,000, an increase of $548,000, or 17.0%, from $3,224,000 in the prior year period. The increase in sales was a result of continued increases in bookings and backlog during the last few quarters led by the addition of new orders from several existing and new EDMS customers. As a result of the increase in bookings and feedback from customers, we anticipate that EDMS sales will continue with moderate growth over the next few quarters as compared to EDMS sales from the previous year. We have based this forecast upon the amount of current scheduled orders in our backlog and the anticipated addition of new EDMS customers. The impact of uncertain economic conditions or the potential impact of electronic raw material shortages could impact our ability to source electronic components used in production and may affect current scheduled orders as well as future bookings. These events could adversely influence sales over the next few quarters.

Other revenues. Additional miscellaneous revenues, which have been allocated between the EDMS and Proprietary Products business segments for segment disclosure purposes, totaled approximately $266,000 for the three-month period ended October 31, 2011. These revenues are related to service and repair, technical consulting fees, engineering services, and freight billings. These sales totaled approximately $174,000 in the three-month period ended October 31, 2010.

Total consolidated backlog at October 31, 2011 was approximately $10,964,000, an increase of $5,206,000, or 90.4%, from a total backlog of $5,758,000 on April 30, 2011 and an increase of approximately $2,884,000, or 35.7%, from a total backlog of $8,080,000 on October 31, 2010. EDMS orders typically specify several deliveries scheduled over a defined and extended period of time. Typically, orders for our proprietary products are completed and shipped to the customer soon after the order is received. Certain larger proprietary product orders may have specific deliveries scheduled over a longer period of time. We anticipate that the amount of our total backlog relative to our revenues will fluctuate as our mix of proprietary products and EDMS sales varies.

Page 23

The following table presents the backlog by business segment for the periods ended October 31, 2011, April 30, 2011, and October 31, 2010 (in thousands).

                        October 31, 2011       April 30, 2011       October 31, 2010
EDMS                   $           10,584     $          4,936     $            7,598
Proprietary products                  380                  822                    482
Total backlog          $           10,964     $          5,758     $            8,080

Gross margin for the three-month period ended October 31, 2011 was 34.2% of sales, or $2,097,000, compared to 31.6% of sales, or $1,729,000, for the three-month period ended October 31, 2010. This was an improvement of approximately $368,000 from the comparable period of the prior fiscal year.

Gross margin for the proprietary products business segment was approximately 52.5% of sales, or $1,239,000, for the three-month period ended October 31, 2011 as compared to 47.5% of sales, or $1,070,000, for the three-month period ended October 31, 2010. The increase in gross margin for the proprietary products of $169,000 was due to the increase in proprietary product sales and the specific product mix.

The gross margin for the EDMS business segment was $858,000, or 22.8% of sales, compared to $659,000, or 20.4% of sales, for the prior year period. The increase of $199,000 of EDMS gross margin dollars was the result of the increase in sales volume from new and existing customers during the period and the related effect on production efficiency.

We expect that consolidated gross margins over the next few quarters will continue in the range of 32% to 37%, as our proprietary products continue to increase as a percentage of our overall total sales volume and we continually work to increase our EDMS margins through productivity improvements and selective production opportunities.

Selling, general and administrative ("SG&A") expenses totaled approximately $1,614,000 for the three-month period ended October 31, 2011. This was an increase of $139,000, or 9.4%, from total SG&A expenses of $1,475,000 for the three-month period ended October 31, 2010. SG&A expenses were 26.3% of sales for the current fiscal quarter of 2012 as compared to 26.9% of sales for the comparable period for fiscal 2011.

Research and development expenses grew $60,000, to $368,000, during the fiscal quarter as compared to the prior year period. This increase is primarily the product of increased investment in additional engineering design personnel engaged in new product development.

Selling and marketing expenses were $526,000 for the three-month period ended October 31, 2011 and $382,000 for the three-month period ended October 31, 2010. The increase of $144,000 was the result of the addition of a sales representative in the Middle East within the last year, increased commissions due to growing proprietary product sales, and an increase in product support and installation expenses linked to the increased number of proprietary units active in the field.

Page 24

General and administrative expenses decreased approximately $65,000 from the comparable period of the prior year. The decrease is the result of a number of factors, including reductions in royalty expense due to the expiration of a royalty agreement at the end of the previous fiscal year, a decrease in personnel and personnel related expenses, and the expiration of an office lease that was assumed in the SensorCast acquisition. These expense reductions were slightly offset by increases in corporate professional fees and equity compensation 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 personnel, new product development, systems and capabilities.

Operating income for the three-month period ended October 31, 2011 was approximately $483,000, an increase of $229,000 from operating income of $254,000 reported for the three-month period ended October 31, 2010.

Financial expense, including interest, was $40,000 and $75,000 for the three-month periods ended October 31, 2011 and 2010, respectively. The decrease of $35,000 resulted from lower total outstanding borrowings compared to the previous fiscal year period in addition to the reduction of the interest rate on the Industrial Revenue Bonds during the period. During the three-month period ended October 31, 2011, there were no additional net borrowings on the operating line of credit and the Company made payments of $50,000 that lowered the total amount outstanding to $1,400,000. As of October 31, 2011, there was also $3,075,000 outstanding in current and long-term borrowings (Industrial Revenue Bonds) compared to $3,278,000 at October 31, 2010. We plan to continue making regular payments on our operating line of credit to lower the total amount of outstanding borrowings, but we may utilize the operating line of credit to fund increases in production activity when necessary.

Income tax expense was approximately $165,000 for the three-month period ended October 31, 2011. For the three-month period ended October 31, 2010, income tax expense was approximately $78,000. The $87,000 increase in income taxes was the result of higher income during the period. The effective income tax rate for the three-month period ended October 31, 2011 was 34.2%.

As a combined result of the above factors, net income was $278,000, or $0.07 per diluted share, for the three-month period ended October 31, 2011 as compared to net income of $101,000, or $0.03 per diluted share, reported for the three-month period ended October 31, 2011.

Page 25

Six Months Ended October 31, 2011 Compared With Six Months Ended October 31, 2010.

The following table sets forth, for the periods presented, certain statements of operations data of the Company:

                                                                    Six Months Ended
                                                          (In thousands, except per share data)
                                                       October 31, 2011            October 31, 2010
Sales                                              $   11,806         100.0 %    $  10,661       100.0 %
Cost of products sold                                   7,705          65.3 %        7,187        67.4 %
Gross margin                                            4,101          34.7 %        3,474        32.6 %
Selling, general and administrative expenses            3,230          27.4 %        2,974        27.9 %
Operating income                                          871           7.3 %          500         4.7 %
Interest expense                                          (96 )        (0.8 %)        (152 )      (1.4 %)
Other (expense) income, net                                (1 )         0.0 %           (7 )       0.0 %
Income before income taxes                                774           6.6 %          341         3.2 %
Income tax expense                                        283           2.4 %          133         1.2 %
Net income                                         $      491           4.2 %    $     208         2.0 %
Net income per share - basic                       $     0.13                    $    0.06
Net income per share - diluted                     $     0.13                    $    0.05

Sales for the six months ended October 31, 2011 were approximately $11,806,000, an increase of $1,145,000, or 10.7%, from $10,661,000 for the comparable period of fiscal 2011.

Proprietary products. Sales of our proprietary products and services were $4,724,000 for the six-month period ended October 31, 2011, which was a $330,000, or 7.5%, increase from sales of $4,394,000 in the prior year period.

Sales of our wireless remote monitoring and telemetry solutions were approximately $3,532,000 for the six-month period ended October 31, 2011, which was an increase of roughly $917,000, or 35.1%, from $2,615,000 for the six-month period ended October 31, 2010. The increase in sales of remote monitoring equipment of $840,000, or 36.6%, to $3,138,000 for the six month period ended October 31, 2011, was primarily the result of the increase in customer orders received and shipped due to our continued focus on sales, marketing, and new product development. Data management services revenue continues to grow as a function of the growing population of monitoring units deployed in the field. Overall, data management services revenue totaled approximately $394,000, an increase of $77,000, or 24.4%, from data management services revenue of $316,000 reported in the comparable period of the prior fiscal year. We are experiencing strong interest and demand from new and existing customers for our current offering of M2M solutions and expect similar demand for new products currently being developed. We expect that sales of our wireless remote monitoring and secure industrial communication solutions for the second half of the fiscal year will continue to increase as compared to the first six months of fiscal 2012.

Page 26

Sales of our Radix rugged handheld computer hardware, peripherals and related services, including maintenance contract revenues and our eXtremeTAG RFID solutions, were approximately $973,000 for the six-month period ended October 31, 2011, a decrease of $655,000, or 40.2%, from the prior year period. We made fewer shipments of Radix computer hardware and eXtremeTAG RFID tags during the period which led to a sales decrease of approximately $502,000. Overall poor international economic conditions have impacted sales to many of our largest international Radix customers. However, we expect sales of the Radix FW950, its related peripherals and product enhancements, which have been positively received by the market, and our eXtremeTAG RFID solutions to improve their sales over the next few quarters. We continue to aggressively market the Radix computer hardware and our eXtremeTAG RFID solutions in both domestic and international markets. Recurring maintenance contract revenues posted a decrease for the six-month period ended October 31, 2011 of approximately $137,000, or 23.6%, as a result of fewer Radix units covered under maintenance contracts that was largely the result of continuing budgetary constraints at many of our municipal customers that led them to discontinue their maintenance plans. Maintenance contract revenues will likely continue to produce steady but relatively flat sales over the next few quarters as compared to comparable periods in the prior fiscal year.

EDMS. Sales for the EDMS business segment were approximately $7,082,000, an increase of $815,000, or 13.0%, from $6,267,000 in the prior year period. The increase in sales was a result of continued steady increases in bookings and backlog during the last few quarters as demonstrated by the addition of new orders from existing and new customers. Based on the increase in recent bookings and feedback from our customers, we anticipate that EDMS sales will likely grow slightly in the near term as compared to EDMS sales from the previous year. This estimate is based upon the amount of current scheduled orders in our backlog and the anticipated addition of new EDMS customers. However, it should be noted that the impact of uncertain economic conditions or the potential impact of raw material shortages could impact our ability to source electronic components used in production and may affect current scheduled orders as well as future bookings. These events could adversely influence sales over the next few quarters.

Other revenues. Additional miscellaneous revenues, which have been allocated between the EDMS and proprietary product segments, totaled approximately $489,000 for the six-month period ended October 31, 2011. These revenues are related to service and repair, technical consulting fees, engineering services, and freight billings. These sales totaled approximately $352,000 in the six-month period ended October 31, 2010.

Gross margin for the six-month period ended October 31, 2011 was 34.7% of sales, or $4,101,000, compared to 32.6% of sales, or $3,474,000, for the six-month period ended October 31, 2010. This was an increase of $627,000 from the comparable period of fiscal 2011.

Gross margin for the proprietary products business segment was approximately $2,463,000, or 52.1%, for the six-month period ended October 31, 2011 as compared to $2,199,000, or 50.1%, for the six-month period ended October 31, 2010. The increase in gross margin for the proprietary products of $264,000 was due to the overall increase in proprietary product sales as well as the specific product mix.

Page 27

The gross margin for the EDMS business segment was $1,638,000, or 23.1% of sales, an increase of $363,000 from $1,275,000, or 20.3% of sales, as compared to the prior year six-month period. This increase was the result of higher sales volumes during the period and its effect on production efficiency.

We expect that consolidated gross margins over the next few quarters will continue in the range of 32% to 37%, as our proprietary products continue to increase as a percentage of our overall total sales volume and we continually work to increase our EDMS margins through productivity improvements and selective production opportunities.

Selling, general and administrative ("SG&A") expenses totaled approximately $3,230,000 for the six-month period ended October 31, 2011. This was an increase of $256,000, or 8.6%, from total SG&A expenses of $2,974,000 for the six-month period ended October 31, 2010. SG&A expenses were 27.4% of sales for the year-to-date period as compared to 27.9% of sales for the comparable period for fiscal 2011.

Research and development expenses increased $86,000 during the fiscal year-to-date period as compared to the six-month period ended October 31, 2010 that included reductions in product support costs of $44,000, a decrease in contract labor of $20,000, and increases in personnel and personnel related expenses of approximately $151,000 for additional engineering design resources engaged in new product development.

Selling and marketing expenses increased approximately $284,000 for the six-month period ended October 31, 2011 to $1,085,000 from $801,000 for the six-month period ended October 31, 2010. The increase was the product of larger commissions due to growing proprietary product sales, an increase in product support and installation expenses linked to the growing number of proprietary units active in the field, and increases in personnel expenses and the related expenses for the addition of a sales representative in the Middle East within the last year.

General and administrative expenses decreased approximately $114,000 from the comparable period of the prior year. The overall decrease is the result of a number of factors, including reductions in royalty expense due to the expiration of a royalty agreement at the end of the previous fiscal year, the expiration of an office lease that was assumed in the SensorCast acquisition, and a decrease in personnel and personnel related expenses. These reductions were slightly offset by an increase equity compensation expense as a result of outstanding unvested stock options.

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, capabilities and marketing and sales for our existing proprietary product lines.

Page 28

Operating income for the six-month period ended October 31, 2011 was approximately $871,000, an improvement of approximately $371,000, or 74.2%, from operating income of $500,000 for the six-month period ended October 31, 2010.

Financial expenses, including interest expense, were $97,000 and $159,000 for the six-month periods ended October 31, 2011 and 2010, respectively. This decrease of $62,000 resulted from the decrease in the total outstanding borrowings compared to the previous fiscal year period as well as the reduction in the interest rate on the Industrial Revenue Bonds. During the six-month period ended October 31, 2011, there were no additional net borrowings on the operating line of credit and $550,000 in payments that lowered the total amount outstanding to $1,400,000. As of October 31, 2011, there was also $3,075,000 outstanding in current and long-term borrowings (Industrial Revenue Bonds) compared to $3,278,000 at October 31, 2010. We plan to continue making regular payments on our operating line of credit to lower the total amount of outstanding borrowings, but we may utilize the operating line of credit to fund increases in production activity when necessary.

Income tax expenses totaled approximately $283,000 for the six-month period ended October 31, 2011 as a result of the income recorded for the period. For the six-month period ended October 31, 2010 income tax expense of approximately $133,000 was reported. The effective income tax rate for the six-month period ended October 31, 2011 was 36.6%.

As a result of the aforementioned activities, net income was $491,000, or $0.13 per diluted share, for the six-month period ended October 31, 2011 as compared to net income of $208,000, or $0.05 per diluted share, reported for the six-month period ended October 31, 2010.

Liquidity and Capital Resources

Cash and cash equivalents decreased $95,000 to $365,000 as of October 31, 2011 compared to $460,000 at April 30, 2011. This decrease was primarily the result of cash provided by an increase in net income and collections of accounts receivable offset by debt payments, reductions in accrued expenses and purchases . . .

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