Overview

Elecsys Corporation provides innovative machine to machine (M2M) communication technology solutions, data acquisition and management systems, and custom electronic equipment for critical industrial applications worldwide. Our primary markets include energy production and distribution, agriculture, transportation, safety and security systems, and water management. Our Proprietary products and services encompass remote monitoring, industrial data communication, and mobile data acquisition 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 display modules for multiple original equipment manufacturers (OEMs) in a variety of industries worldwide.

On October 26, 2012, the Company amended the expiration date of its operating line of credit to October 30, 2014 and removed the interest rate floor. 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 $4,183,000 as of October 31, 2012. The line of credit accrues interest at a performance-based rate that is based on the prime rate (3.25% at October 31, 2012) plus/minus 0.5%. The interest rate is determined by the Company's debt-to-tangible net worth ratio and was 2.75% on October 31, 2012 which was the lowest rate allowed under the terms of the operating line of credit. The previous loan agreement contained an interest rate floor of 3.5%. 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. There were no outstanding borrowings on the line of credit as of October 31, 2012.

Results of Operations

Three Months Ended October 31, 2012 Compared With Three Months Ended October 31,
2011.

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, 2012             October 31, 2011
Sales                                                  6,138           100.0 %        6,133       100.0 %
Cost of products sold                                  3,728            60.7 %        4,036        65.8 %
Gross margin                                           2,410            39.3 %        2,097        34.2 %
Selling, general and administrative expenses           1,710            27.9 %        1,614        26.3 %
Operating income                                         700            11.4 %          483         7.9 %
Financial expense                                        (17 )          (0.3 %)         (40 )      (0.7 %)
Income before income tax expense                         683            11.1 %          443         7.2 %
Income tax expense                                       270             4.4 %          165         2.7 %
Net income                                         $     413             6.7 %    $     278         4.5 %
Net income per share - basic                       $    0.11                      $    0.07
Net income per share - diluted                     $    0.11                      $    0.07

Sales for the three months ended October 31, 2012 were approximately $6,138,000, which was almost identical to the $6,133,000 in sales for the three months ended October 31, 2011.

                                          Three Months Ended
                                            (In thousands)
                              October 31, 2012          October 31, 2011
EMS sales                   $   2,990        48.7 %   $   3,772        61.5 %
Proprietary product sales       3,148        51.3 %       2,361        38.5 %
 Total Sales                    6,138       100.0 %       6,133       100.0 %

Proprietary products. Sales of our Proprietary products and services were $3,148,000 for the three-month period ended October 31, 2012, which was a $787,000, or 33.3%, increase from sales of $2,361,000 in the prior year period.

Sales of our wireless remote monitoring solutions were approximately $1,897,000 for the three-month period ended October 31, 2012, which was an increase of $254,000, or 15.5%, from $1,643,000 during the three-month period ended October 31, 2011. The increase in sales of remote monitoring equipment and services was driven by an increase in customer orders received and shipped during the period. We continue to focus on sales, marketing, and new product development and have seen increases 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 $246,000, an increase of $45,000, or 22.4%, from data management services revenue of $201,000 reported in the comparable period of the prior fiscal year. We anticipate that over the next few quarters, revenues from our wireless remote monitoring solutions will continue to grow from the current period as a result of new products and our expansion into new industrial markets. Although some of our targeted markets and potential new customers remain cautious regarding their capital investments, we expect that our continued investment in sales, marketing, and new product development will produce additional revenues over the next few fiscal quarters and into the next fiscal year.

Sales of our industrial data communication solutions were approximately $295,000 for the three-month period ended October 31, 2012, which was a $139,000, or 89.1%, increase over the total sales of $156,000 for the three-month period ended October 31, 2011. The increase is the direct result of increased sales and marketing efforts to the existing customer base and an active pursuit of new customers for the Director series products. With this additional focus and effort, we expect revenues from our industrial communication products to grow over the next few quarters as we invest in new product development and continue our marketing efforts.

Sales of our mobile data acquisition solutions, including our Radix handheld computer hardware, peripherals, maintenance contract revenues, and our eXtremeTAG RFID solutions, were approximately $847,000 for the three-month period ended October 31, 2012. Total sales increased approximately $417,000, or 97.0%, as compared to the prior year period reported revenues of approximately $430,000. The increase in revenues was primarily driven by an increase in shipments of the Radix FW950 and peripherals to our largest international partner and some domestic projects. The increase in Radix sales was partially offset by decreases in shipments of our eXtremeTAG RFID tags. These sales were sluggish as we focused on specific projects within certain international markets in order to establish a market presence. We believe that improving international economic conditions in specific markets and increased domestic sales of Radix products will provide an overall increase in sales in this area over the next few quarters. Recurring maintenance contract revenues posted an increase for the three-month period ended October 31, 2012 of approximately $14,000, or 6.5%, as a result of customers continuing their maintenance plans after their initial warranty periods expired.

EMS. Sales for the EMS business segment were approximately $2,990,000, a decrease of $782,000, or 20.7%, from $3,772,000 in the prior year period. The decrease in EMS sales was the result of reduced orders from our existing customers mainly due to uncertain economic and business conditions combined with our targeted elimination of certain lower margin customers as we focus on increasing EMS gross margins. We expect that our renewed investment in EMS sales and marketing, along with our focus on targeting additional customers likely to benefit from our proprietary technologies, will lead to moderate growth in EMS sales and margins in the longer term. The prolonged uncertainty regarding future economic conditions will likely have an impact in the near term and could impact current scheduled orders as well as future bookings. These could adversely influence EMS sales over the next few quarters.

Total consolidated backlog at October 31, 2012 was approximately $10,638,000, an increase of $2,733,000, or 34.6%, from a total backlog of $7,905,000 on April 30, 2012 and a decrease of approximately $326,000, or 3.0%, from a total backlog of $10,964,000 on October 31, 2011. EMS orders usually 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 orders are 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 EMS sales varies.

The following table presents the backlog by business segment for the periods ended October 31, 2012, April 30, 2012, and October 31, 2011 (in thousands).

                        October 31, 2012       April 30, 2012       October 31, 2011
EMS                    $            9,134     $          7,750     $           10,584
Proprietary products                1,504                  155                    380
Total backlog          $           10,638     $          7,905     $           10,964

Gross margin for the three-month period ended October 31, 2012 was 39.3% of sales, or $2,410,000, compared to 34.2% of sales, or $2,097,000, for the three-month period ended October 31, 2011. The $313,000 increase of gross margin dollars and the increase in gross margin percentage was the direct result of the impact of the sales of higher margin proprietary products eclipsing the sales volumes of EMS.

                                                    Three Months Ended
                                                      (In thousands)
                                        October 31, 2012          October 31, 2011
Gross margin - EMS                    $      741       24.8 %   $      858       22.7 %
Gross margin - Proprietary products        1,669       53.0 %        1,239       52.5 %
 Total gross margin                   $    2,410       39.3 %   $    2,097       34.2 %

Gross margin for the Proprietary products business segment was approximately 53.0% of sales, or $1,669,000, for the three-month period ended October 31, 2012 as compared to 52.5% of sales, or $1,239,000, for the three-month period ended October 31, 2011. The increase in gross margin for the Proprietary products was mainly due to the overall increase in Proprietary product sales from the previous year period and the specific product mix.

The gross margin for the EMS business segment was $741,000, or 24.8% of sales for the three-month period ended October 31, 2012, compared to $858,000, or 22.7% of sales, for the prior year period. The decrease of EMS gross margin dollars stemmed from a decrease in sales volumes during the period while the increase in gross margin percentage resulted from our continued focus on improving EMS gross margins and the elimination of less profitable accounts.

We expect that consolidated gross margins over the next few quarters will continue in the current range of 34% to 39%. This expectation is based on our forecasted sales mix of Proprietary products and EMS products and services which impacts our manufacturing efficiency and gross margins. We continue to work to increase our EMS margins through productivity improvements and new OEM production opportunities and also anticipate increases in Proprietary product revenues as a percentage of our overall total sales volume.

Selling, general and administrative ("SG&A") expenses totaled approximately $1,710,000 for the three-month period ended October 31, 2012. This was an increase of $96,000 as compared to the total SG&A expenses of $1,614,000 for the three-month period ended October 31, 2011. SG&A expenses were 27.9% of sales for the current fiscal quarter of 2013 as compared to 26.3% of sales for the comparable period for fiscal 2012.

                                                                     Three Months Ended
                                                                       (In thousands)
                                                         October 31, 2012           October 31, 2011
Research & development expenses                       $      427         7.0 %   $      368         6.0 %
Selling & marketing expenses                                 582         9.5 %          526         8.6 %
General & administrative expenses                            701        11.4 %          720        11.7 %
 Total selling, general and administrative expenses   $    1,710        27.9 %   $    1,614        26.3 %

Research and development expenses increased $59,000, to $427,000, during the fiscal quarter as compared to the prior year period. This increase was primarily driven by higher engineering personnel expenses of approximately $10,000 resulting from our increased investment in additional product design and an increase of $42,000 in product development costs. These increases were slightly offset by lower contract labor costs as compared to the previous year period.

Selling and marketing expenses were $582,000 for the three-month period ended October 31, 2012 and $526,000 for the three-month period ended October 31, 2011. The increase of $56,000 was the result of changes in sales personnel from the previous year period. During the third quarter of last fiscal year, we eliminated a sales management position and reallocated those resources to add additional sales people. The result of this reallocation and investment was a slight increase in overall personnel expenses of approximately $26,000 which we believe will help increase both EMS and Proprietary product revenues over the long term. We also experienced increases in travel costs of $29,000 and customer support expenses of $15,000 as compared to the previous year period.

General and administrative expenses decreased approximately $19,000 from the comparable period of the prior year. The decrease was primarily the result of the reduction in professional fees, real estate taxes, and a reduction in bad debt expense due to the recovery of doubtful accounts, slightly offset by an increase in recruiting expenses and facility costs.

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, 2012 was approximately $700,000, an increase of $217,000 from operating income of $483,000 reported for the three-month period ended October 31, 2011.

Financial expense, including interest, was $17,000 and $40,000 for the three-month periods ended October 31, 2012 and 2011, respectively. The decrease of $23,000 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 in early September 2011. During the three-month period ended October 31, 2012, there were no additional net borrowings on the operating line of credit. As of October 31, 2012, there was $2,895,000 outstanding in current and long-term borrowings (Industrial Revenue Bonds) compared to $3,075,000 at October 31, 2011. We may utilize the operating line of credit in the near term to fund increases in production activity when necessary but seek to minimize our interest expense when possible.

Income tax expense for the three-month period ended October 31, 2012 was approximately $270,000 compared to income tax expense of $165,000 for the three-month period ended October 31, 2011. The effective income tax rate was 39.5% and 37.2% for the three-month periods ended October 31, 2012 and 2011, respectively. The change in the effective tax rate was due to the recognition of certain income tax adjustments and the benefit derived from the domestic manufacturing deduction in the previous period of the prior fiscal year.

As a combined result of the above factors, our net income was $413,000, or $0.11 per diluted share, for the three-month period ended October 31, 2012 as compared to net income of $278,000, or $0.07 per diluted share, reported for the three-month period ended October 31, 2011.

Six Months Ended October 31, 2012 Compared With Six Months Ended October 31, 2011.

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, 2012            October 31, 2011
Sales                                                  10,395         100.0 %       11,806       100.0 %
Cost of products sold                                   6,595          63.4 %        7,705        65.3 %
Gross margin                                            3,800          36.6 %        4,101        34.7 %
Selling, general and administrative expenses            3,329          32.0 %        3,230        27.4 %
Operating income                                          471           4.5 %          871         7.4 %
Financial expense                                         (38 )        (0.4 %)         (97 )      (0.8 %)
Income before income tax expense                          433           4.2 %          774         6.6 %
Income tax expense                                        181           1.7 %          283         2.4 %
Net income                                         $      252           2.4 %    $     491         4.2 %
Net income per share - basic                       $     0.06                    $    0.13
Net income per share - diluted                     $     0.06                    $    0.13

Sales for the six months ended October 31, 2012 were approximately $10,395,000, a decrease of $1,411,000, or 12.0%, from $11,806,000 for the comparable period of fiscal 2012.

                                           Six Months Ended
                                            (In thousands)
                              October 31, 2012          October 31, 2011
EMS sales                   $   5,541        53.3 %   $   7,082        60.0 %
Proprietary product sales       4,854        46.7 %       4,724        40.0 %
 Total Sales                   10,395       100.0 %      11,806       100.0 %

Proprietary products. Sales of our Proprietary products and services were $4,854,000 for the six-month period ended October 31, 2012, which was a $130,000, or 2.8%, increase from sales of $4,724,000 in the prior year period.

Sales of our wireless remote monitoring solutions were approximately $2,851,000 for the six-month period ended October 31, 2012, which was a decrease of $407,000, or 12.5%, from $3,258,000 during the six-month period ended October 31, 2011. The overall decrease in sales of remote monitoring equipment and services was driven by a reduction in customer orders received and shipped during the first fiscal quarter. Sales increased during the second quarter, but not enough to overtake the shortfall from the first quarter. We continue to focus on sales, marketing, and new product development and have seen increases 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 $482,000, an increase of $88,000, or 22.3%, from data management services revenue of $394,000 reported in the comparable period of the prior fiscal year. We anticipate that over the next few quarters, revenues from our wireless remote monitoring solutions will continue to grow steadily from the current period as a result of new products and our expansion into new industrial markets. Although some of our targeted markets and potential new customers remain cautious regarding their capital investments, we expect that our continued investment in both sales and marketing and new product development will produce additional revenues over the next few fiscal quarters and into the next fiscal year.

Sales of our industrial data communication solutions were approximately $512,000 for the six-month period ended October 31, 2012, which was a $239,000, or 87.5%, increase over the total sales of $273,000 for the six-month period ended October 31, 2011. The increase is the direct result of increased sales and marketing efforts to the existing customer base and an active pursuit of new customers for the Director series products. With this additional focus and effort, we expect revenues from our industrial communication products to grow over the next few quarters as we invest in new product development and continue our marketing efforts.

Sales of our mobile data acquisition solutions, including our Radix handheld computer hardware, peripherals, maintenance contract revenues, and our eXtremeTAG RFID solutions, were approximately $1,281,000 for the six-month period ended October 31, 2012. Total sales increased approximately $308,000, or 31.7%, as compared to the prior year period reported revenues of approximately $973,000. The increase in revenues was primarily driven by an increase in shipments of the Radix FW950 and peripherals to our largest international partner and some significant domestic projects. Shipments of our eXtremeTAG RFID tags were sluggish as we focused on specific projects within certain international markets in order to establish a market presence. We believe that improving international economic conditions in specific markets and increased domestic sales of Radix products will provide an overall increase in sales over the next few quarters. Recurring maintenance contract revenues posted a slight increase for the six-month period ended October 31, 2012 of approximately $2,000, or 0.5%, as a result of customers continuing their maintenance plans after their initial warranty periods expired

EMS. Sales for the EMS business segment were approximately $5,541,000, a decrease of $1,541,000, or 21.8%, from $7,082,000 in the prior year period. The decrease in EMS sales was the result of reduced orders from our existing customers mainly due to continuing uncertain economic and business conditions combined with our targeted elimination of certain lower margin customers as we focus on increasing EMS gross margins. We expect that our renewed investment in EMS sales and marketing, along with our focus on targeting additional customers likely to benefit from our proprietary technologies, will lead to moderate growth in EMS sales and margins in the longer term. The prolonged uncertainty regarding future economic conditions will likely have an impact in the near term and could impact current scheduled orders as well as future bookings. These could adversely influence EMS sales over the next few quarters.

Gross margin for the six-month period ended October 31, 2012 was 36.6% of sales, or $3,800,000, compared to 34.7% of sales, or $4,101,000, for the six-month period ended October 31, 2011. The $615,000 reduction of gross margin dollars was the direct result of lower overall sales volumes during the period. The increase in gross margin percentage was due to the increase in proprietary product sales as a percentage of total sales.

                                                     Six Months Ended
                                                      (In thousands)
                                        October 31, 2012          October 31, 2011
Gross margin - EMS                    $    1,350       24.4 %   $    1,638       23.1 %
Gross margin - Proprietary products        2,450       50.5 %        2,463       52.1 %
 Total gross margin                   $    3,800       36.6 %   $    4,101       34.7 %

Gross margin for the Proprietary products business segment was approximately 50.5% of sales, or $2,450,000, for the six-month period ended October 31, 2012 as compared to 52.1% of sales, or $2,463,000, for the six-month period ended October 31, 2011. The decrease in gross margin dollars for the Proprietary products was mainly due to the decrease in Proprietary product sales volumes that we experienced during the first fiscal quarter. The sales decrease was almost completely offset by the increase in sales during the second fiscal quarter, but not quite enough to show an increase in overall gross margin dollars as compared to the previous year.

The gross margin for the EMS business segment was $1,350,000, or 24.4% of sales, compared to $1,638,000, or 23.1% of sales, for the prior year period. The decrease of EMS gross margin dollars resulted from a decrease in sales volume during the period while the slight increase in gross margin percentage resulted from our continued focus on improving EMS gross margins and the elimination of less profitable accounts.

We expect that consolidated gross margins over the next few quarters will likely remain in the range of 34% to 39%. This expectation is based on our forecasted sales mix of Proprietary products and EMS products and services which impacts our manufacturing efficiency and gross margins. We continue to work to increase our EMS margins through productivity improvements and new OEM production opportunities and also anticipate increases in Proprietary product revenues as a percentage of our overall total sales volume.

Selling, general and administrative ("SG&A") expenses totaled approximately $3,329,000 for the six-month period ended October 31, 2012. This was an increase of $99,000, or 3.1%, from the total SG&A expenses of $3,230,000 for the six-month period ended October 31, 2011. SG&A expenses were 32.0% of sales for the six-month period ended October 31, 2012 as compared to 27.4% of sales for . . .