UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
for the quarterly period ended July 31, 2008.
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the transition period from _____________ to ______________.
Commission File Number 0-22760
ELECSYS CORPORATION
(Exact name of registrant as specified in its charter)
Kansas 48-1099142
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
846 N. Mart-Way Court
Olathe, Kansas 66061
(Address of principal executive offices)
(913) 647-0158
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer ( ) Accelerated filer ( )
Non-accelerated filer ( ) Smaller reporting company (X)
Indicate by check mark whether registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ( ) No (X)
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common stock, $0.01 par value -
3,290,437 shares outstanding as of September 5, 2008.
Page 1
ELECSYS CORPORATION AND SUBSIDIARIES
FORM 10-Q
Quarter Ended July 31, 2007
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
Condensed Consolidated Statements of Operations -
Three months ended July 31, 2008 and 2007 (Unaudited) 3
Condensed Consolidated Balance Sheets -
July 31, 2008 (Unaudited) and April 30, 2008 4
Condensed Consolidated Statements of Stockholders' Equity -
Three months ended July 31, 2008 (Unaudited) and the year
ended April 30, 2008 5
Condensed Consolidated Statements of Cash Flows -
Three months ended July 31, 2008 and 2007 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operation 22
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 30
ITEM 4T. Controls and Procedures 30
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings 31
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
ITEM 3. Defaults Upon Senior Securities 31
ITEM 4. Submission of Matters to a Vote of Security Holders 31
ITEM 5. Other Information 31
ITEM 6. Exhibits 31
Signatures 32
Exhibit Index 33
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements.
Elecsys Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three months ended
-----------------------------------------
July 31, 2008 July 31, 2007
------------------- ------------------
Sales $5,564 $4,787
Cost of products sold 3,613 3,272
------------------- ------------------
Gross margin 1,951 1,515
Selling, general and administrative expenses 1,655 1,161
------------------- ------------------
Operating income 296 354
Financial income (expense):
Interest expense (117) (102)
Other income, net -- 14
------------------- ------------------
(117) (88)
------------------- ------------------
Income before income taxes 179 266
Income tax expense 70 92
------------------- ------------------
Net income $109 $174
=================== ==================
Net income per share information:
Basic $0.03 $0.05
Diluted $0.03 $0.05
Weighted average common shares outstanding:
Basic 3,287 3,285
Diluted 3,458 3,479
See Notes to Condensed Consolidated Financial Statements.
Page 3
Elecsys Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share data)
July 31, 2008 April 30, 2008
--------------- ----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $301 $357
Accounts receivable, less allowances of $305
and $303, respectively 3,132 3,757
Inventories, net 6,104 6,207
Prepaid expenses 115 75
Deferred taxes 779 781
--------------- ----------------
Total current assets 10,431 11,177
Property and equipment, at cost:
Land 1,737 1,737
Building and improvements 3,395 3,395
Equipment 3,502 3,490
--------------- ----------------
8,634 8,622
Accumulated depreciation (2,380) (2,249)
--------------- ----------------
6,254 6,373
Goodwill 1,492 1,544
Intangible assets, net 1,884 1,927
Other assets, net 76 77
--------------- ----------------
Total assets $20,137 $21,098
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,402 $2,051
Accrued expenses 2,075 2,042
Income taxes payable 253 564
Note payable to bank 3,723 3,836
Current maturities of long-term debt 315 309
--------------- ----------------
Total current liabilities 7,768 8,802
Deferred taxes 314 311
Long-term debt, less current maturities 3,789 3,870
Stockholders' equity:
Preferred stock, $.01 par value, 5,000,000 shares
authorized; issued and outstanding - none -- --
Common stock, $.01 par value, 10,000,000 shares
authorized; issued and outstanding - 3,290,437 at
July 31, 2008 and 3,285,437 at April 30, 2008 33 33
Additional paid-in capital 9,159 9,117
Accumulated deficit (926) (1,035)
--------------- ----------------
Total stockholders' equity 8,266 8,115
--------------- ----------------
Total liabilities and stockholders' equity $20,137 $21,098
=============== ================
See Notes to Condensed Consolidated Financial Statements.
Page 4
Elecsys Corporation and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(In thousands)
Common Common Additional Total
Stock Stock Paid-In Accumulated Stockholders'
(# of shares) ($) Capital Deficit Equity
Balance at April 30, 2007 3,285 $33 $9,031 $(1,723) $7,341
Net income -- -- -- 688 688
Share-based compensation expense -- -- 86 -- 86
--------------- ----------- ------------ --------------- ----------------
Balance at April 30, 2008 3,285 33 9,117 (1,035) 8,115
Net income -- -- -- 109 109
Exercise of stock options 5 -- 25 -- 25
Share-based compensation expense -- -- 17 -- 17
--------------- ----------- ------------ --------------- ----------------
Balance at July 31, 2008 (unaudited) 3,290 $33 $9,159 $(926) $8,266
=============== =========== ============ =============== ================
See Notes to Condensed Consolidated Financial Statements.
Page 5
Elecsys Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three months ended July 31,
----------------------------------
2008 2007
--------------- ---------------
Cash Flows from Operating Activities:
Net income $109 $174
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Share-based compensation expense 17 17
Depreciation 137 124
Amortization 43 13
Provision for doubtful accounts 9 23
Deferred income taxes 5 5
Changes in operating assets and liabilities:
Accounts receivable 616 (998)
Inventories 103 (561)
Accounts payable (649) 285
Accrued expenses 33 10
Income taxes payable (311) --
Other (39) 52
--------------- ---------------
Net cash provided by (used in) operating activities 73 (856)
--------------- ---------------
Cash Flows from Investing Activities:
Purchases of property and equipment (18) (112)
Proceeds from sale of property and equipment -- --
Change in goodwill for purchase price adjustments 52 (3)
--------------- ---------------
Net cash (used in) investing activities 34 (115)
--------------- ---------------
Cash Flows from Financing Activities:
Borrowings on note payable to bank 1,267 2,094
Principal payments on note payable to bank (1,380) (1,262)
Proceeds from exercise of stock options 25 --
Principal payments on long-term debt (75) (67)
--------------- ---------------
Net cash provided by (used in) financing activities (163) 765
--------------- ---------------
Net (decrease) in cash and cash equivalents (56) (206)
Cash and cash equivalents at beginning of period 357 503
--------------- ---------------
Cash and cash equivalents at end of period $301 $297
=============== ===============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for interest $116 $102
Cash paid during the period for income taxes 376 --
See Notes to Condensed Consolidated Financial Statements.
Page 6
Elecsys Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
July 31, 2008
(Unaudited)
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations
Elecsys Corporation (the "Company") is a publicly traded holding
company with three wholly owned subsidiaries, DCI, Inc. ("DCI"), NTG, Inc.
("NTG"), and Radix Corporation ("Radix"). DCI provides electronic design and
manufacturing services for original equipment manufacturers ("OEMs") in the
aerospace, transportation, communications, safety, security and other industrial
product markets. DCI has specialized expertise and capabilities to design and
efficiently manufacture custom electronic assemblies which integrate a variety
of innovative display and interface technologies. NTG designs, markets, and
provides remote monitoring solutions for the gas and oil pipeline industry as
well as other industries that require remote monitoring. Radix develops, designs
and markets ultra-rugged handheld computers, peripherals and portable printers.
The markets served by its products include utilities, transportation logistics,
traffic and parking enforcement, route accounting/deliveries, and inspection and
maintenance.
The Company's sales are made primarily to customers within the United
States, but also include customers in Canada and several other international
markets.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries, DCI, Radix and NTG. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Comprehensive Income
The Company has no components of other comprehensive income, therefore
comprehensive income equals net income.
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157, Fair Value
Measurements ("SFAS 157"). SFAS 157 establishes a common definition for fair
value to be applied to U.S. GAAP, establishes guidance requiring use of fair
value, establishes a framework for measuring fair value, and expands disclosure
about such fair value measurements. FASB Staff Position No. SFAS 157-2 was
issued in February 2008. SFAS 157-2 delayed the application of SFAS 157 for
non-financial assets and non-financial liabilities, except items that are
recognized or disclosed at fair value in the financial statements on a recurring
basis, until fiscal years beginning after November 15, 2008. The Company is
required to adopt SFAS 157 in the first quarter of fiscal year 2010. The Company
believes that the financial impact, if any, of adopting SFAS 157 will
Page 7
not result in a material impact to its financial statements.
In February 2007, the FASB issued SFAS No. 159 ("SFAS 159"), The Fair
Value Option for Financial Assets and Financial Liabilities. Under SFAS 159, the
Company may elect to report financial instruments and certain other items at
fair value on a contract-by-contract basis with changes in value reported in
earnings. This election is irrevocable. SFAS 159 provides an opportunity to
mitigate volatility in reported earnings that is caused by measuring hedged
assets and liabilities that were previously required to use a different
accounting method than the related hedging contracts when the complex hedge
accounting provisions of SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, are not met. The Company adopted SFAS 159 as of May 1, 2008
and it did not result in a material impact to its financial statements.
In December 2007, the FASB issued SFAS No. 160 ("SFAS 160"),
Noncontrolling Interests in Consolidated Financial Statements-an amendment of
ARB No. 51. SFAS 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an
ownership interest in the consolidated entity that should be reported as equity
in the consolidated financial statements. SFAS 160 is effective for the Company
in its fiscal year beginning May 1, 2009. The Company does not believe the
adoption of this statement will have a material impact on its financial position
and results of operations.
In December 2007, the FASB issued SFAS No. 141R ("SFAS 141R"), Business
Combinations. SFAS 141R establishes principles and requirements for how the
acquirer of a business recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree. SFAS 141R also provides guidance for recognizing and
measuring the goodwill acquired in the business combination and determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. SFAS 141R will be
effective for the Company's fiscal year beginning May 1, 2009. The Company does
not believe the adoption of this statement will have a material impact on its
financial position and results of operations.
Revenue Recognition
The Company derives revenue from the manufacture of production units of
electronic assemblies, liquid crystal displays, remote monitoring equipment and
ultra-rugged handheld computers and peripherals. The Company also derives
revenue from repairs and non-warranty services, engineering design services,
remote monitoring services and maintenance contracts. Production and repaired
units are billed to the customer after they are shipped. Remote monitoring
services and maintenance contracts are billed and the revenue recognized at the
end of the month after the services or maintenance periods are completed. For
customers that utilize the Company's engineering design services, the customer
is billed and revenue is recognized after the design services or tooling have
been completed. The Company requires our customers to provide a binding purchase
order to verify the manufacturing services to be provided. Typically, the
Company does not have any post-shipment obligations that would include customer
acceptance requirements. Radix does provide training and installation services
to its customers and those services are billed and the revenue recognized at the
end of the month after the services are completed. Revenue recognized is net of
sales taxes remitted to the government.
Page 8
Accounts Receivable
Accounts receivable are carried at original invoice amount less an
estimate made for doubtful receivables based on a review of all outstanding
amounts on a monthly basis. Management determines the allowance for doubtful
accounts by regularly evaluating individual customer receivables and considering
a customer's financial condition and credit history, and current economic
conditions. Receivables are written off when deemed uncollectible. Recoveries of
receivables previously written off are recorded when received. The majority of
the customer accounts are considered past due after the invoice becomes older
than the customer's credit terms (30 days for the majority of customers).
Interest is not charged on past due accounts for the majority of our customers.
Inventory Valuation
Inventories are stated at the lower of cost, using the first-in,
first-out (FIFO) method, or market value. The Company's industry is
characterized by rapid technological change, short-term customer commitments and
rapid changes in demand, as well as other market considerations. Provisions for
estimated excess and obsolete inventory are based on quarterly reviews of
inventory quantities on hand and the latest forecasts of product demand and
production requirements from the customers. Inventories are reviewed in detail
on a quarterly basis utilizing a 24-month time horizon. Individual part numbers
that have not had any usage in a 24-month time period are examined by
manufacturing personnel for obsolescence, excess and fair value. Parts that are
not identified for common use or are unique to a former customer or application
are categorized as obsolete and are discarded as part of the quarterly inventory
write-down. If actual market conditions or customers' product demands are less
favorable than those projected, additional inventory write-downs may be
required. The reserve balance is analyzed for adequacy along with the inventory
review each quarter.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the following estimated useful lives:
Description Years
Building and improvements 39
Equipment 3-8
Computers and software 3
Goodwill
Goodwill is initially measured as the excess of the cost of an acquired
business over the fair value of the identifiable net assets acquired. The
Company does not amortize goodwill, but rather reviews its carrying value for
impairment annually (April 30), and whenever an impairment indicator is
identified. The Company performs its annual impairment test at year-end and uses
an outside valuation firm. The goodwill impairment test involves a two-step
approach. The first step is to identify if potential impairment of goodwill
exists. If impairment of goodwill is determined to exist, the second step of the
goodwill impairment test measures the amount of the impairment using a fair
value-based approach.
Page 9
Intangible Assets
Intangible assets consist of patents, trademarks, copyrights, customer
relationships and capitalized software. Intangible assets are amortized over
their estimated useful lives using the straight-line method.
Impairment of Long-Lived Intangible Assets
Long-lived assets, including amortizable intangible assets, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset or group of assets may not be fully
recoverable. These events or changes in circumstances may include a significant
deterioration of operating results, changes in business plans, or changes in
anticipated future cash flows. If an impairment indicator is present, the
Company evaluates recoverability by a comparison of the carrying amount of the
assets to future undiscounted cash flows expected to be generated by the assets.
If the sum of the expected future cash flows is less than the carrying amount,
the Company would recognize an impairment loss. An impairment loss would be
measured by comparing the amount by which the carrying value exceeds the fair
value of the long-lived assets and intangibles.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes
("SFAS 109") as clarified by FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to the differences
between the tax bases of assets and liabilities and their carrying amount for
financial reporting purposes, as measured by the enacted tax rates which will be
in effect when these differences are expected to reverse. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date. In assessing the realizability of
deferred income tax assets, the Company considers whether it is "more likely
than not," according to the criteria of SFAS 109, that some portion or all of
the deferred income tax assets will be realized. The ultimate realization of
deferred income tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. FIN 48 requires that the Company recognize the financial statement
benefit of a tax position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit. For tax
positions meeting the more likely than not threshold, the amount recognized in
the financial statements is the largest benefit that has a greater than 50%
likelihood of being realized upon ultimate settlement with the relevant tax
authority.
Warranty Reserve
The Company has established a warranty reserve for rework, product
warranties and customer refunds. The Company provides a limited warranty for a
period of one year from the date of receipt of products by customers and
standard warranties require the Company to repair or replace defective products
at no cost to the customer or refund the customer's purchase price. The warranty
reserve is based on historical experience and analysis of specific known and
potential warranty issues. The product warranty liability reflects management's
best estimate of probable liability under the product warranties.
Page 10
Shipping and Handling Costs
Shipping and handling costs that are billed to our customers are
recognized as revenues in the period that the product is shipped. Shipping and
handling costs that are incurred by the Company are recognized as cost of sales
in the period that the product is shipped.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of the Company include the accounts of the Company and its wholly owned
subsidiaries, DCI, Inc., NTG, Inc. and Radix Corporation. All significant
intercompany balances and transactions have been eliminated. The condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month
period ended July 31, 2008 are not necessarily indicative of the results that
may be expected for the year ending April 30, 2009.
The balance sheet at April 30, 2008 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles in the United
States for complete financial statements.
For further information, refer to the consolidated financial statements
and footnotes included in the Company' annual report on Form 10-KSB for the year
ended April 30, 2008.
3. ACQUISITIONS OF ASSETS
Radix. On September 18, 2007, the Company, through its newly formed and
wholly owned subsidiary, Radix Corporation, acquired the assets and assumed
certain liabilities of Radix International Corporation and its subsidiary. The
Company made the strategic decision to grow through expansion into the
specialized niche of rugged mobile computing. The Company, through Radix,
acquired approximately $4.50 million in assets, including accounts receivable
and inventory, as well as all of the intellectual property and intangible assets
owned by Radix International Corporation and its subsidiary. In the transaction,
Radix assumed accounts payable due to DCI, assumed an additional amount of
approximately $2.2 million in liabilities, and incurred acquisition costs of
approximately $50,000. The transaction also includes performance related
contingent consideration based on the annual revenues of the acquired business
over the next five years. The total performance related contingency is limited
to approximately $2.2 million and is subject to certain conditions that may
impact the total amount to be paid.
The acquisition has been accounted for as a purchase and, accordingly,
the accompanying financial statements include the results of operations of
Radix, from the date of the acquisition.
Page 11
The purchase price was initially allocated based on the fair value of
the assets acquired and, subsequent to the acquisition date, there have been
additional purchase price adjustments leading to the following allocation for
the assets purchased and liabilities assumed (in thousands):
Assets acquired:
Receivables $783
Inventories 614
Goodwill 1,403
Intangibles (customer list, trade names/trade secrets,
and technology) 1,705
----------
4,505
Liabilities assumed:
Accounts payable to outside vendors (611)
Accounts payable to DCI, Inc. (a subsidiary of
Elecsys Corporation) (2,262)
Accrued expenses (1,620)
----------
(4,493)
----------
Cost of acquisition, net of cash acquired $12
==========
The purchase price in excess of the fair value of the tangible assets
acquired has been allocated to intangibles and goodwill. The Company engaged an
independent third party valuation expert to assist in the allocation of the
excess purchase price to the various specific separately identifiable
intangibles. The final valuation report allocated the $1,705,000 in intangible
valuation to customer relationships ($950,000), trade names ($530,000) and
technology ($225,000). These assets were determined by the valuation expert to
have a useful life of 15 years. Amortization expense for the acquired intangible
assets is estimated to be approximately $114,000 in each of the next fifteen
fiscal years.
Page 12
The following table sets forth the unaudited pro forma results of
operations of the Company for the three-month periods ended July 31, 2008 and
2007 as if the Company had acquired the assets and assumed certain liabilities
of Radix International Corporation and subsidiary at the beginning of the
respective periods. The pro forma information contains the actual operating
results of the Company and Radix with the results prior to September 18, 2007,
for Radix, adjusted to include pro forma impact of (i) the elimination of
intercompany sales and gross margin in inventory as of the periods presented;
(ii) additional interest expense associated with the financing arrangement
entered into by the Company on September 25, 2007 in connection with the
transaction; (iii) additional expense as a result of estimated amortization of
identifiable intangible assets; and (iv) an adjustment to income tax expense for
the tax effect of the above adjustments. These pro forma amounts do not purport
to be indicative of the results that would have actually been obtained if the
acquisitions occurred at the beginning of the respective periods or that may be
obtained in the future (in thousands, except per share data).
Three Months Ended July 31,
-------------------------------------------------------------------------------
2008 2007
------------------------------------- --------------------------------------
Pro Forma Pro Pro Forma Pro
Reported Adjustments Forma Reported Adjustments Forma
------------------------------------- --------------------------------------
Sales $5,564 $ -- $5,564 $4,787 $645 $5,432
Net income (loss) 109 -- 109 174 (276) (102)
Basic earnings per share $0.03 $0.03 $0.05 $(0.03)
Diluted earnings per share $0.03 $0.03 $0.05 $(0.03)
AMCI. On December 19, 2006, the Company announced that its NTG
subsidiary had acquired the product lines, technology, customer base and
intellectual property of Advanced Monitoring & Control, Inc. ("AMCI") for
approximately $90,000. The purchase price also included a pending patent
application. The entire purchase price was allocated to the customer list. AMCI
was a competitor of NTG in the business of remote monitoring of oil and gas
pipelines as well as other various remote monitoring applications. The employees
of AMCI became employees of NTG upon completion of the transaction.
Total acquired intangible assets consist of the following (in
thousands):
July 31, 2008 April 30, 2008
---------------------------- -----------------------------
Gross Gross
Intangible Asset Carrying Accumulated Carrying Accumulated
Description Company Amount Amortization Amount Amortization
---------------------------- ----------- ---------- -------------- ----------- --------------
Patents, trademarks and
copyrights NTG $352 $(129) $352 $(120)
Customer relationships NTG 90 (29) 90 (24)
Customer relationships Radix 950 (58) 950 (42)
Trade name Radix 530 (33) 530 (24)
Technology Radix 225 (14) 225 (10)
---------- -------------- ----------- --------------
$2,147 $(263) $2,147 $(220)
========== ============== =========== ==============
Amortization expense for the three-month periods ended July 31, 2008
and 2007 was approximately $43,000 and $13,000, respectively.
Page 13
Estimated amortization expense for the next five fiscal years ending
April 30 is as follows (in thousands):
Year Amount
---------------- ----------------
2009 $128
2010 166
2011 166
2012 161
2013 149
Thereafter 1,116
4. INVENTORY
Inventories are stated at the lower of cost or market, using the
first-in, first-out (FIFO) method. Inventories, net of reserves of approximately
$377,000, for the periods ended July 31, 2008 and April 30, 2008, respectively,
are summarized by major classification as follows (in thousands):
July 31, 2008 April 30, 2008
------------------ ---------------------
Raw material $4,365 $4,725
Work-in-process 1,225 959
Finished goods 514 523
------------------ ---------------------
$6,104 $6,207
================== =====================
5. STOCK OPTION PLAN
At July 31, 2007, the Company had an equity-based compensation plan
from which stock-based compensation awards are granted to eligible employees and
consultants of the Company. According to the terms of the Company's 1991 stock
option plan (the "Plan") for which the Company originally reserved 675,000
shares of common stock, both incentive stock options and non-qualified stock
options to purchase common stock of the Company may be granted to key employees,
directors and consultants to the Company, at the discretion of the Board of
Directors. Incentive stock options may not be granted at prices that are less
than the fair market value on the date of grant. Non-qualified options may be
granted at prices determined appropriate by the Board of Directors of the
Company, but have not been granted at less than market value on the date of
grant. Generally, these options become exercisable and vest over one to five
years and expire within 10 years of the date of grant. The Plan also provides
for accelerated vesting if there is a change in control of the Company. As of
July 31, 2008, options to purchase approximately 311,250 shares were outstanding
of which 254,583 are vested and exercisable.
Prior to May 1, 2006, the Company accounted for its equity-based
compensation plan under the recognition and measurement provision of APB Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
Interpretations, as permitted by Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS
Page 14
123). The Company did not recognize the value of stock-based compensation issued
to employees and directors in its Consolidated Statements of Operations prior to
May 1, 2006, as all options granted under its equity-based compensation plan had
an exercise price equal to the market value of the underlying common stock on
the date of the grant. Effective May 1, 2006, the Company adopted the fair value
recognition provisions of Statement of Financial Accounting Standard No. 123
(revised 2004), Share-Based Payment (SFAS 123R), using the
modified-prospective-transition method. Under this transition method,
compensation cost recognized in the first quarter of fiscal year 2007 includes
compensation costs for all share-based payments granted prior to May 1, 2006,
but not yet vested as of May 1, 2006, based on the grant-date fair value
estimated in accordance with the original provisions of SFAS 123, and
compensation cost for all share-based payments granted subsequent to April 30,
2006 based on the grant date fair value estimated in accordance with the
provisions of SFAS 123R.
The fair value of each option award is estimated on the date of grant
using the Black-Scholes option pricing model, which uses the following
weighted-average assumptions for the three-month periods ended July 31, 2008 and
2007.
Three Months Ended Three Months Ended
July 31, 2008 July 31, 2007
-------------------------- ---------------------------
Risk-free interest rate 1.71% 4.85%
Expected life, in years 6 6
Expected volatility 37.96% 51.32%
Dividend yield 0.0% 0.0%
Forfeiture rate 5.00% 5.00%
The Company uses historical data to estimate option exercises and
employee terminations used in the model. Expected volatility is based on monthly
historical fluctuations of the Company's common stock using the closing market
value for the number of months of the expected term immediately preceding the
grant. The risk-free interest rate is based on the U.S. Treasury yield curve in
effect at the time of the grant for a bond with a similar term.
The Company receives a tax deduction for certain stock option exercises
and disqualifying stock dispositions generally for the excess of the price at
which the options are sold over the exercise prices of the options. In
accordance with SFAS 123R, the Company reports any tax benefit from the exercise
of stock options as financing cash flows. For the three-month periods ended July
31, 2008 and 2007, there were no exercises of stock options which triggered tax
benefits, therefore net cash flow used in financing activities was unchanged as
a result of the adoption of SFAS 123R.
At July 31, 2008, there was approximately $104,000 of unrecognized
compensation cost related to share-based payments which is expected to be
recognized over a weighted-average period of 1.38 years.
Page 15
The following table represents stock option activity for the
three-month period ended July 31, 2008:
Weighted- Weighted-
Number Average Average
of Exercise Remaining
Shares Price Contract Life
------------- -------------- --------------------
Outstanding options at April 30, 2008 324,750 $2.53 5.34 Years
Granted (10,000) 5.63
Exercised (5,000) 4.94
Forfeited 18,500 5.47
------------- -------------- --------------------
Outstanding options at July 31, 2008 311,250 $2.42 4.81 Years
============= ============== ====================
Outstanding exercisable at July 31, 2008 254,583 $1.87 4.16 Years
============= ============== ====================
Shares available for future stock option grants to employees, officers,
directors and consultants of the Company under the existing Plan were 42,000 at
July 31, 2008. At July 31, 2008 the aggregate intrinsic value of options
outstanding was approximately $1,379,000, and the aggregate intrinsic value of
options exercisable was approximately $1,268,000. The Company recognized
share-based compensation expense of $17,000 for the three-month periods ended
July 31, 2008 and 2007. The weighted-average fair value of the options granted
in the three-month period ended July 31, 2008 was $2.09 per option.
The following table summarizes information about stock options
outstanding at July 31, 2008:
Options Outstanding Options Exercisable
------------------ ------------------- ------------------ ---------------- -----------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise at July 30, Contractual Exercise at July 31, Exercise
Prices 2008 Life Price 2008 Price
--------------------- ------------------ ------------------- ------------------ ---------------- -----------------
$0.81 96,250 3.74 years $0.81 96,250 $0.81
$1.25 - $1.50 47,500 4.04 years $1.25 47,500 $1.25
$2.13 - $2.25 51,000 1.52 years $2.25 51,000 $2.25
$3.25 - $3.99 85,000 7.31 years $3.67 58,333 $3.66
$5.63 - $5.90 20,000 7.69 years $5.75 -- --
$6.30 10,000 9.09 years $6.30 -- --
$7.30 1,500 0.16 years $7.30 1,500 $7.30
------------------ ----------------
$0.81 - $7.30 311,250 4.81 years $2.42 254,583 $1.87
================== ================
Page 16
6. NET INCOME PER SHARE
The following table presents the calculation of basic and diluted
income per share (in thousands):
Three Months Ended
-------------------------------------------
July 31, 2008 July 31, 2007
------------------- --------------------
Numerator:
Net income $109 $174
=================== ====================
Denominator:
Weighted average common shares outstanding - basic 3,287 3,285
Effect of dilutive options outstanding 171 194
------------------- --------------------
Weighted average common shares outstanding - diluted 3,458 3,479
=================== ====================
7. PLEDGED ASSETS, NOTES PAYABLE AND LONG-TERM DEBT
As of July 31, 2008, the Company had multiple credit agreements with a
regional lender based in Kansas City, Missouri. These credit agreements include
an operating line of credit, an additional asset-backed long-term note related
to the Company's acquisition of assets and assumption of certain liabilities of
Radix International Corporation, a long-term mortgage secured by approximately
74,000 square feet of land adjacent to the Company's production and headquarters
in Olathe, Kansas, and long-term financing for the facility.
The Company has an operating line of credit that provides the Company
and its subsidiaries with short-term financing for their working capital
requirements. On August 14, 2008, the Company and its financial institution
renewed the $6,000,000 agreement. The line of credit accrues interest at the
prime rate (5.0% at August 14, 2008) and has an interest rate floor of 5.50%.
The line of credit is secured by accounts receivable and inventory, expires on
August 13, 2009, and has a borrowing capacity calculated as a specified
percentage of accounts receivable and inventory. The line of credit contains
various covenants, including certain financial performance covenants pertaining
to the maintenance of debt to net worth and minimum net worth ratios. As of July
31, 2008, and under the former line of credit agreement, the Company was in
violation of its minimum tangible net worth covenant as a result of acquiring a
significant amount of intangible assets in the Radix transaction. The Company
received a waiver of the covenant from its financial institution for the period
ended July 31, 2008. Upon the renewal of the line of credit agreement, which
lowered the tangible net worth covenant, the Company was no longer in violation
of the covenant on August 14, 2008. There were $3,723,000 and $2,357,000 in
borrowings outstanding on the credit facility as of July 31, 2008 and 2007,
respectively.
Page 17
The following table is a summary of the Company's long-term debt and
related current maturities (in thousands):
July 31, April 30,
2008 2008
------------- -------------
Industrial revenue bonds, Series 2006A, 5-year adjustable interest rate based on
the yield on 5-year United States Treasury Notes, plus .45% (5.50% as of July
31, 2007), due in monthly principal and interest payments beginning October 1,
2006 through maturity on September 1, 2026, secured by real estate. $3,480 $3,508
Note payable with an adjustable interest rate of 7.94%, due in monthly principal
and interest payments beginning December 15, 2006 through maturity on November
15, 2016, secured by real estate. 212 217
Note payable with a fixed interest rate of 9.00%, due in monthly principal and
interest payments beginning October 25, 2007 through maturity on September 25,
2010, secured by accounts receivable and inventory. 412 454
------------- -------------
4,104 4,179
Less current maturities 315 309
------------- -------------
Total long-term debt $3,789 $3,870
============= =============
The approximate aggregate amount of principal to be paid on the
long-term debt during each of the next five years ending April 30 is as follows
(in thousands):
Year Amount
---------------- ----------------
2009 $234
2010 334
2011 235
2012 158
2013 167
Thereafter 2,661
----------------
$3,789
================
Page 18
8. SEGMENT REPORTING
The Company operates three reportable business segments: DCI, Inc.,
NTG, Inc. and Radix Corporation. DCI produces custom electronic assemblies which
integrate a variety of interface technologies, such as custom liquid crystal
displays, light emitting diode displays, and keypads, and also provides repair
services and engineering design services. NTG designs, markets, and provides
remote monitoring services. The Company's Radix subsidiary develops, designs and
markets ultra-rugged handheld computers, peripherals and portable printers. The
following table presents business segment revenues, income (loss), and total
assets for the three-month periods ended July 31, 2008 and 2007 (in thousands).
Three Months Ended July 31, 2008
-----------------------------------------------------------------------------------------
DCI NTG Radix Unallocated Eliminations Total
---------- --------- --------- -------------- --------------- ----------
Sales:
External customers $3,319 $781 $1,464 $ -- $ -- $5,564
Intersegment 1,270 -- -- -- (1,270) --
---------- --------- --------- -------------- --------------- ----------
Total sales $4,589 $781 $1,464 $ -- $(1,270) $5,564
========== ========= ========= ============== =============== ==========
Depreciation and
amortization expenses $120 $23 $37 $ -- $ -- $180
========== ========= ========= ============== =============== ==========
Segment income (loss)
before income tax
expense $559 $30 $(38) $(195) $(177) $179
========== ========= ========= ============== =============== ==========
Capital expenditures $5 $1 $12 $ -- $ -- $18
========== ========= ========= ============== =============== ==========
Goodwill and
Intangible assets $ -- $374 $3,004 $ -- $ -- $3,378
========== ========= ========= ============== =============== ==========
Total assets $20,307 $1,452 $6,099 $5,010 $(12,731) $20,137
========== ========= ========= ============== =============== ==========
Page 19
Three Months Ended July 31, 2007
--------------------------------------------------------------------------
DCI NTG Unallocated Eliminations Total
----------- ---------- ------------- --------------- ----------
Sales:
External $4,436 $351 $-- $ -- $4,787
Intersegment 156 -- -- (156) --
----------- ---------- ------------- --------------- ----------
Total sales $4,592 $351 $-- $(156) $4,787
=========== ========== ============= =============== ==========
Depreciation and amortization
expenses $116 $21 $ -- $ -- $137
=========== ========== ============= =============== ==========
Segment income (loss) before
income tax expense $516 $(89) $(168) $ 7 $266
=========== ========== ============= =============== ==========
Capital expenditures $111 $1 $ -- $ -- $112
=========== ========== ============= =============== ==========
Goodwill and intangible assets $ -- $424 $ -- $ -- $424
=========== ========== ============= =============== ==========
Total assets $17,692 $877 $4,560 $(6,027) $17,102
=========== ========== ============= =============== ==========
The following table reconciles total revenues to the products and
services offered by the Company (in thousands).
July 31, 2008 July 31, 2007
------------------ --------------------
Products and services:
Electronic manufacturing services $3,165 $4,315
Remote monitoring solutions 781 351
Rugged mobile computing 1,464 --
Engineering services 79 94
Other 75 27
------------------ --------------------
Total sales $5,564 $4,787
================== ====================
Page 20
9. WARRANTY
The Company provides a limited warranty for a period of one year from
the date of a customer's receipt of its products. The Company's standard
warranties require the Company to repair or replace defective products at no
cost to the customer or refund the customer's purchase price. The Company's
product warranty liability reflects management's best estimate of probable
liability under product warranties. Management determines the liability based on
known product failures (if any), historical experience, and other currently
available evidence.
The following table presents changes in the Company's warranty
liability, which is included in accrued expenses on the balance sheets (in
thousands):
Three Months Ended
July 31,
------------------------------
2008 2007
------------ -------------
Warranty reserve balance at beginning of period $122 $85
Expense accrued 16 22
Warranty costs incurred (29) (27)
------------ -------------
Warranty reserve balance at end of period $109 $80
============ =============
Page 21
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operation.
Overview
Elecsys is a publicly traded company that provides electronic design
and manufacturing services, custom liquid crystal displays ("LCDs"),
ultra-rugged mobile computing devices, and wireless remote monitoring solutions
to numerous industries worldwide. We operate our business through three
wholly-owned subsidiaries, DCI, Inc. ("DCI"), Radix Corporation ("Radix") and
NTG, Inc. ("NTG").
DCI provides electronic design and manufacturing services for original
equipment manufacturers ("OEMs") in the aerospace, transportation,
communications, safety, security and other industrial product markets. DCI has
specialized expertise and capabilities to design and efficiently manufacture
custom electronic assemblies which integrate a variety of specialized interface
technologies, such as custom LCDs, keypads, and touchscreens with circuit boards
and other electronic components. DCI seeks to become an extension of the OEM's
organization by providing key expertise that enables rapid development and
manufacture of electronic products from product conception through volume
production.
Radix designs, develops, and implements ultra-rugged handheld computing
solutions for tough environments where data integrity is paramount. Its
field-proven products, which include handheld computers, printers, peripherals,
and application software, are deployed in over 70 countries in applications that
include utilities, transportation logistics, traffic and parking enforcement,
route accounting/deliveries, and inspection and maintenance. Radix has built a
reputation for reliability and support over its lengthy history. Our flexibility
to custom configure solutions tailored to specific requirements has provided
opportunities to expand our product offerings into new industries.
NTG designs, markets, and provides remote monitoring solutions for the
oil and gas pipeline industry as well as other industries that require remote
monitoring. NTG's wireless remote monitoring devices utilize the existing
cellular and satellite infrastructure and its Watchdog CP Web Monitor to provide
full time, wireless status monitoring and alarm notification regarding the
performance of multiple types of systems over the internet. This highly reliable
network, combined with its internet-based front-end, provides NTG's customers
with active monitoring and control of a large population of field-deployed
remote monitoring devices.
On August 14, 2008, the Company renewed its $6,000,000 operating line
of credit. This line of credit provides the Company and its subsidiaries with
short-term financing for working capital requirements, is secured by accounts
receivable and inventory, and expires on August 13, 2009. The Company's
borrowing capacity under this line is calculated as a specified percentage of
accounts receivable and inventory. The line of credit accrues interest at the
prime rate (5.0% at August 14, 2008) and contains an interest rate floor of
5.5%. The loan agreement has various covenants, including certain financial
performance covenants pertaining to the maintenance of debt to net worth and
minimum net worth ratios.
Page 22
Results of Operations
Three Months Ended July 31, 2008 Compared With Three Months Ended July 31, 2007.
The following table sets forth, for the periods presented, certain
statement of operations data (in thousands) of the Company:
Three Months Ended
-----------------------------------------------------
July 31, 2008 July 31, 2007
------------- -------------
Sales $5,564 100.0% $4,787 100.0%
Cost of products sold 3,613 64.9% 3,272 68.4%
------------ ------------ ------------ ----------
Gross margin 1,951 35.1% 1,515 31.6%
Selling, general and administrative expenses 1,655 29.8% 1,161 24.2%
------------ ------------ ------------ ----------
Operating income 296 5.3% 354 7.4%
Interest expense (117) (2.1%) (102) (2.1%)
Other income, net -- 0.0% 14 0.1%
------------ ------------ ------------ ----------
Income before income taxes 179 3.2% 266 5.6%
Income tax expense 70 1.3% 92 1.9%
------------ ------------ ------------ ----------
Net income $109 1.9% $174 3.7%
Net income per share - basic $0.03 $0.05
============ ============
Net income per share - diluted $0.03 $0.05
============ ============
Sales for the three months ended July 31, 2008 were approximately
$5,564,000, an increase of $777,000, or 16.2%, from $4,787,000 for the
comparable period of fiscal 2008.
DCI. Sales at DCI were approximately $4,589,000, a slight decrease of
$3,000, or 0.1%, from $4,592,000 from the prior year. The sales from the first
quarter of the prior year included $697,000 in sales to the former Radix
Corporation. External sales reported at DCI no longer include sales made to our
Radix subsidiary after September 18, 2007. Overall, sales to outside customers
at DCI, excluding sales to both NTG and Radix in both comparable periods, were
$3,319,000 for the three-month period ended July 31, 2008, a decrease of
$421,000, or 11.3%, from the $3,740,000 for the three-month period ended July
31, 2007. The decrease in sales at DCI to outside customers resulted from lower
bookings during the preceding quarters. We expect sales volumes to outside
customers at DCI to remain at or near the current levels during the next fiscal
quarter, and we expect to increase sales in the second half of the 2009 fiscal
year. This expectation is based upon scheduled shipments to customers currently
recorded in our backlog, combined with anticipated future bookings, and
additional sales and marketing investments made at DCI.
Radix. Sales at the Company's newest subsidiary, Radix, totaled
approximately $1,464,000 since the beginning of the fiscal year. The revenues
were mainly the result of sales of rugged hand held computer hardware and
peripherals as well as maintenance contract revenues. We anticipate a
significant increase in revenue in the next quarter as a result of the $2.6
million order announced in July that is scheduled to be delivered by the end of
October. This order is the
Page 23
initial phase of a larger project that could generate similar orders over the
next few years. Revenues for the second half of the fiscal year are expected to
show significant increases over the preceding year.
NTG. Sales volumes at NTG were $781,000 for the three-month period
ended July 31, 2008 an increase of $430,000, or 123%, from the first quarter of
fiscal 2008. The increase in sales at NTG resulted from shipments of new
products of $505,000, equipment upgrades and repairs of $206,000 during the
period and network messaging service revenues which totaled $70,000 for the
period. Sales at NTG are expected to continue increasing over the next few
quarters as compared to the current period and should equal or show increases to
the comparable quarters of fiscal 2008 due to continued strong demand for our
WatchdogCP products and our initiative to market our products internationally.
Total consolidated backlog at July 31, 2008 was approximately
$7,969,000, a decrease of approximately $2,614,000, or 24.7%, from a total
backlog of $10,583,000 on July 31, 2007 and an increase of $2,803,000 from a
total backlog of $5,166,000 on April 30, 2008. As of July 31, 2007, the backlog
of orders at DCI included approximately $3,174,000 in orders from the former
Radix International Corporation that are no longer reported in consolidated
backlog. The amount of total consolidated backlog at July 31, 2008, includes
purchase orders in place from our customers at each of the three subsidiaries
that are scheduled for shipment in future periods but excludes any intercompany
purchase orders. The following table presents total backlog by subsidiary (in
thousands):
July 31, 2008 April 30, 2008 July 31, 2007
------------------- --------------------- -------------------
DCI, Inc. $6,600 $7,888 $9,514
NTG, Inc. 88 108 1,134
Radix Corporation 3,962 589 --
Less intercompany backlog (2,681) (3,419) (65)
------------------- --------------------- -------------------
Total $7,969 $5,166 $10,583
=================== ===================== ===================
Gross margin for the three-month period ended July 31, 2008, was 35.1%
of sales, or $1,951,000, compared to 31.5% of sales, or $1,515,000, for the
three-month period ended July 31, 2007. The increase in gross margin of
approximately $436,000 is primarily the result of increased sales volumes at NTG
and the additional sales from Radix.
DCI. DCI's gross margin was approximately $1,398,000, or 30.5%, for the
period as compared to approximately $1,327,000, or 28.9%, for the comparable
period of the prior year primarily as a result of product mix to its outside
customers. The gross margin for intercompany sales to Radix and NTG of $177,00
and $7,000 for the three months ended July 31, 2008 and 2007, respectively, are
included in DCI's gross margins for the periods presented and are excluded from
the reported consolidated gross margins.
Radix. The gross margin at Radix for the fiscal quarter was
approximately $432,000, or 29.5%. The gross margin in the three-month period
ended April 30, 2008 was $475,000 or 34.2%. The resulting decrease in gross
margin percentage was the result of product mix between sales of handheld
computer models and peripherals.
NTG. The gross margin at NTG was approximately $298,000, or 38.2%, for
the three-month
Page 24
period ended July 31, 2008 as compared to approximately $181,000 for the
three-month period ended July 31, 2007. The increase in gross margin at NTG was
due to the increased sales volumes with NTG's products, including new equipment
sales and equipment upgrades.
We expect that consolidated gross margins over the next few quarters
will remain in the range of 30% to 35%.
Selling, general and administrative ("SG&A") expenses increased
$494,000, or 42.5%, to $1,655,000 for the three-month period ended July 31, 2008
from $1,161,000 in the three-month period ended July 31, 2007. SG&A expenses
were 29.8% of sales for the fiscal first quarter of 2009 as compared to 24.2% of
sales for the comparable period for fiscal 2008.
DCI. SG&A expenses at DCI increased $8,000 from the prior year period
to $732,000 for the current period. The minor 1.1% change in DCI's SG&A expenses
included increases in personnel and personnel-related expenses of $65,000 mostly
offset by decreases in travel, sales commissions, support engineering expenses
and other administration costs that totaled approximately $57,000.
Radix. SG&A expenses at Radix were approximately $461,000 during the
period, which was the primary contributing factor to the overall increase in
Elecsys operating expenses for the period. Radix was not a part of the Company
during the quarter ending July 31, 2007.
NTG. SG&A expenses at NTG decreased $1,000 from the prior year period.
The SG&A expenses at NTG are indicative of the stabilized and consistent levels
of expenses required to support NTG's sales, marketing and customer support
efforts required at their current level of sales and number of customers.
Elecsys Corporation. Corporate expenses were approximately $26,000
higher than for the corresponding fiscal 2007 quarter as a result of higher
accounting and consulting expenses primarily as a result to comply with the
requirements of the Sarbanes-Oxley Act of 2002.
Excluding the effects of only having a partial year of expenses at
Radix in the previous fiscal year as a result of the timing of the Radix
acquisition, we anticipate that our SG&A expenses will continue at or near their
present levels. We will continue to invest in the growth at DCI and will
intensify our investment in product development, marketing, and sales at both
NTG and Radix.
Interest expense was $117,000 and $102,000 for the three-month periods
ended July 31, 2008 and 2007, respectively. This increase of $15,000 was the
direct result of interest expense on our operating line of credit during the
period due to an increase in the average amount outstanding on the line of
credit. The line of credit was utilized during the period to pay operating
expenses, including accounts payable, income taxes and debt payments. As of July
31, 2008, there was $3,723,000 outstanding on the line of credit and an
additional $4,104,000 in outstanding long-term borrowings. We plan to continue
to utilize the operating line of credit over the next few quarters and
anticipate that the amount of outstanding borrowings will remain stable as our
business continues to grow.
Income tax expense totaled $70,000 for the three-month period ended
July 31, 2008 as compared to $92,000 for the three-month period ended July 31,
2007. Income tax expense for the three-month period ended July 31, 2008 was
based on a 39% blended tax rate for both federal and state taxes.
As a result of the above factors, net income was $109,000, or $0.03 per
diluted share, for
Page 25
the three-month period ended July 31, 2008 as compared to net
income of $174,000, or $0.05 per diluted share, reported for the three-month
period ended July 31, 2007.
Liquidity and Capital Resources
Cash and cash equivalents decreased $56,000 to $301,000 as of July 31,
2008 compared to $357,000 at April 30, 2008. This decrease was primarily the
result of cash used for payments of accounts payable and income taxes slightly
offset by decreases in inventory and collections of receivables.
Operating activities. Our consolidated working capital increased
approximately $287,000 for the three-month period ended July 31, 2008. The
increase was due to an overall reduction in current assets, with reductions in
accounts receivable from collections and a slight decrease in inventories,
offset by a larger decrease in current liabilities as a result of payments for
accounts payable, taxes and debt. Operating cash receipts totaled approximately
$6,189,000 and $3,789,000 during the three-month periods ended July 31, 2008 and
2007, respectively. The increase is the result of the increase in sales for the
current period in combination with the reduction in receivables as compared to
the prior year. Total cash disbursements for operations which include purchases
of inventory and operating expenses, were approximately $6,116,000 for the
three-month period ended July 31, 2008 and $4,645,000 for the three-month period
ended July 31, 2007. The Company utilizes its line of credit when necessary in
order to pay suppliers and meet operating cash requirements.
Investing activities. Cash provided by investing activities of $34,000
during the three-month period ended July 31, 2008. Purchases of equipment
totaled approximately $18,000 while during the three-month period ended July 31,
2007, purchases of equipment totaled $112,000.
Financing activities. For the three-month period ended July 31, 2008,
total borrowings on our operating line of credit were $1,267,000 which were
primarily used to finance the operations of DCI, Radix and NTG. Payments on the
line of credit and long-term debt were $1,455,000 for the first fiscal quarter.
Also included in the Company's financing activities for the quarter was $25,000
of cash provided by the exercise of stock options. For the three-month period
ended July 31, 2007, the cash used in financing activities included payments of
long-term debt principal of $67,000, line of credit payments of $1,262,000, and
borrowings on the line of credit of $2,094,000. As of July 31, 2008, there were
$3,723,000 borrowings outstanding on the operating line of credit.
The Company renewed its $6,000,000 operating line of credit on August
14, 2008. The line of credit is secured by accounts receivable and inventory and
is available for working capital. It expires on August 13, 2009 and its
borrowing capacity is calculated as a specified percentage of accounts
receivable and inventory. The line of credit accrues interest at the prime rate
(5.5% at August 14, 2008) and contains an interest rate floor of 5.5%. The loan
also contains various covenants, including certain financial performance
covenants pertaining to the maintenance of debt to net worth and minimum net
worth ratios.
Although there can be no assurances, we believe that existing cash, the
cash expected to
Page 26
be generated from the operations of DCI, Radix and NTG, amounts available under
our line of credit, and amounts available from trade credit, will be sufficient
to finance our anticipated working capital needs, our capital expenditures, and
our scheduled debt repayment for the foreseeable future.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and related disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. We cannot assure you that actual results
will not differ from those estimates. We believe the following critical
accounting policies affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements.
Revenue Recognition. We derive revenue from the manufacture of
production units of electronic assemblies, liquid crystal displays, remote
monitoring equipment and ultra-rugged handheld computers and peripherals. We
also derive revenue from repairs and non-warranty services, engineering design
services, remote monitoring services and maintenance contracts. Production and
repaired units are billed to the customer after they are shipped. Remote
monitoring services and maintenance contracts are billed and the revenue
recognized at the end of the month after the services or maintenance periods are
completed. For customers that utilize our engineering design services, we bill
the customer and recognize revenue after the design services or tooling have
been completed. We require our customers to provide a binding purchase order to
verify the manufacturing services to be provided. Typically, we do not have any
post-shipment obligations that would include customer acceptance requirements,
training, installation or other services.
Inventory Valuation. Our inventories are stated at the lower of cost,
using the first-in, first-out (FIFO) method, or market value. Our industry is
characterized by rapid technological change, short-term customer commitments and
rapid changes in demand, as well as other market considerations. We make
provisions for estimated excess and obsolete inventory based on our quarterly
reviews of inventory quantities on hand and the latest forecasts of product
demand and production requirements from our customers. We review our inventory
in detail on a quarterly basis utilizing a 24-month time horizon. Individual
part numbers that have not had any usage in a 24-month time period are examined
by manufacturing personnel for obsolescence, excess and fair value. Parts that
are not identified for common use or are unique to a former customer or
application are categorized as obsolete and are discarded as part of our
quarterly inventory write-down. If actual market conditions or our customers'
product demands are less favorable than those projected, additional inventory
write-downs may be required. The reserve balance is analyzed for adequacy along
with the inventory review each quarter.
Allowance for Doubtful Accounts. Accounts receivable are carried at
original invoice amount less an estimate made for doubtful receivables based on
a review of all outstanding
Page 27
amounts on a monthly basis. We determine the allowance for doubtful accounts by
regularly evaluating individual customer receivables and considering a
customer's financial condition and credit history, and current economic
conditions. Receivables are written off when deemed uncollectible. Recoveries of
receivables previously written off are recorded when received. The majority of
the customer accounts are considered past due after 30 days. Interest is not
charged on past due accounts for the majority of our customers.
Warranty Reserve. We have established a warranty reserve for rework,
product warranties and customer refunds. We provide a limited warranty for a
period of one year from the date of receipt of our products by our customers and
our standard warranties require us to repair or replace defective products at no
cost to the customer or refund the customer's purchase price. The warranty
reserve is based on historical experience and analysis of specific known and
potential warranty issues. The product warranty liability reflects management's
best estimate of probable liability under our product warranties.
Goodwill. Goodwill is initially measured as the excess of the cost of
an acquired business over the fair value of the identifiable net assets
acquired. We do not amortize goodwill, but rather review its carrying value for
impairment annually (April 30), and whenever an impairment indicator is
identified. Our annual impairment test is performed at year-end. The goodwill
impairment test involves a two-step approach. The first step is to identify if
potential impairment of goodwill exists. If impairment of goodwill is determined
to exist, the second step of the goodwill impairment test measures the amount of
the impairment using a fair value-based approach.
Intangible Assets. Intangible assets consist of patents, trademarks,
copyrights, customer relationships and capitalized software. Intangible assets
are amortized over their estimated useful lives using the straight-line method.
Impairment of Long-Lived Intangible Assets. Long-lived assets,
including amortizable intangible assets, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
or group of assets may not be fully recoverable. These events or changes in
circumstances may include a significant deterioration of operating results,
changes in business plans, or changes in anticipated future cash flows. If an
impairment indicator is present, we evaluate recoverability by a comparison of
the carrying amount of the assets to future undiscounted cash flows expected to
be generated by the assets. If the sum of the expected future cash flows is less
than the carrying amount, we would recognize an impairment loss. An impairment
loss would be measured by comparing the amount by which the carrying value
exceeds the fair value of the long-lived assets and intangibles.
Forward Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, but not limited to,
statements on strategy, operating forecasts, and our working capital
requirements and availability. In addition, from time to time, the Company or
its representatives have made or may make forward-looking statements, orally or
in writing. Such
Page 28
forward-looking statements may be included in, but are not limited to, various
filings made by the Company with the Securities and Exchange Commission, press
releases or oral statements made by or with the approval of an authorized
executive officer of the Company. Forward-looking statements consist of any
statement other than a recitation of historical fact and can be identified by
the use of forward-looking terminology such as "may," "expect," "anticipate,"
"estimate," or "continue" or the negative thereof or other variations thereon or
comparable terminology. Actual results could differ materially from those
projected or suggested in any forward-looking statements as a result of a wide
variety of factors and conditions, including, but not limited to, an inability
on the part of the Company to successfully market and grow NTG, Radix and DCI,
the Company's dependence on its top customers, reliance on certain key
management personnel, an inability to grow the Company's customer base,
potential growth in costs and expenses, an inability to refinance the Company's
existing debt on terms comparable to those now in existence, potential
deterioration of business or economic conditions for the Company's customers'
products, price competition from larger and better financed competitors, and the
factors and conditions described in the discussion of "Results of Operations"
and "Liquidity and Capital Resources" as contained in Management's Discussion
and Analysis or Plan of Operation of this report, as well as those included in
other documents the Company files from time to time with the Securities and
Exchange Commission, including the Company's quarterly reports on Form 10-Q,
the annual report on Form 10-KSB, and current reports on Form 8-K. Holders of
the Company's securities are specifically referred to these documents with
regard to the factors and conditions that may affect future results. The reader
is cautioned that the Company does not have a policy of updating or revising
forward-looking statements and thus he or she should not assume that silence by
management of the Company over time means that actual events are bearing out as
estimated in such forward-looking statements.
Page 29
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
ITEM 4T. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company's
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the Company's disclosure
controls and procedures, as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as of the end of the period covered by this report. Based on such
evaluation, these officers have concluded that the Company's disclosure controls
and procedures are effective to provide reasonable assurance that information
required to be disclosed in our periodic filings under the Exchange Act is
accumulated and communicated to our management, including those officers, to
allow timely decisions regarding required disclosure.
(b) Changes in internal controls. There were no significant changes in
the Company's internal controls over financial reporting or in other factors
that in management's estimates are reasonably likely to materially affect the
Company's internal controls over financial reporting subsequent to the date of
the evaluation.
Page 30
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
None.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
ITEM 3. Defaults Upon Senior Securities
Not Applicable.
ITEM 4. Submission of Matters to a vote of Security Holders
Not Applicable
ITEM 5. Other Information
Not Applicable.
ITEM 6. Exhibits
10.1 Waiver Relating to Business Loan Agreement between
Elecsys Corporation and Bank Midwest
10.2 Business Loan Agreement (Asset Based) dated August
14, 2008 between Elecsys Corporation and Bank Midwest N.A.
10.3 Promissory Note dated August 14, 2008 between Elecsys
Corporation and Bank Midwest N.A.
31.1 Rule 13a-14(a)/15d-14(a) Certification of President
and Chief Executive Officer (Principal Executive Officer).
31.2 Rule 13a-14(a)/15d-14(a) Certification of Vice
President and Chief Financial Officer (Principal Financial and
Accounting Officer).
32.1 Section 1350 Certification of President and Chief
Executive Officer (Principal Executive Officer).
32.2 Section 1350 Certification of Vice President and
Chief Financial Officer (Principal Financial and Accounting
Officer).
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELECSYS CORPORATION
September 9, 2008 /s/ Karl B. Gemperli
----------------------- -----------------------------------
Date Karl B. Gemperli
President and Chief Executive Officer
(Principal Executive Officer)
September 9, 2008 /s/ Todd A. Daniels
----------------------- -----------------------------------
Date Todd A. Daniels
Vice President and Chief Financial
Officer
(Principal Financial and Accounting
Officer)
Page 32
EXHIBIT INDEX
Item Description
10.1 Waiver Relating to Business Loan Agreement between Elecsys Corporation
and Bank Midwest
10.2 Business Loan Agreement (Asset Based) dated August 14, 2008 between
Elecsys Corporation and Bank Midwest N.A.
10.3 Promissory Note dated August 14, 2008 between Elecsys Corporation and
Bank Midwest N.A.
31.1 Rule 13a-14(a)/15d-14(a) Certification of President and Chief
Executive Officer (Principal Executive Officer).
31.2 Rule 13a-14(a)/15d-14(a) Certification of Vice President and Chief
Financial Officer (Principal Financial and Accounting Officer).
32.1 Section 1350 Certification of President and Chief Executive Officer
(Principal Executive Officer).
32.2 Section 1350 Certification of Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer).
Page 33
Elecsys (AMEX:ASY)
Gráfica de Acción Histórica
De Abr 2024 a May 2024
Elecsys (AMEX:ASY)
Gráfica de Acción Histórica
De May 2023 a May 2024
