10-Q 1 f10q_120913.htm FORM 10-Q f10q_120913.htm
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   October 31, 2013.

(   )  TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from _____________ to ______________.

Commission File Number  001-15057

ELECSYS CORPORATION
       (Exact name of Registrant as Specified in its Charter)

Kansas
48-1099142
(State or other jurisdiction of
(I.R.S. Employer
Incorporation or organization)
Identification No.)

846 N. Mart-Way Court Olathe, Kansas
66061
(Address of principal executive offices)
(Zip Code)

(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 has submitted electronically and posted in its corporate website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]                      No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
[ ] Large accelerated filer            [ ] Accelerated filer             [ ] Non-accelerated filer           [X] Smaller Reporting Company

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 – 3,806,968 shares outstanding as of December 2, 2013.
 
 
Page 1

 
ELECSYS CORPORATION AND SUBSIDIARY
FORM 10-Q
Quarter Ended October 31, 2013

INDEX
 
  Page
PART I - FINANCIAL INFORMATION
 
   
 
   
   
   
   
   
PART II - OTHER INFORMATION
 
   
   
   
   
   
   
   
   
   
38
 
 
Page 2

 
PART I – FINANCIAL INFORMATION

ITEM 1.  Consolidated Financial Statements.

Elecsys Corporation and Subsidiary
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
 
   
Three Months Ended
October 31,
   
Six Months Ended
October 31,
 
   
2013
   
2012
   
2013
   
2012
 
Revenues
  $ 7,330     $ 6,138     $ 14,104     $ 10,395  
Cost of revenues
    4,301       3,728       8,868       6,595  
Gross margin
    3,029       2,410       5,236       3,800  
                                 
Selling, general and administrative expenses:
                               
Research and development expense
    498       427       924       834  
Selling and marketing expense
    659       582       1,166       1,107  
General and administrative expense
    756       701       1,577       1,388  
Total selling, general and administrative expenses
    1,913       1,710       3,667       3,329  
                                 
Operating income
    1,116       700       1,569       471  
                                 
Financial income (expense):
                               
Interest expense
    (14 )     (15 )     (28 )     (36 )
Other income, net
    (3 )     (2 )     (4 )     (2 )
      (17 )     (17 )     (32 )     (38 )
                                 
Net income before income tax expense
    1,099       683       1,537       433  
                                 
Income tax expense
    446       270       620       181  
                                 
Net income
  $ 653     $ 413     $ 917     $ 252  
                                 
Net income per share information:
                               
Basic
  $ 0.17     $ 0.11     $ 0.24     $ 0.06  
Diluted
  $ 0.17     $ 0.11     $ 0.23     $ 0.06  
                                 
Weighted average common shares outstanding:
                               
Basic
    3,860       3,887       3,877       3,886  
Diluted
    3,937       3,927       3,942       3,926  

See Notes to Condensed Consolidated Financial Statements.
 
 
Page 3

 
Elecsys Corporation and Subsidiary
Condensed Consolidated Balance Sheets
(In thousands, except share data)

   
October 31, 2013
   
April 30, 2013
 
   
(Unaudited)
       
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 501     $ 1,464  
Accounts receivable, less allowances of $71 and $35, respectively
    2,762       2,538  
Inventories, net
    8,447       6,238  
Prepaid expenses
    107       61  
Income tax refund claims receivable
    -       106  
Deferred taxes
    700       689  
Total current assets
    12,517       11,096  
                 
Property and equipment:
               
Land
    1,737       1,737  
Building and improvements
    3,395       3,395  
Equipment
    3,914       3,696  
Total property and equipment, gross
    9,046       8,828  
Accumulated depreciation
    (3,607 )     (3,429 )
Total property and equipment, net
    5,439       5,399  
                 
Goodwill
    1,942       1,942  
Intangible assets, net
    1,584       1,685  
Other assets, net
    45       47  
Total assets
  $ 21,527     $ 20,169  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 2,000     $ 1,390  
Accrued expenses
    1,414       1,408  
Income taxes payable
    282       1  
Current maturities of long-term debt
    187       185  
Total current liabilities
    3,883       2,984  
                 
Deferred taxes
    650       637  
Long-term debt, less current maturities
    2,525       2,619  
                 
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 – 3,834,375 at October 31, 2013 and 3,897,832 at April 30, 2013
    40       40  
Additional paid-in capital
    11,536       11,429  
Treasury stock, at cost; 130,774 shares at October 31, 2013 and 59,414 shares at April 30, 2013
    (766 )     (282 )
Retained earnings
    3,659       2,742  
Total stockholders' equity
    14,469       13,929  
Total liabilities and stockholders' equity
  $ 21,527     $ 20,169  
                 
See Notes to Condensed Consolidated Financial Statements.
 
 
Page 4

 
Elecsys Corporation and Subsidiary
Condensed Consolidated Statements of Stockholders' Equity
(In thousands)

   
Common
Stock
(# of
shares)
   
 
Common
Stock
   
Additional
Paid-In
Capital
   
 
Treasury
Stock
   
 
Retained
Earnings
   
Total
Stockholders’
Equity
 
Balance at April 30, 2012
    3,884     $ 39     $ 11,166     $ -     $ 1,059     $ 12,264  
Net income
    -       -       -       -       1,683       1,683  
Exercise of stock options
    70       1       152       -       -       153  
Issue of restricted stock
    3       -       -       -       -       -  
Stock repurchases
    (59 )     -       -       (282 )     -       (282 )
Share-based compensation expense
    -       -       111       -       -       111  
Balance at April 30, 2013
    3,898     $ 40     $ 11,429     $ (282 )   $ 2,742     $ 13,929  
Net income
    -       -       -       -       917       917  
Exercise of stock options
    3       -       14       -       -       14  
Issue of restricted stock
    4       -       -       -       -       -  
Stock repurchases
    (71 )     -       -       (484 )     -       (484 )
Share-based compensation expense
    -       -       93       -       -       93  
Balance at October 31, 2013 (unaudited)
    3,834     $ 40     $ 11,536     $ (766 )   $ 3,659     $ 14,469  
                                                 
See Notes to Condensed Consolidated Financial Statements.

 
Page 5

 
Elecsys Corporation and Subsidiary
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
   
Six months ended October 31,
 
   
2013
   
2012
 
Cash Flows from Operating Activities:
           
Net income
  $ 917     $ 252  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Share-based compensation expense
    93       57  
Depreciation
    190       171  
Amortization
    103       103  
Provision (recovery) for doubtful accounts
    38       (7 )
Deferred income taxes
    2       55  
Changes in operating assets and liabilities:
               
Accounts receivable
    (262 )     860  
Inventories
    (2,209 )     (101 )
Income tax payable/receivable
    387       (15 )
Accounts payable
    610       349  
Accrued expenses
    6       (295 )
Other
    (46 )     (117 )
Net cash (used in) provided by operating activities
    (171 )     1,312  
                 
Cash Flows from Investing Activities:
               
Purchases of property and equipment
    (230 )     (81 )
Net cash (used in) investing activities
    (230 )     (81 )
                 
Cash Flows from Financing Activities:
               
Principal payments on note payable to bank
    -       (750 )
Purchases of common stock for repurchase program
    (484 )     -  
Proceeds from the exercise of stock options
    14       -  
Principal payments on long-term debt
    (92 )     (90 )
Net cash (used in) financing activities
    (562 )     (840 )
Net (decrease) increase in cash and cash equivalents
    (963 )     391  
Cash and cash equivalents at beginning of period
    1,464       136  
Cash and cash equivalents at end of period
  $ 501     $ 527  
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the period for interest
  $ 29     $ 39  
Cash paid during the period for income taxes
    290       141  

See Notes to Condensed Consolidated Financial Statements.
 
 
Page 6

 
Elecsys Corporation and Subsidiary
Notes to Condensed Consolidated Financial Statements
October 31, 2013
(Unaudited)

1.             NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES

Nature of Operations
Elecsys Corporation (“the Company”) provides innovative machine to machine (“M2M”) communication technology solutions, data acquisition and management systems, and custom electronic equipment for critical industrial applications worldwide. The Company’s primary markets include energy production and distribution, agriculture, safety and security systems, water management, and transportation.  The Company’s proprietary products and services encompass rugged remote monitoring, industrial data communication, and mobile data acquisition technologies that are deployed wherever high quality and reliability are essential. The Company develops, manufactures, and supports proprietary technology and products for various markets under several premium brand names.  In addition to its proprietary products, the Company designs and manufactures rugged and reliable custom solutions for original equipment manufacturers (“OEMs”) in a variety of industries worldwide.

The Company’s sales are made to customers within the United States and several international markets.

Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Elecsys International Corporation.  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.

Fair Value of Financial Instruments
The carrying amount of financial instruments, including cash, accounts receivable, accounts payable, and the current portion of long-term debt approximates fair value because of the short-term nature of these items.

The carrying value of the Company’s long-term debt approximates fair value as the Industrial Revenue Bonds include a variable interest rate component. 

Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during the six-month period ended October 31, 2013, which are of material significance, or have potential material significance, to the Company.
 
 
Page 7

 
Revenue Recognition
The Company derives revenue from the manufacture of production units of electronic assemblies, liquid crystal displays, and its proprietary products including its remote monitoring equipment, RFID technology and solutions and its mobile computing products.  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 when they are shipped.  Remote monitoring services and maintenance contracts are billed and the revenue recognized at the end of the month the services are provided or maintenance periods are completed.  Customers that utilize the Company’s engineering design services are billed and revenue is recognized when the design services or tooling have been completed.  The Company requires its 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, including customer acceptance requirements.  The Company does provide training and installation services to its customers and those services are billed and the revenue recognized at the end of the month the services are completed.  Revenue recognized is net of any sales taxes, tariffs, or duties remitted to any governmental authority.

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, considering a customer’s financial condition and credit history, as well as 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 the Company’s customers.

Inventories
Inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or fair 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 customers.  Inventories are reviewed in detail on a quarterly basis utilizing multiple annual time horizons ranging from 24-months to 60-months.  Individual part numbers that have not been used in each of the time horizons 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 included in the provision for estimated excess and obsolete inventory.  If actual market conditions or customers’ product demands are less favorable than those projected, additional inventory write-downs may be required.
 
 
Property and Equipment
Property and equipment are recorded at cost.  Depreciation is computed using the straight-line method over the following estimated useful lives:

 
Page 8

 
Description
Years
Building and improvements
39
Equipment
3
- 8
 
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 (January 31) and whenever an impairment indicator is identified.  The goodwill impairment test involves a two-step approach.  The first step is to identify whether 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.  No impairment indicators were identified as of October 31, 2013.

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.  The useful lives of the Company’s intangible assets range from 5 – 15 years.

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 undiscounted 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 ASC Topic 740, Income Taxes.  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 ASC Topic 740, 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.  ASC Topic 740 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.

 
Page 9

 
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 the Company offers extended warranties for additional purchase by its customers.  The 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.

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.

Subsequent Events
The Company evaluates all subsequent events and transactions for potential recognition or disclosure in its financial statements.  There are no matters which require disclosure.
 
2.             BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Elecsys International 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 8 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 and six-month periods ended October 31, 2013 are not necessarily indicative of the results that may be expected for the year ending April 30, 2014.

The balance sheet at April 30, 2013 has been derived from the audited consolidated 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-K for the year ended April 30, 2013.
 
 
Page 10

 
3.             INTANGIBLE ASSETS AND GOODWILL

The Company’s total intangible assets consist of the following (in thousands):

       
October 31, 2013
   
April 30, 2013
 
Intangible Asset Description
 
Estimated
Useful
Lives
 
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Gross
Carrying
Amount
   
Accumulated
Amortization
 
Patents, trademarks and copyrights
  10 15   $ 852     $ (438 )   $ 852     $ (404 )
Customer relationships
  5 15     1,040       (481 )     1,040       (449 )
Trade name
  15     530       (218 )     530       (200 )
Technologies
  13 15     475       (176 )     475       (159 )
            $ 2,897     $ (1,313 )   $ 2,897     $ (1,212 )
                                         

Amortization expense for the six-month periods ended October 31, 2013 and 2012 was approximately $103,000 in each respective period.

Estimated amortization expense for the next five fiscal years ending April 30 is as follows (in thousands):

Year
 
Amounts
 
2014 (remaining)
  $ 102  
2015
    187  
2016
    166  
2017
    166  
2018
    90  

The carrying amount of the Company’s goodwill at October 31, 2013 and April 30, 2013 was approximately $1,942,000.  There were no changes in the carrying amount of goodwill for the six-month period ended October 31, 2013.

The Company has evaluated the performance related contingent consideration provisions of the asset purchase agreement for its MBBS, S.A. (“MBBS”) acquisition in fiscal year 2010.  As of October 31, 2013, the Company has determined that based on the terms of the agreement and current projections, no contingent consideration is expected to be due in the MBBS transaction.
 
 
Page 11

 
4.             INVENTORY

Inventories are stated at the lower of cost or fair value, using the first-in, first-out (FIFO) method.  Inventories are summarized by major classification as follows (in thousands):

   
October 31, 2013
   
April 30, 2013
 
Raw material
  $ 4,177     $ 3,077  
Work-in-process
    2,009       1,409  
Finished goods
    2,911       2,434  
      9,097       6,920  
Reserves
    (650 )     (682 )
    $ 8,447     $ 6,238  
                 
 
5.             STOCKHOLDERS’ EQUITY

Stock Repurchase Plan
On December 17, 2012, the Company announced a share repurchase program by which the Company planned to repurchase up to 10% of the Company’s outstanding common shares, or approximately 400,000 shares, from time to time at prevailing market prices through the open market or privately negotiated transactions.  The program has no expiration date and purchases are funded from available cash resources.

For accounting purposes, the common stock repurchased under the Repurchase Plan is recorded based upon the settlement date of the applicable trade.  Such repurchased shares are held in treasury and are presented using the cost method.

For the three-month period ended October 31, 2013, the Company repurchased 55,093 shares at a cost of approximately $393,000 (average cost of $7.14 per share).  For the six-month period ended October 31, 2013, the Company repurchased 71,360 shares at a cost of approximately $485,000 (average cost of $6.80 per share).

Stock-Based Compensation
At October 31, 2013, the Company had two equity-based compensation plans from which stock-based compensation awards are granted to eligible employees and consultants of the Company.  These stock-based compensation plans include the: (i) 1991 Stock Option Plan (the “1991 Plan”) and (ii) 2010 Equity Incentive Plan (the “2010 Plan”).

According to the terms of the Company’s original 1991 stock option 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 were not granted at prices that were 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 1991 Plan also provides for accelerated vesting if there is a change in control of the Company.  As of October 31, 2013, there were options remaining outstanding to acquire 103,000 shares of common stock under the 1991 Plan.

 
Page 12

 
The 2010 Plan is an omnibus plan that allows for equity awards including stock options (including incentive stock options and non-qualified options), stock appreciation rights, restricted shares, restricted share units, performance shares, performance units, and other equity-based awards payable in cash or stock to officers, directors, key employees and other service providers.  Under the 2010 Plan, the Company has the ability to grant up to 380,000 shares of common stock.  The number of shares granted to eligible participants will be determined by the Board of Directors on an annual basis based on Company and individual performance and a Compensation Committee analysis.  The awards under the 2010 Plan will include vesting provisions that will require participants (other than non-employee directors) to remain at the Company for a defined period of time.  Options and stock appreciation rights will expire 10 years after the grant date.  The 2010 Plan also includes a change of control provision which allows for accelerated vesting if there is a change of control of the Company.  As of October 31, 2013, there were options outstanding to acquire 158,067 shares of common stock and 11,146 shares of common stock awards granted under the 2010 Plan and still subject to restriction.

 The Company accounts for its stock-based compensation plan in accordance with ASC Topic 718, Compensation-Stock Compensation.  ASC Topic 718 requires the measurement and recognition of compensation expense for all stock-based payment awards based on estimated fair value.  It further requires companies to estimate the fair value of stock-based payment awards on the date of the grant using an option pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods.

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 six-month periods ended October 31, 2013 and 2012:

   
Six Months
Ended
October 31, 2013
 
Six Months
Ended
October 31, 2012
Risk-free interest rate
  2.97%   2.97%
Expected life, in years
  6   6
Expected volatility
  82.59 82.61%   65.52 78.85%
Dividend yield
  0.0%   0.0%
Forfeiture rate
  11.40%   9.40%
 
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.

 
Page 13

 
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 ASC Topic 718, the Company reports any tax benefit from the exercise of stock options as financing cash flows.  For the six-month periods ended October 31, 2013 and 2012, there were no exercises of stock options which triggered tax benefits.

At October 31, 2013, there was approximately $313,000 of unrecognized compensation cost related to share-based payments that is expected to be recognized over a weighted-average period of 1.92 years.

The following tables represent equity award activity for the six-month period ended October 31, 2013:

Stock Options
 
Number
of
Shares
   
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Remaining
Contract Life
(in Years)
 
Outstanding options at April 30, 2013
    205,500     $ 4.28    
6.54
 
   Granted
    60,000     $ 5.86    
9.58
 
   Exercised
    3,433     $ 4.00       -  
   Forfeited
    1,000     $ 3.88       -  
Outstanding options at October 31, 2013
    261,067     $ 4.65    
6.84
 
                         
Outstanding exercisable at October 31, 2013
    143,734     $ 4.39    
5.04
 
                       
 
Restricted Stock
 
Number
of
Shares
 
Outstanding awards at April 30, 2013
    11,007  
   Granted
    4,608  
   Issued
    4,469  
   Forfeited
    -  
Outstanding awards at October 31, 2013
    11,146  
         
Outstanding vested at October 31, 2013
    -  
         

Shares available for future equity awards to employees, officers, directors and consultants of the Company under the existing 1991 Plan and 2010 Plan were 27,000 and 199,651, respectively, at October 31, 2013.  At October 31, 2013 the aggregate intrinsic value of options and restricted stock outstanding was approximately $1,177,000, and the aggregate intrinsic value of exercisable options was approximately $631,000.  The Company recognized share-based compensation expense of $93,000 for the six-month period ended October 31, 2013 and $57,000 for the six-month period ended October 31, 2012.  The weighted-average fair value of the options and restricted stock granted in the six-month period ended October 31, 2013 was $4.19 per stock option and $5.86 per restricted stock award.

 
Page 14

 
The following table summarizes information about equity awards outstanding at October 31, 2013:

       
Options Outstanding
   
Options Exercisable
 
Range of Exercise Prices
 
Number
Outstanding
at
October 31,
2013
   
Weighted-
Average
Remaining
Contractual
Life (in Years)
   
Weighted-
Average
Exercise
 Price
   
Number
Exercisable
at
 October 31,
2013
   
Weighted-
Average
Exercise
Price
 
$3.01
- $4.00     111,250       4.97     $ 3.57       87,250     $ 3.70  
$4.01
- $5.00     24,067       8.56     $ 4.35       7,400     $ 4.35  
$5.01
- $6.00     115,000       8.47     $ 5.54       38,334     $ 5.21  
$6.01
- $7.00     -       -       -       -       -  
$7.01
- $8.00     10,750       4.86     $ 7.05       10,750     $ 7.05  
Total
    261,067       6.84     $ 4.65       143,734     $ 4.39  
                                         
 
6.             NET INCOME PER SHARE

The following table presents the calculation of basic and diluted income per share (in thousands):
 
   
Three Months Ended
October 31,
   
Six Months Ended
October 31,
 
   
2013
   
2012
   
2013
   
2012
 
Numerator:
                       
Net income
  $ 653     $ 413     $ 917     $ 252  
                                 
Denominator:
                               
Weighted average common shares Outstanding – basic
    3,860       3,887       3,877       3,886  
     Effect of dilutive options outstanding
    77       40       65       40  
Weighted average common shares outstanding – diluted
    3,937       3,927       3,942       3,926  
                                 

Options to purchase 60,000 and 258,750 shares of common stock as of the three-month and six-month periods ended October 31, 2013 and 2012, respectively, were anti-dilutive and therefore were not included in the computation of diluted earnings per share.

7.             PLEDGED ASSETS, NOTES PAYABLE AND LONG-TERM DEBT

As of October 31, 2013, the Company had two credit agreements including an operating line of credit and Industrial Revenue Bonds that are secured by its production and headquarters facility in Olathe, Kansas.

 
Page 15

 
The Company’s $6,000,000 operating line of credit provides the Company and its wholly-owned subsidiary with short-term financing for their working capital requirements. The line of credit’s borrowing capacity is calculated as a specified percentage of accounts receivable and inventory on a monthly basis and was amended on October 16, 2013 to extend the expiration date of the line of credit to October 30, 2015.  The total amount of borrowing base for the line of credit as of October 31, 2013 was approximately $5,101,000, all of which was available.  It is secured by accounts receivable and inventory and accrues interest at a performance-based rate that is based on the prime rate (3.25% at October 31, 2013) plus/minus 0.5%.  The interest rate actually assessed is determined by the Company’s debt-to-tangible net worth ratio and was 2.75% on October 31, 2013.  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.  When an amount is outstanding, the borrowings on the line of credit are presented on the balance sheet as long-term in accordance with the terms of the line of credit.

The following table is a summary of the Company’s long-term debt and related current maturities (in thousands):
 
   
October 31, 2013
   
April 30, 2013
 
Industrial Revenue Bonds, Series 2006A, 5-year adjustable interest rate based on the yield on 5-year United States Treasury Notes, plus .45% (1.89% as of October 31, 2013), due in monthly principal and interest payments beginning October 1, 2006 through maturity  on September 1, 2026, secured by real estate.  Effective September 1, 2011, the 5-year adjustable interest rate was reset to 1.89% for the next five years.
  $ 2,712     $ 2,804  
                 
Operating line of credit, $6,000,000 limit on borrowing capacity, prime rate (3.25% at October 31, 2013) plus/minus 0.5% performance based interest, due in full on October 30, 2014, secured by accounts receivable and inventory.  The interest rate as of October 31, 2013 was 2.75%
    -       -  
      2,712       2,804  
Less current maturities
    187       185  
Total long-term debt
  $ 2,525     $ 2,619  
                 
 
 
Page 16

 
The approximate aggregate amount of principal to be paid on the long-term debt and line of credit during each of the next five fiscal years ending April 30 is as follows (in thousands):

Year
 
Amount
 
2014 (remaining)
  $ 93  
2015
    189  
2016
    192  
2017
    196  
2018
    200  
Thereafter
    1,842  
    $ 2,712  
         

8.             SEGMENT REPORTING

The Company operates and measures the revenues and gross margins of two primary business segments, custom solutions for Original Equipment Manufacturers (“OEM”) and Proprietary M2M products (“Proprietary”).   The OEM solutions business segment consists primarily of custom electronic assemblies, engineering services, liquid crystal displays and data communication technologies. The Proprietary products business segment is made up of remote monitoring hardware and data services, industrial data communication solutions, and ultra-rugged handheld computers, peripherals and maintenance contract revenues.  The following table (in thousands) presents segment revenues and gross margins which the Company evaluates in determining overall operating performance and the allocation of resources.  Other segment information such as components of the Statement of Operations below the gross margin total and assets or other balance sheet information are not presented.  As the Company’s operations of the two segments are so intertwined, the Company’s chief operating decision maker (Elecsys International Corporation’s President) does not review that financial information at a segment reporting level and that information is also not readily available.
 
 
Page 17

 
   
Three Months Ended October 31, 2013
 
   
OEM
   
Proprietary
   
Total
 
                   
Total revenues
  $ 3,588     $ 3,742     $ 7,330  
                         
Gross margin
  $ 1,092     $ 1,936     $ 3,028  
                         
 
   
Three Months Ended October 31, 2012
 
   
OEM
   
Proprietary
   
Total
 
                   
Total revenues
  $ 2,990     $ 3,148     $ 6,138  
                         
Gross margin
  $ 741     $ 1,669     $ 2,410  
                         
 
   
Six Months Ended October 31, 2013
 
   
OEM
   
Proprietary
   
Total
 
                   
Total revenues
  $ 7,898     $ 6,206     $ 14,104  
                         
Gross margin
  $ 2,076     $ 3,160     $ 5,236  
                         
Goodwill
  $ --     $ 1,942     $ 1,942  
                         
 
   
Six Months Ended October 31, 2012
 
   
OEM
   
Proprietary
   
Total
 
                   
Total revenues
  $ 5,541     $ 4,854     $ 10,395  
                         
Gross margin
  $ 1,350     $ 2,450     $ 3,800  
                         
Goodwill
  $ --     $ 1,942     $ 1,942  
                         
 
The following table reconciles total revenues to the products and services offered by the Company (in thousands).

   
Three Months Ended
October 31,
   
Six Months Ended
October 31,
 
   
2013
   
2012
   
2013
   
2012
 
Products and services:
                       
OEM solutions
  $ 3,525     $ 2,936     $ 7,773     $ 5,418  
Remote monitoring solutions
    2,859       1,897       4,334       2,851  
Industrial data communications
    253       295       496       512  
Mobile data acquisition
    513       847       1,175       1,281  
Other services:
                               
OEM related services
    63       54       125       123  
Proprietary product related services
    117       109       201       210  
Total sales
  $ 7,330     $ 6,138     $ 14,104     $ 10,395  
                                 
 
 
Page 18

 
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, or one year from the installation date for some of its products, and will also provide an extended warranty for additional purchase price to the customer.  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):

   
Six Months Ended October 31,
 
   
2013
   
2012
 
Warranty reserve balance at beginning of period
  $ 90     $ 163  
Expense accrued, including adjustments
    36       13  
Warranty costs incurred
    (36 )     (47 )
Warranty reserve balance at end of period
  $ 90     $ 129  
                 
 
 
Page 19

 
ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 solutions for multiple original equipment manufacturers (OEMs) in a variety of industries worldwide.

On December 17, 2012, the Company announced a share repurchase program by which the Company planned to repurchase up to 10% of the Company’s outstanding common shares, or approximately 400,000 shares, from time to time at prevailing market prices through the open market or privately negotiated transactions.  The program has no expiration date and purchases are funded from available cash resources.  For the three-month period ended October 31, 2013, the Company repurchased 55,093 shares at a cost of approximately $393,000 (average cost of $7.14 per share).  For the six-month period ended October 31, 2013, the Company repurchased 71,360 shares at a cost of approximately $485,000 (average cost of $6.80 per share).

On October 16, 2013, the Company amended the expiration date of its operating line of credit to October 30, 2015.   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 $5,101,000 as of October 31, 2013. The line of credit accrues interest at a performance-based rate that is based on the prime rate (3.25% at October 31, 2013) 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, 2013 which was the lowest rate allowed under the terms of the operating line of credit.  The loan agreement has various covenants, including a financial covenant pertaining to the maintenance of total tangible net worth and a required debt service coverage ratio.  There were no outstanding borrowings on the line of credit as of October 31, 2013.

 
Page 20

 
Results of Operations

Three Months Ended October 31, 2013 Compared With Three Months Ended October 31, 2012.

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, 2013
   
October 31, 2012
 
Revenues
    7,330       100.0 %     6,138       100.0 %
Cost of revenues
    4,301       58.7 %     3,728       60.7 %
Gross margin
    3,029       41.3 %     2,410       39.3 %
Selling, general and administrative expenses
    1,913       26.1 %     1,710       27.9 %
Operating income
    1,116       15.2 %     700       11.4 %
Financial expense
    (17 )     (0.2 %)     (17 )     (0.3 %)
Income before income taxes
    1,099       15.0 %     683       11.1 %
Income tax expense
    446       5.8 %     270       4.4 %
Net income
  $ 653       9.2 %   $ 413       6.7 %
Net income per share – basic
  $ 0.17             $ 0.11          
Net income per share – diluted
  $ 0.17             $ 0.11          
                                 

Revenues for the three months ended October 31, 2013 were approximately $7,330,000, which was an increase of $1,192,000, or 19.4%, from revenues of $6,138,000 for the three months ended October 31, 2012.

   
Three Months Ended
 
   
(In thousands)
 
   
October 31, 2013
   
October 31, 2012
 
OEM revenues
  $ 3,588       49.0 %   $ 2,990       48.7 %
Proprietary product revenues
    3,742       51.0 %     3,148       51.3 %
Total Sales
    7,330       100.0 %     6,138       100.0 %
                                 

Proprietary products.  Revenues from our proprietary products and services were $3,742,000 for the three-month period ended October 31, 2013, which was a $594,000, or 18.9%, increase from sales of $3,148,000 in the prior year period.

 
Page 21

 
Sales of our wireless remote monitoring solutions were approximately $2,859,000 for the three-month period ended October 31, 2013, which was an increase of $962,000, or 50.7%, from $1,897,000 during the three-month period ended October 31, 2012.  The increase in revenues for the period was due to an overall increase in customer orders received and shipped including our new remote monitoring product for the commercial transportation industry. Recurring data management services revenue continues to grow as a function of the growing population of monitoring units deployed in the field.  Data management services revenue totaled approximately $281,000, an increase of $35,000, or 14.2%, from data management services revenue of $246,000 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 increase from the current period as a result of continued customer interest in our M2M solutions, our introduction of new products, and our expansion into new industrial markets.  Although the current period did not contain revenue from the previously announced order from the Al Rushaid Group in Saudi Arabia, due to a delay by the prime contractor, we expect a positive impact on revenues from this order over the next two fiscal quarters.
 
Sales of our industrial data communication solutions were approximately $253,000 for the three-month period ended October 31, 2013, which was a $42,000, or 14.2%, decrease from total sales of $295,000 for the three-month period ended October 31, 2012.  The decrease is mainly due to fewer sales of software and services during the current period slightly offset by increases in equipment sales as compared to the comparable period of the prior year.  We are actively pursuing new customers and applications for the Director series products and continue our sales and marketing efforts to the existing industrial data communication customer base.  Our additional focus and effort is expected to grow revenues from our industrial communication products 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, and maintenance contract revenues, were approximately $513,000 for the three-month period ended October 31, 2013. Total revenues decreased approximately $334,000, as compared to the prior year period reported revenues of approximately $847,000.  The decrease in revenues was principally the result of a decrease in shipments to one of our largest international customers of the Radix FW950/960 and peripherals as compared to the prior year period.  Recurring maintenance contract revenues decreased slightly for the three-month period ended October 31, 2013 approximately $5,000, or 2.6%, as a result of customers not electing to purchase maintenance plans after their initial warranty periods expired.  We believe that sales of Radix products and services over the next few quarters will be consistent with the current period.
 
OEM solutions.  Sales for the OEM business segment were approximately $3,588,000, an increase of $598,000, or 20.0%, from $2,990,000 in the prior year period.  The increase in OEM sales was primarily the result of increased orders from existing customers due to growth in their businesses as well as the addition of a few new customers. We expect that our continuing investment in sales and marketing to OEMs, including our efforts to target potential customers who will benefit from our proprietary technologies, will generate moderate growth in OEM sales and margins in the longer term.

 
Page 22

 
Total backlog that is scheduled for delivery over the next twelve months at October 31, 2013 was approximately $12,423,000, an increase of $3,930,000, or 46.3%, from a backlog of $8,493,000 on April 30, 2013 and an increase of approximately $1,785,000, or 16.8%, from a backlog of $10,638,000 on October 31, 2012.  Orders from OEMs usually specify several deliveries scheduled over a defined and extended period of time.  Typically, orders for our standard 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 backlog relative to our revenues will fluctuate as our mix of proprietary products and OEM sales varies.

The following table presents the total twelve-month backlog by business segment for the periods ended October 31, 2013, April 30, 2013, and October 31, 2012 (in thousands).

   
October 31, 2013
   
April 30, 2013
   
October 31, 2012
 
OEM
  $ 10,332     $ 7,963     $ 9,134  
Proprietary products
    2,091       530       1,504  
Total backlog
  $ 12,423     $ 8,493     $ 10,638  
                         

Gross margin for the three-month period ended October 31, 2013 was 41.3% of sales, or $3,028,000, compared to 39.3% of sales, or $2,410,000, for the three-month period ended October 31, 2012.  The increase in both gross margin dollars and percentage was the direct result of the increase in overall sales volume led by sales increases in both business segments.

   
Three Months Ended
 
   
(In thousands)
 
   
October 31, 2013
   
October 31, 2012
 
Gross margin – OEM
  $ 1,092       30.4 %   $ 741       24.8 %
Gross margin – Proprietary products
    1,936       51.7 %     1,669       53.0 %
Total gross margin
  $ 3,028       41.3 %   $ 2,410       39.3 %
                                 

Gross margin for the proprietary products business segment was approximately 51.7% of proprietary product sales, or $1,936,000, for the three-month period ended October 31, 2013 as compared to 53.0% of sales, or $1,669,000, for the three-month period ended October 31, 2012.  The increase in gross margin dollars for the proprietary products was the direct result of the increase in overall sales volume.  The gross margin percentage decrease was primarily due to the revenue mix of proprietary product sales as compared to the previous year period.

The gross margin for the OEM business segment was $1,092,000, or 30.4% of sales, for the three-month period ended October 31, 2013 compared to $741,000, or 24.8% of sales, for the prior year period.  The increase of OEM gross margin dollars and gross margin percentage was primarily the result of the increase in OEM revenues for the period as well as the impact of the product mix of shipments between various customers.

We expect that consolidated gross margins over the next few quarters will continue within the range of 36% to 41%.  This expectation is based on our forecasted sales volume and the mix of proprietary products and OEM products and services which impact our manufacturing efficiency and gross margins.

 
Page 23

 
Selling, general and administrative (“SG&A”) expenses totaled approximately $1,913,000 for the three-month period ended October 31, 2013.  This was an increase of $203,000 as compared to total SG&A expenses of $1,710,000 for the three-month period ended October 31, 2012.  SG&A expenses were 26.1% of sales for the current fiscal quarter of 2014 as compared to 27.9% of sales for the comparable period for fiscal 2013.

   
Three Months Ended
 
   
(In thousands)
 
   
October 31, 2013
   
October 31, 2012
 
Research & development expenses
  $ 498       6.8 %   $ 427       7.0 %
Selling & marketing expenses
    659       9.0 %     582       9.5 %
General & administrative expenses
    756       10.3 %     701       11.4 %
  Total selling, general and administrative expenses
  $ 1,913       26.1 %   $ 1,710       27.9 %
                                 

Research and development expenses increased $71,000, to $498,000, during the fiscal quarter as compared to the prior year period. This increase was primarily driven by higher engineering personnel related expenses of approximately $60,000 as a result of our increased investment in engineering personnel focused on new product development and design, in addition to slightly higher product support costs compared to the previous year period.

Selling and marketing expenses were $659,000 for the three-month period ended October 31, 2013 and $582,000 for the three-month period ended October 31, 2012.  The $77,000 increase was largely the result of increases in sales commissions due to the increase in revenues during the period.

General and administrative expenses increased approximately $55,000 from the comparable period of the prior year.  The increase was due to growth of personnel related expenses, including equity-based compensation, of approximately $20,000 in addition to an increase in general office related expenses of $35,000.

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, but will also likely remain relatively consistent as a percentage of total revenues.

 
Page 24

 
Operating income for the three-month period ended October 31, 2013 was approximately $1,116,000, an increase of $416,000 from an operating income of $700,000 reported for the three-month period ended October 31, 2012.

Financial expense, including interest, was $17,000 for both the three-month periods ended October 31, 2013 and 2012.  During the three-month period ended October 31, 2013, there were no borrowings on the operating line of credit.  As of October 31, 2013, there was $2,712,000 outstanding in current and long-term borrowings (Industrial Revenue Bonds) compared to $2,804,000 at October 31, 2012.  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, 2013 was approximately $446,000 compared to an income tax expense of $270,000 for the three-month period ended October 31, 2012.  The effective income tax rate was 40.6% and 39.5% for the three-month periods ended October 31, 2013 and 2012, respectively.  The slight increase in the effective tax rate was due to the recognition of certain income tax adjustments during the previous year period.

As a combined result of the above factors, our net income was $653,000, or $0.17 per diluted share, for the three-month period ended October 31, 2013 as compared to net income of $413,000, or $0.11 per diluted share, reported for the three-month period ended October 31, 2012.

Six Months Ended October 31, 2013 Compared With Six Months Ended October 31, 2012.

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, 2013
   
October 31, 2012
 
Revenues
    14,104       100.0 %     10,395       100.0 %
Cost of revenues
    8,868       62.9 %     6,595       63.4 %
Gross margin
    5,236       37.1 %     3,800       36.6 %
Selling, general and administrative expenses
    3,667       26.0 %     3,329       32.0 %
Operating income
    1,569       11.1 %     471       4.5 %
Financial expense
    (32 )     (0.2 %)     (38 )     (0.4 %)
Income before income taxes
    1,537       10.9 %     433       4.2 %
Income tax expense
    620       4.3 %     181       1.7 %
Net income
  $ 917       6.6 %   $ 252       2.4 %
Net income per share – basic
  $ 0.24             $ 0.06          
Net income per share – diluted
  $ 0.23             $ 0.06          
                                 

 
Page 25

 
Revenues for the six months ended October 31, 2013 were approximately $14,104,000, which was an increase of $3,709,000, or 35.7%, from revenues of $10,395,000 for the six months ended October 31, 2012.

   
Six Months Ended
 
   
(In thousands)
 
   
October 31, 2013
   
October 31, 2012
 
OEM revenues
  $ 7,898       56.0 %   $ 5,541       53.3 %
Proprietary product revenues
    6,206       44.0 %     4,854       46.7 %
Total Sales
    14,104       100.0 %     10,395       100.0 %
                                 

Proprietary products.  Revenues from our proprietary products and services were $6,206,000 for the six-month period ended October 31, 2013, which was a $1,352,000, or 27.9%, increase from sales of $4,854,000 for the six-month period ended October 31, 2012.

Sales of our wireless remote monitoring solutions were approximately $4,334,000 for the six-month period ended October 31, 2013, which was an increase of $1,483,000, or 52.0%, from $2,851,000 during the six-month period ended October 31, 2012.  The increase in revenues for the six-month period ended October 31, 2013, was the result of an overall increase in customer orders received and shipped including our new remote monitoring product for the commercial transportation industry.  Overall, data management services revenue totaled approximately $557,000, an increase of $75,000, or 15.6%, from data management services revenue of $482,000 reported in the comparable period of the prior fiscal year.  Recurring data management services revenue continues to grow as a function of the growing population of monitoring units deployed in the field.  We anticipate that over the next few quarters, revenues from our wireless remote monitoring solutions will increase from the current period as a result of continued customer interest in our M2M solutions, our introduction of new products, and our expansion into new industrial markets.  Although the current year-to-date period did not contain revenue from the previously announced order from the Al Rushaid Group, we expect a positive impact on revenues from this order over the next two fiscal quarters.
 
Sales of our industrial data communication solutions were approximately $496,000 for the six-month period ended October 31, 2013, which was a $16,000, or 3.1%, decrease from total sales of $512,000 for the same period of the prior fiscal year.  The decrease is mainly due to fewer sales of software and services during the current year-to-date period slightly offset by increases in equipment sales as compared to the comparable period of the prior year.  We remain actively committed to pursuing new customers and applications for the Director series products and will continue our sales and marketing efforts to the existing industrial data communication customer base.  Our additional focus and effort is expected to grow revenues from our industrial communication products over the next few quarters as we invest in new product development and continue our marketing efforts.

 
Page 26

 
Sales of our mobile data acquisition solutions, including our Radix handheld computer hardware, peripherals, and maintenance contract revenues, were approximately $1,175,000 for the six-month period ended October 31, 2013. Total revenues decreased approximately $106,000, or 8.3%, as compared to the prior year period reported revenues of approximately $1,281,000.  The decrease in revenues was the result of fewer shipments to one of our largest international partners of the Radix FW950/960 and peripherals as compared to the prior year period.  Recurring maintenance contract revenues continued to decrease for the six-month period ended October 31, 2013 approximately $15,000, or 3.8%, as a result of customers not electing to purchase maintenance plans after their initial warranty periods expired.  We believe that sales of Radix products and services over the next few quarters will be consistent with the current quarter.
 
OEM solutions.  Sales for the OEM business segment were approximately $7,898,000, an increase of $2,357,000, or 42.5%, from $5,541,000 in the prior year period.  The increase in OEM sales was primarily the result of increased orders from existing customers due to growth in their businesses, as well as the addition of several new customers.  We expect that our continuing investment in OEM sales and marketing, including our efforts to target potential customers who will benefit from our proprietary technologies, will generate moderate growth in OEM sales and margins in the longer term.

Gross margin for the six-month period ended October 31, 2013 was 37.1% of sales, or $5,236,000, compared to 36.6% of sales, or $3,800,000, for the six-month period ended October 31, 2012.  The $1,436,000 increase in gross margin dollars was the direct result of the increase in overall sales volume in both business segments.  The gross margin percentage increase was primarily due to the revenue mix between OEM and proprietary product revenues.

   
Six Months Ended
 
   
(In thousands)
 
   
October 31, 2013
   
October 31, 2012
 
Gross margin – OEM
  $ 2,076       26.3 %   $ 1,350       24.4 %
Gross margin – Proprietary products
    3,160       50.9 %     2,450       50.5 %
  Total gross margin
  $ 5,236       37.1 %   $ 3,800       36.6 %
                                 

Gross margin for the proprietary products business segment was approximately 50.9% of proprietary product sales, or $3,160,000, for the six-month period ended October 31, 2013 as compared to 50.5% of sales, or $2,450,000, for the six-month period ended October 31, 2012.  The increase in gross margin dollars and percentage for the proprietary products was mainly due to the overall increase in proprietary product revenues and a change in the product mix from the previous year period.

 
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The gross margin for the OEM solutions business segment was $2,076,000, or 26.3% of sales, for the six-month period ended October 31, 2013 compared to $1,350,000, or 24.4% of sales, for the prior year period.  The increase of OEM gross margin dollars and percentage was primarily the result of the increase in OEM revenues as well as the impact of the mix of shipments between various customers.

We expect that consolidated gross margins over the next few quarters will continue within the range of 36% to 41%.  This expectation is based on our forecasted sales volume and the mix of proprietary products and OEM products and services which impact our manufacturing efficiency and gross margins.

Selling, general and administrative (“SG&A”) expenses totaled approximately $3,667,000 for the six-month period ended October 31, 2013.  This was an increase of $338,000 as compared to total SG&A expenses of $3,329,000 for the six-month period ended October 31, 2012.  SG&A expenses were 26.0% of sales for the current fiscal year-to-date period of 2014 as compared to 32.0% of sales for the comparable period for fiscal 2013.

   
Six Months Ended
 
   
(In thousands)
 
   
October 31, 2013
   
October 31, 2012
 
Research & development expenses
  $ 924       6.6 %   $ 834       8.0 %
Selling & marketing expenses
    1,166       8.3 %     1,107       10.6 %
General & administrative expenses
    1,577       11.2 %     1,388       13.4 %
Total selling, general and administrative expenses
  $ 3,667       26.0 %   $ 3,329       32.0 %
                                 

Research and development expenses increased $90,000, to $924,000, during the fiscal year to date period as compared to the prior year.  This increase was the result of higher engineering personnel expenses of approximately $110,000 as a result of our increased investment in engineering personnel focused on new product development and design, slightly offset by lower product support costs compared to the previous year period.

Selling and marketing expenses were $1,166,000 for the six-month period ended October 31, 2013 and $1,107,000 for the six-month period ended October 31, 2012.  The $59,000 increase was the result of an increase in sales commissions due to the increase in revenues, slightly offset by a reduction in travel expenses and personnel costs resulting from changes in sales personnel from the previous year period.

General and administrative expenses increased approximately $189,000 from the comparable period of the prior year.  The increase was due to growth of personnel related expenses, including equity-based compensation, increases in professional fees, and office 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.

 
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Operating income for the six-month period ended October 31, 2013 was approximately $1,569,000, an increase of $1,098,000 from operating income of $471,000 reported for the six-month period ended October 31, 2012.

Financial expense, including interest, was $32,000 and $38,000 for the six-month periods ended October 31, 2013 and 2012, respectively.  The decrease of $6,000 resulted from lower total outstanding borrowings compared to the previous fiscal year period.  As of October 31, 2013, there were no net borrowings outstanding on the operating line of credit.  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 six-month period ended October 31, 2013 was approximately $620,000 compared to income tax expense of $181,000 for the six-month period ended October 31, 2012.  The effective income tax rate was 40.3% and 41.8% for the six-month periods ended October 31, 2013 and 2012, respectively.  The slight decrease in the effective tax rate was due to the recognition of certain income tax adjustments during the current year period.

As a combined result of the above factors, our net income was $917,000, or $0.23 per diluted share, for the six-month period ended October 31, 2013 as compared to net income of $252,000, or $0.06 per diluted share, reported for the six-month period ended October 31, 2012.

Liquidity and Capital Resources

Cash and cash equivalents decreased $963,000 to $501,000 as of October 31, 2013 compared to $1,464,000 at April 30, 2013.  This decrease was the result of cash used in operating activities, mainly due to inventory purchases, in addition to cash used for purchases of equipment and purchases of common stock through our stock repurchase program.

Operating activities.  Our consolidated working capital increased approximately $521,000 during the six-month period ended October 31, 2013.  The increase was largely the result of an increase in current assets, mostly inventory, offset slightly by an increase in current liabilities.  Operating cash receipts totaled approximately $13,880,000 and $11,248,000 during the six-month periods ended October 31, 2013 and 2012, respectively.  The increase in operating cash receipts is primarily the result of an increase in revenues and collections of accounts receivable. Total cash disbursements for operations, which include purchases of inventory and operating expenses, were approximately $14,051,000 for the six-month period ended October 31, 2013 and $9,936,000 for the six-month period ended October 31, 2012.

Investing activities.  Cash used in investing activities totaled $230,000 and $81,000 during the six-month periods ended October 31, 2013 and 2012, respectively, as we purchased more equipment in the current year-to-date period of fiscal 2014 as compared to the prior year to increase efficiency and expand production capacity.

 
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Financing activities.  As of October 31, 2013, we had a $6,000,000 operating line of credit that provided us and our wholly-owned subsidiary with short-term financing for our working capital requirements. The line of credit’s borrowing capacity is calculated as a specified percentage of accounts receivable and inventory on a monthly basis and expires on October 30, 2015.  As of October 31, 2013, there were no borrowings outstanding on the operating line of credit. The total amount of borrowing base for the line of credit as of October 31, 2013 was approximately $5,101,000.  It is secured by accounts receivable and inventory and accrues interest at a performance-based rate that is based on the prime rate (3.25% at October 31, 2013) plus/minus 0.5%.  The interest rate actually assessed is determined by our debt-to-tangible net worth ratio. The rate as of October 31, 2013 of 2.75% was the lowest rate allowed under the amended terms of the operating line of credit.  The loan agreement has various covenants, including a financial covenant pertaining to the maintenance of total tangible net worth and a required debt service coverage ratio.  As of October 31, 2013 we were in compliance will all covenants.    Total payments on long-term debt totaled approximately $92,000 while purchases of common stock during the period for the stock repurchase program totaled $484,000.  There were also some stock options exercised during the six-month period ended October 31, 2013, which totaled approximately $14,000.  For the six-month period ended October 31, 2012, financing activities included $750,000 of cash used in payment on the line of credit and $90,000 in payments on long-term debt.
 
Although there can be no assurances, we believe that existing cash, the cash expected to be generated from our operations, amounts available under our line of credit, and amounts available from trade credit from our vendors, will be sufficient to finance our anticipated working capital needs, our capital expenditures, and our scheduled debt repayments for the foreseeable future.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

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 ensure 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, and our proprietary products including our remote monitoring equipment, RFID technology and solutions and our mobile computing products.  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 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 and to ensure payment.  Typically, we do not have any post-shipment obligations that would include customer acceptance requirements.  We do provide training and installation services to our customers and those services are billed and the revenue recognized at the end of the month the services are completed.  Revenue recognized is net of sales taxes, tariffs, or duties remitted to any governmental authority.

 
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Inventory Valuation.  Our inventories are stated at the lower of cost, using the first-in, first-out (FIFO) method, or fair 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 multiple annual time horizons ranging from 24-months to 60-months.  Individual part numbers that have not been used within each of the time horizons 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.
 
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 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 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.
 
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.  Our customers may also elect to purchase an extended warranty.  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 our carrying value for impairment annually (January 31), and whenever an impairment indicator is identified.  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.

 
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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.  The useful lives of the intangible assets range from 5 – 15 years.

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 undiscounted 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.
 
 

 
 
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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 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 its products and services, the Company’s dependence on its top customers, reliance on certain key management personnel, an inability to grow the Company’s customer base, an inability to integrate, manage and grow any acquired business or underlying technology, 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 of Financial Condition and Results 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, annual report on Form 10-K, 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.

 
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ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information required under this item.
 
ITEM 4.  Controls and Procedures

Evaluation of disclosure controls and procedures

The Company maintains disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.  The Company, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of such disclosure controls and procedures for this report.  Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of October 31, 2013.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during its last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
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PART II - OTHER INFORMATION

Legal Proceedings.

None.

ITEM 1A.               Risk Factors.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and is not required to provide the information required under this item.

ITEM 2.                  Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth our stock repurchase activity during the three-month period ended October 31, 2013.

ISSUER PURCHASES OF EQUITY SECURITIES
 
Period
 
 
 
 
 
 
Total
Number
of Shares
Purchased
   
 
 
 
 
 
Average
Price
Paid per
Share
   
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
   
Maximum
Number (or
Approximate
Dollar Value)
of Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
 
From: August 1, 2013
To: August 31, 2013
    15,555     $ 6.45       91,236       302,055  
From: September 1, 2013
To: September 30, 2013
    21,817     $ 6.90       113,053       280,238  
From: October 1, 2013
To: October 31, 2013
    17,721     $ 7.97       130,774       262,517  
Total
    55,093     $ 7.14                  
                                 

On December 17, 2012, the Company announced a share repurchase program by which the Company planned to repurchase up to 10% of the Company’s outstanding common shares, or approximately 400,000 shares, from time to time at prevailing market prices through the open market or privately negotiated transactions.  The program has no expiration date and purchases are funded from available cash resources.  For the three-month period ended October 31, 2013, the Company repurchased 55,093 shares at a cost of approximately $393,000 (average cost of $7.14 per share).

 
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ITEM 3.                  Defaults Upon Senior Securities

None.

ITEM 4.                  Mine Safety Disclosure

Not applicable.

ITEM 5.                  Other Information

None.

ITEM 6.                  Exhibits

See Exhibit Index following the signature page.

 
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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


December9, 2013      
     /s/ Karl B. Gemperli
Date
Karl B. Gemperli
 
President and Chief Executive Officer
 
(Principal Executive Officer)


December 9, 2013     
     /s/ Todd A. Daniels
Date
Todd A. Daniels
 
Vice President and Chief Financial Officer
 
(Principal Financial and Accounting Officer)


 
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Item
Description
   
10.1
Fourth Amendment to Secured Loan Agreement dated October 16, 2013 with UMB Bank, 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).
   
101
The following information from Elecsys Corporation’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2013, formatted in Extensible Business Reporting Language (XBRL):
   
 
(i)     the Consolidated Balance Sheet,
 
(ii)    the Consolidated Statement of Operations,
 
(iii)   the Consolidated Statement of Stockholders’ Equity,
 
(iv)   the Consolidated Statement of Cash Flows, and
 
(v)    the Notes to the Consolidated Financial Statements.
 

 
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