Dailystocks.com - Ticker-based level links to all the information for the Stocks you own. Portal for Daytrading and Finance and Investing Web Sites
DailyStocks.com
What's New
Site Map
Help
FAQ
Log In
Home Quotes/Data/Chart Warren Buffett Fund Letters Ticker-based Links Education/Tips Insider Buying Index Quotes Forums Finance Site Directory
OTCBB Investors Daily Glossary News/Edtrl Company Overviews PowerRatings China Stocks Buy/Sell Indicators Company Profiles About Us
Nanotech List Videos Magic Formula Value Investing Daytrading/TA Analysis Activist Stocks Wi-fi List FOREX Quote ETF Quotes Commodities
Make DailyStocks Your Home Page AAII Ranked this System #1 Since 1998 Bookmark and Share


Welcome!
Welcome to the investing community at DailyStocks where we believe we have some of the most intelligent investors around. While we have had an online presence since 1997 as a portal, we are just beginning the forums section now. Our moderators are serious investors with MBA and CFAs with practical experience wwell-versed in fundamental, value, or technical investing. We look forward to your contribution to this community.

Recent Topics
Article by DailyStocks_admin    (11-26-13 10:39 PM)

Description

Electro-Sensors. 10% Owner Nancy P. Peterson bought 409,781 shares on 11-19-2013 at $ 3.92.

BUSINESS OVERVIEW

Introduction

Electro-Sensors, Inc. (“we”, “us”, “our”, the “Company” or “ESI”) is engaged in the manufacture and distribution of industrial production monitoring and process control systems.

In addition, through our subsidiary ESI Investment Company, we periodically make strategic investments in other businesses and companies, primarily when we believe that such investments will facilitate development of technology complementary to our existing products. Although we invest in other businesses and companies through our subsidiary ESI Investment Company, we do not intend to become an investment company and intend to remain primarily an operating company. Our primary investment is 273,267 shares of Rudolph Technologies, Inc., which is accounted for using the available-for-sale method.

Unless indicated otherwise, the terms “Company” and “ESI” when used herein, include Electro-Sensors, Inc. and its consolidated subsidiaries. As of December 31, 2012, ESI had two consolidated subsidiaries: ESI Investment Company and Senstar Corporation. Senstar Corporation does not have any business operations.

ESI was incorporated in Minnesota in July 1968. Our executive offices are located at 6111 Blue Circle Drive, Minnetonka, Minnesota, 55343-9108. Our telephone number is (952) 930-0100.

Products

We manufacture and sell several different types of monitoring systems that measure actual machine production and operation rates, as well as systems that regulate the speed of related machines in production processes.

Our original products—speed monitoring systems—compare machine revolutions per minute or speed against acceptable rates as determined by the customer. The monitors generally have the same relative operating principle and use a non-contacting sensing head that translates the speed of a rotating shaft into analog readouts. The systems include a signal-generating pulser disc or wrap that attaches to a rotating shaft, the sensing device, and a control unit. The systems vary in complexity, from a simple system that detects slow-downs or stoppages, to more sophisticated systems that warn of deviations from precise tolerances and that permit various subsidiary operations to be determined through monitoring the shaft speed.

The speed monitoring systems include a line of digital products that translate sensor impulses from its production monitoring systems into digital readouts indicating production counts or rates, such as parts, gallons, or board feet. The speed monitoring systems also include alarm systems, tachometers, and other devices that translate impulses from the sensors into alarm signals, computer inputs, or digital displays that are usable by the customer.

Three production monitoring devices that do not operate by measuring shaft speeds are also in the speed monitoring systems product line. These devices are the tilt switch, vibration monitor, and slide gate position monitor. A tilt switch is designed to alert the operator when a storage bin or production system reaches a certain capacity ( e.g., when grain fills a silo). A vibration monitor will alert an operator when the vibration of a machine in a production system exceeds or is below a specified level. The slide gate position monitor is used in plant operations to provide feedback of the position of a slide gate. As part of our Electro-Sentry Hazard Monitoring system, we also have temperature sensors that are used to monitor bearing temperature and belt misalignment.

We have several products used in drive control systems that regulate the speed of motors on related machines in a production sequence to ensure that the performances of various operations are coordinated. The products consist of a line of digital control products for motors that require a complete closed loop PID (Proportional Integral Derivative) control. The closed loop controllers coordinate production speed among process motors and reduce waste.

We have a sales agreement with Motrona GmbH (the West German manufacturer of control and interface devices), giving us rights to distribute in the United States the products manufactured by Motrona GmbH. These products interface with our products on various applications.

We believe that manufacturing companies can achieve significant savings in both time and materials by adding production monitoring and drive control technology to existing manufacturing processes to coordinate operation of related machines. We intend to continue to market our products to this “retro-fit” market and also to companies building new manufacturing machinery or processing systems.

In 2008, we introduced our Electro-Sentry Hazard Monitoring System, which integrates our sensors for bearing temperature, belt misalignment, and shaft speed with a programmable logic controller and touch screen interface to create a complete system for hazard monitoring. By doing this, we are enabling our customer to locate which part of the material handling system is operating incorrectly, typically in less than ten seconds. This is done by using visual diagrams on the touch screen.

We expect to continue to expend resources in new product development and the marketing of new and existing products for use in production monitoring applications. We continue to expand our line of hazard monitoring products with new system displays and sensors to meet the requirements of a wider customer base. In 2012, we introduced the Electro-Sentry 16 hazard monitoring system and added new features to the Electro-Sentry 1 system. Other new products included a new ST420 shaft tachometer and several sensor mounting products.

Our customers have diverse applications for our products in the grain, feed, bio-fuels, power generation, water utilities and waste water treatment, mining, chemical, and other processing areas. We are continuing to look for new industries to expand sales and may also consider acquiring compatible businesses as part of our growth strategy. Our corporate web site provides significant information and product application knowledge to existing and prospective customers and also direct knowledge to our sales partners. Information on our website is not incorporated by reference herein and is not a part of this Form 10-K.

Marketing and Distribution

We sell our products primarily through home office sales people who deal directly with customers and a number of manufacturer’s representatives and distributors located throughout the United States, Mexico, China, Canada, Chile, Bolivia, Colombia, Malaysia, Singapore, Great Britain, Australia, Egypt, El Salvador, Guatemala, Korea, Puerto Rico, Taiwan, and Turkey. The sensing and control units are sold under the Electro-Sensors, Inc. brand as a range of products from simple sensors to complex motor speed controllers. These products are sold to businesses in all major standard industrial classifications, including grain, feed, biofuels, food processing, chemicals, agricultural, mining, utility, forest products, steel, tire, glass and electronics. Any business that uses machinery with a rotating shaft is a potential customer.

We advertise in national industrial periodicals that cover a wide range of industrial products and attend several local, national and international tradeshows designated for the industry throughout the year. A corporate website and other related industry websites are also used for advertising and marketing purposes.

Competition

Competition for our monitoring products arises from a broad range of industrial and commercial businesses. Design, quality and multiplicity of application, rather than price, are the focus of competition in selling these products. We face substantial competition for our production monitoring systems. Many of these competitors are well established and larger than us in terms of total sales volume. Among our larger competitors are Danaher Controls, Red Lion Controls, Control Concepts, 4B Elevator Components Ltd., Durant Corporation, and Contrex, Inc. We believe our competitive advantages include that our products are sold as ready-to-install units and that our products have a wide range of applications. Our major disadvantages include the fact that our major competitors are much larger, have a broader variety of sensing instruments, and have larger sales forces and established names.

Suppliers

We purchase parts and materials for our production monitoring systems from various manufacturers and distributors. In some instances, these materials are manufactured in accordance with proprietary designs. Multiple sources of these supplies and materials are readily available, and we are not dependent on any single source for these supplies and materials. We have not experienced any problem of short supply or delays from our suppliers.

Customers

We are not dependent upon a single or a few customers for a material (10% or more) portion of our sales.

Patents, Trademarks and Licenses

The name “Electro-Sensors” is trademark registered with the U.S. Patent and Trademark Office, as Reg. No. 1,142,310. We believe our trademark has been and will continue to be useful in developing and protecting market recognition for our products.

We hold six patents relating to our production monitoring systems. Pursuant to a sales agreement with Motrona GmbH, a West-German manufacturer of control and interface devices, we hold rights to distribute in the United States the products manufactured by Motrona GmbH.

Governmental Approvals

We are not required to obtain governmental approval of our products.

Effect of Governmental Regulations

We do not believe that any existing or proposed governmental regulations will have a material effect on our business.

Research and Development

We invest in research and development programs to develop new products in related markets and to integrate state of the art technology into existing products. We incurred research and development expenses attributable to our production monitoring systems of $443,000 and $437,000 during 2012 and 2011, respectively. Our development projects are undertaken based upon the identified specific needs of our customer base.

Our future success is dependent in part upon our ability to develop new products in our varying segments. Difficulties or delays in our ability to develop, produce, test and market new products could have a material adverse effect on future sales growth.

Compliance with Environmental Laws

Compliance with federal, state and local environmental laws has only a nominal effect on current or anticipated capital expenditures and has had no material effect on earnings or on our competitive position.

Employees

As of March 22, 2013, we had 29 employees, of which 28 are full-time and one is part-time. We believe that our relations with our employees are good. None of our employees are members of unions.

Our ability to maintain a competitive position and to continue to develop and market new products depends, in part, on our ability to retain key employees and qualified personnel. If we are unable to retain and/or recruit key employees, product development, marketing and sales could be negatively impacted.

Fluctuations in Operating Results.

We have experienced fluctuations in our operating results in the past, and may experience fluctuations in the future, which may affect the market price of our Common Stock. Sales can fluctuate as a result of a variety of factors, many of which are beyond our control. Some of these factors are: product competition and acceptance, timing of customer orders, cancellation of orders, the mix of products sold, downturns in the market and economic disruptions. Because fluctuations can happen, we caution investors that results of our operations for preceding periods may not be indicative of how we will perform in the future. There can be no assurance that we will experience continued earnings growth.

Further, investments held by our subsidiary, ESI Investment Company, are subject to significant positive and negative changes in value. In particular, our significant investment in Rudolph Technologies, Inc. has experienced substantial value fluctuations, both negative and positive, which are expected to continue. Our current intention is to continue to gradually liquidate our investment securities to finance our working capital needs as required.

Expending Funds for Changes in Industry Standards, Customer Preferences or Technology.

Our business depends upon periodically introducing new and enhanced products and solutions for customer needs. The development of products requires us to commit financial resources, personnel and time, usually in advance of significant market demand for such products. In order to compete, we must anticipate both future demand and the technology available to meet that demand. There can be no assurance that our research and development efforts will lead to new products or product innovations that can be made available to or will be accepted by the market.

Cautionary Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. We have made, and may continue to make, forward-looking statements with respect to our business and financial matters, including statements contained in this document, other filings with the Securities and Exchange Commission, and reports to shareholders . Forward-looking statements generally include discussion of current expectations or forecasts of future events and can be identified by the use of terminology such as “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “will,” and similar words or expressions. Any statement that does not relate solely to historical fact should be considered forward-looking. Our forward-looking statements generally relate to our growth strategy, future financial results, product development and sales efforts. Forward-looking statements are made throughout this Annual Report, but primarily in this Item 1 and Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations , and include statements relating to management’s intentions that we not become an investment company, our expectations and intentions with respect to growth, statements relating to management’s beliefs with respect to our marketing and product development, our expectations and beliefs with respect to the value of our intellectual property, our beliefs with respect to our competitive position in the marketplace, our beliefs with respect to the effect of governmental regulations on our business, our beliefs with respect to our employee relations, our intention with respect to gradually liquidating our investment securities to finance working capital needs, our expectations and beliefs with respect to the future performance of our investment securities, the adequacy of our facilities, expansion of the number of our manufacturer’s representatives and exclusive distributors, our intention to develop new products, the possibility of acquiring compatible businesses as part of our growth strategy, and our expectations with respect to our cash requirements and use of cash. Forward-looking statements cannot be guaranteed and actual results may vary materially due to the uncertainties and risks, known and unknown, associated with such statements , including our ability to successfully develop new products and manage our cash requirements . We undertake no obligations to update any forward-looking statements. We wish to caution investors that the following important factors, among others, in some cases have affected and in the future could affect our actual results of operations and cause such results to differ materially from those anticipated in forward-looking statements made in this document and elsewhere by us or on our behalf. It is not possible to foresee or identify all factors that could cause actual results to differ from expected or historical results. As such, investors should not consider any list of such factors to be an exhaustive statement of all risks, uncertainties or potentially inaccurate assumptions. These factors include:

•
our ability to successfully develop new products;

•
our ability to quickly and successfully adapt to changing industry technological standards;

•
our ability to comply with existing and changing industry regulations;

•
our ability to manage cash requirements;

•

our ability to attract and retain new manufacturer’s representatives and exclusive distributors;

•
our ability to attract and retain key personnel, including senior management;

•
our ability to adapt to changing economic conditions and manage downturns in the economy in general; and

•
our ability to keep pace with competitors, some of whom are much larger and have substantially greater resources than us.

CEO BACKGROUND

The Bylaws of the Company provide that the shareholders at each Annual Meeting shall determine the number of directors, which shall not be less than one. The Nominating Committee and the Board of Directors recommends that the number of directors be set at five and that five directors be elected at the Annual Meeting to serve until the next Annual Meeting or until their successors are duly elected and qualified. Under applicable Minnesota law and the Bylaws of the Company, approval of the proposal to set the number of directors at five requires the affirmative vote of the holders of a majority of the voting power of the shares represented in person or by proxy at the Annual Meeting with authority to vote on such matter.

The Nominating Committee recommended and the Board of Directors selected the persons named below for election to the Board of Directors. All nominees are currently directors of the Company. If, prior to the Annual Meeting, it should become known that any of the following individuals will be unable to serve as a director after the Annual Meeting by reason of death, incapacity or other unexpected occurrence, the proxies will be voted for such substitute nominee as is selected by the Board of Directors. The Board of Directors has no reason to believe that any of the following nominees will be unable to serve. The Bylaws of the Company provide that directors shall be elected by a plurality of the votes cast by holders of shares present in person or by proxy and entitled to vote on the election of directors at a meeting at which a quorum is present.

Name: Bradley D. Slye

Chairman of the Board and President of the Company since 1997; Chief Financial Officer since 2000

Age: 53

Director Since: 1997

Name: Joseph A. Marino

Principal Occupation and Directorships: President and CEO of Cardia, Inc. (a medical equipment manufacturer) since 1998

Age: 61

Director Since: 1994

Name: Geoffrey W. Miller

Principal Occupation and Directorships: CFO of Wilcox Paper (a distributor of fine paper to the Printing Industry) since 2002; General Manager of AmSan – Brissman Kennedy in 2001 (a distributor of janitorial supplies); CFO/VP Operations of AmSan – Brissman Kennedy (1999-2001)

Age: 58

Director Since: 1999

Name: Jeffrey D. Peterson

Principal Occupation and Directorships: Private investor since 1998; Previously employed by John G. Kinnard and Company, a regional brokerage firm.

Age: 56

Director Since: 2011

Name: Michael C. Zipoy

Principal Occupation and Directorships: Investment executive with Feltl and Company (brokerage and investment banking firm) since 2005

Age: 65

Director Since: 2012

When considering whether the nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the Company’s business and structure, the Nominating Committee and the Board of Directors focused primarily on the biographical information set forth in the table above. In particular with regard to Mr. Slye, the Board of Directors considered his years of experience with the Company, his high level of customer interaction, and his strong engineering and product development background. These factors all increase the Company’s ability to develop new products that meet customer needs, which is critical to the success of the Company. With regards to Mr. Zipoy, the Board of Directors considered his investment experience in small and micro cap companies and his participation in public and private equity financing. With regards to Mr. Marino, the Board of Directors considered his leadership in building companies and his experience in the medical device industry. With regards to Mr. Miller, the Board of Directors considered his significant management experience, expertise, and background with regard to accounting and financial matters. With regards to Mr. Peterson, the Board of Directors considered his years of experience in the investment industry and personal connections with many businesses in Minnesota.

MANAGEMENT DISCUSSION FROM LATEST 10K

The following discussion should be read in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” and elsewhere in this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Comparison of Fiscal Year 2012 vs. Fiscal Year 2011

Net Revenues

Net revenues for 2012 increased $383,000 to $6,498,000, or 6.3%, when compared to net revenues for 2011.The increase was spread across a broad range of our sensors and control products in the industrial markets that we serve and was driven largely by increased customer demand in connection with capacity expansion and plant retro-fit projects.

Cost of Sales

Our cost of sales increased $245,000 from $2,613,000 to $2,858,000, or 9.4%, when comparing fiscal year 2012 to fiscal year 2011. This increase was primarily a result of increased sales and increased costs of materials and labor. We continue our efforts to maintain or reduce production costs by manufacturing products in the most cost effective manner.

Gross Margins

Gross margin for 2012 was 56.0% compared to 57.3% for the prior year. The slight decrease in the gross margin was due to the increased cost of materials and labor.

Operating Expenses

Total operating expenses increased by $47,000, or 1.7%, when comparing 2012 to 2011.

Selling and marketing costs decreased by $25,000, or 1.8%, when comparing 2012 to 2011. The decrease was due to a decrease in advertising and marketing expenses resulting from a change in the mix of direct advertising and tradeshows, offset by increases in wages and benefit expense (due to changes in the compensation package and higher commissions due to increased sales), travel (due to attendance at additional tradeshows and increased customer visits), trade shows (due to additional local and regional shows) and outside sales representatives’ commissions related to the increase in sales.

General and administrative costs increased by $66,000, or 6.9%, in 2012 compared to 2011. The increase was primarily due to an increase in expanded XBRL reporting requirements and depreciation expense due to upgrades in our enterprise software and related hardware. These increases were offset by decreases in expenses relating to repairs and maintenance of our building.

Research and development costs increased $6,000, or 1.4%, in 2012 when compared with 2011. The increase in research and development costs was due to an increase in lab testing fees for product testing and approval for hazardous locations and legal expenses related to patent applications, offset by decreases in the cost of lab materials and contract engineering expenses (due to the development and installation of the Electro-Sentry 1 system in 2011).

Operating Income

Operating income increased by $91,000 in 2012 from $740,000 to $831,000, an increase of 12.3% compared to 2011. The increase in operating income was mainly due to the increase in net sales.

Non-Operating Income

ESI Investment Company continues to provide us with an alternative source of earnings through investments in available-for-sale securities and other investments; however, our intent is to remain an operations-based company. Our investments in available-for-sale securities are subject to significant positive and negative changes in value. In addition to income from the sale of investments, we also realize interest income from our short-term holdings.

Non-operating income for fiscal year 2012 increased by $742,000 to $811,000. The increase was driven primarily by an increase in the gain on the sale of investments. In December 2012, the Company started liquidating its investment in Rudolph Technology, which resulted in a gain of $794,000. In December 2011, the Company’s investment in PPT Vision was liquidated, which resulted in a gain of $72,000. The 2011 gain from investments was offset by a loss of $18,000 on disposal of property and equipment related to building maintenance. There was no such loss on disposal of property in 2012.

Available-for-sale securities are stated at fair value, and unrealized holding gains and losses, net of the related deferred tax effect, are reported as a separate component of stockholders’ equity. Dividends on marketable equity securities are recognized in income when declared.

Realized gains and losses, including losses from declines in value of specific securities determined by management to be other-than-temporary, are included in income. Realized gains and losses are determined on the basis of the specific securities sold.

Interest income decreased $2,000, or 33.3%, when comparing fiscal year 2012 to the same period in 2011.

For the years ended December 31, 2012 and 2011, the Company recorded as other income earn-out payments related to the sale of the AutoData Systems Division to Auto Data Inc. of $13,000 and $3,000, respectively.

Loss From Discontinued Operations

On September 16, 2011, the Company sold its entire interest in its AutoData Systems Division to Auto Data Inc. (ADI). The purchase price will be paid as an earn-out based on three percent of the software, hardware, and maintenance contracts that ADI sells over the next five years (four percent while ADI continues to occupy our building). The transaction was intended to allow us to focus on our core markets.

For the year ended December 31, 2011 the AutoData Systems Division had an operating loss, net of income taxes, of $50,000.

Net Income After Tax

We reported net income after tax for 2012 of $1,086,000, as compared to net income of $548,000 in 2011, an increase of $538,000, or 98.2%. Basic and diluted earnings per share from continuing operations were $0.32 and $0.31, respectively in 2012, compared to basic and diluted earnings per share from continuing operations of $0.17 in 2011.

OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any off-balance sheet transactions, arrangements or obligations that have, or are reasonably likely to have, a material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $1,102,000 and $5,476,000 at December 31, 2012 and 2011, respectively. The decrease was mainly due to investing activities, as described below.

Cash from operating activities of $732,000 for the year ended December 31, 2012 was primarily a result of our net income adjusted for the gain on the sale of investments, and changes in accounts receivable, inventories, and income tax activity. Cash from operating activities increased $423,000 for the year ended December 31, 2012 when compared to the year ended December 31, 2011 due to an increase in net income of $538,000. The net change in trade receivables was due a decrease of $57,000 in the balance at December 31, 2012 compared to the prior year and an increase of $118,000 in the balance at December 31, 2011 when compared to the prior year. This was due to a decrease in outstanding accounts receivable balances as of December 31, 2012, partially due to the 2011 balance including a $71,000 receivable for the sale of PPT Vision stock. The net change in inventories was due to an increase of $102,000 in the balance at December 31, 2012 compared to the prior year and an increase of $188,000 in the balance at December 31, 2011 when compared to the prior year. The increase as of December 31, 2012 was smaller than the increase as of December 31, 2011 due to the type of new products introduced in 2012 compared to 2011. The net change in income taxes was due to an increase in the payable balance of $330,000 at December 31, 2012 compared to the prior year and an increase in the receivable balance of $37,000 at December 31, 2011 when compared to the prior year. The increase in the net payable was due to taxes due on gain on sale of investments. These increases were offset by the change in the gain on sale of investments. The gain on sale of investment was $794,000 for the year ended December 31, 2012 and $73,000 for the year ended December 31, 2011, a change in the adjustment to net income of $721,000.

Cash used in investing activities was $4,571,000 for the year ended December 31, 2012, compared to cash from investing activities of $5,106,000 for the year ended December 31, 2011. The significant increase in cash used in investing activities was due to an increase in net purchases of Treasury Bills with maturity dates of more than three months, with only a purchase of $5,249,000 during 2012, compared to net proceeds of $5,200,000 during 2011. During 2011, we had $9,500,000 in Treasury Bills mature and purchased $4,300,000 in Treasury Bills. We purchased $169,000 and $82,000 of property and equipment in the years ended December 31, 2012 and 2011, respectively. We received $874,000 on the sale of investments during 2012 compared to $2,000 during 2011.

Cash used in financing activities was $535,000 and $522,000 for the years ended December 31, 2012 and 2011, respectively. During the years ended December 31, 2012 and 2011, we paid aggregate dividends of $543,000 each year. During the years ended December 31, 2012 and 2011, we had $8,000 and $10,000, respectively, in stock purchases under our 1996 Employee Stock Purchase Plan. Also, in the year ended December 31, 2011, $11,000 in stock options were exercised.

We intend that our ongoing cash requirements will be primarily used for capital expenditures, researching potential acquisitions, acquisitions, research and development, and working capital. Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements through at least the next 12 months.

Our primary investment is 273,267 and 343,267 shares of Rudolph Technologies, Inc. (“Rudolph”), as of December 31, 2012 and 2011, respectively, listed on the Nasdaq stock market. The Rudolph investment is accounted for using the available-for-sale method. The fair value of the Rudolph investment totaled $3,673,000 and $3,134,000 as of December 31, 2012 and 2011, respectively. Our Rudolph shares are subject to fluctuations in price and could have a negative effect on our liquidity. Liquid securities are periodically sold as deemed appropriate by management. The market value of the Rudolph stock as of March 20, 2013 was $2,947,000.

CRITICAL ACCOUNTING ESTIMATES

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. Such decisions include the selection of applicable accounting principles and the use of judgment in their application, the results of which impact reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions.

Significant estimates, including the underlying assumptions, consist of the economic lives of property and equipment, realizability of accounts receivable, and valuation of deferred tax assets/liabilities, inventory and investments. It is at least reasonably possible that these estimates may change in the near term.

Economic lives of property and equipment
We estimate the economic useful life of property and equipment used in the business. Expected asset lives may be shortened or an impairment recorded based on a change in the expected use of the asset.

Realizability of accounts receivable
We estimate our allowance for doubtful accounts based on prior history and the aging of our accounts receivable. We are unable to predict which, if any, of our customers will be unable to pay their open invoices at a future date.

Valuation of deferred tax assets/liabilities
We estimate our deferred tax assets and liabilities based on current tax laws and rates. The tax laws and rates could change in the future to either disallow the deductions or increase/decrease the tax rates.

Valuation of inventory
We purchase inventory based on estimated demand of products. It is possible that the inventory we have purchased will not be used in the products that our customers need or meet future technological requirements.

Valuation of investments
Our investments in equity securities are valued at market prices in an open market. The prices are subject to the normal fluctuations that could be either negative or positive.
Additional information regarding our significant accounting policies is provided below in Part II, Item 8, Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements, Note 1, Nature of Business and Significant Accounting Policies .

MANAGEMENT DISCUSSION FOR LATEST QUARTER

CRITICAL ACCOUNTING ESTIMATES

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make decisions based upon estimates, assumptions, and factors it considers relevant to the circumstances. These decisions include the selection of applicable accounting principles and the use of judgment in their application, and affect reported amounts and disclosures. Changes in economic conditions or other business circumstances may affect the outcomes of management’s estimates and assumptions. An in-depth description of our accounting estimates can be found in the interim financial statements included in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012. One new estimate since those discussed in our Annual Report is the estimate of the value of stock-based compensation expense. We estimate the expected life and forfeiture rates of stock options granted when calculating the value of options using the Black-Sholes-Merton model. The actual life and forfeiture rate could be different from what we estimated.

RESULTS OF OPERATIONS

Net Sales

Net sales for the three-month period ended September 30, 2013 increased $141,000, or 9.0%, when compared to the same period in 2012. The increase for the three-month period has been broad based across our agriculture customers and driven by both an increase in the number of orders processed as well as an increase in the number of larger orders being received. Net sales for the nine-month period ended September 30, 2013 decreased $191,000, or 3.8%, when compared to the same period in 2012. Although sales have decreased in the first nine months of 2013 compared to the same period in 2012, we are encouraged with our third quarter 2013 performance and recent agricultural industry data showing strong forecasts for the 2013 harvest.

Gross Profit

Gross margin for the three-month period ended September 30, 2013 was 57.4% versus 55.6% for the same period in 2012. For the nine-month periods ended September 30, 2013 and 2012, gross margins were 57.6% and 56.3%, respectively. The increase in gross margin, for both periods, was primarily due to a change in the mix of products sold, with a relative increase in the sale of higher margin products, and a price increase that went into effect in January 2013.

Operating Expenses

Total operating expenses increased $312,000, or 47.7%, for the three months ended September 30, 2013 when compared to the same period in 2012. For the nine months ended September 30, 2013 when compared to the same period of 2012, operating expenses increased $363,000, or 16.5%.

Selling and marketing costs increased $73,000, or 23.9%, for the three months ended September 30, 2013 when compared to the same period in 2012. For the nine months ended September 30, 2013, selling and marketing costs increased $65,000, or 5.9%, when compared to the same period in 2012. The increase for the three months ended September 30, 2013 was due to an increase in wages and benefits due to additional sales personnel and higher commission expense to outside sales representatives (due to increased sales and an immaterial error related to prior quarters). For the nine months ended September 30, 2013, the increase was due to higher wages and benefits due to additional sales personnel, partially offset by decreases in marketing expenses.

General and administrative costs increased $200,000, or 82.0%, for the three months ended September 30, 2013 compared to the same period in 2012. For the nine months ended September 30, 2013, general and administrative costs increased $257,000, or 33.4%, when compared to the same period in 2012. For the three months ended September 30, 2013, the increase in general and administrative expenses was primarily due to higher stock compensation expense on stock option grants, and wages, bonuses, and benefits due to changes in management. For the nine months ended September 30, 2013, the increase in general and administrative expenses was primarily due to stock compensation expense on stock option grants, depreciation expense related to the upgrade of the enterprise software and related hardware, legal and professional fees (related to board changes, stock option grants, and our domain name), and computer maintenance and supplies. The increase was offset by a decrease in bad debts expense due to the write off of accounts in 2012 which did not occur in 2013. Stock based compensation for the three and nine-month periods ended September 30, 2013 was approximately $149,000 compared to approximately $6,000 for the same periods in 2012.

Research and development costs for the three months ended September 30, 2013 increased $39,000, or 37.1%, compared to the same period in 2012. For the nine months ended September 30, 2013, research and development costs increased $41,000, or 12.3%, when compared to the same period in 2012. For the three months ended September 30, 2013, the increase was due to an increase in wages and benefits due to changes in management responsibilities. For the nine months ended September 30, 2013, the increase resulted from an increase in wages and benefits due to changes in management, partially offset by a decrease in lab testing for product approval for hazardous location.

Non-Operating Income

Non-operating income increased by $131,000, or 3275.0%, for the three-month period ended September 30, 2013 compared to the same period for 2012. For the nine months ended September 30, 2013, non-operating income increased $532,000, or 3800.0%, when compared to the same period in 2012. During the three and nine months ended September 30, 2013, we sold 10,000 and 41,931 shares, respectively, of Rudolph stock and recognized gains of $129,000 and $529,000, respectively, on the sales. We sold no investments during the three and nine months ended September 30, 2012.

Other income from the earn-out agreement on the sale of the AutoData Systems Division increased $1,000, or 50%, for the three months ended September 30, 2013 when compared to the same period in 2012. Other income from the earn-out agreement on the sale of the AutoData Systems Division increased $2,000, or 22.2%, for the nine months ended September 30, 2013 when compared to the same period in 2012. The increase for both periods was due to an increase in the software, hardware, and maintenance contracts that ADI sold during the period.

Interest income increased $2,000, or 200.0%, when comparing the three months ended September 30, 2013 to the same period in 2012. Interest income was flat when comparing the nine months ended September 30, 2013 to the same period in 2012. The increase was due to the interest recognized on Treasury Bills owned in 2013.

Income Before Income Taxes

Income before income taxes was $150,000 for the three months ended September 30, 2013, representing a decrease of $71,000, or 32.1%, when compared to the same period in 2012. Income before income taxes was $754,000 for the nine months ended September 30, 2013, representing an increase of $125,000, or 19.9%, when compared to the same period in 2012. The decrease for the three months ended September 30, 2013 was due to higher operating expenses. The increase for the nine months ended September 30, 2013 was mainly due to the gain on sale of investments (see Non-Operating Income).

The Production Monitoring Division had income before income taxes of $18,000 for the three months ended September 30, 2013 compared to $220,000 for the same period in 2012, a decrease of $202,000, or 91.8%. For the nine months ended September 30, 2013, the Production Monitoring Division had income before income taxes of $220,000 compared to $626,000 for the same period in 2012, a decrease of $406,000, or 64.9%. The decrease in income before income taxes for the three and nine months ended September 30, 2013 was mainly due to the increase in operating expenses. The main increase in operating expenses, for both periods in 2013, was an increase in stock based compensation. During 2013, the Company had approximately $149,000 in stock based compensation compared to $6,000 in 2012.

ESI Investment Company had income before income taxes of $132,000 for the three-month period ended September 30, 2013 compared to $1,000 for the same period in 2012, an increase of $131,000. ESI Investment Company had income before income taxes of $534,000 for the nine-month period ended September 30, 2013 compared to income before income taxes of $3,000 for the same period in 2012, an increase of $531,000. These increases were a result of the gain on sales of available-for-sale securities in 2013 compared to 2012 (see “Non-Operating Income”).

The net decrease in the unrealized value of available-for-sale securities was $39,000 and $639,000 for the three and nine months, respectively, ended September 30, 2013. The net decrease is due to the sale of Rudolph stock which resulted in a $129,000 and $529,000 gain on the sale during the three and nine months ended September 30, 2013, respectively. ESI Investment Company has approximately $2,607,000 in unrealized gain on the Rudolph investment that is reported in Other Comprehensive Income (see Note 4 “Investments” in the notes to the accompanying condensed consolidated financial statements).

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $1,116,000 at September 30, 2013 and $1,102,000 at December 31, 2012.

Cash used in operating activities was $65,000 for the nine months ended September 30, 2013, compared to cash generated from operating activities of $681,000 for the nine months ended September 30, 2012. Cash used in operating activities increased $746,000 for the nine months ended September 30, 2013 when compared to the same period in 2012 mainly due to the net change in trade receivables and accrued income taxes, partially offset by the net change in inventories. The net change in trade receivables was due to an increase in the receivable balance of $126,000 at September 30, 2013 when compared to the prior year and a decrease in the receivable balance of $61,000 at September 30, 2012 when compared to the prior year. The net change in income taxes was due to a decrease in the payable balance of $289,000 at September 30, 2013 when compared to the prior year and an increase in the payable of $85,000 at September 30, 2012 when compared to the prior year. The primary reason for the decrease is due to the payment in 2013 of the taxes owed for the year ended December 31, 2012. Those changes are offset by the net change in inventories which is due to a decrease in the inventory balance of $70,000 at September 30, 2013 when compared to the prior year and an increase in the inventory balance of $154,000 at September 30, 2012 when compared to the prior year.

Cash from investing activities was $343,000 compared to cash used in investing activities of $50,000 for the nine months ended September 30, 2013 and 2012, respectively. The significant increase in cash from investing activities was the proceeds of $536,000 on the sale of available-for-sales securities during the nine months ended September 30, 2013. There were no such sales during the nine months ended September 30, 2012. In addition, we purchased $18,000 and $50,000 of property and equipment for the nine months ended September 30, 2013 and 2012, respectively.

Cash used in financing activities was $264,000 and $399,000 for the nine months ended September 30, 2013 and 2012, respectively. During the nine-month periods ended September 30, 2013 and 2012, the Company paid aggregate dividends of $272,000 and $407,000, respectively. On July 23, 2013, the Board temporarily suspended the quarterly dividend. During the nine-month periods ended September 30, 2013 and 2012, the Company had $8,000, in each period, in stock issuances under the Employee Stock Purchase Plan.

Our ongoing cash requirements will be primarily for capital expenditures, research and development, and working capital. Management believes that cash on hand and any cash provided by operations will be sufficient to meet our cash requirements through at least the next 12 months.

Our primary investment is 231,336 shares of Rudolph, listed on the Nasdaq Stock Market, accounted for using the available-for-sale method. The investment is subject to fluctuations in market price.

Off-balance Sheet Arrangements

As of September 30, 2013, the Company had no off-balance sheet arrangements or transactions.

Business Development Activities

The Company continues to seek growth opportunities, both internally through the Company’s existing portfolio of products, technologies and markets, as well as externally through technology partnerships or related-product acquisitions. Although the Company is continuing to explore these external opportunities, it currently has no agreements or understandings with any third parties.

FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. Forward-looking statements include, but are not limited to, statements relating to our marketing efforts or our efforts to accelerate growth; our business development activities; our efforts to maintain or reduce production costs; management’s intention that we not become an investment company; our expected use of cash on hand; our cash requirements; and the sufficiency of our cash flows. Any statement that is not based solely upon historical facts, including strategies for the future and the outcome of events that have not yet occurred, is considered a forward-looking statement.

All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume no obligation to update any such forward-looking statements, other than as required by law. It is important to note that our actual results could differ materially from those in such forward-looking statements. The forward-looking statements we make in this Quarterly Report are subject to certain risks and uncertainties that could cause future results to differ materially from our recent results or those projected in the forward-looking statements, including the accuracy of management’s assumptions with respect to industry trends, fluctuations in industry conditions, the impact of any worsening of the global economy, the accuracy of management’s assumptions regarding expenses and our cash needs and those listed under the heading “Cautionary Statements” under “Item 1—Business,” in our Annual Report on Form 10-K for the year ended December 31, 2012.

SHARE THIS PAGE:  Add to Delicious Delicious  Share    Bookmark and Share



 
Icon Legend Permissions Topic Options
You can comment on this topic
Print Topic

Email Topic

1545845 Views