News Column

HICKOK INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

August 14, 2014

Results of Operations, Third Quarter (April 1, 2014 through June 30, 2014)

Fiscal 2014 Compared to Third Quarter Fiscal 2013



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Reportable Segment Information



The Company has determined that it has two reportable segments: 1) indicators and gauges and 2) automotive related diagnostic tools and equipment. The indicators and gauges segment consists of products manufactured and sold primarily to companies in the aircraft and locomotive industry. Within the aircraft market, the primary customers are those companies that manufacture or service business, military and pleasure aircraft. Within the locomotive market, indicators and gauges are sold to original equipment manufacturers, servicers of locomotives and operators of railroad equipment. Revenue in this segment was $460,749 and $432,812 for the third quarter of fiscal 2014 and fiscal 2013, respectively, and $1,211,350 and $1,260,745 for the first nine months of fiscal 2014 and fiscal 2013, respectively.

The automotive diagnostic tools and equipment segment consists primarily of products designed and manufactured to support the testing or servicing of automotive systems using electronic means to measure vehicle parameters. These products are sold to OEM's and to the aftermarket using several brand names and a variety of distribution methods. Included in this segment are products used for state required testing of vehicle emissions. Revenue in this segment was $1,669,663 and $907,019 for the third quarter of fiscal 2014 and fiscal 2013, respectively, and $3,085,771 and $3,782,427 for the first nine months of fiscal 2014 and fiscal 2013, respectively. Increased sales volume in both fiscal years over the recent past was primarily due to large orders from a Tier 1 OEM supplier.

Results of Operations



Product sales for the quarter ended June 30, 2014 were $2,074,295 versus $1,270,405 for the quarter ended June 30, 2013. The 63% increase in product sales during the current quarter of approximately $804,000 was volume related due primarily to increased sales of automotive diagnostic testing products to OEM's of approximately $1,042,000. Sales of emission products and aftermarket products decreased during the current quarter by approximately $196,000 and $69,000 respectively. In addition, sales of indicator products increased during the current quarter by approximately $27,000. Product sales for the quarter ended June 30, 2014 benefited from the large order from a Tier 1 Supplier with no similar order in the prior year third quarter. Product sales are expected to increase slightly during the fourth quarter of the fiscal year due to the completion of the large order and to anticipated improved sales in other markets the Company serves.

Service sales for the quarter ended June 30, 2014 were $56,117 versus $69,526 for the quarter ended June 30, 2013. The decrease was volume related and due primarily to a lower sales volume for chargeable repairs. The current level of service sales related to product repair sales is expected to continue in the fourth quarter of the fiscal year.

Cost of product sold in the third quarter of fiscal 2014 was $963,721 (46.5% of product sales) as compared to $731,058 (57.5% of product sales) in the third quarter of 2013. The percentage decrease in the cost of product sold was due primarily to a change in product mix. The dollar increase was due to the increased sales volume during the current quarter from the large order from the Tier 1 Supplier. The current cost of product sold percentage is expected to continue during the fourth quarter of the fiscal year.

Cost of service sold for the quarter ended June 30, 2014 was $41,777 (74.4% of service sales) as compared to $36,681 (52.8% of service sales) in the quarter ended June 30, 2013. The percentage increase was due primarily to the lower service sales volume, product specifics of chargeable repairs and an increase in warranty repairs in the current quarter. The current cost of services sold percentage is anticipated to decrease slightly in the fourth quarter of the fiscal year.

Product development expenses were $243,600 in the third quarter of fiscal 2014 (11.7% of product sales) as compared to $234,813 (18.5% of product sales) in the third quarter of fiscal 2013. The percentage decrease was due primarily to higher product sales during the current quarter. The current level of product development expenses is expected to continue in the fourth quarter of the fiscal year. Management believes the existing resources will be sufficient to continue to develop identified new products for both OEM and Aftermarket customers.

Marketing and administrative expenses were $496,832 (23.3% of total sales) in the third quarter of fiscal 2014 versus $453,621 (33.9% of total sales) for the same period a year ago. Marketing expenses were approximately $211,000 in the third quarter of fiscal 2014 versus $196,000 for the same period a year ago. Within marketing expenses,royalty expense and labor costs increased by approximately $41,000 and $3,000 respectively. These increases were offset in part by a decrease in advertising expense, commissions, travel expense and credit and collection expense of approximately $19,000, $8,000, $1,000 and $1,000 respectively. Administrative expenses were approximately $285,000 in the third quarter of fiscal 2014 versus $258,000 for the same period a year ago. Within administrative expenses, professional fees, labor costs, repairs and maintenance computer equipment and rent machinery and equipment increased by approximately $23,000, $5,000, $2,000 and $1,000 respectively. These increases were offset in part by a decrease in data processing expense of approximately $4,000. The current level of marketing and administrative expenses is expected to continue during the fourth quarter Interest expense was $2,691 in the third quarter of fiscal 2014 which compares with $22,750 in the third quarter of fiscal 2013. Interest expense for the current quarter was due primarily to short-term borrowing on notes from a major shareholder who is also an employee and to a lesser extent to the borrowing available on the convertible note payable. Interest expense for the prior year third quarter was due to recording as non-cash interest expense a portion of the present value of the warrants issued in December 2012. The current level of interest expense is expected to decrease during the fourth quarter of the fiscal year due to an anticipated decease in short-term borrowing.

Other income was $5,120 in the third quarter of fiscal 2014 which compares with $5,215 in the third quarter of fiscal 2013. Other income consists primarily of the proceeds from the sale of scrap metal shavings, purchase discounts and interest income on cash and cash equivalents invested. The current level of other income is expected to continue during the fourth quarter

Income taxes in the third quarter of fiscal 2014 and 2013 was $0. In the third quarter of fiscal 2014 income taxes were calculated at an effective tax rate of 37% offset by deferred taxes, specifically net operating loss carryforwards. In the third quarter of fiscal 2013 recovery of income taxes was calculated at an effective rate of 37% offset by an increase in the valuation allowance netting to $0.

The net income in the third quarter of fiscal 2014 was $386,911 which compares with a net loss of $133,777 in fiscal 2013. The net income for the current quarter was the result of a higher sales volume due primarily from shipments made on the large order from a Tier 1 Supplier to an OEM.

Unshipped customer orders as of June 30, 2014 were $1,287,000 versus $652,000 at June 30, 2013. The $697,000 increase was due primarily to increased orders for diagnostic products to automotive OEM's of approximately $860,000 and aftermarket products of approximately $62,000, offset in part by a decrease in orders for indicator products of approximately $161,000 and emissions products of approximately $64,000. The Company anticipates that most of the current backlog will be shipped in the last quarter of fiscal 2014. The current order backlog increased substantially due to the large order for a Tier 1 Supplier and the remaining balance of this order will ship in the fourth quarter of fiscal 2014.

Results of Operations, Nine Months Ended June 30, 2014 Compared to Nine Months Ended June 30, 2013



Product sales for the nine months ended June 30, 2014 were $4,112,374 versus $4,809,092 for the same period in fiscal 2013. The decrease in product sales during the first nine months of the current fiscal year of approximately $697,000 was volume related due to lower sales of automotive diagnostic testing products, primarily, automotive diagnostic testing products to OEM's of approximately $308,000. Sales of emission products and aftermarket products decreased by approximately $230,000 and $123,000 respectively. In addition, sales of indicator products decreased by approximately $36,000. The decrease in product sales to OEM's is due to the prior year benefiting from a large order for a Tier 1 OEM supplier shipping during the first half of fiscal 2013. A similar large order during the current year began shipping during the third quarter and will be completed during the fourth quarter. Management anticipates product sales for the fourth quarter to increase slightly.

Service sales for the nine months ended June 30, 2014 were $184,747 compared with $234,080 for the same period in fiscal 2013. The decrease was volume related and due primarily to a lower sales volume for chargeable repairs. The current level of service sales related to product repair sales is expected to continue in the last three months of the fiscal year.

Cost of product sold was $2,259,005 (54.9% of product sales) compared with $2,687,961 (55.9% of product sales) for the nine months ended June 30, 2013. The dollar decrease in the cost of product sold was due primarily to a lower sales volume in the current fiscal year. The current cost of product sold percentage is expected to decrease slightly during the fourth quarter of the fiscal year.

Cost of service sold was $124,333 (67.3% of service sales) compared with $114,341 (48.8% of service sales) for the nine months ended June 30, 2013. The dollar and percentage increase was due primarily to the product specifics of chargeable repairs and an increase in warranty repairs. The cost of services sold percentage is expected to continue in the fourth quarter of the fiscal year.

Product development expenses were $727,810 (17.7% of product sales) compared to $712,058 (14.8% of product sales) for the nine months ended June 30, 2013. The percentage increase was due primarily to lower product sales during the current nine months of fiscal 2014. The current level of product development expenditures is expected to continue for the fourth quarter of the fiscal year. Management believes the existing and planned resources will be sufficient to continue to develop identified new products for both OEM and Aftermarket customers.

Marketing and administrative expenses were $1,425,374 for the nine months ended June 30, 2014 (33.2% of total sales) versus $1,339,619 (26.5% of total sales) for the nine months ended June 30, 2013. The percentage increase during the first nine months of the current fiscal year was due primarily to the lower level of sales. Marketing expenses were approximately $528,000 during the first nine months of the current fiscal year versus $558,000 for the same period a year ago. Within marketing expenses, decreases were primarily in commission expense, advertising expense and royalty expense of approximately $21,000, $17,000 and $10,000 respectively. These decreases were offset in part by increases in labor costs, credit and collection expense and promotion expense of approximately $11,000, $3,000 and $2,000 respectively. Administrative expenses were approximately $897,000 during the first nine months of the current fiscal year versus $782,000 for the same period a year ago. The dollar increase during the first nine months of the current fiscal year was due primarily to increases in professional fees and labor costs of approximately $122,000 and $16,000 respectively. These increases were offset in part by decreases in data processing expenses, depreciation expense, rent machinery and equipment and travel expense of approximately $9,000, $7,000, $6,000 and $3,000 respectively. The current level of marketing and administrative expenses are expected to continue for the remainder of the fiscal year.

Interest expense was $2,691 for the nine months ended June 30, 2014, and $68,428 for the same period in 2013. Interest expense for the current year was due primarily to short-term borrowing on notes from a major shareholder who is also an employee and to a lesser extent to the borrowing available on the convertible note payable. Interest expense for the prior year year was due to recording as non-cash interest expense a portion of the present value of the warrants issued in December 2012. The current level of interest expense is expected to decrease during the fourth quarter of the fiscal year due to an anticipated decease in short-term borrowing.

Other income of $11,061 compares with other income of $8,693 in the same period last year. Other income consists primarily of the proceeds from the sale of scrap metal shavings, purchase discounts and interest income on cash and cash equivalents invested. The increase was due primarily to an increase in the sale of scrap metal shavings of approximately $3,500 during the current year nine month period. The current level of other income is expected to continue for the fourth quarter of fiscal 2014.

Income taxes during the first nine months of fiscal 2014 was $0 which compares with income taxes of $0 in the first nine months of fiscal 2013. In the first nine months of fiscal 2014 recovery of income taxes was calculated at an effective tax rate of 37% offset by a increase in the valuation allowance netting to $0. In the first nine months of fiscal 2013 income taxes were recorded at an effective tax rate of 37% offset by deferred taxes, specifically net operating loss carryforwards.

The net loss for the nine months ended June 30, 2014 was $231,031 which compares with net income of $128,458 for the nine months ended June 30, 2013. The net loss for the first nine months of fiscal 2014 was primarily the result of a lower sales volume.

Liquidity and Capital Resources



Total current assets were $3,837,570, $3,199,326 and $3,126,016 at June 30, 2014, September 30, 2013 and June 30, 2013, respectively. The increase of approximately $712,000 from June to June is due primarily to the increase in accounts receivable, inventory and prepaid expenses of approximately $827,000, $524,000 and $20,000 respectively, offset in part by a decrease in cash and cash equivalents of approximately $656,000. The decrease in cash and cash equivalents combined with the increase in inventory was due primarily to the purchase of inventory for the large OEM order being shipped in the last half of the fiscal year. The increase in accounts receivable was due to the increased sales volume during the period from the large OEM order. The increase in current assets from September to June of approximately $638,000 was due primarily to the increase in accounts receivable, inventory and prepaid expenses of approximately $893,000, $518,000 and $36,000 respectively, offset in part by a decrease in cash and cash equivalents of approximately $809,000. The decrease in cash and cash equivalents combined with the increase in inventory was due primarily to the purchase of inventory for the large OEM order being shipped in the last half of the fiscal year. The increase in accounts receivable was due to the increased sales volume during the period from the large OEM order.

Working capital as of June 30, 2014 amounted to $2,151,941 as compared with $2,396,782 a year earlier. Current assets were 2.3 times current liabilities compared to 4.3 a year ago. The quick ratio was 1.0 compared to 2.0 a year ago.

Internally generated funds during the nine months ended June 30, 2014 were a negative $1,581,605 and were not adequate to fund the Company's primary non-operating cash requirements consisting of capital expenditures of $110,916. The primary reason for the negative cash flow from operations was the net loss during the period of $231,031 and the increase in inventory and accounts receivable due to the large order received in January 2014. The Company does anticipate additional capital expenditures during fiscal 2014 of approximately $35,000. The Company believes that cash and cash equivalents, together with funds anticipated to be generated by operations in addition to available short-term financing will provide adequate funding of the Company's working capital needs.

Shareholders' equity during the nine months ended June 30, 2014 decreased by $228,737 which was the net loss during the period of $231,031 and share-based compensation expense of $2,294.

During fiscal 2014 the Company received an order for approximately $1,800,000. The order has required a temporary increase in inventory and has caused a short-term cash drain, subsequent cash collections on this order began in July 2014. The Company believes that internally generated funds and available short-term financing will provide sufficient liquidity to meet ongoing working capital requirements.

Critical Accounting Policies



Our critical accounting policies are as presented in Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations in our Form 10-K for the year ended September 30, 2013.

Forward-Looking Statements



The foregoing discussion includes forward-looking statements relating to the business of the Company. These forward-looking statements, or other statements made by the Company, are made based on management's expectations and beliefs concerning future events impacting the Company and are subject to uncertainties and factors (including, but not limited to, those specified below) which are difficult to predict and, in many instances, are beyond the control of the Company. As a result, actual results of the Company could differ materially from those expressed in or implied by any such forward-looking statements. These uncertainties and factors include (a) the Company's dependence upon a limited number of customers, (b) the highly competitive industry in which the company operates, which includes several competitors with greater financial resources and larger sales organizations, (c) the acceptance in the marketplace of new products and/or services developed or under development by the Company including automotive diagnostic products and indicating instrument products, (d) the ability of the Company to further establish distribution and a customer base in the automotive aftermarket, (e) the Company's ability to capitalize on market opportunities including state automotive emissions programs and OEM tool programs and (f) the Company's ability to obtain cost effective financing.


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Source: Edgar Glimpses


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