CRAWFORD UNITED Corp - Quarter Report: 2008 December (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended December 31, 2008

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to ____ _ .

HICKOK INCORPORATED
_____________________________________________________________
(Exact name of registrant as specified in its charter)

Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes X No___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.

Item 1. Financial Statements.

HICKOK INCORPORATED
CONSOLIDATED INCOME STATEMENTS
(Unaudited)

HICKOK INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED DECEMBER 31,
(Unaudited)

HICKOK INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
DECEMBER 31, 2008

1. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended December 31, 2008 are not necessarily indicative of the results that may be expected for the year ended September 30, 2009. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-KSB for the year ended September 30, 2008.

Inventories are valued at the lower of cost or market and consist of the following:

The above amounts are net of reserve for obsolete inventory in the amount of $224,257, $188,000 and $510,706 for the periods ended December 31, 2008, September 30, 2008 and December 31, 2007 respectively.

3. Short-term Financing

Under the Company's Key Employees Stock Option Plans (collectively the "Employee Plans"), incentive stock options, in general, are exercisable for up to ten years, at an exercise price of not less than the market price on the date the option is granted. Non-qualified stock options may be granted at such exercise price and such other terms and conditions as the Compensation Committee of the Board of Directors may determine. No options may be granted at a price less than $2.925. Options for 62,600 Class A shares were outstanding at December 31, 2008 (73,400 shares at September 30, 2008 and 73,400 shares at December 31, 2007) at prices ranging from $3.125 to $7.125 per share. Options for 14,450 at prices ranging from $3.125 to $10.50 per share were exercised during the three month period ended December 31, 2007. In addition, options for 10,800 at a price of $7.125 per share expired during the three month period ended December 31, 2008. Options for 5,300 at a price of $10.50 per share expired during the three month period ended December 31, 2007. No other options were granted, exercised or canceled during the three month periods presented under the Employee Plans. All options granted under the Employee Plans are exercisable at December 31, 2008.

The Company's Outside Directors Stock Option Plans (collectively the "Directors Plans"), provide for the automatic grant of options to purchase up to 43,000 shares of Class A Common Stock to members of the Board of Directors who are not employees of the Company, at the fair market value on the date of grant. Options for 43,000 Class A shares were outstanding at December 31, 2008 (43,000 shares at September 30, 2008 and 51,000 shares at December 31, 2007) at prices ranging from $3.55 to $12.25 per share. All outstanding options under the Directors Plans become fully exercisable on February 21, 2011.

The following is a summary of the range of exercise prices for stock options outstanding and exercisable under the Employee Plans and the Directors Plans at December 31, 2008:

On October 1, 2006, the Company adopted Statement of Financial Standards SFAS No. 123(R), Share-Based Payment, under the modified prospective method for its stock options for both employees and non-employee Directors.

Compensation cost for fixed based awards are measured at the grant date, and the Company uses the Black-Scholes option pricing model to determine the fair value estimates for recognizing the cost of employee and director services received in exchange for an award of equity instruments. The Black-Scholes option pricing model requires the use of subjective assumptions which can materially affect the fair value estimates. Employee stock options are immediately exercisable while Director's stock options are exercisable over a three year period. The fair value of stock option grants to Directors is amortized over the three year vesting period. During the quarter ended December 31, 2008 $4,122 was expensed as share-based compensation. During the quarter ended December 31, 2007 $3,463 was expensed as share-based compensation. The following weighted-average assumptions were used in the option pricing model for the three month periods ended December 31, 2008 and 2007 respectively: a risk free interest rate of 5.5% and 6.0%; an expected life of 10 and 10 years; an expected dividend yield of 1.1% and 1.9%; and a volatility factor of .37 and .37.

5. Recently Issued Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities - Including an Amendment of FASB Statement No. 115. This statement permits an entity to choose to measure many financial instruments and certain other items at fair value. The fair value option established by FSAS No. 159 permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are to be recognized in earnings at each subsequent reporting date. The Company adopted the provisions of this pronouncement effective October 1, 2008. The Company did not incur any material impact to its financial condition or results of operations due to the adoption of FSAS No. 159.

Earnings per common share are based on the provisions of FAS Statement No. 128, "Earnings per Share." Accordingly, the adoption of this statement did not affect the Company's results of operations, financial position or liquidity. The effects of applying FAS No. 128 on earnings per share and required reconciliations are as follows:

Options to purchase 105,600 shares of common stock during the first quarter of fiscal 2009 at prices ranging from $3.125 to $11.00 per share were outstanding but were not included in the computation of diluted earnings per share because the option's effect was antidilutive or the exercise price was greater than the average market price of the common share.

7. Segment and Related Information

The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which changes the way the Company reports the information about its operating segments.

The Company's four business units have a common management team and infrastructure that offer different products and services. The business units have been aggregated into two reportable segments: 1.)indicators and gauges and 2.)automotive related diagnostic tools and equipment.

Indicators and Gauges
This 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 and pleasure aircraft. Within the locomotive market, indicators and gauges are sold to both original equipment manufacturers and to operators of railroad equipment.

Automotive Diagnostic Tools and Equipment
This 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. Also included in this segment are fastening control products used primarily by large manufacturers to monitor and control the "nut running process" (the controlled tightening of threaded fasteners)in assembly plants. This equipment provides high quality joint control and documentation. 

Information by industry segment is set forth below:

All export sales to Canada and other foreign countries are made in United States of America Dollars.

8. Business Condition 

The Company incurred large operating losses in the last two quarters as a result of decreasing sales of existing product lines and a general economic downturn. Management has implemented expense reductions during the current quarter in response to the economic downturn and uncertainty in the markets the Company serves. The Company has reduced headcount, product development, and marketing, administrative and sales related expenses in order to appropriately manage its working capital. Management believes if these cost cutting measures are successful they will return the Company to profitability.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations, First Quarter (October 1, 2008 through December 31, 2008)
Fiscal 2009 Compared to First Quarter Fiscal 2008
-----------------------------------------------------------------------------------------

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 both original equipment manufacturers, servicers of locomotives and operators of railroad equipment. Revenue in this segment was $455,590 and $432,363 for the first quarter of fiscal 2009 and fiscal 2008, 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. Also included in this segment are fastening control products used primarily by large manufacturers to monitor and control the "nut running process" (the controlled tightening of threaded fasteners)in assembly plants. This equipment provides high quality joint control and documentation. Revenue in this segment was $703,473 and $6,809,049 for the first quarter of fiscal 2009 and fiscal 2008, respectively. The decrease was due primarily to the completion of the California Evaporative Emissions Testing Program during fiscal 2008 and the negative effects of the current economic crisis on all of the Company's markets.

Results of Operations

Product sales for the quarter ended December 31, 2008 were $1,063,831 versus $7,128,256 for the quarter ended December 31, 2007. The decrease in product sales during the current quarter of approximately $6,064,000 was volume related due primarily to decreased sales of automotive diagnostic products, primarily, emissions testing products of approximately $5,667,000. Sales of diagnostic products to OEM's and aftermarket products decreased by approximately $164,000 and $269,000 respectively. Indicator product sales increased by approximately $36,000. Although the current economic uncertainties make forecasting difficult product sales are expected to increase moderately during the second and third quarter of fiscal 2009.

Service sales for the quarter ended December 31, 2008 were $95,232 versus $113,156 for the quarter ended December 31, 2007. 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 for the balance of the fiscal year.

Cost of product sold in the first quarter of fiscal 2009 was $787,187 (74.0% of product sales) as compared to $3,823,656 (53.6% of product sales) in the first quarter of fiscal 2008. The increase in the cost of product sold percentage was due primarily to a lower sales volume, lower plant utilization and a change in product mix. The current cost of product sold percentage is expected to decrease moderately for the balance of the fiscal year due to cost cutting measures implemented January 1, 2009 in the form of personnel and wage reductions along with other cost containment measures and moderately increased product sales.

Cost of service sold in the first quarter of fiscal 2009 was $89,425 (93.9% of service sales) as compared to $103,677 (91.6% of service sales) in the first quarter of fiscal 2008. The dollar decrease was due primarily to a lower volume of chargeable repairs. The increase in the cost of services sold percentage was primarily due to a lower plant utilization. The current cost of services sold percentage is expected to decrease slightly for the balance of the fiscal year due to price adjustments and cost cutting measures implemented January 1, 2009 in the form of personnel and wage reductions along with other cost containment measures.

Product development expenses were $450,469 in the first quarter of fiscal 2009 (42.3% of product sales) as compared to $464,730 (6.5% of product sales) in the first quarter of fiscal 2008. The dollar decrease was due primarily to decreased labor costs and a decrease in research and experimental material. The percentage increase was due primarily to lower product sales. The current level of product development expenses is expected to decrease significantly for the balance of the fiscal year due to cost cutting measures implemented January 1, 2009 in the form of personnel and wage reductions along with other cost containment measures. The Company believes the current resources will be sufficient to continue to develop identified new products for both OEM and Aftermarket customers.

Marketing and administrative expenses were $790,977 (68.2% of total net sales) in the first quarter of fiscal 2009 versus $1,113,183 (15.4% of total net sales) for the same period a year ago. The percentage increase was due primarily to the lower level of total sales for the current quarter. Marketing expenses were approximately $423,000 in the first quarter of fiscal 2009 versus $488,000 for the same period a year ago. Within marketing expenses, commissions, royalties, advertising, promotion, travel and collection expense decreased by approximately $14,000, $4,000, $10,000, $24,000, $8,000 and $4,000 respectively. Administrative expenses were approximately $368,000 in the first quarter of fiscal 2009 versus $625,000 for the same period a year ago. The dollar decrease was due primarily to no provision for bonus during the current quarter versus a bonus provision of $224,000 during the prior year quarter. In addition, wages, professional fees, director fees and depreciation decreased approximately $4,000, $6,000, $9,000 and $6,000 respectively. The Company anticipates that variable marketing expenses will decline modestly for the remainder of fiscal 2009 due to an anticipated lower sales volume. In addition, the current level of marketing and administrative expenses are expected to decrease significantly for the remainder of the fiscal year due to cost cutting measures implemented January 1, 2009 in the form of personnel and wage reductions along with other cost containment measures.

Interest expense was $1,597 in the first quarter of fiscal 2009 which compares with $3,786 in the first quarter of fiscal 2008. The decrease in interest charges in the current quarter compared to a year ago was due to no short-term borrowing during the current fiscal year. The current year interest was a charge on the unused portion of the loan facility. The current level of interest expense is expected to increase moderately for the third and fourth quarter of the year due to expected financing requirements of anticipated orders.

Other income was $15,239 in the first quarter of fiscal 2009 which compares with $21,509 in the first quarter of fiscal 2008. Other income consists primarily of interest income on cash and cash equivalents invested and the proceeds from the sale of scrap metal shavings. The decrease is due primarily to a lower level of cash available for investment during the current quarter.

Income taxes in the first quarter of fiscal 2009 was $200,000 which compares with income taxes of $645,000 in the first quarter of fiscal 2008. The $200,000 fiscal 2009 first quarter income taxes was caused by the decision to increase the Company's valuation allowance by $200,000 in light of the Company's current economic outlook. In the first quarter of fiscal 2009 recovery of income taxes was recorded at an effective tax rate of 37% offset by the increase in the valuation allowance. The effective tax rate for fiscal 2008 was 37%.

The net loss in the first quarter of fiscal 2009 was $1,145,353. The loss in fiscal 2009 was primarily the result of a lower sales volume. This compares with net income in the first quarter of fiscal 2008 of $1,108,889. Net income for the prior year quarter was primarily the result of a higher sales volume due to the California Evaporative Emissions Testing Program.

The Company has available a net operating loss carryforward and research and development credit carryforwards that begin to expire in 2015. During the first quarter of fiscal 2009 the Company recorded an increase in the valuation allowance in the amount of $550,000 due to additional losses and an increased likelihood of tax credits expiring before being utilized. During fiscal 2008 the Company recorded an increase in the valuation allowance in the amount of $535,000 due to additional losses and an increased likelihood of tax credits expiring before being utilized.

The Company's ability to realize the entire benefit of its deferred tax assets requires that the Company achieve certain future earning levels prior to the expiration of its net operating loss and research and development credit carryforwards. The Company could be required to record additional valuation allowances for a portion or all of its deferred tax assets if market conditions deteriorate further and future earnings are below, or are projected to be below, its current estimates. Because of the uncertainties involved with this significant estimate, it is reasonably possible that the Company's estimate may change.

Management projects increased sales or future cost cutting measures will generate sufficient taxable income during the carryforward period to fully realize deferred tax benefits and credits to be earned in the future.

Unshipped customer orders as of December 31, 2008 were $946,000 versus $885,000 at December 31, 2007. The increase was due primarily to increased orders for automotive diagnostic products to automotive OEM's and aftermarket products which include emissions products of $93,000 and $39,000 respectively. In addition, indicator products increased approximately $20,000. These lower levels of backlog are more typical for the Company versus the large backlog level of $5,756,000 at September 30, 2007. The Company anticipates that most of the current backlog will be shipped in fiscal 2009.

Liquidity and Capital Resources

Total current assets were $4,994,853, $6,024,686 and $8,718,219 at December 31, 2008, September 30, 2008 and December 31, 2007, respectively. The decrease of approximately $3,723,000 from December to December is due primarily to the decrease in cash and cash equivalents, accounts receivable, deferred income taxes and prepaid expenses of approximately $2,579,000, $999,000, $251,000 and $38,000 respectively, offset in part by an increase in inventories of approximately $144,000. The decrease from September 30, 2008 to December 31, 2008 is due primarily to the decrease in cash and cash equivalents, accounts receivable and inventories of $745,000, $318,000 and $30,000 respectively, offset in part by the increase in  prepaid expenses of approximately $70,000. The decreases are due primarily to a decreased sales volume in December 2008 and decreased inventory purchasing volume during the current quarter.

Working capital as of December 31, 2008 amounted to $4,483,062 as compared with $7,856,399 a year earlier. Current assets were 9.8 times current liabilities and total cash and cash equivalents and receivables were 3.5 times current liabilities. These ratios compare to 10.1 and 6.2, respectively, at December 31, 2007.

Internally generated funds during the three months ended December 31, 2008 were a negative $740,572. Capital expenditures during the period were $4,604. The primary reason for the negative cash flow from operations was the net loss and the decrease in trade accounts payable during the current quarter. The Company believes that cash and cash equivalents, together with funds anticipated to be generated by operations and funds available under its credit agreement will provide the liquidity necessary to support its current and anticipated capital expenditures through the end of fiscal 2009.

Shareholders' equity during the three months ended December 31, 2008 decreased by $1,141,231 which was the net loss during the period of $1,145,353 and $4,122 of share-based compensation expense.

Critical Accounting Policies

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 and the automotive industry, (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, fastening systems 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.

Item 4T. Controls and Procedures.

As of December 31, 2008, an evaluation was performed, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer along with the Company's Senior Vice President, Finance and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the Company's management, including the Chief Executive Officer along with the Company's Senior Vice President, Finance and Chief Financial Officer, concluded that the Company's disclosure controls and procedures were effective as of December 31, 2008 in ensuring that information required to be disclosed by the Company in the reports it files and submits under the Exchange Act is (1) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (2) is accumulated and communicated to the Company's management, including its principal executive and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. There were no changes in the Company's internal controls over financial reporting during the first fiscal quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no material developments in legal proceedings since the filing of Form 10-KSB for fiscal 2008.

Item 6. Exhibits.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.