CRAWFORD UNITED Corp - Quarter Report: 2010 March (Form 10-Q)

Item 1. Financial Statements.

See Notes to Consolidated Financial Statements

Note: Amounts derived from audited financial statements previously filed with the Securities and Exchange Commission.

See Notes to Consolidated Financial Statements

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 and six month periods ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ended September 30, 2010. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended September 30, 2009.

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 $532,790, $455,000 and $262,254 for the periods ended March 31, 2010, September 30, 2009 and March 31, 2009 respectively.

3. Short-term Financing

The Company had a credit agreement with its financial lender that was rescinded on December 17, 2009. The rescinded agreement provided for a secured revolving credit facility of $1,000,000 with interest generally equal to three percent per annum plus one month LIBOR. The agreement was set to expire in February 2010. The agreement was secured by the Company's accounts receivable, inventory, equipment and general intangibles. In addition, the credit agreement contained affirmative covenant requirements, tested on an annual basis, that required the Company to maintain a tangible net worth of $8,000,000 and a pre-tax interest coverage ratio of not less than 3.0 to 1.0 which were violated due to operating losses. The Company was unable to obtain waivers on the violated covenants from its financial lender. The Company had no outstanding borrowings under this loan facility since November 2007. The Company is currently evaluating other short-term financing alternatives.

4. Capital Stock, Treasury Stock, Contributed Capital and Stock Options

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 41,500 Class A shares were outstanding at March 31, 2010 (59,400 shares at September 30, 2009 and 61,000 shares at March 31, 2009) at prices ranging from $3.125 to $5.00 per share. Options for 17,900 shares at prices ranging from $3.125 to $5.00 per share expired during the three month period ended December 31, 2009. Options for 1,600 shares at prices ranging from $3.125 to $3.55 were canceled during the three month period ended March 31, 2009. In addition, options for 10,800 shares at a price of $7.125 expired during the three month period ended December 31, 2008. No other options were granted, exercised or canceled or expired during the three or six month periods presented under the Employee Plans. All options granted under the Employee Plans are exercisable at March 31, 2010.

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 March 31, 2010:

5. Recently Issued Accounting Pronouncements

Earnings per common share information is computed on the weighted average number of shares outstanding during each period based on the provisions of FASB Codification ASC Topic 260, "Earnings per Share." The required reconciliations are as follows:

7. Segment and Related Information

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, military 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.

Information by industry segment is set forth below:

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

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

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 $433,789 and $496,566 for the second quarter of fiscal 2010 and fiscal 2009, respectively and $741,459 and $952,156 for the first six months of fiscal 2010 and fiscal 2009, respectively. The reduced sales volume was primarily caused by lower orders for locomotive replacement items for distributor inventories due to tight credit and a slowing of business aircraft conversion activity.

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 $960,271 and $838,490 for the second quarter of fiscal 2010 and fiscal 2009, respectively, and $2,289,318 and $1,541,963 for the first six months of fiscal 2010 and fiscal 2009, respectively. The current year increase was due primarily to the completion of an order for automotive diagnostic testing equipment for an OEM.

Product sales for the quarter ended March 31, 2010 were $1,286,077 versus $1,192,941 for the quarter ended March 31, 2009. The 8% increase in product sales during the current quarter of approximately $93,000 was volume related due primarily to increased sales of automotive diagnostic products of approximately $158,000. Sales of diagnostic products to OEM's and non- emission aftermarket products increased by approximately $7,000 and $205,000 respectively. Emission products declined by approximately $54,000. In addition, indicator products decreased by approximately $65,000. Management continues to be concerned about the current economic conditions in the markets the Company serves and anticipates product sales for the third and fourth quarter of fiscal 2010 to increase moderately above the sales levels from the second quarter. Management instituted cost cutting measures in two stages in fiscal 2009. Fiscal 2010 second quarter benefited from the January and April fiscal 2009 cost cutting measures while fiscal 2009 second quarter benefited from only the January cost cutting measures.

Cost of product sold in the second quarter of fiscal 2010 was $797,113 (62.0% of product sales) as compared to $866,161 (72.6% of product sales) in the second quarter of fiscal 2009. The dollar and percentage decrease in the cost of product sold was due primarily to the continuation of the cost cutting measures and wage reductions implemented in fiscal 2009. The current cost of product sold percentage is expected to decrease slightly for the balance of the fiscal year due to the continuation of the cost cutting measures and wage reductions implemented in fiscal 2009 and a change in product mix. For the quarter ended March 31, 2010 the Company achieved the savings that were anticipated from the cost cutting measures implemented in fiscal 2009.

Cost of service sold in the second quarter of fiscal 2010 was $68,701 (63.6% of service sales) as compared to $99,255 (69.8% of service sales) in the second quarter of fiscal 2009. The dollar and percentage decrease was due primarily to the continuation of the cost cutting measures and wage reductions implemented in fiscal 2009. The current cost of services sold percentage is anticipated to continue for the balance of the fiscal year due to price adjustments and the cost cutting measures. For the quarter ended March 31, 2010 the Company achieved the savings that were anticipated from the cost cutting measures implemented in January 2009.

Product development expenses were $283,439 in the second quarter of fiscal 2010 (22.0% of product sales) as compared to $337,574 (28.3% of product sales) in the second quarter of fiscal 2009. The dollar and percentage decrease was due primarily to decreased labor costs of approximately $52,000. The current level of product development expenses is expected to continue for the balance of the fiscal year due to the continuation of the cost cutting measures and wage reductions implemented in fiscal 2009. For the quarter ended March 31, 2010 the Company achieved the savings that were anticipated from the cost cutting measures implemented in fiscal 2009. Management believes the current resources will be sufficient to maintain current product development commitments and continue to develop some new products for both OEM and Aftermarket customers.

Marketing and administrative expenses were $585,072 (42.0% of total sales) in the second quarter of 2010 versus $640,840 (48.0% of total sales) for the same period a year ago. The dollar and percentage decrease was due primarily to the continuation of the cost cutting measures and wage reductions implemented in fiscal 2009. Marketing expenses were approximately $276,000 in the second quarter of fiscal 2010 versus $335,000 for the same period a year ago. Within marketing expenses, labor costs, travel expense, advertising expense, promotion expense and credit and collection expense decreased by approximately $68,000, $10,000, $12,000, 5,000 and $2,000 respectively. These decreases were offset in part by an increase in outside consulting expenses, commissions, industry association dues and royalty expenses of approximately $31,000 and $5,000, $4,000 and $3,000 respectively. Administrative expenses were approximately $309,000 in the second quarter of fiscal 2010 versus $306,000 for the same period a year ago. The current quarter benefited from a decrease in labor costs of approximately $4,000 offset by an increase in professional fees of $6,000. The current level of administrative expenses is expected to continue at current levels and marketing expenses are expected to decrease slightly for the remainder of the fiscal year due to the continuation of the cost cutting measures and wage reductions implemented in fiscal 2009. For the quarter ended March 31, 2010 the Company achieved the savings that were anticipated from the cost cutting measures implemented in fiscal 2009.

Interest expense was $0 in the second quarter of fiscal 2010 which compares with $948 in the second quarter of fiscal 2009. The credit facility was rescinded in December 2009 with no interest charges on an unused portion during the second quarter of fiscal 2010. The prior year interest was an interest charge on the $1,000,000 unused credit facility. The current level of interest expense is expected to continue for the third and fourth quarters of the year.

Other income was $4,723 in the second quarter of fiscal 2010 which compares with $9,669 in the second quarter of fiscal 2009. 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 interest rate earned on cash available for investment during the current period.

Income taxes in the second quarter of fiscal 2010 was $0 which compares with income taxes of $1,645,200 in the second quarter of fiscal 2009. In the second quarter of fiscal 2010 a recovery of income taxes was calculated at an effective tax rate of 37% offset by an increase in the valuation allowance netting to $0. During the second quarter of fiscal 2009 management recorded a valuation allowance on the entire balance of deferred tax assets in the amount of $1,645,200 due to continued losses, the current economic uncertainties, the negative effects of the current economic crisis on all of the Company's markets and concern that a more likely than not expiration of the Company's net operating loss and research and development credit carryforwards could occur before they can be used.

The net loss in the second quarter of fiscal 2010 was $335,542 which compares with a net loss of $2,245,253 in the second quarter of fiscal 2009. The net loss for the prior year quarter was primarily the result of the increase in the valuation allowance of $1,645,200 and a lower sales volume.

Unshipped customer orders as of March 31, 2010 were $519,000 versus $755,000 at March 31, 2009. The decrease was due to decreased orders in automotive diagnostic products of approximately $115,000, specifically, $8,000 for diagnostic products to the aftermarket which includes emissions products and a decrease in orders for automotive diagnostic products to automotive OEM's of approximately $107,000. In addition, indicator products decreased by approximately $121,000. The Company anticipates that most of the current backlog will be shipped in the last half of fiscal 2010.

Service sales for the six months ended March 31, 2010 were $205,076 compared with $237,347 for the same period in fiscal 2009. 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 was $1,500,955 or (53.1% of product sales) compared to $1,653,348 (73.3% of product sales) for the six months ended March 31, 2009. The percentage decrease in the cost of product sold was due primarily to a higher sales volume and a change in product mix. The dollar decrease was due primarily to the continuation of the cost cutting measures and wage reductions implemented in fiscal 2009. The current cost of product sold percentage is expected to decrease slightly for the balance of the fiscal year due to product mix and the continuation of cost cutting measures and wage reductions implemented in fiscal 2009. For the six month period ended March 31, 2010 the Company achieved the savings that were anticipated from the cost cutting measures implemented in fiscal 2009.

Cost of service sold was $125,034 (61.0% of service sales) compared with $188,680 (79.5% of service sales) for the six months ended March 31, 2009. The dollar and percentage decrease was due primarily to the continuation of the cost cutting measures and wage reductions implemented in fiscal 2009. The cost of services sold percentage is expected to continue for the balance of the fiscal year due to price adjustments and the continuation of the cost cutting measures. For the six month period ended March 31, 2010 the Company achieved the savings that were anticipated from the cost cutting measures implemented in fiscal 2009.

Product development expenses were $537,897 (19.0% of product sales) compared to $788,043 (34.9% of product sales) for the six months ended March 31, 2009. The dollar and percentage decrease was due primarily to higher product sales, and the continuation of of the cost cutting measures and wage reductions implemented in fiscal 2009. During the current six month period labor costs declined by approximately $239,000. The current level of product development expenditures is expected to continue for the balance of the fiscal year due to continuation of the cost cutting measures and wage reductions implemented in fiscal 2009. For the six month period ended March 31, 2010 the Company achieved the savings that were anticipated from the cost cutting measures implemented in fiscal 2009. Management believes the current resources will be sufficient to maintain current product development commitments and continue to develop some new products for both OEM and Aftermarket customers. 

Marketing and administrative expenses were $1,149,794 for the six months ended March 31, 2010 (37.9% of total sales) versus $1,431,817 (57.4% of total sales) for the six months ended March 31, 2009. The percentage decrease was primarily due to the higher level of total sales during the first six months of the current fiscal year. Marketing expenses were approximately $555,000 during the first six months of the current fiscal year versus $758,000 for the same period a year ago. Within marketing expenses, decreases were primarily in labor costs, advertising, travel expense, promotion expense and collection expense of approximately $227,000, $26,000, $25,000, $11,000 and $5,000 respectively. These decreases were offset in part by increases in outside consulting, commissions and royalties of approximately $60,000, $39,000, and $3,000 respectively. Administrative expenses were approximately $595,000 during the first six months of the current fiscal year versus $674,000 for the same period a year ago. The dollar decrease was due primarily to decreases in labor costs and data processing expenses of approximately $80,000 and $6,000 respectively, offset in part by an increase in professional fees of approximately $12,000. The current level of administrative expenses is expected to continue at current levels and marketing expenses are expected to decrease slightly for the remainder of the fiscal year due to the continuation of the cost cutting measures and wage reductions implemented in fiscal 2009. For the six month period ended March 31, 2010 the Company achieved the savings that were anticipated from the cost cutting measures implemented in fiscal 2009. 

Interest expense was $542 for the six months ended March 31, 2010, and $2,545 for the same period in 2009. The credit facility was rescinded in December 2009 with no interest charges on an unused portion during the second quarter of fiscal 2010. The prior year interest was an interest charge on the unused credit facility which was reduced from $2,500,000 to $1,000,000 in February 2009. The current level of interest expense is expected to continue for the third and fourth quarters of the year.

Other income of $12,612 for the six months ended March 31, 2010 compares with other income of $24,908 in the same period last year. 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 interest rate earned on cash available for investment during the current period. The current level of other income is expected to decrease for the remainder of fiscal 2010 due to a lower level of cash and cash equivalents invested in interest bearing accounts.

The net loss for the six months ended March 31, 2010 was $270,833 compared with a net loss of $3,390,606 for the six months ended March 31, 2009. The improvement was primarily due to the continuation of the cost cutting measures implemented in fiscal 2009 and a higher sales volume. The net loss for the first half of fiscal 2009 was primarily the result of the increase in the valuation allowance of $1,845,200 and a lower sales volume.

In December of 2008 management took steps to reduce non-direct product related expenses throughout the Company in response to the economic downturn and the uncertainty in the markets the Company serves. The steps included a substantial reduction in personnel, wage reductions for all personnel and expenditure restrictions in most aspects of the Company's operations. Management took additional steps in April 2009 and made additional reductions in personnel throughout the Company due to the continued decline in sales to the markets the Company serves. The expected annual cost savings of approximately $3,080,000 takes into consideration possible increases in other expenses that may occur. The savings are expected to be realized in equal amounts per month with similar impact on both future earnings and cash flows. Beginning in January 2009 through April 2009 the monthly savings were expected to be approximately $191,000 per month. Beginning in May 2009 the monthly savings were expected to be approximately $257,000 per month. Major expense categories impacted are as follows:

For the quarter and the six months ended March 31, 2010 and March 31, 2009 the Company achieved the savings that were anticipated from the cost cutting measures implemented in fiscal 2009. The cost reduction measures are expected to continue for the remainder of the fiscal year.

Total current assets were $3,912,662, $4,106,654 and $4,322,711 at March 31, 2010, September 30, 2009 and March 31, 2009, respectively. The decrease of approximately $410,000 from March to March was due primarily to the decrease in inventory of approximately $837,000 offset in part by an increase in cash and cash equivalents and accounts receivable of approximately $278,000 and $150,000 respectively. Cash and cash equivalents and accounts receivable increased due to the higher sales volume during the period. The decrease from September to March of approximately $194,000 was due primarily to the decrease in accounts receivable and inventory of approximately $435,000 and $133,000 respectively, offset in part by an increase in cash and cash equivalents and prepaid expenses of approximately $333,000 and $40,000 respectively.

Working capital as of March 31, 2010 amounted to $3,388,206 as compared with $3,795,700 a year earlier. Current assets were 7.5 times current liabilities compared to 8.2 a year ago. The quick ratio was 3.3 compared to 2.5 a year ago.

Internally generated funds during the six months ended March 31, 2010 were $351,248 and were adequate to fund the Company's primary non-operating cash requirement consisting of capital expenditures of $17,857. The primary reason for the positive cash flow from operations was the decrease in accounts receivable and inventory during the period. The Company believes that cash and cash equivalents, together with funds anticipated to be generated by operations will provide the liquidity necessary to support its current and anticipated working capital and capital expenditure requirements through the end of fiscal 2010.

Shareholders' equity during the six months ended March 31, 2010 decreased by $262,828 which was the net loss during the period of $270,833 and $8,005 of share-based compensation expense.  

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

Item 4. Controls and Procedures.

As of March 31, 2010, 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 March 31, 2010 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 second fiscal quarter ended March 31, 2010 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.

The Company is the plaintiff in a suit pursuing patent infringement against a competitor in the emissions market. Discovery and initial depositions along with an unsuccessful effort at mediation have been completed. It is not possible, at this time, to estimate the timing of subsequent actions in the matter and management believes that it is not currently possible to estimate the impact, if any, that the ultimate resolution of the patent infringement matter will have on the Company's results of operations, financial position or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders.

At the Company's Annual Meeting of Shareholders held on February 24, 2010, the following individuals were elected to the Board of Directors:

Item 6. Exhibits.

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.