UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2008
Commission File Number I-4383
ESPEY MFG. & ELECTRONICS CORP.
------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 14-1387171
-------- ----------
(State of incorporation) (I.R.S. Employer's Identification No.)
233 Ballston Avenue, Saratoga Springs, New York 12866
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(Address of principal executive offices)
Registrant's telephone number, including area code 518-584-4100
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No [ ]
Indicate by check mark whether the registrant is an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of
"large accelerated filer," "accelerated filer" and "smaller reporting company"
in Rule 12b-2 of the Exchange Act.
Large accelerated filer |_| Accelerated filer |_|
Non-accelerated filer |_| Smaller reporting company |X|
Indicated by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 13, 2008
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Common stock, $.33-1/3 par value 2,325,353 shares
ESPEY MFG. & ELECTRONICS CORP.
Quarterly Report on Form 10-Q
I N D E X
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Balance Sheets -
September 30, 2008 (Unaudited) and June 30, 2008 1
Statements of Income (Unaudited) -
Three Months Ended September 30, 2008 and 2007 3
Statements of Cash Flows (Unaudited)-
Three Months Ended September 30, 2008 and 2007 4
Notes to Financial Statements (Unaudited) 5
Item 2 Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market Risk 11
Item 4 Controls and Procedures 11
PART II OTHER INFORMATION AND SIGNATURES 12
Item 1 Legal Proceedings 12
Item 2 Unregistered Sales of Equity Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits 12
SIGNATURES 13
PART I: FINANCIAL INFORMATION
-----------------------------
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
September 30, 2008 (Unaudited) and June 30, 2008
2008 2008
September 30, June 30,
------------- --------
ASSETS:
Cash and cash equivalents $ 4,240,259 $ 6,851,753
Short term investments 9,466,000 7,336,000
Trade accounts receivable, net 4,284,555 3,646,127
Income tax receivable 502,244 276,087
Other receivables 2,874 4,348
ESOP receivable due to dividends on unallocated shares -- 36,809
Inventories:
Raw materials 1,556,332 1,575,116
Work-in-process 976,038 1,151,332
Costs relating to contracts in process, net of advance
payments of $968,648 at September 30, 2008 and
$959,175 at June 30, 2008 8,343,542 7,461,786
----------- -----------
Total inventories 10,875,912 10,188,234
Deferred income taxes 166,898 169,853
Prepaid expenses and other current assets 291,197 355,688
----------- -----------
Total current assets 29,829,939 28,864,899
----------- -----------
Property, plant and equipment, net 2,955,478 2,956,590
Loan receivable 58,494 65,003
----------- -----------
Total assets $32,843,911 $31,886,492
=========== ===========
See accompanying notes to the financial statements. (Continued)
1
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
September 30, 2008 (Unaudited) and June 30, 2008
2008 2008
September 30, June 30,
------------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 1,531,034 $ 600,931
Accrued expenses:
Salaries, wages and commissions 254,654 184,377
Vacation 481,018 542,441
ESOP payable 30,984 --
Other 36,793 46,253
Payroll and other taxes withheld and accrued 49,015 42,175
------------ ------------
Total current liabilities 2,383,498 1,416,177
------------ ------------
Deferred income taxes 123,568 132,578
------------ ------------
Total liabilities 2,507,066 1,548,755
------------ ------------
Common stock, par value $.33-1/3 per share.
Authorized 10,000,000 shares; issued 3,029,874 shares
on September 30, 2008 and June 30, 2008. Outstanding
2,327,358 and 2,325,902 (includes 219,167 and
225,000 Unearned ESOP Shares on September 30, 2008
and June 30, 2008, respectively) 1,009,958 1,009,958
Capital in excess of par value 13,568,187 13,476,609
Retained earnings 25,721,621 25,796,703
------------ ------------
40,299,766 40,283,270
Less: Unearned ESOP shares (3,251,248) (3,251,248)
Treasury shares, cost of 702,516 shares on September
30, 2008 and 703,972 shares on June 30, 2008 (6,711,673) (6,694,285)
------------ ------------
Total stockholders' equity 30,336,845 30,337,737
------------ ------------
Total liabilities and stockholders' equity $ 32,843,911 $ 31,886,492
============ ============
See accompanying notes to the financial statements.
2
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three Months Ended September 30, 2008 and 2007
Three Months
September 30, September 30,
2008 2007
------------------------------
Net sales $ 6,053,519 $ 6,301,786
Cost of sales 4,902,244 4,952,676
------------ ------------
Gross profit 1,151,275 1,349,110
Selling, general and administrative expenses 678,227 667,553
------------ ------------
Operating income (expense) 473,048 681,557
------------ ------------
Other income (expense)
Interest and dividend income 102,915 196,121
Other 11,241 19,485
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114,156 215,606
------------ ------------
Income before income taxes 587,204 897,163
Provision for income taxes 188,908 305,580
------------ ------------
Net income $ 398,296 $ 591,583
============ ============
Net income per share:
Basic $ 0.19 $ 0.29
Diluted $ 0.19 $ 0.28
------------ ------------
Weighted average number of shares outstanding:
Basic 2,102,306 2,065,879
Diluted 2,116,039 2,103,746
------------ ------------
Dividends per share: $ 0.2250 $ 0.1750
============ ============
See accompanying notes to the financial statements.
3
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 2008 and 2007
September 30,
2008 2007
------------ -------------
Cash Flows From Operating Activities:
Net income $ 398,296 $ 591,583
Adjustments to reconcile net income to net
cash provided by operating activities:
Excess tax benefits from share-based compensation 30,245 53,725
Stock-based compensation 29,083 50,840
Depreciation 124,325 123,657
ESOP compensation expense 118,418 134,247
Loss on disposal of assets 2,542 1,526
Deferred income tax (6,055) (14,229)
Changes in assets and liabilities:
Increase in trade receivable, net (638,428) (335,763)
Increase in income taxes receivables (226,157) (64,358)
Decrease (increase) in other receivables 1,474 (2,486)
Decrease in ESOP receivable due to dividends on unallocated shares 36,809 --
(Increase) decrease in inventories (687,678) 624,150
Decrease in prepaid expenses and other current assets 64,491 143,504
Increase (decrease) in accounts payable 930,103 (432,144)
Increase in accrued salaries, wages and commissions 70,277 25,191
Decrease in vacation accrual (61,423) (91,239)
Decrease in ESOP payable (87,434) (43,604)
Decrease in other accrued expenses (9,460) (114)
Increase in payroll and other taxes withheld and accrued 6,840 22,688
Decrease in income taxes payable (30,245) (253,668)
------------ -------------
Net cash provided by operating activities 66,023 533,506
------------ -------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (125,755) (72,359)
Proceeds from loan receivable 6,509 --
Purchase of short term investments (4,242,000) (864,000)
Maturity of short term investments 2,112,000 864,000
------------ -------------
Net cash used in investing activities (2,249,246) (72,359)
------------ -------------
Cash Flows From Financing Activities:
Dividends on common stock (473,378) (360,147)
Purchase of treasury stock (52,038) (370,857)
Proceeds from exercise of stock options 66,900 156,100
Excess tax benefits from share-based compensation 30,245 53,725
------------ -------------
Net cash used in financing activities (428,271) (521,179)
------------ -------------
Decrease in cash and cash equivalents (2,611,494) (60,032)
Cash and cash equivalents, beginning of period 6,851,753 11,096,111
------------ -------------
Cash and cash equivalents, end of period $ 4,240,259 $ 11,036,079
============ =============
Supplemental disclosures of cash flow information:
Income Taxes Paid $ 400,000 $ 540,000
============ =============
See accompanying notes to the financial statements.
4
ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements (Unaudited)
-----------------------------------------
Note 1. Basis of Presentation
In the opinion of management the accompanying unaudited financial statements
contain all adjustments (consisting of only normal recurring adjustments)
necessary for a fair presentation of the results for such periods. The results
for any interim period are not necessarily indicative of the results to be
expected for the full fiscal year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with United
States generally accepted accounting principles have been condensed or omitted.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of assets and liabilities. On an ongoing basis,
we evaluate our estimates and judgments, including those related to revenue
recognition, inventories, income taxes, and stock-based compensation. Management
bases its estimates on historical experience and on various other factors that
are believed to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions. These
financial statements should be read in conjunction with the Company's most
recent audited financial statements included in its report on Form 10-KSB for
the year ended June 30, 2008.
Note 2. Net Income per Share
Basic net income per share excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the income of the Company. As
Unearned ESOP shares are released or committed-to-be-released the shares become
outstanding for earnings-per-share computations.
Note 3. Stock Based Compensation
Effective July 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (Revised 2004),"Share-Based Payment" ("SFAS No. 123 (R)"),
which amends SFAS No. 123 and supersedes Accounting Principles Board Opinion
("APB") No. 25 in establishing standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services, as well
as transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that maybe settled by the issuance of those equity instruments. SFAS No. 123(R)
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements based on the fair value of the
share-based payment. SFAS No.123(R) establishes fair value as the measurement
objective in accounting for share-based payment transactions with employees,
except for equity instruments held by employee share ownership plans. As allowed
under SFAS No. 123(R), the Company elected the modified prospective method of
adoption, under which compensation cost is recognized in the financial
statements beginning with the effective date of SFAS No. 123(R) for all
share-based payments granted after that date, and for all unvested awards
granted prior to the effective date of SFAS No. 123(R). Accordingly, prior
period amounts have not been restated.
Total stock-based compensation expense recognized in the Statement of Income for
the three months ended September 30, 2008 and 2007, was $29,083 and $50,840,
respectively, before income taxes. The related total deferred tax benefit was
approximately $2,477 and $4,017, for the three months ended September 30, 2008
and 2007, respectively. Prior to the adoption of SFAS No. 123(R), the Company
presented all tax benefits for deductions resulting from the exercise of stock
options as operating cash flows in the Statements of Cash Flows. SFAS No. 123(R)
requires the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options to be classified and reported as
both an operating cash outflow and a financing cash inflow on a prospective
basis upon adoption.
As of September 30, 2008, there was approximately $118,984 of unrecognized
compensation cost related to stock option awards that is expected to be
recognized as expense over a period of 1.75 years.
The Company has one employee stock option plan under which options may be
granted, the 2007 Stock Option and Restricted Stock Plan (the "2007 Plan"). The
Board of Directors may grant options to acquire shares of common
5
stock to employees of the Company at the fair market value of the common stock
on the date of grant. Generally, options granted have a two-year vesting period
based on two years of continuous service and have a ten-year contractual life.
Option grants provide for accelerated vesting if there is a change in control.
Shares issued upon the exercise of options are from those held in Treasury. The
2007 Plan was approved by the Company's shareholders at the Company's Annual
Meeting on November 30, 2007 and supercedes the Company's 2000 Stock Option Plan
(the "2000 Plan"). Options covering 400,000 shares are authorized for issuance
under the 2007 Plan, of which 34,400 have been granted as of September 30, 2008.
While no further grants of options may be made under the 2000 Plan, as of
September 30, 2008, 87,900 options were outstanding of which 53,900 are vested
and exercisable.
SFAS No. 123(R) requires the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the Black-Scholes
option valuation model, which incorporates various assumptions including those
for volatility, expected life and interest rates.
The table below outlines the weighted average assumptions that the Company used
to calculate stock-based employee compensation for the three months ended:
September 30, 2008 September 30,2007
------------------- -----------------
Dividend yield 3.34 % 2.4%
Expected stock price volatility 24.41 % 22.29%
Risk-free interest rate 3.91 % 4.54%
Expected option life (in years) 4 yrs 5 yrs
Weighted average fair value per share of options
granted during the period $3.594 $4.04
The Company pays dividends quarterly and does plan to pay dividends in the
foreseeable future. Expected stock price volatility is based on the historical
volatility of the Company's stock. The risk-free interest rate is based on the
implied yield available on U.S. Treasury issues with an equivalent term
approximating the expected life of the options. The expected option life (in
years) represents the estimated period of time until exercise and is based on
the safe harbor calculation under SFAS No. 123.
The following table summarizes stock option activity during the three months
ended September 30, 2008:
Employee Stock Options Plan
----------------------------------------------
Weighted
Number of Weighted Average
Shares Average Remaining
Subject Exercise Contractual
To Option Price Term
----------------------------------------------
Balance at July 1, 2008 126,500 $18.40 8.10
Granted --
Exercised (4,200) $15.93
Forfeited or expired --
----------------------------------------------
Balance September 30, 2008 122,300 $18.49 8.14
==============================================
Exercisable at September 30, 2008 53,900 $16.66 7.02
==============================================
The intrinsic value of stock options exercised was $18,495 and $144,447, during
the three months ended September 30, 2008 and 2007, respectively. The intrinsic
value of stock options outstanding and exercisable as of September 30, 2008 and
2007 was $90,945 and $239,585, respectively.
Note 4. Commitments and Contingencies
The Company at certain times enters into standby letters of credit agreements
with financial institutions primarily relating to the guarantee of future
performance on certain contracts. Contingent liabilities on outstanding standby
letters of credit agreements aggregated to zero at September 30, 2008. As a
government contractor, the Company is continually subject to audit by various
agencies of the U.S. Government to determine compliance with various procurement
laws and regulations. As a result of such audits and as part of normal business
operations of the Company, various claims and charges can be asserted against
the Company. It is not possible to predict the outcome of such actions.
Currently the Company has no claims or assertions pending or threatened against
it.
6
Note 5. Recently Issued Accounting Standards
In May 2008, the FASB issued Statement of Financial Accounting Standard No. 162
("SFAS 162"), The Hierarchy of Generally Accepted Accounting Principals. SFAS
162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with generally
accepted accounting principles (GAAP) in the United States. SFAS 162 is
effective 60 days following the SEC's approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles. SFAS 162 does not have
a material effect on the company's financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standard No.
159 ("SFAS 159"), The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS 159 provides companies with an option to report selected
financial assets and financial liabilities at fair value. Unrealized gains and
losses on items for which the fair value option has been elected are reported in
earnings at each subsequent reporting date. SFAS 159 is effective beginning July
1, 2008. The adoption of the provisions of SFAS 159 did not have a material
effect on the Company's financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standard
No. 157 ("SFAS 157"), Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 applies to other accounting pronouncements
that require or permit fair value measurements, but does not require any new
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those years. SFAS 157 did not have a material effect on the Company's financial
statements.
In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), Accounting for
Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109, which
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. In particular, this interpretation requires uncertain tax
positions to be recognized only if they are "more-likely-than-not" to be upheld
based on their technical merits. Additionally, the measurement of the tax
position will be based on the largest amount that is determined to have greater
than a 50% likelihood of realization upon ultimate settlement. Any resulting
cumulative effect of applying the provisions of FIN 48 upon adoption would be
reported as an adjustment to the beginning balance of retained earnings in the
period of adoption. FIN 48 was effective beginning July 1, 2007. The adoption of
FIN 48 did not have a material effect on the Company's financial statements.
Note 6. Employee Stock Ownership Plan
The Company sponsors a leveraged employee stock ownership plan (the "ESOP") that
covers all nonunion employees who work 1,000 or more hours per year and are
employed on June 30.
The Company makes annual contributions to the ESOP equal to the ESOP's debt
service less dividends on unallocated shares received by the ESOP. All dividends
on unallocated shares received by the ESOP are used to pay debt service.
Dividends on allocated ESOP shares are recorded as a reduction of retained
earnings. As the debt is repaid, shares are released and allocated to active
employees, based on the proportion of debt service paid in the year. The Company
accounts for its ESOP in accordance with Statement of Position 93-6.
Accordingly, the shares purchased by the ESOP are reported as Unearned ESOP
Shares in the statement of financial position. As shares are released or
committed-to-be-released, the Company reports compensation expense equal to the
current average market price of the shares, and the shares become outstanding
for earnings-per-share (EPS) computations ESOP compensation expense was $118,418
for the quarter ended September 30, 2008. The ESOP shares as of September 30,
2008 were as follows:
Allocated Shares 442,886
Committed-to-be-released shares 5,833
Unreleased shares 219,167
-----------
Total shares held by the ESOP 667,886
===========
Fair value of unreleased shares at September 30, 2008 $ 4,021,714
===========
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Espey Mfg. & Electronics Corp. (the "Company") located in Saratoga Springs, New
York, is engaged principally in the development, design, production and sale of
specialized electronic power supplies, a wide variety of transformers and other
types of iron-core components, and electronic system components. In some cases,
the Company manufactures such products in accordance with pre-developed
mechanical and electrical requirements ("build to print"). In other cases, the
Company is responsible for both the overall design and manufacture of the
product. The Company does not generally manufacture standardized components and
does not have a product line. The products manufactured by the Company find
application principally in (i) shipboard and land based radar, (ii) locomotives,
(iii) aircraft, (iv) short and medium range communication systems, (v)
navigation systems, and (vi) land-based military vehicles.
Business is solicited from large industrial manufacturers and defense companies,
the government of the United States, foreign governments and major foreign
electronic equipment companies. In certain countries the Company has external
sales representatives to help solicit and coordinate foreign contracts. The
Company is also on the eligible list of contractors of agencies of the United
States Department of Defense and generally is automatically solicited by such
agencies for procurement needs falling within the major classes of products
produced by the Company. In addition, the Company directly solicits bids from
the United States Department of Defense for prime contracts.
There is competition in all classes of products manufactured by the Company from
divisions of the largest electronic companies, as well as many small companies.
The Company's sales do not represent a significant share of the industry's
market for any class of its products. The principal methods of competition for
electronic products of both a military and industrial nature include, among
other factors, price, product performance, the experience of the particular
company and history of its dealings in such products. The Company, as well as
other companies engaged in supplying equipment for military use, is subject to
various risks, including, without limitation, dependence on United States and
foreign government appropriations and program allocations, the competition for
available military business, and government termination of orders for
convenience.
In the first three months of fiscal 2009, the Company received approximately
$5.5 million in new orders. These orders include both follow-on production
quantities for mature products and engineering development orders which will
enable the Company to utilize its engineering expertise in developing new
customer specific products. Some of these products, once developed, will be
produced in the Company's manufacturing facility and are expected to provide
large production order quantities over several years. These orders are in line
with the Company's strategy of getting involved in long-term high quantity
military and industrial products. The Company's backlog was $44.2 million at
September 30, 2008 and is $42.7 million at November 10, 2008, which includes
$26.8 million from two significant customers.
The sales backlog gives the Company a solid base of future sales. Based upon the
backlog and the anticipated schedule for the fulfillment of orders, management
expects sales for fiscal 2009 to be higher than fiscal 2008 sales. In addition
to the backlog, the Company currently has outstanding quotations and potential
business representing approximately $48.2 million in the aggregate for both
repeat and new programs.
Sales to two significant customers in the first three months of fiscal 2009 and
2008 represented 71.8% and 56.9%, respectively, of the Company's total sales.
While the Company has always had a small number of customers that account for a
large percentage of its total sales in any given year, management is pursuing
business opportunities involving significant product programs with new and
current customers with an overall objective of lowering the concentration of
sales and minimizing the impact of a significant customer or excessive reliance
upon a single major product program of a particular customer.
The outstanding quotations encompass various new and previously manufactured
power supplies, transformers, and subassemblies. However, there can be no
assurance that the Company will acquire any or all of the anticipated orders
described above, many of which are subject to allocations of the United States
defense spending and factors affecting the defense industry and military
procurement generally.
8
The total backlog for the Company of $44.2 million at September 30, 2008, up
$10.1 million from September 30, 2007, and down $0.6 million from June 30, 2008,
represents the estimated remaining sales value of work to be performed under
firm contracts. These contracts include significant orders for military and
industrial power supplies, and contracts to manufacture certain customer
products in accordance with pre-engineered requirements.
Management, along with the Board of Directors, continues to evaluate the need
and use of the Company's working capital. Expectations are that the working
capital will be required to fund any increase in orders over the next several
quarters, dividend payments, and general operations of the business. Also, the
Mergers and Acquisitions Committee of the Board of Directors continues to
evaluate potential strategic options on a periodic basis.
Critical Accounting Policies and Estimates
Management believes our most critical accounting policies include revenue
recognition and estimates to completion.
A significant portion of our business is comprised of development and production
contracts. Generally, revenues on long-term fixed-price contracts are recorded
on a percentage of completion basis using units of delivery as the measurement
basis for progress toward completion.
Percentage of completion accounting requires judgment relative to expected
sales, estimating costs and making assumptions related to technical issues and
delivery schedule. Contract costs include material, subcontract costs, labor and
an allocation of overhead costs. The estimation of cost at completion of a
contract is subject to numerous variables involving contract costs and estimates
as to the length of time to complete the contract. Given the significance of the
estimation processes and judgments described above, it is possible that
materially different amounts of expected sales and contract costs could be
recorded if different assumptions were used, based on changes in circumstances,
in the estimation process. When a change in expected sales value or estimated
cost is determined, changes are reflected in current period earnings.
Results of Operations
Net sales for the three months ended September 30, 2008 were $6,053,519 as
compared to $6,301,786 for the same period in 2007, representing a 3.9%
decrease. Generally, these decreases can be attributed to the contract specific
nature of the Company's business. Net sales to two customers represented 72% of
total sales for the quarter. New orders received in the first three months of
fiscal 2009 were approximately $5.5 million, representing a 31.8% increase over
the amount of new orders received in the first three months of fiscal 2008.
For the three months ended September 30, 2008 and 2007 gross profits were
$1,151,275 and $1,349,110, respectively. Gross profit as a percentage of sales
was 19.0% and 21.4%, for the three months ended September 30, 2008 and 2007,
respectively. The primary factor in determining gross profit and net income is
product mix. The gross profits on mature products and build to print contracts
are higher as compared to products which are still in the engineering
development stage or in the early stages of production. In any given accounting
period the mix of product shipments between higher margin mature programs and
less mature programs, including loss contracts, has a significant impact on
gross profit and net income. The decreased gross profit and gross profit
percentage in the three months ended September 30, 2008, was the result of
shipping mature products with favorable margins, offset by losses incurred on
contracts with significant engineering time required for design efforts.
Management continues to evaluate the Company's workforce to ensure that
production and overall execution of the backlog orders and additional
anticipated orders are successfully obtained and executed. Employment of full
time equivalents at September 30, 2008 was 169 compared to 182 people at
September 30, 2007.
Selling, general and administrative expenses were consistent with the comparable
period one year earlier, $678,227 for the three months ended September 30, 2008;
an increase of $10,674, compared to the three months ended September 30, 2007.
Other income for three months ended September 30, 2008 decreased as compared to
the three months ended September 30, 2007 due to decreased interest income on
the Company's cash and cash equivalents and short-term investments. The Company
does not believe that there is a significant risk associated with its investment
policy, since at September 30, 2008 all of the investments were primarily
represented by short-term liquid investments including certificates of deposit
and money market funds.
9
The effective income tax rate at September 30, 2008 and 2007 was 32.2% and
34.1%, respectively. The effective tax rate is less than the statutory tax rate
mainly due to the benefit the Company receives on its Qualified Production
Activities and the benefit derived from the ESOP dividends paid on allocated
shares.
Net income for the three months ended September 30, 2008, was $398,296 or $.19
per share, both basic and diluted, compared to $591,583 or $.29 and $.28 per
share, basic and diluted, respectively, for the three months ended September 30,
2007. The decrease in net income per share was mainly due to lower gross profit
as a percentage of sales and decreased interest income.
Liquidity and Capital Resources
The Company's working capital is an appropriate indicator of the liquidity of
its business, and during the past three fiscal years, the Company, when
possible, has funded all of its operations with cash flows resulting from
operating activities and when necessary from its existing cash and investments.
The Company did not borrow any funds during the last three fiscal years.
Management had available a $3,000,000 line of credit to help fund further growth
or working capital needs, but did not anticipate the need for any borrowed funds
in the foreseeable future and therefore did not renew the line of credit which
expired November 30, 2007.
The Company's working capital as of September 30, 2008 was approximately $27.4
million. During the three months ended September 30, 2008 and 2007 the Company
repurchased 2,744 and 16,743 shares, respectively, of its common stock from the
Company's Employee Retirement Plan and Trust ("ESOP"), for a total purchase
price of $52,038 and $370,857, respectively. Under existing authorizations from
the Company's Board of Directors, as of September 30, 2008, management is
authorized to purchase an additional $1,947,961 million of Company stock.
Three Months Ended September 30,
2008 2007
------------ -----------
Net cash provided by operating activities $ 66,023 $ 533,506
Net cash used in investing activities (2,249,246) (72,359)
Net cash used in financing activities (428,271) (521,179)
Net cash provided by operating activities fluctuates between periods primarily
as a result of differences in net income, the timing of the collection of
accounts receivable, purchase of inventory, level of sales and payment of
accounts payable. Net cash used in investing activities increased in the first
three months of fiscal 2009 due to the increase in purchases of short-term
investments. The decrease in cash used in financing activities is due primarily
to the decrease in purchases of treasury stock.
The Company currently believes that the cash flow generated from operations and
when necessary, from cash and cash equivalents, will be sufficient to meet its
long-term funding requirements for the foreseeable future.
During the three months ended September 30, 2008 and 2007, the Company expended
$125,755 and $72,359, respectively, for plant improvements and new equipment.
The Company has budgeted approximately $350,000 for new equipment and plant
improvements in fiscal 2009. Management anticipates that the funds required will
be available from current operations.
The Company at certain times enters into standby letters of credit agreements
with financial institutions primarily relating to the guarantee of future
performance on certain contracts. Contingent liabilities on outstanding standby
letters of credit agreements aggregated to zero at September 30, 2008.
10
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The terms "believe,"
"anticipate," "intend," "goal," "expect," and similar expressions may identify
forward-looking statements. These forward-looking statements represent the
Company's current expectations or beliefs concerning future events. The matters
covered by these statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those set forth in the
forward-looking statements, including the Company's dependence on timely
development, introduction and customer acceptance of new products, the impact of
competition and price erosion, supply and manufacturing constraints, potential
new orders from customers and other risks and uncertainties. The foregoing list
should not be construed as exhaustive, and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is a smaller reporting company as defined under Securities and
Exchange Commission Rule 12b-2. Pursuant to the exemption available to smaller
reporting company issuers under Item 305 of Regulation S-K, quantitative and
qualitative disclosures about market risk, the Company is not required to
provide the information for this item.
Item 4T. Controls and Procedures
(a) The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, carried out an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end
of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, our chief executive officer and chief financial officer have
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
(b) There have been no changes in our internal controls over financial reporting
during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
11
PART II: Other Information and Signatures
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) None
(c) Securities Repurchased
Purchases of Equity Securities
Total Number Maximum Number
of Shares (or Approximate
Purchased Dollar Value)
as Part of of Shares
Total Average Publicly that May Yet
Number Price Announced Be Purchased
of Shares Paid Plan or Under the Plan
Period Purchased per Share Program or Program (1)
-------------------------------------------------------------------------------------
September 1 to
September 30, 2008 2,744 $18.96 2,744 $1,947,961
(1) Pursuant to a prior Board of Directors authorization, as of
September 30, 2008 the Company can repurchase up to $1,947,961 of
its common stock pursuant to an ongoing plan.
Item 3 Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Rules
13a-14(a) and 15d-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification of the Principal Financial Officer pursuant to
Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Principal Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
12
S I G N A T U R E S
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESPEY MFG. & ELECTRONICS CORP.
/s/ Howard Pinsley
------------------------------
Howard Pinsley, President and
Chief Executive Officer
/s/ David O'Neil
----------------------------
David O'Neil, Treasurer and
Principal Financial Officer
November 13, 2008
-----------------
Date
13