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 March 31, 2009
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
(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 May 11, 2009
----- ---------------------------
Common stock, $.33-1/3 par value 2,314,803 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 -
March 31, 2009 (Unaudited) and June 30, 2008 1
Statements of Income (Unaudited) -
Three and Nine Months Ended March 31, 2009 and
2008 3
Statements of Cash Flows (Unaudited)-
Nine Months Ended March 31, 2009 and 2008 4
Notes to Financial Statements (Unaudited) 5
Item 2 Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosures About Market
Risk 12
Item 4 Controls and Procedures 12
PART II OTHER INFORMATION AND SIGNATURES 13
Item 1 Legal Proceedings 13
Item 2 Unregistered Sales of Equity Securities 13
Item 4 Submission of Matters to a Vote of Security Holders 13
Item 5 Other Information 13
Item 6 Exhibits 13
SIGNATURES 14
PART I: FINANCIAL INFORMATION
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
March 31, 2009 (Unaudited) and June 30, 2008
2009 2008
March 31, June 30,
----------- -----------
ASSETS:
Cash and cash equivalents $ 852,199 $ 6,851,753
Short term investments 7,866,000 7,336,000
Trade accounts receivable, net 4,780,648 3,646,127
Income tax receivable 142,724 276,087
Other receivables 99 4,348
ESOP receivable due to dividends on unallocated shares 199,921 36,809
Inventories:
Raw materials 1,473,070 1,575,116
Work-in-process 998,906 1,151,332
Costs relating to contracts in process, net of advance
payments of $667,623 at March 31, 2009 and
$959,175 at June 30, 2008 10,246,364 7,461,786
----------- -----------
Total inventories 12,718,340 10,188,234
Deferred income taxes 167,868 169,853
Prepaid expenses and other current assets 258,509 355,688
----------- -----------
Total current assets 26,986,308 28,864,899
----------- -----------
Property, plant and equipment, net 2,800,159 2,956,590
Loan receivable 45,331 65,003
----------- -----------
Total assets $29,831,798 $31,886,492
=========== ===========
See accompanying notes to the financial statements. (Continued)
1
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
March 31, 2009 (Unaudited) and June 30, 2008
2009 2008
March 31, June 30,
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 2,060,275 $ 600,931
Accrued expenses:
Salaries, wages and commissions 235,620 184,377
Vacation 502,229 542,441
Other 48,289 46,253
Payroll and other taxes withheld and accrued 42,665 42,175
------------ ------------
Total current liabilities 2,889,078 1,416,177
------------ ------------
Deferred income taxes 105,547 132,578
------------ ------------
Total liabilities 2,994,625 1,548,755
------------ ------------
Common stock, par value $.33-1/3 per share. Authorized 10,000,000
shares; issued 3,029,874 shares on March 31, 2009 and June 30,
2008. Outstanding 2,314,803 and 2,325,902 (includes 207,450 and
225,000 Unearned ESOP Shares on March 31, 2009 and
June 30, 2008, respectively) 1,009,958 1,009,958
Capital in excess of par value 13,651,897 13,476,609
Retained earnings 22,359,796 25,796,703
------------ ------------
37,021,651 40,283,270
Less: Unearned ESOP shares (3,251,248) (3,251,248)
Treasury shares, cost of 715,071 shares on March
31, 2009 and 703,972 shares on June 30, 2008 (6,933,230) (6,694,285)
------------ ------------
Total stockholders' equity 26,837,173 30,337,737
------------ ------------
Total liabilities and stockholders' equity $ 29,831,798 $ 31,886,492
============ ============
See accompanying notes to the financial statements.
2
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three and Nine Months Ended March 31, 2009 and 2008
Three Months Nine Months
2009 2008 2009 2008
---------------------------- ---------------------------
Net sales $ 6,709,880 $ 6,479,020 $ 18,957,576 $ 19,512,950
Cost of sales 4,977,068 4,301,589 15,447,559 14,303,824
------------ ------------ ------------ ------------
Gross profit 1,732,812 2,177,431 3,510,017 5,209,126
Selling, general and
administrative expenses 658,115 647,998 2,125,927 2,017,370
------------ ------------ ------------ ------------
Operating income 1,074,697 1,529,433 1,384,090 3,191,756
------------ ------------ ------------ ------------
Other income (expense)
Interest and dividend income 72,982 137,594 268,866 537,039
Other (2,278) 16,186 13,635 64,748
------------ ------------ ------------ ------------
70,704 153,780 282,501 601,787
------------ ------------ ------------ ------------
Income before income taxes 1,145,401 1,683,213 1,666,591 3,793,543
Provision for income taxes 364,129 584,008 529,436 1,305,669
------------ ------------ ------------ ------------
Net income $ 781,272 $ 1,099,205 $ 1,137,155 $ 2,487,874
============ ============ ============ ============
Net income per share:
Basic $ .37 $ .53 $ .54 $ 1.20
Diluted $ .37 $ .53 $ .54 $ 1.18
------------ ------------ ------------ ------------
Weighted average number of
shares outstanding:
Basic 2,113,772 2,083,659 2,107,735 2,074,743
Diluted 2,115,696 2,098,596 2,114,732 2,101,177
------------ ------------ ------------ ------------
Dividends per share: $ .2250 $ 1.7000 $ 2.1750 $ 2.0500
============ ============ ============ ============
See accompanying notes to the financial statements.
3
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows (Unaudited)
Nine Months Ended March 31, 2009 and 2008
March 31,
2009 2008
------------ ------------
Cash Flows From Operating Activities:
Net income $ 1,137,155 $ 2,487,874
Adjustments to reconcile net income to net
cash provided by operating activities:
Excess tax benefits from share-based compensation 30,245 83,471
Stock-based compensation 85,111 115,822
Depreciation 369,379 368,147
ESOP compensation expense 326,263 381,111
Gain on disposal of assets (996) (385)
Deferred income tax (25,046) (33,968)
Changes in assets and liabilities:
Increase in trade receivables, net (1,134,521) (774,588)
Decrease in income taxes receivable 133,363 --
Decrease (increase) in other receivables 4,249 (1,425)
Increase in ESOP receivable due to dividends on unallocated shares (163,112) (129,681)
(Increase) decrease in inventories (2,530,106) 587,921
Decrease in prepaid expenses and other current assets 97,179 207,242
Increase in accounts payable 1,459,344 146,956
Increase in accrued salaries, wages and commissions 51,243 20,313
Decrease in vacation accrual (40,212) (54,865)
Decrease in ESOP payable (326,263) (381,111)
Increase (decrease) in other accrued expenses 2,036 (4,061)
Increase (decrease) in payroll & other taxes withheld and accrued 490 (83)
Decrease in income taxes payable (30,245) (107,691)
------------ ------------
Net cash (used in) provided by operating activities (554,444) 2,910,999
------------ ------------
Cash Flows From Investing Activities:
Additions to property, plant & equipment (211,952) (423,131)
Payment for issuance of loan receivable -- (80,000)
Proceeds from loan receivable 19,672 6,395
Purchase of short term investments (7,318,000) (5,887,000)
Maturity of short term investments 6,788,000 3,360,000
------------ ------------
Net cash used in investing activities (722,280) (3,023,736)
------------ ------------
Cash Flows From Financing Activities:
Dividends on common stock (4,574,062) (4,263,849)
Purchase of treasury stock (311,545) (716,363)
Proceeds from exercise of stock options 132,532 502,147
Excess tax benefits from share-based compensation 30,245 83,471
------------ ------------
Net cash used in financing activities (4,722,830) (4,394,594)
------------ ------------
Decrease in cash and cash equivalents (5,999,554) (4,507,331)
Cash and cash equivalents, beginning of period 6,851,753 11,096,111
------------ ------------
Cash and cash equivalents, end of period 852,199 6,588,780
============ ============
Supplemental disclosures of cash flow information:
Income Taxes Paid $ 400,000 $ 1,290,000
============ ============
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 may be 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 March 31, 2009 and 2008, was $26,945 and $32,491,
respectively, before income taxes. The related total deferred tax benefit was
approximately $2,399 and $2,487, for the three months ended March 31, 2009 and
2008, respectively. Total stock-based compensation expense recognized in the
Statement of Income for the nine months ended March 31, 2009 and 2008, was
$85,111 and $115,822, respectively, before income taxes. The related total
deferred tax benefit was approximately $7,353 and $8,991, for the nine months
ended March 31, 2009 and 2008, 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.
5
As of March 31, 2009, there was approximately $140,854 of unrecognized
compensation cost related to stock option awards that is expected to be
recognized as expense over a period of 2.0 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 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 65,700 have been granted and are outstanding as of March
31, 2009. While no further grants of options may be made under the 2000 Plan, as
of March 31, 2009, 80,900 options were outstanding, 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 and nine months
ended March 31, 2009 and 2008:
Three Months Ended Nine Months Ended
March 31, March 31,
2009 2008 2009 2008
-------------------- ---------------------
Dividend yield 3.93% 2.59% 3.93% 2.40%
Expected stock price volatility 26.55% 20.50% 26.55% 22.29%
Risk-free interest rate 3.26% 4.80% 3.26% 4.54%
Expected option life (in years) 4.1 yrs 5 yrs 4.1 yrs 5 yrs
Weighted average fair value per share of
options granted during the period $3.341 $3.655 $3.341 $3.838
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 nine months
ended March 31, 2009:
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 7.61
Granted 31,800 $17.09 9.89
Exercised (8,800) $15.06 --
Forfeited or expired (2,900) $18.46 --
----------------------------------------
Balance at March 31, 2009 146,600 $18.32 8.18
========================================
Exercisable at March 31, 2009 80,900 $17.45 7.10
========================================
The intrinsic value of stock options exercised was $21,073 and $242,495, during
the nine months ended March 31, 2009 and 2008, respectively. The intrinsic value
of stock options outstanding and exercisable as of March 31, 2009 and 2008 was
$25,120 and $132,828, respectively.
6
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 March 31, 2009. 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.
Note 5. Recently Issued Accounting Standards
In May 2008, the Financial Accounting Standards Board ("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 did not have a material effect on the company's financial
statements.
In March 2008, the FASB issued Statement of Financial Accounting Standard No.
161 ("SFAS 161"), Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133. SFAS 161 requires enhanced
disclosures about an entity's derivative and hedging activities. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008 with early application encouraged. As such,
the Company was required to adopt these provisions at the beginning of the
fiscal year ended June 30, 2009. The adoption of the provisions of SFAS 161 did
not have a material effect on the Company's financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standard No.
160 ("SFAS 160"), Noncontrolling Interests in Consolidated Financial Statements,
an amendment of ARB No. 51. SFAS 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. As such, the Company was required to adopt these provisions on January 1,
2009. The adoption of the provisions of SFAS 160 did not have a material effect
on the Company's financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standard No.
141(R) ("SFAS 141(R)"), Business Combinations. SFAS 141(R) establishes
principles and requirements for how the acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
an any noncontrolling interest in the acquiree, recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141(R) is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. As such, the
Company was required to adopt these provisions on January 1, 2009. The adoption
of the provisions of SFAS 141(R) did 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
7
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.
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 $97,360
for the three-month period ended March 31, 2009 and $326,263 for the nine-month
period ended March 31, 2009. The ESOP shares as of March 31, 2009 were as
follows:
Allocated Shares 426,894
Committed-to-be-released shares 17,500
Unreleased shares 207,500
----------
Total shares held by the ESOP 651,894
==========
Fair value of unreleased shares at March 31, 2009 $3,133,250
==========
8
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 artillery.
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.
New orders received in the first nine months of fiscal 2009 were approximately
$14.2 million, representing a 12.8% decrease from the amount of new orders
received in the first nine months of fiscal 2008. These orders are predominately
follow-on production quantities for mature products. 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 $40.0 million at
March 31, 2009 compared to $33 million at March 31, 2008, and is $38.9 million
at May 10, 2009, which includes $19.1 million from two significant customers.
The backlog for the Company 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.
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 $56 million in the aggregate for both repeat
and new programs.
Net sales to two significant customers represented 59.0% and 58.4% of the
Company's total sales for the three-month period ended March 31, 2009 and 2008,
respectively. Sales to these two customers for the nine-month period ended March
31, 2009 and 2008 represented 65.7% and 57.9% of total sales, respectively.
Historically, a small number of customers have accounted for a large percentage
of the Company's total sales in any given fiscal year. For several years,
management has pursued opportunities with current and new customers with an
objective of lowering the concentration of sales, mitigating excessive reliance
upon a single major product program of a particular program and minimizing the
impact of the loss of a single significant customer. Management continues to
evaluate its business development functions and potential revised courses of
action.
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
9
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.
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 an ongoing 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 March 31, 2009 were $6,709,880 as compared
to $6,479,020 for the same period in 2008, representing an 3.6% increase. Net
sales for the nine months ended March 31, 2009 were $18,957,576 as compared to
$19,512,950 for the same period in 2008, representing a 2.8% decrease.
Generally, the increases and decreases in net sales can be attributed to the
contract specific nature of the Company's business. The increase for the three
months ended March 31, 2009, was due to an overall increase in power supply
shipments offset by a decrease in transmitter component shipments. The decrease
for the nine months ended March 31, 2009 was due to a decrease in transmitter
component and transformer shipments offset by an increase in power supply
shipments.
For the three months ended March 31, 2009 and 2008 gross profits were $1,732,812
and $2,177,431, respectively. Gross profit as a percentage of sales was 25.8%
and 33.6%, for the three months ended March 31, 2009 and 2008, respectively. For
the nine months ended March 31, 2009 and 2008 gross profits were $3,510,017 and
$5,209,126, respectively. Gross profit as a percentage of sales was 18.5% and
26.7%, for the nine months ended March 31, 2009 and 2008, 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
and nine months ended March 31, 2009, was primarily the result of unexpected
losses incurred on two programs with significant engineering and production time
required for design efforts. These two programs experienced significant cost
overruns due to extended product qualification testing and difficulties moving
the products from engineering design into full production. Currently, one
program has completed qualification testing and has moved into full production.
The other program is still in qualification testing and has made significant
progress towards completion. There also is a third loss contract that had a
negative impact on gross profit and net income in the 3 months ended March 31,
2009. This contract is near completion and should ship prior to June 30, 2009.
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 March 31, 2009 was 166 compared to 173 people at March 31,
2008.
10
Selling, general and administrative expenses were $658,115 for the three months
ended March 31, 2009; an increase of $10,117, compared to the three months ended
March 31, 2008. Selling, general and administrative expenses were $2,125,927 for
the nine months ended March 31, 2009, an increase of $108,557 compared to the
nine months ended March 31, 2008. The increase for the three and nine months
ended March 31, 2009, relates primarily to an increase in salaries and an
increase in legal and consulting fees.
Other income for the three and nine months ended March 31, 2009 decreased as
compared to the three and nine months ended March 31, 2008 due to decreased
interest rates and related 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 March 31,
2009 all of the investments were primarily represented by short-term liquid
investments including certificates of deposit and money market funds.
The effective income tax rate at March 31, 2009 and 2008 was 31.8% and 34.4%,
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 March 31, 2009, was $ 781,272 or $.37 per
share, both basic and diluted, compared to $1,099,205 or $.53 per share, both
basic and diluted, for the three months ended March 31, 2008. Net income for the
nine months ended March 31, 2009, was $1,137,155 or $.54 per share, both basic
and diluted, compared to $2,487,874 or $1.20 and $1.18 per share, basic and
diluted, respectively, for the nine months ended March 31, 2008. The decrease in
net income per share was primarily due to the loss programs explained above 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.
The Company's working capital as of March 31, 2009 and 2008 was approximately
$24.1 million and $26.4 million, respectively. During the three months ended
March 31, 2009 and 2008 the Company repurchased 14,350 and 7,500 shares,
respectively, of its common stock for a total purchase price of $209,035 and
$144,600, respectively. Of the total purchases, 10,699 shares and 7,500 shares,
respectively, were purchased from the Company's Employee Retirement Plan and
Trust ("ESOP") for a purchase price of $157,222 and $144,600, respectively. All
remaining shares were purchased on the open market. During the nine months ended
March 31, 2009 and 2008 the Company repurchased 19,899 and 33,220 shares,
respectively, of its common stock for a total purchase price of $311,545 and
$716,363, respectively. Of the total purchases, 11,499 shares and 33,220 shares,
respectively, were purchased from the Company's Employee Retirement Plan and
Trust ("ESOP") for a purchase price of $171,662 and $716,363, respectively. All
remaining shares were purchased on the open market. Under existing
authorizations from the Company's Board of Directors, as of March 31, 2009,
management is authorized to purchase an additional $1,688,454 million of Company
stock.
Nine Months Ended March 31,
2009 2008
------------ ------------
Net cash (used in) provided by operating activities $ (554,444) $ 2,910,999
Net cash used in investing activities (722,280) (3,023,736)
Net cash used in financing activities (4,722,830) (4,394,594)
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 decreased in the first
nine months of fiscal 2009 primarily due to more short-term investments maturing
during the current period. The increase in cash used in financing activities is
due primarily to increased dividends paid on common stock, decreased purchase of
treasury shares, and a decrease in the proceeds from the exercise of stock
options.
11
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 nine months ended March 31, 2009 and 2008, the Company expended
$211,952 and $423,131, 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 March 31, 2009 and March 31,
2008.
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.
12
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)
--------------------------------------------------------------------------
March 1 to
March 31, 2009 14,350 $14.5669 14,350 $1,688,454
(1) Pursuant to a prior Board of Directors authorization, as of
March 31, 2009 the Company can repurchase up to $1,688,454 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
13
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
May 13, 2009
------------
Date
14