Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended September 30, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from ______ to ______
Commission File Number I-4383
ESPEY MFG. & ELECTRONICS CORP.
------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 14-1387171
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(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. |X| Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company:
[ ] Large accelerated filer
[ ] Accelerated filer
[ ] Non-accelerated filer
|X| Smaller reporting company
Indicate by check mark whether the registrant is a shell company. [ ] Yes |X| No
At November 11, 2009, there were 2,335,289 shares outstanding of the
registrant's Common stock, $.33-1/3 par value.
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, 2009 (Unaudited) and June 30, 2009 1
Statements of Income (Unaudited) -
Three Months Ended September 30, 2009 and 2008 3
Statements of Cash Flows (Unaudited)-
Three Months Ended September 30, 2009 and 2008 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 4T 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 3 Defaults Upon Senior 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 Sheet
September 30, 2009 (Unaudited) and June 30, 2009
September 30, June 30,
2009 2009
------------ ------------
ASSETS:
Cash and cash equivalents $ 3,596,115 $ 2,775,319
Short term investments 7,349,874 6,349,874
Trade accounts receivable, net 4,009,318 5,133,792
ESOP receivable due to dividends on unallocated shares 25,528 71,053
Other receivables 9 297
Inventories:
Raw materials 1,352,046 1,394,441
Work-in-process 1,044,434 1,107,880
Costs relating to contracts in process, net of progress
payments of $1,256 at September 30, 2009 and
aaa$60,079 at June 30, 2009 10,695,861 10,526,884
------------ ------------
Total inventories 13,092,341 13,029,205
Deferred income taxes 225,036 224,835
Prepaid expenses and other current assets 198,672 233,072
------------ ------------
Total current assets 28,496,893 27,817,447
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Property, plant and equipment, net 2,768,568 2,738,222
Loan receivable 34,209 38,673
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Total assets $ 31,299,670 $ 30,594,342
============ ============
See accompanying notes to the financial statements. (Continued)
1
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheet
September 30, 2009 (Unaudited) and June 30, 2009
September 30, June 30,
2009 2009
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 1,098,862 $ 999,521
Accrued expenses:
Salaries, wages and commissions 161,140 219,533
Vacation 501,489 520,072
Other 92,257 42,863
Payroll and other taxes withheld and accrued 42,286 42,075
Income taxes payable 37,506 266,891
------------ ------------
Total current liabilities 1,933,540 2,090,955
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Deferred income taxes 92,006 99,253
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Total liabilities 2,025,546 2,190,208
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Common stock, par value $.33-1/3 per share.
Authorized 10,000,000 shares; issued 3,029,874 shares
on September 30, 2009 and June 30, 2009. Outstanding
2,335,289 and 2,314,803 (includes 196,041 and 201,666
Unearned ESOP Shares) on September 30, 2009 and June
30, 2009, respectively 1,009,958 1,009,958
Capital in excess of par value 13,939,481 13,755,808
Retained earnings 24,002,983 23,485,675
------------ ------------
38,952,422 38,251,441
Less: Unearned ESOP shares (2,914,077) (2,914,077)
Cost of 694,585 and 715,071 shares of common stock in
treasury on September 30, 2009 and June 30, 2009, respectively (6,764,221) (6,933,230)
------------ ------------
Total stockholders' equity 29,274,124 28,404,134
------------ ------------
Total liabilities and stockholders' equity $ 31,299,670 $ 30,594,342
============ ============
See accompanying notes to the financial statements.
2
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three Months Ended September 30, 2009 and 2008
Three Months
September 30, September 30,
2009 2008
---------------- ----------------
Net sales $ 6,874,940 $ 6,053,519
Cost of sales 4,816,738 4,902,244
---------------- ----------------
Gross profit 2,058,202 1,151,275
Selling, general and administrative expenses 752,386 678,227
---------------- ----------------
Operating income 1,305,816 473,048
---------------- ----------------
Other income
Interest and dividend income 42,639 102,915
Other 8,102 11,241
---------------- ----------------
Total other income, net 50,741 114,156
---------------- ----------------
Income before income taxes 1,356,557 587,204
Provision for income taxes 363,794 188,908
---------------- ----------------
Net income $ 992,763 $ 398,296
================ ================
Net income per share:
Basic $ 0.47 $ 0.19
Diluted $ 0.47 $ 0.19
---------------- ----------------
Weighted average number of shares outstanding:
Basic 2,116,984 2,102,306
Diluted 2,118,848 2,116,039
---------------- ----------------
Dividends per share: $ 0.2250 $ 0.2250
================ ================
See accompanying notes to the financial statements.
3
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 2009 and 2008
September 30, September 30,
2009 2008
----------- -----------
Cash Flows From Operating Activities:
Net income $ 992,763 $ 398,296
Adjustments to reconcile net income to net cash provided
by operating activities:
Excess tax benefits from share-based compensation 626 30,245
Stock-based compensation 25,304 29,083
Depreciation 115,348 124,325
ESOP compensation expense 90,899 118,418
Loss on disposal of assets 1,615 2,542
Deferred income tax benefit (7,448) (6,055)
Changes in assets and liabilities:
Decrease (increase) in trade receivable, net 1,124,474 (638,428)
Increase in income taxes receivables -- (226,157)
Decrease in other receivables 288 1,474
Decrease in ESOP receivable due to dividends on unallocated shares 45,525 36,809
Increase in inventories (63,136) (687,678)
Decrease in prepaid expenses and other current assets 34,400 64,491
Increase in accounts payable 99,341 930,103
(Decrease) increase in accrued salaries, wages and commissions (58,393) 70,277
Increase (decrease) in other accrued expenses 49,394 (9,460)
Decrease in vacation accrual (18,583) (61,423)
Decrease in ESOP payable (90,899) (87,434)
Increase in payroll and other taxes withheld and accrued 211 6,840
Decrease in income taxes payable (230,011) (30,245)
----------- -----------
Net cash provided by operating activities 2,111,718 66,023
----------- -----------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (147,308) (125,755)
Proceeds from loan receivable 4,464 6,509
Purchase of short term investments (3,696,000) (4,242,000)
Proceeds from maturity of short term investments 2,696,000 2,112,000
----------- -----------
Net cash used in investing activities (1,142,844) (2,249,246)
----------- -----------
Cash Flows From Financing Activities:
Sale of treasury stock 326,752 --
Dividends on common stock (475,456) (473,378)
Purchase of treasury stock -- (52,038)
Proceeds from exercise of stock options -- 66,900
Excess tax benefits from share-based compensation 626 30,245
----------- -----------
Net cash used in financing activities (148,078) (428,271)
----------- -----------
Increase (decrease) in cash and cash equivalents 820,796 (2,611,494)
Cash and cash equivalents, beginning of period 2,775,319 6,851,753
----------- -----------
Cash and cash equivalents, end of period $ 3,596,115 $ 4,240,259
=========== ===========
Supplemental Schedule of Cash Flow Information:
Income taxes paid $ 600,000 $ 400,000
=========== ===========
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-K for the
year ended June 30, 2009.
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
The Company follows Statement of Financial Accounting Standards No. 123(R) (FASB
ASC 718) 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. FASB ASC 718
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. FASB ASC 718 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.
Total stock-based compensation expense recognized in the Statement of Income for
the three month period ended September 30, 2009 and 2008, was $25,304 and
$29,083, respectively, before income taxes. The related total deferred tax
benefit was approximately $2,477 for the same periods. FASB ASC 718 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, 2009, there was approximately $96,684 of unrecognized
compensation cost related to stock option awards that is expected to be
recognized as expense over the next 2 years. The total deferred tax benefit
related to these awards is approximately $8,526.
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, and 68,700 have been granted and are outstanding as of September
5
30, 2009. While no further grants of options may be made under the 2000 Plan, as
of September 30, 2009, 76,500 options remain outstanding, vested and exercisable
from the 2000 Plan.
FASB ASC 718 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, September 30,
2009 2008
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Dividend yield 4.49% 3.34 %
Expected stock price volatility 29.22% 24.41 %
Risk-free interest rate 2.46% 3.91 %
Expected option life (in years) 4 yrs 4 yrs
Weighted average fair value per share of options
granted during the period $3.351 $3.594
The Company pays dividends quarterly and anticipates that it will be able to
continue 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 actual historical experience.
The following table summarizes stock option activity during the three months
ended September 30, 2009:
Employee Stock Options Plan
------------------------------------
Weighted
Number of Weighted Average
Shares Average Remaining
Subject Exercise Contractual
To Option Price Term
------------------------------------
Balance at July 1, 2009 140,400 $18.29 7.65
Granted 2,500 $17.09 9.84
Exercised -- -- --
Forfeited or expired (3,400) $19.07 --
------------------------------------
Balance September 30, 2009 139,500 $18.25 7.69
====================================
Exercisable at September 30, 2009 76,500 $17.41 6.58
====================================
The intrinsic value of stock options exercised was $0 and $18,495, during the
three months ended September 30, 2009 and 2008, respectively. The intrinsic
value of stock options outstanding and exercisable as of September 30, 2009 and
2008 was $42,948 and $90,945, 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, 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 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 165, Subsequent Events (FASB ASC 855-10).
FASB ASC 855-10 establishes principles and requirements for subsequent events.
6
FASB ASC 855-10 is effective for interim or annual financial periods ending
after June 15, 2009. As such, the Company is required to adopt this standard in
the current period. Adoption of FASB ASC 855-10 did not have a material effect
on the company's financial statements.
In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard No. 168 ("SFAS 168"), The FASB Accounting
Standards Codification ("Codification") and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No. 162, The Hierarchy
of Generally Accepted Accounting Principles. Under the provisions of SFAS 168,
the Codification will become the source of authoritative U.S. GAAP recognized by
the FASB to be applied by nongovernmental entities. The rules and interpretive
releases of the SEC under authority federal securities laws are also sources of
authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. The provisions of
SFAS 168 are effective for financial statements issued for interim and annual
periods ending after September 15, 2009. Adoption of SFAS 168 had no effect on
the company's financial statements.
In September 2009, the FASB issued ASC 605-25 for revenue recognition with
multiple deliverables. These new standards impact the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, these new standards
modify the manner in which the transaction consideration is allocated across the
separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration. These new standards are effective in
fiscal years beginning on or after June 15, 2010, however early adoption is
permitted. The Company is currently assessing the potential impact, if any, of
the guidance on its 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 FASB ASC 718. 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 $90,899
for the three-month period ended September 30, 2009 and $118,418 for the
three-month period ended September 30, 2008. The ESOP shares as of September 30,
2009 and 2008 were as follows:
September 30, September 30,
2009 2008
-------------- --------------
Allocated Shares 461,537 442,886
Committed-to-be-released shares 5,625 5,833
Unreleased shares 196,041 219,167
-------------- --------------
Total shares held by the ESOP 663,203 667,886
============== ==============
Fair value of unreleased shares $ 3,473,847 $ 4,021,714
============== ==============
Note 7. Subsequent Events
Subsequent events were evaluated through November 11, 2009, the dates these
financial statements were available for issue.
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 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 three months of fiscal 2010 were approximately
$4.8 million, representing a 13.1% decrease from the amount of new orders
received in the first three months of fiscal 2009. These new orders are in line
with the Company's strategy of getting involved in long-term high quantity
military and industrial products and are predominately for follow-on production
of mature products. The Company's backlog was $37.0 million at September 30,
2009 which includes $19.1 million from two significant customers compared to
$44.2 million at September 30, 2008 which included $28.0 million from two
significant customers. The backlog for the Company represents the estimated
remaining sales value of work to be performed under firm contracts.
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 2010 to be higher than fiscal 2009 sales. In addition
to the backlog, the Company currently has outstanding quotations and potential
business representing approximately $52.1 million in the aggregate for both
repeat and new programs.
Net sales to three significant customers represented 66.8% of the Company's
total sales for the three month period ended September 30, 2009 and net sales to
two significant customers represented 71.8% of the Company's total sales for the
first three month period ended September 30, 2008. 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 overall objective of
lowering the concentration of sales, mitigating excessive reliance upon a single
major product 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 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
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, 2009 were $6,874,940 as
compared to $6,053,519 for the same period in 2008, representing a 13.6%
increase. The increase for the three months ended September 30, 2009 was due to
an overall increase in transformer shipments offset by a decrease in power
supply shipments.
For the three months ended September 30, 2009 and 2008 gross profits were
$2,058,202 and $1,151,275, respectively. Gross profit as a percentage of sales
was 29.9% and 19.0%, for the three months ended September 30, 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 increased gross profit and gross profit
percentage in the three months ended September 30, 2009, as compared to
September 30, 2008, was primarily the result of favorable product mix with only
minor cost overruns related to loss contracts. For the three months ended
September 30, 2008 the Company had 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 and has made significant progress towards completion. 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, 2009 was 166 compared to 169 people at September 30, 2008.
Selling, general and administrative expenses were $752,386 for the three months
ended September 30, 2009; an increase of $74,159, compared to the three months
ended September 30, 2008. The increase for the three months ended September 30,
2009 relates primarily to an increase in salary expense, consulting, and
director fees.
Other income for three months ended September 30, 2009 decreased as compared to
the three months ended September 30, 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 there is a significant risk
associated with its investment policy, since at September 30, 2009 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, 2009 and 2008 was 26.8% and
32.2%, 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, 2009, was $992,763 or $.47
per share, both basic and diluted, compared to $398,296 or $.19 per share, both
basic and diluted, for the three months ended September 30, 2008. The increase
in net income per share was mainly due to higher gross profit on sales offset by
higher selling general and administrative expenses 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 two 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 September 30, 2009 was approximately $26.6
million. During the three months ended September 30, 2009 and 2008 the Company
repurchased 0 and 2,744 shares, respectively, of its common stock on the open
market for a total purchase price of $0 and $52,038, respectively. Under
existing authorizations from the Company's Board of Directors, as of September
30, 2009, management is authorized to purchase an additional $1,688,454 million
of Company stock.
Three Months Ended
September 30, September 30,
2009 2008
------------- -------------
Net cash provided by operating activities 2,111,718 $ 66,023
Net cash used in investing activities (1,142,844) (2,249,246)
Net cash used in financing activities (148,078) (428,271)
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
three months of fiscal 2010 due to the due to more short-term investments
maturing during the current period. The decrease in cash used in financing
activities is due primarily to decreased purchase of treasury shares and a
decrease in the proceeds from the exercise of stock options.
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, 2009 and 2008, the Company expended
$147,308 and $125,755, respectively, for plant improvements and new equipment.
The Company has budgeted approximately $450,000 for new equipment and plant
improvements in fiscal 2010. 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, 2009.
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) Securities Sold - For the three-month period ended September
30, 2009, the Company sold 20,486 shares to
the ESOP. The aggregate gross proceeds from
the shares of common stock sold were
$169,009.50. The securities were sold for
cash and the sales were made without
registration under the Securities Act in
reliance upon the exemption from
registration afforded under Section 4(2) of
the Securities Act of 1933. Proceeds were
used for general working capital purposes.
(c) Securities Repurchased - None
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
Chief Executive Officer
/s/ David O'Neil
---------------------------
David O'Neil, Treasurer and
Principal Financial Officer
November 11, 2009
-----------------
Date
13
