UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2006
[ ] TRANSISTION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission File Number I-4383
ESPEY MFG. & ELECTRONICS CORP.
(Exact name of registrant as specified in 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)
Issuer's telephone number, including area code 518-584-4100
------------
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. YES [X] NO [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding at November 8, 2006
----- -------------------------------
Common stock, $.33-1/3 par value 2,314,596 shares
Transitional Small Business Disclosure Format YES [ ] NO [ ]
ESPEY MFG. & ELECTRONICS CORP.
Quarterly Report on Form 10-QSB
I N D E X
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Balance Sheet (Unaudited) - September 30, 2006 1
Statements of Income (Unaudited) -
Three Months Ended September 30, 2006 and 2005 2
Statements of Cash Flows (Unaudited)-
Three Months Ended September 30, 2006 and 2005 3
Notes to Financial Statements (Unaudited) 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3 Controls and Procedures 11
PART II OTHER INFORMATION 12
Item 1 Legal Proceedings 12
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 12
Item 3 Defaults on Senior Securities 12
Item 4 Submission of Matters to a Vote of Security Holders 12
Item 5 Other Information 12
Item 6 Exhibits 13
SIGNATURES 13
PART I: FINANCIAL INFORMATION
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheet (Unaudited)
September 30, 2006
ASSETS:
Cash and cash equivalents $ 8,064,351
Short term investments 4,224,000
Trade accounts receivable, net 3,256,196
Other receivables 5,227
Inventories:
Raw materials and supplies 1,831,508
Work-in-process 2,201,007
Costs relating to contracts in process, net of advance
payments of $477,142 at September 30, 2006 8,507,544
------------
Total inventories 12,540,059
Deferred income taxes 168,038
Prepaid expenses and other current assets 740,008
------------
Total current assets 28,997,879
------------
Property, plant and equipment, net 2,867,764
------------
Total assets $ 31,865,643
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 1,287,651
Accrued expenses:
Salaries, wages and commissions 168,723
Vacation 515,634
ESOP payable 71,608
Other 46,849
Payroll and other taxes withheld and accrued 45,048
Income taxes payable 134,059
------------
Total current liabilities 2,269,572
------------
Deferred income taxes 211,518
------------
Total liabilities 2,481,090
------------
Common stock, par value $.33-1/3 per share
Authorized 10,000,000 shares; issued 3,029,874 shares
on September 30, 2006. Outstanding 2,312,596 (includes
267,917 Unearned ESOP Shares) on September 30, 2006 1,009,958
Capital in excess of par value 12,590,207
Retained earnings 25,930,546
Less: Unearned ESOP Shares (3,961,079)
Cost of 717,278 Treasury shares on September 30, 2006 (6,185,079)
------------
Total stockholders' equity 29,384,553
------------
Total liabilities and stockholders' equity $ 31,865,643
============
See accompanying notes to the financial statements.
1
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three Months Ended September 30, 2006 and 2005
Three Months
2006 2005
-------------------------
Net sales $ 6,071,906 $ 4,560,574
Cost of sales 4,674,598 3,680,284
----------- -----------
Gross profit 1,397,308 880,290
Selling, general and
administrative expenses 726,980 669,719
----------- -----------
Operating income 670,328 210,571
----------- -----------
Other income (expense)
Interest and dividend income 145,511 98,934
Other 3,625 (2,823)
----------- -----------
149,136 96,111
----------- -----------
Income before income taxes 819,464 306,682
Provision for income taxes 276,414 88,938
----------- -----------
Net income $ 543,050 $ 217,744
=========== ===========
Net income per share:
Basic $ 0.27 $ .11
Diluted $ 0.26 $ .11
----------- -----------
Weighted average number of shares outstanding:
Basic 2,034,014 2,017,164
Diluted 2,060,338 2,054,942
----------- -----------
Dividends per share: $ 0.1300 $ .0750
=========== ===========
As described in note 7, a stock split in the form of a stock dividend of one
share of common stock for each share of common stock issued, was paid on
December 30, 2005 (all per share and share amounts have been adjusted to reflect
this dividend).
See accompanying notes to the financial statements.
2
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows (Unaudited)
Three Months Ended September 30, 2006 and 2005
September 30,
2006 2005
----------- -----------
Cash Flows From Operating Activities:
Net income $ 543,050 $ 217,744
Adjustments to reconcile net income to net
cash provided by operating activities:
Tax effect on stock options 24,569 --
Stock option compensation 39,189 --
Depreciation 121,128 128,874
ESOP compensation expense 107,250 106,401
Loss on disposal of assets 3,493 8,077
Deferred income tax (18,204) (17,500)
Changes in assets and liabilities:
Decrease in trade receivable, net 957,032 73,779
Decrease (Increase) in other receivables 1,657 (6,282)
Increase in inventories (135,680) (499,276)
Increase in prepaid expenses and other current assets (185,881) (300,951)
Increase in accounts payable 672,065 462,692
Increase in accrued salaries, wages and commissions 40,716 29,805
Decrease in other accrued expenses (4,551) (5,680)
Decrease in vacation accrual (29,789) (55,527)
Increase in payroll and other taxes withheld and accrued 4,451 8,289
Decrease in income taxes payable (520,159) (133,907)
Decrease in ESOP payable (35,642) (22,500)
----------- -----------
Net cash provided by (used in) operating activities 1,584,694 (5,962)
----------- -----------
Cash Flows From Investing Activities:
Unearned ESOP Shares -- (4,335,000)
Additions to property, plant and equipment (109,933) (50,426)
Purchase of short term investments (864,000) (1,920,000)
Maturity of short term investments 576,000 1,632,000
----------- -----------
Net cash used in investing activities (397,933) (4,673,426)
----------- -----------
Cash Flows From Financing Activities:
Sale of treasury stock -- 4,396,424
Dividends on common stock (264,449) (149,903)
Purchase of treasury stock (31,126) (417,684)
Proceeds from exercise of stock options 100,550 61,170
----------- -----------
Net cash (used in) provided by financing activities (195,025) 3,890,007
----------- -----------
Increase (Decrease) in cash and cash equivalents 991,736 (789,381)
Cash and cash equivalents, beginning of period 7,072,615 9,803,507
----------- -----------
Cash and cash equivalents, end of period 8,064,351 9,014,126
=========== ===========
Supplemental disclosures of cash flow information:
Income Taxes Paid $ 790,500 $ 240,345
=========== ===========
Non-cash investing and financing activities:
During the period ended December 31, 2005, the Company effected a stock
split in the form of a stock dividend of 1,514,937 common shares,
representing one share for each share outstanding and each share held as
a treasury share. This resulted in a transfer from retained earnings to
common stock of $504,979.
See accompanying notes to the financial statements.
3
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.
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, 2006.
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
Prior to July 1, 2006, the Company accounted for its stock-based compensation
plan under the recognition and measurement provisions of Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion
No. 25") and related interpretations, as permitted by the Financial Accounting
Standards Board's ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure.
Accordingly, no stock-based compensation expense was recognized in the Statement
of Income for the three months ended September 30, 2005, as all options granted
under the Company's stock-based employee compensation plans had an exercise
price equal to the market value of the underlying common stock on the date of
grant. As permitted by SFAS No. 123, stock-based compensation expense was
included as a pro forma disclosure in the Notes to the Company's financial
statements for the three months ended September 30, 2005.
Effective July 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123(R), Share-Based Payment, using the modified
prospective transition method. Under that transition method, compensation cost
recognized during the three months ended September 30, 2006 includes
compensation expense for all stock-based compensation awards granted prior to,
but not yet vested as of July 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123. Results for prior
periods have not been restated, as allowed for under the modified prospective
transition method.
Total stock-based compensation expense recognized in the Statement of Income for
the three months ended September 30, 2006, was $39,189 before income taxes. The
related total deferred tax benefit was approximately $3,069, for the three
months ended September 30, 2006. 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, 2006, there was approximately $190,439 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, the 2000 Stock Option 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
4
continuous service and have a ten year contractual life. Option grants provide
for accelerated vesting if there is a change in control. Shares issued to
satisfy option grants are issued from Treasury stock. Options authorized for
issuance under the 2000 Stock Option Plan totaled 275,300. As of September 30,
2006, of the options authorized for issuance, 129,200 were granted and are
outstanding, 56,200 of which are vested and exercisable. Options available for
future grants at September 30, 2006 total 103,800.
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, 2006:
Three Months Ended
September 30, 2006
------------------
Dividend yield 2.36%
Expected stock price volatility 21.72%
Risk-free interest rate 4.35%
Expected option life (in years) 5.4
Weighted average fair value per share of options
granted during the period --
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 illustrates the effect on net income per share for the three
months ended September 30, 2005 as if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation:
Three Months Ended
September 30, 2005
------------------
Net income, as reported $ 217,744
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards,
net of related income taxes (4,858)
-----------
Pro forma net income $ 212,886
===========
Income per share:
Basic - as reported $ .11
Basic - pro forma $ .11
Diluted - as reported $ .11
Diluted - pro forma $ .10
The table below outlines the weighted average assumptions as if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation for the three months ended September 30, 2005:
Three Months Ended
September 30, 2005
------------------
Dividend yield 3.0%
Expected stock price volatility 20.0%
Risk-free interest rate 4.0%
Expected option life (in years) 5.0
Weighted average fair value per share of options
granted during the period --
5
The following table summarizes stock option activity during the three months
ended September 30, 2006:
Employee Stock Options Plan
-----------------------------------------
Weighted
Number of Weighted Average
Shares Average Remaining
Subject Exercise Contractual
To Option Price Term
-----------------------------------------
Balance at July 1, 2006 146,200 $14.02 8
Granted -- -- --
Exercised (9,800) $10.26 --
Forfeited or expired (7,200) $13.39 --
-----------------------------------------
Balance September 30, 2006 129,200 $14.33 8
=========================================
Exercisable at September 30, 2006 56,200 $10.10 6.5
=========================================
The intrinsic value of stock options exercised was $35,272, during the three
months ended September 30, 2006. The intrinsic value of stock options
outstanding and exercisable as of September 30, 2006 was $387,525.
Note 4. Commitments and Contingencies
The Company has entered 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 $246,625 at September 30, 2006. The Company does
not expect to fund any of the amounts under the standby letters of credit. 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 against it.
Note 5. Recently Issued Accounting Standards
In July 2006, the FASB issued Interpretation No. ("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 will be effective beginning July 1, 2007. The
adoption of FIN 48 will 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. Prior to July 15, 2005, the ESOP owned 230,120 shares, all
of which were allocated to employees. On July 15, 2005, pursuant to a Stock
Purchase Agreement dated as of such date, the Company, by selling 150,000 shares
of its common stock, par value $0.33-1/3 per share, to the Espey Mfg. &
Electronics Corp. Employee Stock Ownership Plan Trust, provided more shares to
be allocated to employees for services rendered over the next 15 years. The ESOP
paid $28.90 per share, for an aggregate purchase price of $4,335,000. The
determination of the purchase price was based on a fairness opinion obtained by
an independent valuation firm. The ESOP borrowed from the Corporation an amount
equal to the purchase price. The loan will be repaid in fifteen (15) equal
annual installments of principal and the unpaid balance will bear interest at a
fixed rate of 6.25% per annum, the "prime rate" as quoted in The Wall Street
Journal on the date of closing. The above ESOP information has not been adjusted
for the stock split described in note 7.
6
The Board of Directors of the Company had approved a purchase price per share
equal to a 5% discount on the average trading price of the Company's common
stock on the American Stock Exchange on the date before closing, but in no event
greater than the fair market value as determined by an independent valuation
firm retained by the ESOP. The average trading price of the Company's common
stock on the American Stock Exchange on July 14, 2005 was $30.72.
In making the sale, the Company relied on the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended, because the shares sold
were offered only to the ESOP.
After giving effect to the transaction, the ESOP owned 380,120 shares of the
Company's 1,158,294 outstanding shares of common stock as of July 15, 2005.
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
$107,250 for the quarter ended September 30, 2006. The ESOP shares as of
September 30 (after the stock split described in note 7) were as follows:
Allocated Shares 444,202
Committed-to-be-released shares 6,250
Unreleased shares 267,917
----------
Total shares held by the ESOP 718,369
==========
Fair value of unreleased shares at September 30, 2006 $4,554,589
==========
Note 7. Stock Split
On December 30, 2005, the Company effected a one-for-one stock split in the form
of a dividend of one share of common stock for each share of common stock
outstanding. The Company also allocated to treasury an additional share for each
share being held as a treasury share. All references to the number of common
shares, shares related to the Company's stock option plan, as well as per share
data in the accompanying financial statements, have been adjusted to reflect the
stock split on a retroactive basis with the exception of the details describing
the Company's ESOP transaction which became executed on July 15, 2005 described
in note 6 and "Other Matters". As a result of the stock split, common stock was
increased and retained earnings was decreased by $504,979.
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 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.
Management is optimistic about the future of the Company. In the first three
months of fiscal 2007, the Company received approximately $3.9 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 being involved in long-term high quantity military and industrial
products.
The sales backlog of approximately $35.6 million at September 30, 2006 gives the
Company a solid base of future sales and, therefore, management expects an
increase in sales for fiscal 2007 as compared to fiscal 2006. In addition to the
backlog, the Company currently has outstanding quotations and expected business
representing approximately $31 million in the aggregate for both repeat and new
programs. Many potential orders are currently being discussed and negotiated
with our customers.
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.
The total backlog for the Company of $35.6 million at September 30, 2006, down
$9.7 million over September 30, 2005, represents the estimated remaining sales
value of work to be performed under firm contracts. The funded portion of this
backlog at September 30, 2006 is approximately $31.2 million. This includes
items that have been authorized and appropriated by Congress and/or funded by
the customer. The unfunded backlog is approximately $4.3 million and represents
firm multi-year orders for which funding has not yet been appropriated by
Congress. While there is no guarantee that future budgets and appropriations
will provide funding for a given program, management has included in unfunded
backlog only those programs that it believes are likely to receive funding. The
unfunded backlog at September 30, 2005 was $8.7 million. The backlog at
September 30, 2006 as discussed
8
above, includes 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 the 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, 2006 were $6,071,906 as
compared to $4,560,574 for the same period in 2005, representing a 33.1%
increase. Generally, this increase can be attributed to the contract specific
nature of the Company's business. The Company continues to deliver product on
its single largest order for power supplies. The increase in sales for the
quarter is largely attributable to an increase in shipments to two customers for
power supplies and transformers. New orders received in the first three months
of fiscal 2007 were approximately $3.9 million compared to approximately $18.1
million in the first three months of fiscal 2006. Additional orders are expected
to be received in the next several months and new orders for fiscal 2007 are
expected to be equivalent to or exceed the value of new orders received in 2006
of approximately $26.8 million.
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
than with respect to the 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.
For the three months ended September 30, 2006 and 2005 gross profits were
$1,397,308 and 880,290, respectively. Gross profit as a percentage of sales was
23.0% and 19.3%, for the three months ended September 30, 2006 and 2005,
respectively. The improved gross profit percentage in the three months ended
September 30, 2006, relates to favorable product mix and lower overhead expenses
primarily due to decreased engineering salary expense. 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
performed. Employment at September 30, 2006 and 2005 was 173 people.
Selling, general and administrative expenses were $726,980 for the three months
ended September 30, 2006, an increase of $57,261 compared to the three months
ended September 30, 2005. The increase is primarily due to the requirement to
record stock option expense in accordance with new accounting rules (see note 3
to the financial statements).
Other income for three months ended September 30, 2006 increased as compared to
the three months ended September 30, 2005, due to increased interest income on
the Company's cash and cash equivalents and short-term
9
investments due to higher interest rates. The Company does not believe that
there is a significant risk associated with its investment policy, since at
September 30, 2006 all of the investments are primarily represented by
short-term liquid investments including certificates of deposit and money market
accounts.
The effective income tax rate at September 30, 2006 and 2005 was 33.7% and
29.0%, respectively. The effective tax rate is less than the statutory tax rate
mainly due to the foreign exportation benefit the Company receives on its
international sales, the Qualified Production Activities benefit, and the
benefit derived from the ESOP dividends paid on allocated shares.
Net income for the three months ended September 30, 2006, was $543,050 or $.27
and $.26 per share, basic and diluted, respectively, compared to $217,744 or
$.11 per share, both basic and diluted, for the three months ended September 30,
2005. The increase in net income per share was due to improved gross profit as a
percentage of sales, offset partially by the increase in selling, general and
administrative expenses.
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 has available a $3,000,000 line of credit to help fund further growth
or working capital needs, if necessary, but does not anticipate the need for any
borrowed funds in the foreseeable future.
The Company's working capital as of September 30, 2006 was approximately $26.7
million. During the three months ended September 30, 2006 and 2005 the Company
repurchased 1,766 and 24,284 shares, respectively, of its common stock from the
Company's Employee Retirement Plan and Trust ("ESOP"), for a total purchase
price of $31,126 and $417,685, respectively. Under existing authorizations from
the Company's Board of Directors, as of September 30, 2006, management is
authorized to purchase an additional $968,874 of Company stock.
Three Months Ended September 30,
2006 2005
----------- -----------
Net cash provided by (used in) operating activities $ 1,584,694 $ (5,962)
Net cash used in investing activities (397,933) (4,673,426)
Net cash (used in) provided by financing activities (195,025) 3,890,007
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 2007 due to the decrease in purchases of short-term
investments and the ESOP transaction described in note 6 which occurred in the
prior year. The decrease in cash provided by financing activities is due
primarily to the decrease in purchases of short-term investments and the ESOP
transaction described in note 6 which occurred in the prior year and less
purchases of treasury stock during the current quarter.
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, 2006 and 2005, the Company expended
$109,933 and $50,426, respectively, for plant improvements and new equipment.
The Company has budgeted approximately $400,000 for new equipment and plant
improvements in fiscal 2007. Management presently anticipates that the funds
required will be available from current operations.
The Company has entered 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 $246,625 at September 30, 2006. The Company does
not expect to fund any of the amounts under the standby letters of credit.
10
Other Matters
On July 15, 2005, pursuant to a Stock Purchase Agreement dated as of such date,
the Company sold 150,000 shares of its common stock, par value $0.33-1/3 per
share, to the Espey Mfg. & Electronics Corp. Employee Stock Ownership Plan Trust
(the "ESOP"). The ESOP paid $28.90 per share, for an aggregate purchase price of
$4,335,000. The determination of the purchase price was based on a fairness
opinion obtained by an independent valuation firm. The ESOP borrowed from the
Corporation an amount equal to the purchase price. The loan will be repaid in
fifteen (15) equal annual installments of principal and the unpaid balance will
bear interest at a fixed rate of 6.25% per annum, the "prime rate" as quoted in
The Wall Street Journal on the date of closing. The above ESOP information has
not been adjusted for the stock split described in note 7.
The Board of Directors of the Company approved a purchase price per share equal
to a 5% discount on the average trading price of the Company's common stock on
the American Stock Exchange on the date before closing, but in no event greater
than the fair market value as determined by an independent valuation firm
retained by the ESOP. The average trading price of the Company's common stock on
the American Stock Exchange on July 14, 2005 was $30.72.
In making the sale, the Company relied on the exemption from registration under
Section 4(2) of the Securities Act of 1933, as amended, because the shares sold
were offered only to the ESOP.
After giving effect to the transaction the ESOP owned 380,120 shares of the
Company's 1,158,294 outstanding shares of common stock as of July 15, 2005. As
of September 30, 2006, there were 444,202 shares (after giving effect to the
one-for-one stock dividend) allocated to participants.
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. 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-QSB. 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)
---------------------------------------------------------------------------
August 1 to
August 31, 2006 1,766 $17.625 1,766 $968,874
(1) Pursuant to a prior Board of Directors authorization, as of
September 30, 2006 the Company can repurchase up to $968,874 of
its common stock pursuant to an ongoing plan.
Item 3 Defaults on 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 14, 2006
-----------------
Date
13