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 March 31, 2007
[ ] 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 May 10, 2007
----- ---------------------------
Common stock, $.33-1/3 par value 2,315,693 shares
Transitional Small Business Disclosure Format YES [ ] NO [ X ]
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) - March 31, 2007 1
Statements of Income (Unaudited) -
Three and Nine Months Ended March 31, 2007 and 2006 2
Statements of Cash Flows (Unaudited)-
Nine Months Ended March 31, 2007 and 2006 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)
March 31, 2007
March 31,
2007
------------
ASSETS:
Cash and cash equivalents $ $ 8,138,084
Short term investments 4,224,000
Trade accounts receivable, net 4,577,044
Other receivables 3,356
Inventories:
Raw materials and supplies 1,804,576
Work-in-process 1,955,619
Costs relating to contracts in process, net of advance
payments of $140,045 at March 31, 2007 7,923,866
------------
Total inventories 11,684,061
Deferred income taxes 174,431
Prepaid expenses and other current assets 645,667
------------
Total current assets 29,446,643
------------
Property, plant and equipment, net 2,884,906
------------
Total assets $ 32,331,549
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 998,863
Accrued expenses:
Salaries, wages and commissions 154,630
Vacation 546,149
ESOP payable 220,842
Other 47,135
Payroll and other taxes withheld and accrued 54,208
Income taxes payable 116,136
------------
Total current liabilities 2,137,963
------------
Deferred income taxes 181,248
------------
Total liabilities 2,319,211
------------
Common stock, par value $.33-1/3 per share.
Authorized 10,000,000 shares; issued 3,029,874 shares
on March 31, 2007. Outstanding 2,313,293 (includes
255,417 Unearned ESOP Shares) on March 31, 2007 1,009,958
Capital in excess of par value 12,737,251
Retained earnings 26,552,825
Less: Unearned ESOP Shares (3,961,079)
Treasury shares, cost of 716,581 shares on March 31, 2007 (6,326,617)
------------
Total stockholders' equity 30,012,338
------------
Total liabilities and stockholders' equity $ 32,331,549
============
See accompanying notes to the financial statements.
1
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three and Nine Months Ended March 31, 2007 and 2006
Three Months Nine Months
2007 2006 2007 2006
------------ ------------ ------------ ------------
Net sales $ 8,059,695 $ 4,677,808 $ 20,250,921 $ 14,294,465
Cost of sales 6,443,561 3,635,543 15,979,258 11,424,550
------------ ------------ ------------ ------------
Gross profit 1,616,134 1,042,265 4,271,663 2,869,915
Selling, general and
administrative expenses 697,740 649,101 2,137,463 1,985,260
------------ ------------ ------------ ------------
Operating income 918,394 393,164 2,134,200 884,655
------------ ------------ ------------ ------------
Other income (expense)
Interest and dividend income 151,896 121,213 447,285 331,123
Other 9,589 (213) 43,939 (8,650)
------------ ------------ ------------ ------------
161,485 121,000 491,224 322,473
------------ ------------ ------------ ------------
Income before income taxes 1,079,879 514,164 2,625,424 1,207,128
Provision for income taxes 365,849 149,107 888,433 350,067
------------ ------------ ------------ ------------
Net income $ 714,030 $ 365,057 $ 1,736,991 $ 857,061
============ ============ ============ ============
Net income per share:
Basic $ 0.35 $ 0.18 $ 0.85 $ 0.43
Diluted $ 0.34 $ 0.18 $ 0.84 $ 0.42
------------ ------------ ------------ ------------
Weighted average number of shares outstanding:
Basic 2,053,545 2,010,173 2,044,839 2,010,580
Diluted 2,077,994 2,041,443 2,069,730 2,048,022
------------ ------------ ------------ ------------
Dividends per share: $ 0.15 $ 0.09 $ 0.41 $ 0.25
============ ============ ============ ============
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)
Nine Months Ended March 31, 2007 and 2006
March 31,
2007 2006
----------- -----------
Cash Flows From Operating Activities:
Net income $ 1,736,991 $ 857,061
Adjustments to reconcile net income to net
cash provided by operating activities:
Tax effect on stock options 64,636 --
Stock option compensation 119,856 --
Depreciation 363,833 403,191
ESOP compensation expense 333,250 332,248
Loss on disposal of assets 5,404 26,741
Deferred income tax (54,867) (52,500)
Changes in assets and liabilities:
(Increase) Decrease in trade receivable, net (363,816) 135,720
Decrease (Increase) in other receivables 3,528 (5,100)
Decrease (Increase) in inventories 720,318 (2,202,770)
Increase in prepaid expenses and other current assets (91,540) (359,336)
Increase in accounts payable 383,277 1,359,487
Increase in accrued salaries, wages and commissions 26,623 30,857
(Decrease) Increase in other accrued expenses (4,265) 4,042
Increase in vacation accrual 726 11,674
Increase in payroll and other taxes withheld and accrued 13,611 9,334
Decrease in income taxes payable (538,082) (164,257)
Decrease in ESOP payable (112,408) (75,750)
----------- -----------
Net cash provided by operating activities 2,607,075 310,642
----------- -----------
Cash Flows From Investing Activities:
Unearned ESOP Shares -- (4,335,000)
Additions to property, plant and equipment (371,701) (360,464)
Proceeds on sale of assets, net 10 500
Purchase of short term investments (3,648,000) (5,280,000)
Maturity of short term investments 3,360,000 4,224,000
----------- -----------
Net cash used in investing activities (659,691) (5,750,964)
----------- -----------
Cash Flows From Financing Activities:
Sale of treasury stock -- 4,396,423
Dividends on common stock (836,111) (505,631)
Purchase of treasury stock (298,064) (679,808)
Proceeds from exercise of stock options 252,260 153,055
----------- -----------
Net cash (used in) provided by financing activities (881,915) 3,364,039
----------- -----------
Increase (Decrease) in cash and cash equivalents 1,065,469 (2,076,283)
Cash and cash equivalents, beginning of period 7,072,615 9,803,507
----------- -----------
Cash and cash equivalents, end of period 8,138,084 7,727,224
=========== ===========
Supplemental disclosures of cash flow information:
Income Taxes Paid $ 1,417,038 $ 591,345
=========== ===========
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 2006 Form 10-KSB.
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 and nine months ended March 31, 2006, as all options
granted under the Company's stock-based employee compensation plan 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 and nine months ended March 31, 2006.
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 and nine months ended March 31, 2007 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. No new grants have been awarded since July 1, 2006.
Total stock-based compensation expense recognized in the Statement of Income for
the three and nine months ended March 31, 2007, was $43,836 and $119,856,
respectively, before income taxes. The related total deferred tax benefit was
approximately $3,470 and $9,462, for the three and nine months ended March 31,
2007, respectively. Prior to the adoption of SFAS No. 123(R), the Company
presented all tax benefits for deductions resulting from the exercise of stock
options as operating cash flows in the Statements of Cash Flows. SFAS No. 123(R)
requires the tax benefits resulting from tax deductions in excess of the
compensation cost recognized for those options to be classified and reported as
both an operating cash outflow and a financing cash inflow on a prospective
basis upon adoption.
As of March 31, 2007 there was approximately $221,866 of unrecognized
compensation cost related to stock option awards that is expected to be
recognized as expense over a period of 2 years.
The 2000 Stock Option Plan is the Company's only 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
continuous service and have a ten year contractual life. Option grants provide
for accelerated vesting if there is a change in control.
4
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
March 31, 2007, of the options authorized for issuance, 149,400 were granted and
are outstanding, 41,000 of which are vested and exercisable. Options available
for future grants at March 31, 2007 total 68,400.
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, 2007:
Three Months Ended Nine Months Ended
March 31, 2007 March 31, 2007
-------------- --------------
Dividend yield 2.40% 2.53%
Expected stock price volatility 22.29% 21.80%
Risk-free interest rate 4.54% 4.42%
Expected option life (in years) 5.0 5.0
Weighted average fair value per share
of options granted during the period $3.284 $3.284
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
and nine months ended March 31, 2006 as if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation:
Three Months Ended Nine Months Ended
March 31, 2006 March 31, 2006
-------------- --------------
Net income, as reported $ 365,057 $ 857,061
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related income taxes (20,926) (46,710)
-------------- --------------
Pro forma net income $ 344,131 $ 810,351
============== ==============
Income per share:
Basic - as reported $ .18 $ .43
Basic - pro forma $ .17 $ .40
Diluted - as reported $ .18 $ .42
Diluted - pro forma $ .17 $ .40
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 and nine months ended March 31, 2006:
5
Three Months Ended Nine Months Ended
March 31, 2006 March 31, 2006
-------------- --------------
Dividend yield 2.46% 2.46%
Expected stock price volatility 23.26% 23.26%
Risk-free interest rate 4.00% 4.00%
Expected option life (in years) 5.0 5.0
Weighted average fair value per share
of options granted during the period -- $4.221
The following table summarizes stock option activity during the nine months
ended March 31, 2007:
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 37,800 18.29 10
Exercised (25,000) 10.09 --
Forfeited or expired (9,600) 14.44 --
------------------------------------
Balance at March 31, 2007 149,400 15.73 8
====================================
Exercisable at March 31, 2007 41,000 10.15 6
====================================
The intrinsic value of stock options exercised was $106,108, during the nine
months ended March 31, 2007. The intrinsic value of stock options outstanding
and exercisable as of March 31, 2007 was $389,485.
Note 4. Commitments and Contingencies
The Company at times, enters into standby letters of credit agreements with
financial institutions primarily relating to the guarantee of future performance
on certain contracts. The Company has no outstanding standby letters of credit
agreements at March 31, 2007. 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 and an
adjustment to tax liabilities 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.
In September 2006, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 157, Fair Value Measurements. SFAS 157 defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS 157 applies to other accounting pronouncements
that require or permit fair value measurements, but does not require any new
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods within
those years. The Company is currently evaluating the effect of the guidance
contained in SFAS 157 and does not expect the implementation to have a material
effect on the Company's financial statements.
6
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
$114,625 for the quarter ended March 31, 2007 and $333,250 for the nine-month
period ending March 31, 2007. The ESOP shares as of March 31, 2007 were as
follows:
Allocated Shares 426,296
Committed-to-be-released shares 18,750
Unreleased shares 255,417
----------
Total shares held by the ESOP 700,463
==========
Fair value of unreleased shares at March 31, 2007 $5,018,944
==========
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. 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.
The sales backlog of approximately $32.1 million at March 31, 2007 gives the
Company a solid base of future sales. Management continues to expect an increase
in sales for fiscal 2007 as compared to fiscal 2006. In addition to the backlog,
the Company currently has outstanding quotations representing approximately
$39.6 million in the aggregate for both repeat and new programs. New orders
received in the first nine months of fiscal 2007 were approximately $14.7
million compared to approximately $23.7 in the first nine months of fiscal 2006.
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. Although
the sales backlog and new orders booked are down as compared to the same point
in fiscal 2006, many potential orders are currently being discussed and
negotiated with our customers and management expects to book several orders in
the final quarter of the fiscal year. Management is currently in the latter
stage of negotiations with its customers on potential orders representing in
excess of $20 million in the aggregate and expects to increase the backlog
significantly by June 30, 2007. These new orders should allow the Company to
maintain current sales levels for fiscal 2008.
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 $32.1 million at March 31, 2007, down $9
million as compared to March 31, 2006, represents the estimated remaining sales
value of work to be performed under firm contracts and includes orders for
military and industrial power supplies, and contracts to manufacture certain
customer products in accordance with pre-engineered requirements. The funded
portion of this backlog at March 31, 2007 is approximately $27.8 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
8
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 March
31, 2006 was $8.3 million.
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 new 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
We believe 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, 2007 were $8,059,695 as compared
to $4,677,808 for the same period in 2006, representing a 72.3% increase. Net
sales for the nine months ended March 31, 2007 were $20,250,921 as compared to
$14,294,465 for the same period in 2006, representing a 41.7% increase.
Generally, these increases 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 three and nine
months ended March 31, 2007 is largely attributable to an increase in shipments
to two customers for military and industrial power supplies.
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 March 31, 2007 and 2006 gross profits were $1,616,134
and $1,042,265, respectively. Gross profit as a percentage of sales was 20.1%
and 22.3%, for the three months ended March 31, 2007 and 2006, respectively. For
the nine months ended March 31, 2007 and 2006 gross profits were $4,271,663 and
$2,869,915, respectively. Gross profit as a percentage of sales was 21.1% and
20.1%, for the nine months ended March 31, 2007 and 2006, respectively.
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, 2007 was 181 people compared to 173 people at
March 31, 2006.
Selling, general and administrative expenses were $697,740 for the three months
ended March 31, 2007, an increase of $48,639 compared to the three months ended
March 31, 2006. Selling, general and administrative expenses were $2,137,463 for
the nine months ended March 31, 2007, an increase of $152,203 compared to the
nine months ended March 31, 2006. The increase for the three and nine months
ended March 31, 2007, is primarily due to employee training and recruitment
fees, stock option expense and an increase in selling expenses.
9
Other income for three and nine months ended March 31, 2007 increased as
compared to the three and nine months ended March 31, 2006 due to increased
interest income on the Company's cash and cash equivalents and short-term
investments due to higher interest rates. The Company does not believe that
there is a significant risk associated with its investment policy, since at
March 31, 2007 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 March 31, 2007 and 2006 was 33.8% 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 March 31, 2007, was $714,030 or $.35 and
$.34 per share, basic and diluted, respectively, compared to $365,057 or $.18
per share, both basic and diluted, for the three months ended March 31, 2006.
Net income for the nine months ended March 31, 2007, was $1,736,991 or $.85 and
$.84 per share, basic and diluted, respectively, compared to $857,061 or $.43
and $.42 per share, basic and diluted, respectively, for the nine months ended
March 31, 2006. The increase in net income per share was due to higher 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 March 31, 2007 was approximately $27.3
million. During the three months ended March 31, 2007 and 2006 the Company
repurchased 10,196 and 0 shares, respectively, of its common stock from the
Company's Employee Retirement Plan and Trust ("ESOP"), for a total purchase
price of $187,861 and $0, respectively. During the nine months ended March 31,
2007 and 2006 the Company repurchased 16,269 and 38,746 shares, respectively, of
its common stock for a total purchase price of $298,064 and $679,808,
respectively. Under existing authorizations from the Company's Board of
Directors, as of March 31, 2007, management is authorized to purchase an
additional $701,936 of Company stock.
Nine Months Ended March 31,
2007 2006
----------- -----------
Net cash provided by operating activities $2,607,075 $ 310,642
Net cash used in investing activities (659,691) (5,750,964)
Net cash (used in) provided by financing activities (881,915) 3,364,039
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 2007 due to the purchase of short-term investments and the
ESOP described in note 6. The decrease in cash provided by financing activities
is due primarily to the sale of treasury shares to the ESOP in the first half of
fiscal 2007.
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, 2007 and 2006, the Company expended
$371,701 and $360,464, respectively, for plant improvements and new equipment.
The Company has budgeted approximately $500,000 for new equipment and plant
improvements in fiscal 2007 and expects to spend slightly over the budgeted
amount. Management presently anticipates that the funds required will be
available from current operations.
The Company on occasion, 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 were $0 at March 31, 2007.
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. 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)
------------------------------------------------------------------------------------------
March 1 to
March 31, 2007 10,196 $18.425 10,196 $701,936
(1) Pursuant to a prior Board of Directors authorization, as of
March 31, 2007 the Company can repurchase up to $701,936 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
12
Item 6. Exhibits
(a) 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
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 10, 2007
------------
Date
13