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, 2008
[ ] 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 14, 2008
----- ---------------------------
Common stock, $.33-1/3 par value 2,324,773 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, 2008 1
Statements of Income (Unaudited) -
Three and Nine Months Ended March 31, 2008 and 2007 2
Statements of Cash Flows (Unaudited)-
Nine Months Ended March 31, 2008 and 2007 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, 2008
ASSETS:
Cash and cash equivalents $ 6,588,780
Short term investments 6,847,000
Trade accounts receivable, net 3,795,069
Other receivables 4,873
ESOP receivable due to dividends on unallocated shares 129,681
Inventories:
Raw materials 1,622,904
Work-in-process 2,852,379
Costs relating to contracts in process, net of advance
payments of $230,700 at March 31, 2008 6,086,123
------------
Total inventories 10,561,406
Deferred income taxes 180,769
Prepaid expenses and other current assets 340,970
------------
Total current assets 28,448,548
------------
Property, plant and equipment, net 2,989,879
Loan receivable 73,605
------------
Total assets $ 31,512,032
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 1,127,907
Accrued expenses:
Salaries, wages and commissions 182,515
Vacation 527,616
Other 41,974
Payroll and other taxes withheld and accrued 41,983
Income taxes payable 175,723
------------
Total current liabilities 2,097,718
------------
Deferred income taxes 148,036
------------
Total liabilities 2,245,754
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Common stock, par value $.33-1/3 per share.
Authorized 10,000,000 shares; issued 3,029,874 shares
on March 31, 2008. Outstanding 2,324,773 (includes
231,042 Unearned ESOP Shares) on March 31, 2008 1,009,958
Capital in excess of par value 13,252,634
Retained earnings 25,278,350
Less: Unearned ESOP Shares (3,600,459)
Treasury shares, cost of 705,101 shares on March 31, 2008 (6,674,205)
------------
Total stockholders' equity 29,266,278
------------
Total liabilities and stockholders' equity $ 31,512,032
============
See accompanying notes to the financial statements.
1
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three and Nine Months Ended March 31, 2008 and 2007
Three Months Nine Months
2008 2007 2008 2007
------------------------- -------------------------
Net sales $ 6,479,020 $ 8,059,695 $19,512,950 $20,250,921
Cost of sales 4,301,589 6,443,561 14,303,824 15,979,258
----------- ----------- ----------- -----------
Gross profit 2,177,431 1,616,134 5,209,126 4,271,663
Selling, general and
administrative expenses 647,998 697,740 2,017,370 2,137,463
----------- ----------- ----------- -----------
Operating income 1,529,433 918,394 3,191,756 2,134,200
----------- ----------- ----------- -----------
Other income (expense)
Interest and dividend income 137,594 151,896 537,039 447,285
Other 16,186 9,589 64,748 43,939
----------- ----------- ----------- -----------
153,780 161,485 601,787 491,224
----------- ----------- ----------- -----------
Income before income taxes 1,683,213 1,079,879 3,793,543 2,625,424
Provision for income taxes 584,008 365,849 1,305,669 888,433
----------- ----------- ----------- -----------
Net income $ 1,099,205 $ 714,030 $ 2,487,874 $ 1,736,991
=========== =========== =========== ===========
Net income per share:
Basic $ 0.53 $ 0.35 $ 1.20 $ 0.85
Diluted $ 0.53 $ 0.34 $ 1.18 $ 0.84
----------- ----------- ----------- -----------
Weighted average number of shares outstanding:
Basic 2,083,659 2,053,545 2,074,743 2,044,839
Diluted 2,098,596 2,077,994 2,101,177 2,069,730
----------- ----------- ----------- -----------
Dividends per share: $ 1.70 $ 0.15 $ 2.05 $ 0.41
=========== =========== =========== ===========
See accompanying notes to the financial statements.
2
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows (Unaudited)
Nine Months Ended March 31, 2008 and 2007
March 31,
2008 2007
------------ ------------
Cash Flows From Operating Activities:
Net income $ 2,487,874 $ 1,736,991
Adjustments to reconcile net income to net cash provided by operating
activities:
Excess tax benefits from share-based compensation 83,471 64,636
Stock option compensation 115,822 119,856
Depreciation 368,147 363,833
ESOP compensation expense 381,111 333,250
Loss on disposal of assets (385) 5,404
Deferred income tax (33,968) (54,867)
Changes in assets and liabilities:
Increase in trade receivable, net (774,588) (363,816)
(Increase) decrease in other receivables (1,425) 3,528
Increase in ESOP receivable due to dividends on unallocated shares (129,681) --
Decrease in inventories 587,921 720,318
Decrease (increase) in prepaid expenses and other current assets 207,242 (91,540)
Increase in accounts payable 146,956 383,277
Increase in accrued salaries, wages and commissions 20,313 26,623
Decrease in other accrued expenses (4,061) (4,265)
(Decrease) increase in vacation accrual (54,865) 726
(Decrease) increase in payroll and other taxes withheld and accrued (83) 13,611
Decrease in income taxes payable (107,691) (602,718)
Decrease in ESOP payable (381,111) (112,408)
------------ ------------
Net cash provided by operating activities 2,910,999 2,542,439
------------ ------------
Cash Flows From Investing Activities:
Additions to property, plant and equipment (423,131) (371,701)
Proceeds on sale of assets, net -- 10
Payment for loan receivable (80,000) --
Proceeds from return of loan receivable 6,395 --
Purchase of short term investments (5,887,000) (3,648,000)
Maturity of short term investments 3,360,000 3,360,000
------------ ------------
Net cash used in investing activities (3,023,736) (659,691)
------------ ------------
Cash Flows From Financing Activities:
Sale of treasury stock -- --
Dividends on common stock (4,263,849) (836,111)
Purchase of treasury stock (716,363) (298,064)
Proceeds from exercise of stock options 502,147 252,260
Excess tax benefits from share-based compensation 83,471 64,636
------------ ------------
Net cash (used in) provided by financing activities (4,394,594) (817,279)
------------ ------------
(Decrease) increase in cash and cash equivalents (4,507,331) 1,065,469
Cash and cash equivalents, beginning of period 11,096,111 7,072,615
------------ ------------
Cash and cash equivalents, end of period 6,588,780 8,138,084
============ ============
Supplemental disclosures of cash flow information:
Income Taxes Paid $ 1,290,000 $ 1,417,038
============ ============
Non-cash investing and financing activities:
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, 2007.
Note 2. Net income per Share
Basic net income per share excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the income of the Company. As
Unearned ESOP shares are released or committed-to-be-released the shares become
outstanding for earnings-per-share computations.
Note 3. Stock Based Compensation
Effective July 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (Revised 2004),"Share-Based Payment" ("SFAS No. 123 (R)"),
which amends SFAS No. 123 and supersedes Accounting Principles Board Opinion
("APB") No. 25 in establishing standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services, as well
as transactions in which an entity incurs liabilities in exchange for goods or
services that are based on the fair value of the entity's equity instruments or
that maybe settled by the issuance of those equity instruments. SFAS No. 123(R)
requires that the cost resulting from all share-based payment transactions be
recognized in the financial statements based on the fair value of the
share-based payment. SFAS No.123(R) establishes fair value as the measurement
objective in accounting for share-based payment transactions with employees,
except for equity instruments held by employee share ownership plans. As allowed
under SFAS No. 123(R), the Company elected the modified prospective method of
adoption, under which compensation cost is recognized in the financial
statements beginning with the effective date of SFAS No. 123(R) for all
share-based payments granted after that date, and for all unvested awards
granted prior to the effective date of SFAS No. 123(R). Accordingly, prior
period amounts have not been restated.
Total stock-based compensation expense recognized in the Statement of Income for
the three months ended March 31, 2008 and 2007, was $32,491 and $43,836,
respectively, before income taxes. The related total deferred tax benefit was
approximately $2,487 and $3,470, for the three months ended March 31, 2008 and
2007, respectively. Total stock-based compensation expense recognized in the
Statement of Income for the nine months ended March 31, 2008 and 2007, was
$115,822 and $119,856, respectively, before income taxes. The related total
deferred tax benefit was approximately $8,991 and $9,462, for the nine months
ended March 31, 2008 and 2007, respectively. Prior to the adoption of SFAS No.
123(R), the Company presented all tax benefits for deductions resulting from the
exercise of stock options as operating cash flows in the Statements of Cash
Flows. SFAS No. 123(R) requires the tax benefits resulting from tax deductions
in excess of the compensation cost recognized for those options to be classified
and reported as both an operating cash outflow and a financing cash inflow on a
prospective basis upon adoption.
As of March 31, 2008, there was approximately $55,201 of unrecognized
compensation cost related to stock option awards that is expected to be
recognized as expense over a period of 1 year.
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
4
contractual life. Option grants provide for accelerated vesting if there is a
change in control. Shares issued upon the exercise of options are from those
held in Treasury. The 2007 Plan was approved by the Company's shareholders at
the Company's Annual Meeting on November 30, 2007 and supercedes the Company's
2000 Stock Option Plan (the "2000 Plan"). Options covering 400,000 shares are
authorized for issuance under the 2007 Plan, of which zero have been granted as
of March 31, 2008. While no further grants of options may be made under the 2000
Plan, as of March 31, 2008, 96,100 options were outstanding of which 28,700 are
vested and exercisable.
SFAS No. 123(R) requires the use of a valuation model to calculate the fair
value of stock-based awards. The Company has elected to use the Black-Scholes
option valuation model, which incorporates various assumptions including those
for volatility, expected life and interest rates.
The table below outlines the weighted average assumptions that the Company used
to calculate stock-based employee compensation for the three and nine months
ended March 31, 2008:
Three Months Ended Nine Months Ended
March 31, 2008 March 31, 2008
------------------ -----------------
Dividend yield 2.59% 2.40%
Expected stock price volatility 20.50% 22.29%
Risk-free interest rate 4.80% 4.54%
Expected option life (in years) 5 5
Weighted average fair value per share
of options granted during the period $3.95 $4.04
The Company pays dividends quarterly and does plan to pay dividends in the
foreseeable future. Expected stock price volatility is based on the historical
volatility of the Company's stock. The risk-free interest rate is based on the
implied yield available on U.S. Treasury issues with an equivalent term
approximating the expected life of the options. The expected option life (in
years) represents the estimated period of time until exercise and is based on
the safe harbor calculation under SFAS No. 123.
The following table summarizes stock option activity during the nine months
ended March 31, 2008:
Employee Stock Options Plan
-------------------------------------
Weighted
Number of Weighted Average
Shares Average Remaining
Subject Exercise Contractual
To Option Price Term
-------------------------------------
Balance at July 1, 2007 138,800 $15.77 7.38
Granted -- -- --
Exercised (41,100) $12.22 --
Forfeited or expired (1,600) $18.05 --
-------------------------------------
Balance at March 31, 2008 96,100 $17.25 8.03
=====================================
Exercisable at March 31, 2008 28,700 $15.37 6.88
=====================================
The intrinsic value of stock options exercised was $240,245 and $106,108 during
the nine months ended March 31, 2008 and 2007, respectively. The intrinsic value
of stock options outstanding and exercisable as of March 31, 2008 and 2007 was
$132,828 and $389,485, 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 March 31, 2008. As a
government contractor, the Company is continually subject to audit by various
agencies of the U.S. Government to determine compliance with various procurement
laws and regulations. As a result of such audits and as part of normal business
operations of the Company, various claims and charges can be asserted against
the Company. It is not possible to predict the outcome of such actions.
Currently the Company has no claims or assertions against it.
5
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 was effective beginning July 1, 2007. The adoption of
FIN 48 did 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.
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
$117,937 for the quarter ended March 31, 2008 and $381,111 for the nine-month
period ending March 31, 2008. The ESOP shares as of March 31, 2008 were as
follows:
Allocated Shares 418,076
Committed-to-be-released shares 18,125
Unreleased shares 231,042
-----------
Total shares held by the ESOP 667,243
===========
Fair value of unreleased shares at March 31, 2008 $ 4,620,840
===========
6
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.
In the first nine months of fiscal 2008, the Company received approximately
$16.3 million in new orders. These orders include both follow-on production
quantities for mature products and engineering development orders which will
enable the Company to utilize its engineering expertise in developing new
customer specific products. Some of these products, once developed, will be
produced in the Company's manufacturing facility and are expected to provide
large production order quantities over several years. These orders are in line
with the Company's strategy of getting involved in long-term high quantity
military and industrial products. The Company's backlog is $41.8 million at May
12, 2008, which includes $27.5 million from the two most significant customers
in the first nine months of fiscal 2008.
The sales backlog of approximately $33.0 million at March 31, 2008 gives the
Company a solid base of future sales. Management expects sales for fiscal 2008
to be slightly less than fiscal 2007 sales. In addition to the backlog, the
Company currently has outstanding quotations and expected business representing
approximately $34.7 million in the aggregate for both repeat and new programs.
Sales to two significant customers in the first nine months of fiscal 2008 and
2007 represented 58.0% and 58.9%, respectively, of the Company's total sales.
While the Company has always had a small number of customers that account for a
large percentage of its total sales in any given year, management is pursuing
business opportunities involving significant product programs with new and
current customers with an overall objective of lowering the concentration of
sales and minimizing the impact of a significant customer or excessive reliance
upon a single major product program of a particular customer. The backlog at
March 31, 2008 of $33.0 million includes $23.0 million from the two most
significant customers in the first nine months of 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.
7
The total backlog for the Company of $33.0 million at March 31, 2008, up $0.9
million from March 31, 2007, and up $1.6 million from December 31, 2007,
represents the estimated remaining sales value of work to be performed under
firm contracts. These contracts include significant orders for military and
industrial power supplies, and contracts to manufacture certain customer
products in accordance with pre-engineered requirements.
Management, along with the Board of Directors, continues to evaluate the need
and use of the Company's working capital. Expectations are that the working
capital will be required to fund any increase in orders over the next several
quarters, dividend payments, and general operations of the business. Also, the
Mergers and Acquisitions Committee of the Board of Directors continues to
evaluate potential strategic options on a periodic basis.
Critical Accounting Policies and Estimates
Management believes our most critical accounting policies include revenue
recognition and estimates to completion.
A significant portion of our business is comprised of development and production
contracts. Generally, revenues on long-term fixed-price contracts are recorded
on a percentage of completion basis using units of delivery as the measurement
basis for progress toward completion.
Percentage of completion accounting requires judgment relative to expected
sales, estimating costs and making assumptions related to technical issues and
delivery schedule. Contract costs include material, subcontract costs, labor and
an allocation of overhead costs. The estimation of cost at completion of a
contract is subject to numerous variables involving contract costs and estimates
as to the length of time to complete the contract. Given the significance of the
estimation processes and judgments described above, it is possible that
materially different amounts of expected sales and contract costs could be
recorded if different assumptions were used, based on changes in circumstances,
in the estimation process. When a change in expected sales value or estimated
cost is determined, changes are reflected in current period earnings.
Results of Operations
Net sales for the three months ended March 31, 2008 were $6,479,020 as compared
to $8,059,695 for the same period in 2007, representing a 19.6% decrease. Net
sales for the nine months ended March 31, 2008 were $19,512,950 as compared to
$20,250,921 for the same period in 2007, representing a 3.6% decrease.
Generally, these decreases can be attributed to the contract specific nature of
the Company's business. Also, one large program currently in production
experienced vendor delays with material needed to produce power supplies, which
caused decreased sales for the quarter. New orders received in the first nine
months of fiscal 2008 were approximately $16.3 million, representing a 10.9%
increase over the amount of new orders received in the first nine months of
fiscal 2007. The sales order backlog has been over $30 million for twelve
consecutive fiscal quarters and expectations are this trend will continue.
For the three months ended March 31, 2008 and 2007 gross profits were $2,177,431
and $1,616,134, respectively. Gross profit as a percentage of sales was 33.6%
and 20.1%, for the three months ended March 31, 2008 and 2007, respectively. For
the nine months ended March 31, 2008 and 2007 gross profits were $5,209,126 and
$4,271,663, respectively. Gross profit as a percentage of sales was 26.7% and
21.1%, for the nine months ended March 31, 2008 and 2007, respectively. The
primary factor in determining gross profit and net income is product mix. The
gross profits on mature products and build to print contracts are higher as
compared to products which are still in the engineering development stage or in
the early stages of production. In any given accounting period the mix of
product shipments between higher margin mature programs and less mature programs
including loss contracts, has a significant impact on gross profit and net
income. The improved gross profit and gross profit percentage in the three and
nine months ended March 31, 2008, was the result of shipping mature products
with favorable margins. 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, 2008 was 173 compared to 182 people at
March 31, 2007.
Selling, general and administrative expenses were $647,998 for the three months
ended March 31, 2008; a decrease of $49,742 compared to the three months ended
March 31, 2007. Selling, general and administrative expenses were $2,017,370 for
the nine months ended March 31, 2008; a decrease of $120,093 compared to the
nine months ended March 31, 2007. The decrease is due primarily to reduced
headcount.
8
Other income for three months ended March 31, 2008 decreased as compared to the
three months ended March 31, 2007 due to decreased interest income on the
Company's cash and cash equivalents and short-term investments. Lower interest
rates and lower cash and cash equivalents due to the special dividend of $1.50
per share paid to shareholders on March 20, 2008, caused this decrease. Other
income for the nine months ended March 31, 2008 increased as compared to the
nine months ended March 31, 2007 due to higher balances of cash and cash
equivalents for a majority of the nine month period ended March 31, 2008. The
Company does not believe that there is a significant risk associated with its
investment policy, since at March 31, 2008 all of the investments are primarily
represented by short-term liquid investments including certificates of deposit
and money market funds.
The effective income tax rate at March 31, 2008 and 2007 was 34.4% and 33.8%,
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, 2008, was $1,099,205 or $.53 per
share, both basic and diluted, compared to $714,030 or $.35 and $.34 per share,
basic and diluted, respectively, for the three months ended March 31, 2007. Net
income for the nine months ended March 31, 2008, was $2,487,874 or $1.20 and
$1.18 per share, basic and diluted, respectively, compared to $1,736,991 or $.85
and $.84 per share, basic and diluted, respectively, for the nine months ended
March 31, 2007. The increase in net income per share was due to higher gross
profit as a percentage of sales, a decrease in selling, general and
administrative expenses, and increased interest income.
Liquidity and Capital Resources
The Company's working capital is an appropriate indicator of the liquidity of
its business, and during the past three fiscal years, the Company, when
possible, has funded all of its operations with cash flows resulting from
operating activities and when necessary from its existing cash and investments.
The Company did not borrow any funds during the last three fiscal years.
Management had available a $3,000,000 line of credit to help fund further growth
or working capital needs, but did not anticipate the need for any borrowed funds
in the foreseeable future and therefore did not renew the line of credit which
expired November 30, 2007.
The Company's working capital as of March 31, 2008 was approximately $26.4
million. During the three months ended March 31, 2008 and 2007 the Company
repurchased 7,500 and 10,196 shares, respectively, of its common stock from the
Company's Employee Retirement Plan and Trust ("ESOP"), for a total purchase
price of $144,600 and $187,861, respectively. During the nine months ended March
31, 2008 and 2007 the Company repurchased 33,220 and 16,269 shares,
respectively, of its common stock for a total purchase price of $716,363 and
$298,064, respectively. Under existing authorizations from the Company's Board
of Directors, as of March 31, 2008, management is authorized to purchase an
additional $1,283,637 million of Company stock.
Nine Months Ended March 31,
2008 2007
----------- ----------
Net cash provided by operating activities $2,910,999 $2,542,439
Net cash used in investing activities (3,023,736) (659,691)
Net cash used in financing activities (4,394,594) (817,279)
Net cash provided by operating activities fluctuates between periods primarily
as a result of differences in net income, the timing of the collection of
accounts receivable, purchase of inventory, level of sales and payment of
accounts payable. Net cash used in investing activities increased in the first
nine months of fiscal 2008 due to the increase in purchases of short-term
investments. The increase in cash used in financing activities is due primarily
to the increase in purchases of treasury stock and the increase in dividends
paid.
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, 2008 and 2007, the Company expended
$423,131 and $371,701, respectively, for plant improvements and new equipment.
The Company has budgeted approximately $400,000 for new equipment and plant
improvements in fiscal 2008 (and does not anticipate additional expenditures of
this nature during the fourth quarter).
9
The Company at certain times enters into standby letters of credit agreements
with financial institutions primarily relating to the guarantee of future
performance on certain contracts. Contingent liabilities on outstanding standby
letters of credit agreements aggregated to zero at March 31, 2008.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The terms "believe,"
"anticipate," "intend," "goal," "expect," and similar expressions may identify
forward-looking statements. These forward-looking statements represent the
Company's current expectations or beliefs concerning future events. The matters
covered by these statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those set forth in the
forward-looking statements, including the Company's dependence on timely
development, introduction and customer acceptance of new products, the impact of
competition and price erosion, supply and manufacturing constraints, potential
new orders from customers and other risks and uncertainties. The foregoing list
should not be construed as exhaustive, and the Company disclaims any obligation
subsequently to revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events. The Company wishes to caution readers not
to place undue reliance on any such forward-looking statements, which speak only
as of the date made.
Item 3. 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.
10
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, 2008 7,500 $19.28 7,500 $1,283,637
(1) Pursuant to a prior Board of Directors authorization, as of
March 31, 2008 the Company can repurchase up to $1,283,637 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
11
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 14, 2008
------------
Date
12