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, 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 May 08, 2006
----- ---------------------------
Common stock, $.33-1/3 par value 2,298,562 shares
Transitional Small Business Disclosure Format YES [X] NO [ ]
ESPEY MFG. & ELECTRONICS CORP.
Quarterly Report on Form 10-Q
I N D E X
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Balance Sheet (Unaudited) - March 31, 2006 1
Statements of Income (Unaudited) -
Three and Nine Months Ended March 31, 2006 and 2005 2
Statements of Cash Flows (Unaudited)-
Nine Months Ended March 31, 2006 and 2005 3
Notes to Financial Statements (Unaudited) 4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
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, 2006
ASSETS:
Cash and cash equivalents $ 7,727,224
Short term investments 4,128,000
Trade accounts receivable, net 2,857,520
Other receivables 8,273
Inventories:
Raw materials and supplies 1,769,400
Work-in-process 2,377,807
Costs relating to contracts in process, net of advance
payments of $397,991 at March 31, 2006 8,423,115
------------
Total inventories 12,570,322
Deferred income taxes 135,997
Prepaid expenses and other current assets 695,331
------------
Total current assets 28,122,667
------------
Property, plant and equipment, net 2,914,869
------------
Total assets $ 31,037,536
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 1,738,258
Accrued expenses:
Salaries, wages and commissions 93,135
Vacation 509,689
ESOP payable 256,498
Other 57,825
Payroll and other taxes withheld and accrued 45,311
Income taxes payable 147,871
------------
Total current liabilities 2,848,587
------------
Deferred income taxes 245,557
------------
Total liabilities 3,094,144
------------
Common stock, par value $.33-1/3 per share
Authorized 10,000,000 shares; issued 3,029,874 shares
on March 31, 2006. Outstanding 2,297,762 (includes
280,626 Unearned ESOP Shares) on March 31, 2006 1,009,958
Capital in excess of par value 12,429,727
Retained earnings 25,131,005
Less: Unearned ESOP Shares (4,335,000)
Cost of 732,112 Treasury shares on March 31, 2006 (6,292,298)
------------
Total stockholders' equity 27,943,392
------------
Total liabilities and
stockholders' equity $ 31,037,536
============
See accompanying notes to the financial statements.
1
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three and Nine Months Ended March 31, 2006 and 2005
Three Months Nine Months
2006 2005 2006 2005
---------------------------- ----------------------------
Net sales $ 4,677,808 $ 4,219,861 $ 14,294,465 $ 13,846,929
Cost of sales 3,635,543 3,568,971 11,424,550 11,774,510
------------ ------------ ------------ ------------
Gross profit 1,042,265 650,890 2,869,915 2,072,419
Selling, general and
administrative expenses 649,101 565,145 1,985,260 1,746,362
------------ ------------ ------------ ------------
Operating income 393,164 85,745 884,655 326,057
------------ ------------ ------------ ------------
Other income (expense)
Interest and dividend income 121,213 66,420 331,123 144,908
Other (213) 7,816 (8,650) 14,182
------------ ------------ ------------ ------------
121,000 74,236 322,473 159,090
------------ ------------ ------------ ------------
Income before income taxes 514,164 159,981 1,207,128 485,147
Provision for income taxes 149,107 47,994 350,067 145,544
------------ ------------ ------------ ------------
Net income $ 365,057 $ 111,987 $ 857,061 $ 339,603
============ ============ ============ ============
Net income per share:
Basic $ 0.18 $ 0.06 $ 0.43 $ 0.17
Diluted $ 0.18 $ 0.05 $ 0.42 $ 0.17
------------ ------------ ------------ ------------
Weighted average number of shares outstanding:
Basic 2,010,173 2,021,342 2,010,580 2,023,488
Diluted 2,041,443 2,046,606 2,048,022 2,045,116
------------ ------------ ------------ ------------
Dividends per share: $ 0.0900 $ 0.0750 $ 0.2525 $ 0.2250
============ ============ ============ ============
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, 2006 and 2005
March 31,
2006 2005
------------ ------------
Cash Flows From Operating Activities:
Net income $ 857,061 $ 339,603
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 403,191 411,499
ESOP compensation expense 332,248 --
Loss on disposal of assets 26,741 --
Deferred income tax (52,500) 32,194
Changes in assets and liabilities:
Decrease (Increase) in trade receivable, net 135,720 (517,664)
Increase in other receivables (5,100) (6,256)
(Increase) decrease in inventories (2,202,770) 157,586
Increase in prepaid expenses and other current assets (359,336) (138,370)
Increase in accounts payable 1,359,487 326,195
Increase in accrued salaries, wages and commissions 30,857 15,507
Decrease in accrued employees' insurance costs -- (7,487)
Increase in vacation accrual 11,674 4,984
Increase in other accrued expenses 4,042 4,286
Increase in payroll and other taxes withheld and accrued 9,334 17,503
Decrease in income taxes payable (164,257) (123,552)
Decrease in ESOP payable (75,750) --
------------ ------------
Net cash provided by operating activities 310,642 516,028
------------ ------------
Cash Flows From Investing Activities:
Unearned ESOP Shares (4,335,000) --
Additions to property, plant and equipment (360,464) (380,305)
Proceeds on sale of assets, net 500 --
Purchase of short term investments (5,280,000) (2,304,000)
Maturity of short term investments 4,224,000 672,000
------------ ------------
Net cash used in investing activities (5,750,964) (2,012,305)
------------ ------------
Cash Flows From Financing Activities:
Sale of treasury stock 4,396,423 --
Dividends on common stock (505,631) (455,042)
Purchase of treasury stock (679,808) (215,366)
Proceeds from exercise of stock options 153,055 15,500
------------ ------------
Net cash provided by (used in) financing activities 3,364,039 (654,908)
------------ ------------
Decrease in cash and cash equivalents (2,076,283) (2,151,185)
Cash and cash equivalents, beginning of period 9,803,507 12,310,972
------------ ------------
Cash and cash equivalents, end of period 7,727,224 10,159,787
============ ============
Supplemental disclosures of cash flow information:
Income Taxes Paid $ 591,345 $ 236,902
============ ============
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 2005 Form 10-K.
Note 2. Net income per Share
Basic net income per share excludes dilution and is computed by dividing net
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted net income per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the income of the Company. As
Unearned ESOP shares are released or committed-to-be-released the shares become
outstanding for earnings-per-share computations.
Note 3. Stock Based Compensation
The Company has elected to account for its stock-based compensation plans under
the intrinsic value-based method of accounting as permitted by SFAS No. 123 and
as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations including FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - An Interpretation of APB No. 25," in accounting for its fixed
stock option plans. Under this method, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price.
The following table illustrates the effect on net income and net income per
share 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, March 31,
2006 2005 2006 2005
--------- --------- --------- ---------
Net income as reported $ 365,057 $ 111,987 $ 857,061 $ 339,603
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (20,926) (8,286) (46,710) (26,660)
--------- --------- --------- ---------
Pro forma net income $ 344,131 $ 103,701 $ 810,351 $ 312,943
========= ========= ========= =========
Net Income per share:
Basic-as reported $ .18 $ .06 $ .43 $ .17
========= ========= ========= =========
Basic-pro forma $ .17 $ .05 $ .40 $ .15
========= ========= ========= =========
Diluted-as reported $ .18 $ .05 $ .42 $ .17
========= ========= ========= =========
Diluted-pro forma $ .17 $ .05 $ .40 $ .15
========= ========= ========= =========
4
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 March 31, 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 December 2004, the FASB issued SFAS No. 123R, "Share Based Payment." SFAS No.
123R requires companies to recognize in the income statement the grant-date fair
value of stock options and other equity-based compensation issued to employees.
SFAS No. 123R was originally effective for interim and annual periods beginning
after December 15, 2005. The effective date has been delayed by the SEC until
annual periods beginning after December 15, 2005. The SFAS No. 123R is not
expected to have a material impact on the Company's results of operations and
financial condition (see note 3).
In June 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections", a replacement of APB Opinion No. 20, "Accounting Changes", and
SFAS No. 3, "Reporting Accounting Changes in Interim Financial Statements". SFAS
No. 154 changes the requirements of the accounting for and reporting of a change
in accounting principle. Previously, most voluntary changes in accounting
principles required recognition via a cumulative effect adjustment within net
income in the period of the change. SFAS No. 154 requires retrospective
application to prior periods' financial statements, unless it is impractical to
determine either the period-specific effects or the cumulative effect of the
change. SFAS No. 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005, however, the Statement does not change the
transition provisions of any of the existing accounting pronouncements. We do
not believe adoption of SFAS No. 154 will have a material effect on our
consolidated financial position, results of operations or cash flows.
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.
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.
5
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
$104,948 for the quarter ended March 31, 2006 and $332,248 for the nine-month
period ending March 31, 2006. The ESOP shares as of March 31 (after the stock
split described in note 7) were as follows:
Allocated Shares 420,585
Committed-to-be-released shares 19,374
Unreleased shares 280,626
----------
Total shares held by the ESOP 720,585
==========
Fair value of unreleased shares at March 31, 2006 $4,447,922
==========
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.
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.
Management is optimistic about the future of the Company. In the first nine
months of fiscal 2006, the Company received approximately $23.7 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 $41.2 million at March 31, 2006 gives the
Company a solid base of future sales and, therefore, management expects an
increase in sales for fiscal 2006 as compared to fiscal 2005. In addition to the
backlog, the Company currently has outstanding quotations representing
approximately $21.2 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 $41.2 million at March 31, 2006, up $26.9
million over March 31, 2005, represents the estimated remaining sales value of
work to be performed under firm contracts. The funded portion of this backlog at
March 31, 2006 is approximately $32.9 million. This includes items that have
been authorized and appropriated by Congress and/or funded by the customer. The
unfunded backlog is approximately $8.3 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 March
31, 2005 was zero. The backlog at March 31, 2006 as discussed above, includes
significant orders
7
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 March 31, 2006 were $4,677,808 as compared
to $4,219,861 for the same period in 2005, representing a 10.9% increase. Net
sales for the nine months ended March 31, 2006 were $14,294,465 as compared to
$13,846,929 for the same period in 2005, representing a 3.2% increase.
Generally, this increase can be attributed to the contract specific nature of
the Company's business and the long-term nature of these contracts. The increase
in backlog that occurred during the last two quarters of fiscal 2005 began to be
recognized in net sales. This trend is expected to continue into the next
several quarters. New orders received in the first nine months of fiscal 2006
were approximately $23.7 million compared to approximately $12.7 million in the
first nine months of fiscal 2005.
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, 2006 and 2005 gross profits were $1,042,265
and $650,890, respectively. Gross profit as a percentage of sales was 22.3% and
15.4%, for the three months ended March 31, 2006 and 2005, respectively. For the
nine months ended March 31, 2006 and 2005 gross profits were $2,869,915 and
$2,072,419, respectively. Gross profit as a percentage of sales was 20.1% and
15.0%, for the nine months ended March 31, 2006 and 2005, respectively. The
improved gross profit percentage in the three and nine months ended March 31,
2006, relates to favorable product mix, offset partially by higher ESOP
contribution expense and higher energy costs. ESOP contribution expense included
in cost of sales was $83,958 for the three months ended March 31, 2006, and
$265,799 for the nine months ended March 31, 2006, and $0 for both comparable
periods of the prior year (see note 6 to the financial statements). 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 March 31, 2006 was 173 people compared to
171 people at March 31, 2005.
Selling, general and administrative expenses were $649,101 for the three months
ended March 31, 2006; an increase of $83,956 compared to the three months ended
March 31, 2005. Selling, general and administrative expenses were $1,985,260 for
the nine months ended March 31, 2006; an increase of $238,898 compared to the
nine months ended
8
March 31, 2005. The increase is primarily due to an increase in the sales force
and ESOP contribution expense, offset partially by a decrease in professional
fees.
Other income for three and nine months ended March 31, 2006 increased as
compared to the three and nine months ended March 31, 2005 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, 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 March 31, 2006 and 2005 was 29.0% and 30.0%,
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, 2006, was $365,057 or $.18 per
share, both basic and diluted, respectively, compared to $111,987 or $.06 and
$.05 per share, basic and diluted, for the three months ended March 31, 2005.
Net income for the nine months ended March 31, 2006, was $857,061 or $.43 and
$.42 per share, basic and diluted, compared to $339,603 or $.17 per share, both
basic and diluted, for the nine months ended March 31, 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 March 31, 2006 was approximately $25.3
million. During the three months ended March 31, 2006 and 2005 the Company
repurchased 0 and 9,420 shares, respectively, of its common stock from the
Company's Employee Retirement Plan and Trust ("ESOP"), for a total purchase
price of $0 and $125,051, respectively. During the nine months ended March 31,
2006 and 2005 the Company repurchased 38,746 and 17,448 shares, respectively, of
its common stock for a total purchase price of $679,808 and $215,366,
respectively. Under existing authorizations from the Company's Board of
Directors, as of March 31, 2006, management is authorized to purchase an
additional $737,876 of Company stock.
Nine Months Ended March 31,
2006 2005
---------- ----------
Net cash provided by operating activities $ 310,642 $ 516,028
Net cash used in investing activities (5,750,964) (2,012,305)
Net cash provided by (used in) financing activities 3,364,039 (654,908)
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 2006 due to the purchase of short-term investments and the
ESOP transaction described in note 6. The increase in cash provided by financing
activities is due primarily to the sale of treasury shares to the ESOP in the
first half of fiscal 2006.
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, 2006 and 2005, the Company expended
$360,464 and $380,305, respectively, for plant improvements and new equipment.
The Company has budgeted approximately $500,000 for new equipment and plant
improvements in fiscal 2006. Management presently anticipates that the funds
required will be available from current operations.
9
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 $246,620 at March 31, 2006. The Company does not
expect to fund any of the amounts under the standby letters of credit.
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 March 31, 2006, there were 420,585 shares (after giving effect to the
one-for-one stock dividend) allocated to participants.
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) Securities Sold -For the three and nine-month periods
ended March 31, 2006, 1,000 and 16,400 stock options
were exercised under the Company's existing stock option
plan, respectively. In addition to the stock option
shares, the Company sold 3,520 shares to the ESOP for
the three and nine-month periods ended March 31, 2006.
The securities were sold for cash and the sales were
made without registration under the Securities Act in
reliance upon the exemption from registration afforded
under Section 4(2) of the Securities Act of 1933.
Proceeds were used for general working capital purposes.
(c) Securities Repurchased
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, 2006 -- -- -- $737,876
(1) Pursuant to a prior Board of Directors authorization, as of
March 31, 2006 the Company can repurchase up to $737,876 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 08, 2006
------------
Date
13