Company Quick10K Filing
Espey Mfg & Electronics
Price24.81 EPS1
Shares2 P/E25
MCap60 P/FCF19
Net Debt-5 EBIT3
TEV55 TEV/EBIT18
TTM 2019-09-30, in MM, except price, ratios
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ESP 10Q Quarterly Report

Part I: Financial Information
Note 1. Basis of Presentation
Note 2. Net Income per Share
Note 3. Stock Based Compensation
Note 4. Commitments and Contingencies
Note 5. Recently Issued Accounting Standards
Note 6. Employee Stock Ownership Plan
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4T. Controls and Procedures
Part Ii: Other Information and Signatures
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4. Submission of Matters To A Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31-1.htm
EX-31.2 ex31-2.htm
EX-32.1 ex32-1.htm
EX-32.2 ex32-2.htm

Espey Mfg & Electronics Earnings 2009-12-31

Balance SheetIncome StatementCash Flow
40322416802012201420172020
Assets, Equity
151185202012201420172020
Rev, G Profit, Net Income
3.82.41.0-0.5-1.9-3.32012201420172020
Ops, Inv, Fin

10-Q 1 form10q-105275_esp.htm FORM 10Q form10q-105275_esp.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q

S      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended   December 31, 2009
OR
 
£      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ______ to ______    

Commission File Number I-4383


ESPEY MFG. & ELECTRONICS CORP.
 (Exact name of registrant as specified in its charter)

NEW YORK
14-1387171
(State of incorporation)
(I.R.S. Employer's Identification No.)

233 Ballston Avenue, Saratoga Springs, New York  12866
(Address of principal executive offices)

Registrant's telephone number, including area code     518-584-4100


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    S Yes     £ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:
£ Large accelerated filer  
£ Accelerated filer
£ Non-accelerated filer
S Smaller reporting company

Indicate by check mark whether the registrant is a shell company. £ Yes     S No


At February 10, 2010, there were 2,316,576 shares outstanding of the registrant's Common stock, $.33-1/3 par value.

 
 

 

ESPEY MFG. & ELECTRONICS CORP.
Quarterly Report on Form 10-Q
I N D E X

PART I
FINANCIAL INFORMATION
PAGE
         
 
Item 1
Financial Statements:
 
         
     
Balance Sheets - December 31, 2009 (Unaudited) and June 30, 2009
1
         
     
Statements of Income (Unaudited) - Three and Six Months Ended December 31, 2009 and 2008
3
         
     
Statements of Cash Flows (Unaudited) - Six Months Ended December 31, 2009 and 2008
4
         
     
Notes to Financial Statements (Unaudited)
5
         
 
Item 2
Management's Discussion and Analysis of  Financial Condition and Results of Operations
8
         
         
 
Item 3
Quantitative and Qualitative Disclosures About Market Risk
11
         
 
Item 4T
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 Upon Senior Securities
12
         
 
Item 4
Submission of Matters to a Vote of Security Holders
12
         
 
Item 5
Other Information
13
         
 
Item 6
Exhibits
13
         
SIGNATURES
14




 
 

 

PART I:  FINANCIAL INFORMATION

ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
December 31, 2009 (Unaudited) and June 30, 2009


 
 
2009
   
2009
 
 
 
December 31,
   
June 30,
 
             
ASSETS:
           
             
     Cash and cash equivalents
  $ 2,194,735     $ 2,775,319  
     Short term investments
    7,306,541       6,349,874  
     Trade accounts receivable, net
    2,854,751       5,133,792  
     Income tax receivable
    280,669       --  
     Other receivables
    15       297  
     ESOP receivable due to dividends on unallocated shares
    163,726       71,053  
                 
     Inventories:
               
          Raw materials
    1,298,947       1,394,441  
          Work-in-process
    1,184,996       1,107,880  
          Costs relating to contracts in process, net of advance
               
               payments of $1,256 at December 31, 2009 and
               
               $60,079 at June 30, 2009
    10,226,425       10,526,884  
       Total inventories
    12,710,368       13,029,205  
                 
     Deferred income taxes
    224,943       224,835  
     Prepaid expenses and other current assets
    96,064       233,072  
               Total current assets
    25,831,812       27,817,447  
                 
     Property, plant and equipment, net
    2,798,326       2,738,222  
     Loan receivable
    29,722       38,673  
                 
               Total assets
  $ 28,659,860     $ 30,594,342  
                 
                 
See accompanying notes to the financial statements.
         
(Continued)
 



 

 
1

 


ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
December 31, 2009 (Unaudited) and June 30, 2009


   
2009
   
2009
 
   
December 31,
   
June 30,
 
             
LIABILITIES AND STOCKHOLDERS' EQUITY:
           
             
Accounts payable
  $ 976,197     $ 999,521  
Accrued expenses:
               
Salaries, wages and commissions
    156,298       219,533  
Vacation
    494,951       520,072  
Other
    63,633       42,863  
Payroll and other taxes withheld and accrued
    53,877       42,075  
Income taxes payable
    --       266,891  
Total current liabilities
    1,744,956       2,090,955  
                 
Deferred income taxes
    84,759       99,253  
Total liabilities
    1,829,715       2,190,208  
                 
Common stock, par value $.33-1/3 per share.
               
Authorized 10,000,000 shares; issued 3,029,874 shares
               
on December 31, 2009 and June 30, 2009.  Outstanding
               
2,316,576 and 2,314,803 (includes 190,416 and 201,666
               
Unearned ESOP Shares on December 31, 2009 and
               
June 30, 2009, respectively)
    1,009,958       1,009,958  
                 
Capital in excess of par value
    14,013,454       13,755,808  
                 
Retained earnings
    21,897,585       23,485,675  
      36,920,997       38,251,441  
                 
Less:   Unearned ESOP shares
    (2,914,077 )     (2,914,077 )
                 
Treasury shares, cost of 713,298 shares on December
               
31, 2009 and 715,071 shares on June 30, 2009
    (7,176,775 )     (6,933,230 )
Total stockholders’ equity
    26,830,145       28,404,134  
                 
Total liabilities and stockholders' equity
  $ 28,659,860     $ 30,594,342  
                 

See accompanying notes to the financial statements.


 
2

 

ESPEY MFG. & ELECTRONICS CORP.
 Statements of Income (Unaudited)
Three and Six Months Ended December 31, 2009 and 2008


 
 
Three Months
   
Six Months
 
 
 
2009
   
2008
   
2009
   
2008
 
                         
Net sales
  $ 5,866,331     $ 6,194,177     $ 12,741,271     $ 12,247,696  
Cost of sales
    4,404,238       5,568,247       9,220,976       10,470,491  
Gross profit
    1,462,093       625,930       3,520,295       1,777,205  
                                 
Selling, general and
                               
administrative expenses
    796,749       789,585       1,549,135       1,467,812  
                                 
Operating income (loss)
    665,344       (163,655 )     1,971,160       309,393  
                                 
Other income
                               
                                 
Interest and dividend income
    26,025       92,969       68,664       195,884  
Other
    9,983       4,672       18,085       15,913  
      36,008       97,641       86,749       211,797  
                                 
Income (loss) before income taxes
    701,352       (66,014 )     2,057,909       521,190  
                                 
Provision (benefit) for income taxes
    187,181       (23,602 )     550,975       165,306  
                                 
Net income (loss)
  $ 514,171     $ (42,412 )   $ 1,506,934     $ 355,884  
                                 
Net income (loss) per share:
                               
                                 
Basic
  $ 0.24     $ ( .02 )   $ .71     $ .17  
Diluted
  $ 0.24     $ ( .02 )   $ .71     $ .17  
                                 
Weighted average number of
                               
shares outstanding:
                               
                                 
Basic
    2,138,416       2,107,257       2,127,700       2,104,782  
Diluted
    2,149,831       2,114,363       2,134,339       2,115,201  
                                 
Dividends per share:
  $ 1.2250     $ 1.7250     $ 1.4500     $ 1.9500  

See accompanying notes to the financial statements.





 
3

 

ESPEY MFG. & ELECTRONICS CORP.
 Statements of Cash Flows (Unaudited)
Six Months Ended December 31, 2009 and 2008

 
 
December 31,
 
 
 
2009
   
2008
 
Cash Flows From Operating Activities:
           
     Net income
  $ 1,506,934     $ 355,884  
 
               
     Adjustments to reconcile net income to net
               
       cash provided by operating activities:
               
     Excess tax benefits from share-based compensation
    3,138       30,245  
     Stock-based compensation
    50,856       58,166  
     Depreciation
    229,059       247,973  
     ESOP compensation expense
    199,742       228,903  
     Loss on disposal of assets
    1,802       2,542  
     Deferred income tax
    (14,602 )     (15,590 )
     Changes in assets and liabilities:
               
     Decrease in trade receivables, net
    2,279,041       606,298  
     Increase in income taxes receivable
    (280,669 )     (240,223 )
     Decrease (increase) in other receivables
    282       (2,015 )
     Increase in ESOP receivable due to dividends on unallocated shares
    (92,673 )     (209,847 )
     Decrease (increase)  in inventories
    318,837       (1,156,603 )
     Decrease in prepaid expenses and other current assets
    137,008       140,169  
     (Decrease) increase in accounts payable
    (23,324 )     1,294,026  
     Decrease in accrued salaries, wages and commissions
    (63,235 )     (85,063 )
     Decrease in vacation accrual
    (25,121 )     (91,501 )
     Decrease in ESOP payable
    (199,742 )     (228,903 )
     Increase in other accrued expenses
    20,770       20,494  
     Increase in payroll & other taxes withheld and accrued
    11,802       4,866  
     Decrease in income taxes payable
    (270,029 )     (30,245 )
Net cash provided by operating activities
    3,789,876       929,576  
                 
Cash Flows From Investing Activities:
               
     Additions to property, plant & equipment
    (290,965 )     (185,801 )
     Proceeds from loan receivable
    8,951       13,066  
     Purchase of short term investments
    (6,586,541 )     (6,550,000 )
     Maturity of short term investments
    5,629,874       4,320,000  
Net cash used in investing activities
    (1,238,681 )     (2,402,735 )
                 
Cash Flows From Financing Activities:
               
     Sale of treasury stock
    326,752       --  
     Dividends on common stock
    (3,095,024 )     (4,100,628 )
     Purchase of treasury stock
    (452,155 )     (102,510 )
     Proceeds from exercise of stock options
    85,510       93,900  
     Excess tax benefits from share-based compensation
    3,138       30,245  
Net cash used in financing activities
    (3,131,779 )     (4,078,993 )
                 
Decrease in cash and cash equivalents
    (580,584 )     (5,552,152 )
Cash and cash equivalents, beginning of period
    2,775,319       6,851,753  
Cash and cash equivalents, end of period
    2,194,735       1,299,601  
                 
Supplemental disclosures of cash flow information:
               
     Income Taxes Paid
  $ 1,110,000     $ 400,000  

See accompanying notes to the financial statements.


 
4

 

ESPEY MFG. & ELECTRONICS CORP.
Notes to Financial Statements (Unaudited)

Note 1. Basis of Presentation

In the opinion of management the accompanying unaudited financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the results for such periods.  The results for any interim period are not necessarily indicative of the results to be expected for the full fiscal year.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities.  On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, income taxes, and stock-based compensation.  Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.  These financial statements should be read in conjunction with the Company's most recent audited financial statements included in its report on Form 10-K for the year ended June 30, 2009.

Note 2. Net Income per Share

Basic net income per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company.  As Unearned ESOP shares are released or committed-to-be-released the shares become outstanding for earnings-per-share computations.

Note 3. Stock Based Compensation

The Company follows Statement of Financial Accounting Standards No. 123(R) (FASB ASC 718) in establishing standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, as well as transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that maybe settled by the issuance of those equity instruments.  FASB ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements based on the fair value of the share-based payment.  FASB ASC 718 establishes fair value as the measurement objective in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans.

Total stock-based compensation expense recognized in the Statement of Income for the three month period ended December 31, 2009 and 2008, was $25,552 and $29,083, respectively, before income taxes.  The related total deferred tax benefit was approximately $2,183 and $2,477 for the three month period ended December 31, 2009 and 2008, respectively.  Total stock-based compensation expense recognized in the Statement of Income for the six month period ended December 31, 2009 and 2008, was $50,856 and $58,166, respectively, before income taxes.  The related total deferred tax benefit was approximately $4,660 and $4,954 for the six month period ended December 31, 2009 and 2008, respectively.  FASB ASC 718 requires the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options to be classified and reported as both an operating cash outflow and a financing cash inflow on a prospective basis upon adoption.

As of December 31, 2009, there was approximately $71,132 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the next 1.75 years.  The total deferred tax benefit related to these awards is approximately $6,343.

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,

 
5

 

options granted have a two-year vesting period based on two years of continuous service and have a ten-year contractual life.  Option grants provide for accelerated vesting if there is a change in control.  Shares issued upon the exercise of options are from those held in Treasury.  The 2007 Plan was approved by the Company's shareholders at the Company's Annual Meeting on November 30, 2007 and supercedes the Company's 2000 Stock Option Plan (the "2000 Plan").  Options covering 400,000 shares are authorized for issuance under the 2007 Plan, and 63,000 have been granted and are outstanding as of December 31, 2009.  While no further grants of options may be made under the 2000 Plan, as of December 31, 2009, 70,700 options remain outstanding, vested and exercisable from the 2000 Plan.

FASB ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option valuation model, which incorporates various assumptions including those for volatility, expected life and interest rates.

The table below outlines the weighted average assumptions that the Company used to calculate the fair value of each option award for the six months ended December 31, 2009:

   
2009
Dividend yield
    5.30 %
Expected stock price volatility
    31.41 %
Risk-free interest rate
    1.79 %
Expected option life (in years)
 
4.3 yrs
Weighted average fair value per share of options granted during the period
  $ 2.767

There were no options granted during the six months ended December 31, 2008.

The Company pays dividends quarterly and anticipates that it will be able to continue to pay dividends in the foreseeable future. Expected stock price volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options. The expected option life (in years) represents the estimated period of time until exercise and is based on actual historical experience.

The following table summarizes stock option activity during the three months ended December 31, 2009:

 
 
Employee Stock Options Plan
 
 
             
Weighted
 
 
 
Number of
   
Weighted
   
Average
 
 
 
Shares
   
Average
   
Remaining
 
 
 
Subject
   
Exercise
   
Contractual
 
 
 
To Option
   
Price
   
Term
 
Balance at July 1, 2009
    140,400     $ 18.29       7.40  
Granted
    2,500     $ 17.09       9.59  
Exercised
    (4,800 )   $ 17.81       --  
Forfeited or expired
    (4,400 )   $ 18.90       --  
Balance December 31, 2009
    133,700     $ 18.26       7.48  
Exercisable at December 31, 2009
    70,700     $ 17.37       6.31  

The intrinsic value of stock options exercised was $10,373 and $18,495, during the six months ended December 31, 2009 and 2008, respectively.  The intrinsic value of stock options outstanding and exercisable as of December 31, 2009 and 2008 was $123,394 and $90,637, 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 December 31, 2009.  As a government contractor, the Company is continually subject to audit by various agencies of the U.S. Government to determine compliance with various procurement laws and regulations.  As a result of such audits and as part of normal business operations of the

 
6

 

Company, various claims and charges can be asserted against the Company.  It is not possible to predict the outcome of such actions.  Currently the Company has no claims or assertions pending or threatened against it.

Note 5.  Recently Issued Accounting Standards

In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 165, Subsequent Events (FASB ASC 855-10).  FASB ASC 855-10 establishes principles and requirements for subsequent events.  FASB ASC 855-10 is effective for interim or annual financial periods ending after June 15, 2009.  Adoption of FASB ASC 855-10 did not have a material effect on the company’s financial statements.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 168 (“SFAS 168”), The FASB Accounting Standards Codification ("Codification") and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles. Under the provisions of SFAS 168, the Codification will become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The rules and interpretive releases of the SEC under authority federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of SFAS 168, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  The provisions of SFAS 168 are effective for financial statements issued for interim and annual periods ending after September 15, 2009.  Adoption of SFAS 168 had no effect on the company's financial statements.

In September 2009, the FASB issued ASC 605-25 for revenue recognition with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective in fiscal years beginning on or after June 15, 2010, however early adoption is permitted. The Company is currently assessing the potential impact, if any, of the guidance on its financial statements.

Note 6. Employee Stock Ownership Plan

The Company sponsors a leveraged employee stock ownership plan (the "ESOP") that covers all nonunion employees who work 1,000 or more hours per year and are employed on June 30.  The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends on unallocated shares received by the ESOP.  All dividends on unallocated shares received by the ESOP are used to pay debt service.  Dividends on allocated ESOP shares are recorded as a reduction of retained earnings.  As the debt is repaid, shares are released and allocated to active employees, based on the proportion of debt service paid in the year.  The Company accounts for its ESOP in accordance with FASB ASC 718.  Accordingly, the shares purchased by the ESOP are reported as Unearned ESOP Shares in the statement of financial position.  As shares are released or committed-to-be-released, the Company reports compensation expense equal to the current average market price of the shares, and the shares become outstanding for earnings-per-share (EPS) computations.   ESOP compensation expense was $108,843 and $110,485 for the three month periods ended December 31, 2009 and 2008, respectively.  ESOP compensation expense was $199,742 and $228,903 for the six month periods ended December 31, 2009 and 2008, respectively.    The ESOP shares as of December 31, 2009 and 2008 were as follows:

   
2009
   
2008
 
Allocated Shares
    431,061       437,593  
Committed-to-be-released shares
    11,250       11,667  
Unreleased shares
    190,416       213,333  
                 
Total shares held by the ESOP
    632,727       662,593  
                 
Fair value of unreleased shares
  $ 3,640,754     $ 3,991,460  


 
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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Espey Mfg. & Electronics Corp. (the "Company") located in Saratoga Springs, New York, is engaged principally in the development, design, production and sale of specialized electronic power supplies, a wide variety of transformers and other types of iron-core components, and electronic system components. In some cases, the Company manufactures such products in accordance with pre-developed mechanical and electrical requirements (“build to print”). In other cases, the Company is responsible for both the overall design and manufacture of the product. The Company does not generally manufacture standardized components and does not have a product line.  The products manufactured by the Company find application principally in (i) shipboard and land based radar, (ii) locomotives, (iii) aircraft, (iv) short and medium range communication systems, (v) navigation systems, and (vi) land-based military artillery.

Business is solicited from large industrial manufacturers and defense companies, the government of the United States, foreign governments and major foreign electronic equipment companies.  In certain countries the Company has external sales representatives to help solicit and coordinate foreign contracts. The Company is also on the eligible list of contractors of agencies of the United States Department of Defense and generally is automatically solicited by such agencies for procurement needs falling within the major classes of products produced by the Company.  In addition, the Company directly solicits bids from the United States Department of Defense for prime contracts.

There is competition in all classes of products manufactured by the Company from divisions of the largest electronic companies, as well as many small companies. The Company's sales do not represent a significant share of the industry's market for any class of its products. The principal methods of competition for electronic products of both a military and industrial nature include, among other factors, price, product performance, the experience of the particular company and history of its dealings in such products. The Company, as well as other companies engaged in supplying equipment for military use, is subject to various risks, including, without limitation, dependence on United States and foreign government appropriations and program allocations, the competition for available military business, and government termination of orders for convenience.

New orders received in the first six months of fiscal 2010 were approximately $7.6 million, representing a 34% decrease over the amount of new orders received in the first six months of fiscal 2009.  These orders are in line with the Company’s strategy of getting involved in long-term high quantity military and industrial products and are predominately for follow-on production of mature products.  The Company's backlog was $33.9 million at December 31, 2009 which includes $23.0 million from three significant customers compared to $44.0 million at December 31, 2008 which included $24.6 million from two significant customers.  The backlog for the Company represents the estimated remaining sales value of work to be performed under firm contracts.

Based upon the backlog and the anticipated schedule for the fulfillment of orders, management expects sales for fiscal 2010 to be higher than fiscal 2009 sales.  In addition to the backlog, the Company currently has outstanding quotations and potential business representing approximately $52.7 million in the aggregate for both repeat and new programs.

Net sales to three significant customers represented 48.0% of the Company's total sales for the three-month period ended December 31, 2009 while sales to two significant customers represented 67.1% of the Company's total sales for the three-month period ended December 31, 2008, respectively.  Sales to  two customers for the six-month period ended December 31, 2009 and 2008 represented 46.0% and 69.4% of total sales, respectively.  Historically, a small number of customers have accounted for a large percentage of the Company’s total sales in any given fiscal year.  Even though our business tends to be concentrated in several customers, the make up of those customers is constantly changing.  For several years, management has pursued opportunities with current and new customers with an overall objective of lowering the concentration of sales, mitigating excessive reliance upon a single major product of a particular program and minimizing the impact of the loss of a single significant customer.  Management continues to evaluate its business development functions and potential revised courses of action.

The outstanding quotations encompass various new and previously manufactured power supplies, transformers, and subassemblies.  However, there can be no assurance that the Company will acquire any or all of the anticipated

 
8

 

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.

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 December 31, 2009 were $5,866,331 as compared to $6,194,177 for the same period in 2008, representing a 5.3% decrease. Net sales for the six months ended December 31, 2009 were $12,741,271 as compared to $12,247,696 for the same period in 2008, representing a 4% increase.   Generally, these fluctuations can be attributed to the contract specific nature of the Company's business. The decrease for the three months ended December 31, 2009 was due to an overall decrease in power supply shipments offset by an increase in transformer shipments. The increase for the six months ended December 31, 2009 was due to an overall increase in transformer shipments offset by a decrease in power supply shipments.

For the three months ended December 31, 2009 and 2008 gross profits were $1,462,093 and $625,930, respectively.  Gross profit as a percentage of sales was 24.9% and 10.1%, for the three months ended December 31, 2009 and 2008, respectively.  For the six months ended December 31, 2009 and 2008 gross profits were $3,520,295 and $1,777,205, respectively.  Gross profit as a percentage of sales was 27.6% and 14.5%, for the six months ended December 31, 2009 and 2008, respectively.  The primary factor in determining gross profit and net income is product mix.  The gross profits on mature products and build to print contracts are higher as compared to products which are still in the engineering development stage or in the early stages of production.  In any given accounting period the mix of product shipments between higher margin mature programs and less mature programs, including loss contracts, has a significant impact on gross profit and net income.  The increased gross profit and gross profit percentage in the three and six months ended December 31, 2009, was primarily the result of favorable product mix with only minor cost overruns related to loss contracts.  For the six months ended December 31, 2008 the Company had unexpected losses incurred on two programs with significant engineering and production time required for design efforts.  These two programs experienced significant cost overruns due to extended product qualification testing and difficulties moving the products from engineering design into full production.  Currently, one program has completed qualification testing and has moved into full production.  The other program is still in qualification testing and has made significant progress towards completion.

Selling, general and administrative expenses were $796,749 for the three months ended December 31, 2009; an increase of $7,164, compared to the three months ended December 31, 2008.  Selling, general and administrative expenses were $1,549,135 for the six months ended December 31, 2009; an increase of $81,323 compared to the six months ended December 31, 2008.  The increase for the three and six months ended December 31, 2009, relates primarily to an increase in salary expense, consulting fees, and director fees.

 
9

 


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 December 31, 2009 was 165 compared to 171 people at December 31, 2008.

Other income for the three and six months ended December 31, 2009 decreased as compared to the three and six months ended December 31, 2008 due to decreased interest rates and related interest income on the Company’s cash and cash equivalents and short-term investments. The Company does not believe that there is a significant risk associated with its investment policy, since at December 31, 2009 all of the investments were primarily represented by short-term liquid investments including certificates of deposit and money market funds.

The effective income tax rate at December 31, 2009 and 2008 was 26.8% and 31.7%, respectively.  The effective tax rate is less than the statutory tax rate mainly due to the benefit the Company receives on its Qualified Production Activities and the benefit derived from the ESOP dividends paid on allocated shares.

Net income (loss) for the three months ended December 31, 2009, was $514,171 or $0.24 per share, both basic and diluted compared to $(42,412) or $(.02) per share, both basic and diluted, for the three months ended December 31, 2008.  Net income for the six months ended December 31, 2009, was $1,506,934 or $0.71 per share, both basic and diluted, compared to $355,884 or $.17 per share, both basic and diluted, for the six months ended December 31, 2008.  The increase in net income per share was mainly due to higher gross profit on sales offset by higher selling, general and administrative expenses and decreased interest income.

Liquidity and Capital Resources

The Company's working capital is an appropriate indicator of the liquidity of its business, and during the past 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.

The Company's working capital as of December 31, 2009 and 2008 was approximately $24.1 million and $23.8 million, respectively.  During the three months ended December 31, 2009 and 2008 the Company repurchased 23,513 and 2,805 shares, respectively, of its common stock for a total purchase price of $452,155 and $50,471, respectively.  Of the total purchases, 23,513 shares and 800 shares, respectively, were purchased from the Company's Employee Retirement Plan and Trust ("ESOP") for a purchase price of $452,155 and $14,400, respectively.  All remaining shares were purchased on the open market.  During the six months ended December 31, 2009 and 2008 the Company repurchased 23,513 and 5,549 shares, respectively, of its common stock for a total purchase price of $452,155 and $102,510, respectively.  Of the total purchases, 23,513 shares and 800 shares, respectively, were purchased from the Company's Employee Retirement Plan and Trust ("ESOP") for a purchase price of $452,155 and $14,400, respectively.  All remaining shares were purchased on the open market.  Under existing authorizations from the Company's Board of Directors, as of December 31, 2009, management is authorized to purchase an additional $1,236,300 million of Company stock.

   
Six Months Ended December 31,
 
   
2009
   
2008
 
Net cash provided by operating activities
  $ 3,789,876     $ 929,576  
Net cash used in investing activities
    (1,238,681 )     (2,402,735 )
Net cash used in financing activities
    (3,131,779 )     (4,078,993 )

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 half of fiscal 2010 due to more short-term investments maturing during the period.  The decrease in cash used in financing activities is due primarily to increased purchase of treasury shares offset by a decrease in the dividends on common stock.

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.

 
10

 

During the six months ended December 31, 2009 and 2008, the Company expended $290,965 and $185,801, respectively, for plant improvements and new equipment. The Company has budgeted approximately $450,000 for new equipment and plant improvements in fiscal 2010.  Management anticipates that the funds required will be available from current operations.

The Company at certain times enters into standby letters of credit agreements with financial institutions primarily relating to the guarantee of future performance on certain contracts.  Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at December 31, 2009 and December 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. Quantitative and Qualitative Disclosures About Market Risk

The Company is a smaller reporting company as defined under Securities and Exchange Commission Rule 12b-2. Pursuant to the exemption available to smaller reporting company issuers under Item 305 of Regulation S-K, quantitative and qualitative disclosures about market risk, the Company is not required to provide the information for this item.

Item 4T. Controls and Procedures

(a) The Company's management, with the participation of the Company's chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) There have been no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.




 
11

 

PART II:    Other Information and Signatures

Item 1.
Legal Proceedings

None

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

 
(a)
Securities Sold -  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)
 
December 1 to
                       
December 31, 2009
    23,513     $ 19.23       23,513     $ 1,236,300  
                                 
(1) Pursuant to a prior Board of Directors authorization, as of December 31, 2009 the Company can repurchase up to $1,236,300 of its common stock pursuant to an ongoing plan.
 

Item 3
Defaults Upon Senior Securities

None

Item 4.
Submission of Matters to a Vote of Security Holders

 
(a)
The Company's Annual Meeting of Shareholders (the "Annual Meeting") was held on November 20, 2009.

 
(b)
Howard Pinsley, Alvin Sabo and Carl Helmetag were re-elected as Class A directors each to serve for a three-year term.  Continuing as directors after the Annual Meeting were:

Class A (term expiring 2012):
Howard Pinsley
 
Alvin Sabo
 
Carl Helmetag
   
Class B (term expiring 2010):
Barry Pinsley
 
Seymour Saslow*
   
Class C (term expiring 2011):
Paul J. Corr
 
Michael W. Wool

 
*As referenced in the Company’s 8-K filed December 16, 2009, Seymour (Sy) Saslow, former VP of Engineering and member of the Board of Directors since 1992 passed away.





 
12

 

 
(c)
The following matters were voted upon at the annual meeting:

The election of three Class A directors. The votes were cast as follows:

Nominee:
Voted For:
Voted Against or Withheld:
Howard Pinsley
2,280,901
13,763
Alvin Sabo
2,217,161
77,503
Carl Helmetag
2,277,835
16,829

Ratification of EFP Rotenberg LLP, as independent auditors for the Corporation for the fiscal year ending June 30, 2010.  The votes were cast as follows:

 
Shares in favor
2,280,719
 
Shares against
1,477
 
Abstentions
12,467

Item 5.
Other Information

None

Item 6.
Exhibits

 
31.1
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 
31.2
Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 
32.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 
32.2
Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


 
13

 



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
ESPEY MFG. & ELECTRONICS CORP.
   
   
 
/s/ Howard Pinsley
 
Howard Pinsley,
 
Chief Executive Officer
   
 
/s/ David O'Neil
 
David O'Neil, Treasurer and
 
Principal Financial Officer

February 10, 2010
           Date

 
14