UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2002
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) (Zip Code)
Registrant's telephone number, including area code 518-584-4100
---------------------------
Number of shares outstanding of issuer's class of common stock $.33-1/3 par
value as of November 6, 2002: 1,034,561.
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.
YES [X] NO [_]
ESPEY MFG. & ELECTRONICS CORP.
I N D E X
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements:
Consolidated Balance Sheets -
September 30, 2002 and June 30, 2002 1
Consolidated Statements of Income -
Three Months Ended September 30, 2002 and 2001 3
Consolidated Statements of Cash Flows -
Three Months Ended September 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations. 6
Item 4 Controls and Procedures 8
PART II OTHER INFORMATION 8
SIGNATURES
ESPEY MFG. & ELECTRONICS CORP.
Consolidated Balance Sheets
September 30, 2002 and June 30, 2002
------------------------------------
A S S E T S
Unaudited
2002 2002
September 30 June 30
------------ -------
CURRENT ASSETS:
Cash and cash equivalents $ 8,991,556 $ 9,192,962
Investment security 366,000 368,000
Trade accounts receivable, net 3,690,346 2,409,706
Other receivables 2,353 13,413
----------- -----------
Total Receivables 3,692,699 2,423,119
----------- -----------
Inventories:
Raw materials and supplies 1,587,082 1,424,278
Work-in-process 2,864,912 4,298,988
Costs relating to contracts in
process, net of advance payments of
$2,738,701 at September 30, 2002
and $2,194,269 at June 30, 2002 8,016,052 7,017,529
----------- -----------
Total Inventories 12,468,046 12,740,795
----------- -----------
Deferred Income Taxes 86,634 85,773
Prepaid expenses and other current assets 148,744 198,061
----------- -----------
Total Current Assets 25,753,679 25,008,710
----------- -----------
Property, Plant and Equipment, net 3,410,661 3,324,252
----------- -----------
Total Assets $29,164,340 $28,332,962
=========== ===========
See accompanying notes to the consolidated financial statements.
(Continued)
ESPEY MFG. & ELECTRONICS CORP.
Consolidated Balance Sheets, Continued
September 30,2002 and June 30, 2002
------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Unaudited
2002 2002
September 30 June 30
------------ -------
CURRENT LIABILITIES:
Accounts Payable $ 912,990 $ 497,454
Accrued expenses:
Salaries, wages and commissions 87,382 86,881
Vacation 348,621 398,898
Employees' insurance costs 7,043 6,887
ESOP payable 136,514 --
Dividend payable -- --
Other 36,993 41,410
Payroll and other taxes withheld and accrued 41,313 37,943
Income taxes payable 191,148 88,966
Deferred Income Taxes 120,081 120,081
---------- ----------
Total Current Liabilities 1,882,085 1,278,520
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, par value .33-1/3 per share.
Authorized 10,000,000 shares;
Issued 1,514,937 shares on September 30, 2002
and June 30, 2002, outstanding 1,034,561
on September 30, 2002 and June 30, 2002 504,979 504,979
Capital in excess of par value 10,465,878 10,465,878
Accumulated other comprehensive loss (30,961) (29,079)
Retained earnings 25,078,553 24,848,858
---------- ----------
36,018,449 35,790,636
Less Common stock subscribed (1,117,325) (1,117,325)
Cost of 480,376 shares on
September 30, 2002 and June 30, 2002
of common stock in treasury (7,618,869) (7,618,869)
---------- ----------
Total Stockholders' Equity 27,282,255 27,054,442
---------- ----------
Total Liabilities And
Stockholders' Equity $29,164,340 $28,332,962
=========== ===========
See accompanying notes to the consolidated financial statements.
2
ESPEY MFG. & ELECTRONICS CORP.
Consolidated Statements of Income
Three Months Ended September 30, 2002 and 2001
------------------------------------------------------
Unaudited
Three Months
2002 2001
---- ----
Net sales $4,491,359 $4,585,515
Cost of sales 3,702,138 3,977,930
---------- ----------
Gross profit 789,221 607,585
Selling, general and
administrative expenses 429,307 394,032
---------- ----------
Operating income 359,914 213,553
---------- ----------
Other income
Interest and
dividend income 45,269 66,479
Other income 3,544 10,955
---------- ----------
48,813 77,434
---------- ----------
Income before income taxes 408,727 290,987
Provision for income taxes 102,182 87,296
---------- ----------
Net Income $ 306,545 $ 203,691
========== ==========
Income per share:
Basic and diluted
income per share $ .30 $ .20
---------- ----------
Weighted average number
of shares outstanding
Basic 1,034,561 1,029,461
Diluted 1,037,460 1,032,471
========== ==========
See accompanying notes to the consolidated financial statements.
3
ESPEY MFG. & ELECTRONICS CORP.
Consolidated Statements of Cash Flows
Three Months Ended September 30, 2002 and 2001
Unaudited
September 30,
2002 2001
---- ----
Cash Flows From Operating Activities:
Net income $ 306,545 $ 203,691
Adjustments to reconcile net income to net cash
provided by (used in)operating activities:
Depreciation 121,808 123,635
Changes in assets and liabilities:
Increase in receivables (1,269,579) (747,852)
Decrease in inventories 272,749 1,254,179
Decrease in prepaid expenses and
other current assets 49,317 35,008
Increase in accounts payable 415,536 357,244
Increase (Decrease) in accrued salaries,
wages and commissions 500 (14,008)
Increase (Decrease) in accrued
employees' insurance costs 156 (27,668)
Increase (Decrease) in other accrued expenses (4,417) (4,017)
Decrease in vacation accrual (50,277) (51,421)
Increase in payroll & other
taxes withheld and accrued 3,370 1,653
Increase in income taxes payable 102,182 75,058
Increase in ESOP contributions 136,514 134,938
----------- -----------
Net cash provided by
operating activities 84,404 1,340,440
----------- -----------
Cash Flows From Investing Activities:
Additions to property, plant & equipment (208,217) (164,067)
Net cash used in
----------- -----------
investing activities (208,217) (164,067)
----------- -----------
Cash Flows From Financing Activities:
Dividends on common stock (77,592) (77,209)
---------- -----------
Net cash used in
financing activities (77,592) (77,209)
------------ -----------
Increase (Decrease) in cash and cash equivalents (201,405) 1,099,164
Cash and cash equivalents, beginning of period 9,192,961 5,200,735
------------ -----------
Cash and cash equivalents, end of period $ 8,991,556 $ 6,299,899
------------ -----------
Income Taxes Paid $ -- $ 12,238
------------ -----------
Noncash Financing Activities
Dividends Payable $ -- $ 231,629
------------ -----------
See accompanying notes to the consolidated financial statements.
4
ESPEY MFG. & ELECTRONICS CORP.
Notes to Consolidated Financial Statements
-------------------
1. In the opinion of management the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments) necessary for a fair presentation for 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 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 2002 Form 10-K.
2. Other income consists principally of interest on money market accounts and
dividends on equity securities.
3. For purposes of the statements of cash flows, the Company considers all
liquid debt instruments with original maturities of three months or less to
be cash equivalents.
4. Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings 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.
5. In fiscal 1989 the Company established an Employee Stock Ownership Plan
(ESOP) for eligible non-union employees. The ESOP used the proceeds of a
loan from the Company to purchase 316,224 shares of the Company's common
stock for approximately $8.4 million and the Company contributed
approximately $400,000 to the ESOP, which was used by the ESOP to purchase
an additional 15,000 shares of the Company's common stock.
As of September 30, 2002 there were 216,577 shares allocated to
participants.
6. Total comprehensive income consists of:
Three Months Ended
September 30,
2002 2001
-------- --------
Net income $ 306,545 $ 203,691
Accumulated other comprehensive income:
Unrealized (loss) gain on available for sale securities (1,882) 10,920
--------- ---------
Total comprehensive income $ 304,663 $ 214,611
========= =========
5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies and Estimates
We believe our most critical accounting policies include revenue
recognition and cost estimation on our contracts.
Revenue recognition and cost estimation
A significant portion of our business is comprised of development and
production contracts which are accounted for under the provisions of the
American Institute of Certified Public Accountants (AICPA) Statement of
Position No. 81-1, "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts." Generally revenue 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.
Contract accounting requires judgment relative to estimating costs and
making assumptions related to technical issues and delivery schedule.
Contract costs include material, subcontract costs, labor and an allocation
of indirect 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 contract costs could be recorded if
different assumptions were used in the estimation of cost at completion.
When a change in contract value , contract performance status, or estimated
cost is determined, changes are reflected in current period earnings.
Results of Operations
Net sales for the three months ended September 30, 2002 were $4,491,359 as
compared to $4,585,515 for the same period in 2001. The $94,156 decrease in
net sales for the three-month period is mainly due to the timing of
shipments on several long-term contracts with deliveries to occur in the
next several quarters. Management anticipates an overall increase in net
sales for the year ending June 30, 2003.
During the first quarter of fiscal 2003 gross profits as a percentage of
sales increased approximately 4.3% as compared with the first quarter of
fiscal 2002. The increase in gross profit was primarily due to lower
production costs from decreased labor hours and a more favorable product
mix. Management's implementation of certain Lean Manufacturing principles
has improved gross profit. Management continues to evaluate the Company's
workforce to insure that production and overall execution of backlog orders
and additional anticipated orders are successfully performed. Present
employment is 194 people.
Net income for the three months ended September 30, 2002 was $306,545 or
$.30 per share compared to $203,691 or $.20 per share for the corresponding
period ended September 30, 2001.
Selling, general and administrative expenses were $429,307 for the three
months ended September 30, 2002, an increase of $35,275, or 8.9%, as
compared to the three months ended September 30, 2001. This increase was
primarily due to an increase in the cost of health insurance.
Total other income for the three months ended September 30, 2002 decreased
by $28,621, or 37% as compared to the three months ended September 30,
2001. The decrease is due to lower interests rates on the Company's Money
Market accounts. The Company does not believe that there is any risk
associated with its investment policy, since its investments are
represented by a preferred equity security and money market accounts.
The Company continues to diversify its customer base and product offerings.
The backlog at September 30, 2002 was approximately $26,239,000 as compared
to approximately $24,767,000 at September 30, 2001.
6
Liquidity and Capital Resources
- -------------------------------
As of September 30, 2002, the Company had working capital of $23.9 million
compared to $23.7 million at June 30, 2002. The Company meets its
short-term financing needs through cash from operations and when necessary,
from its existing cash and short term investments.
The table below presents the summary of cash flow for the periods
indicated:
Three Months Ended September 30,
2002 2001
---- ----
Net cash provided by operating activities $ 84,404 $ 1,340,440
Net cash used in investing activities $(208,217) $ (164,067)
Net cash used in financing activities $ (77,592) $ (77,209)
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
represents purchases of fixed assets. Net cash used in financing activities
represents dividends on common stock.
The Company currently believes that its current cash and cash equivalent
balances and the cash generated from operations will be sufficient to meet
its funding requirements for the next twelve months. Management has in
place an uncommitted $3,000,000 line of credit to help fund further growth.
For the first quarter of fiscal 2003 capital expenditures were
approximately $208,000.
Since the debt of the Company's ESOP is not to an outside party the Company
has eliminated from the Consolidated Statements of Income the offsetting
items of interest income and interest expenses relating to ESOP. The
Company has also eliminated the offsetting accruals from the Consolidated
Balance Sheets.
During the three months ended September 30, 2002 and 2001, the Company did
not repurchase any of its common stock. Under existing Board authorization,
as of September 30, 2002, $854,859 could be utilized to repurchase the
Company's common stock.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
It should be noted that in this Management's Discussion and Analysis of
Financial Condition and Results of Operations are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are made pursuant to the safe harbor provisions 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, as well as supply and manufacturing constraints 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.
7
Item 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an
evaluation was conducted under the supervision of and with the
participation of Espey's management, including the Chief Executive Officer
and the Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures. Based on that
evaluation, the Chief Executive Officer and the Chief Financial Officer
have concluded that our disclosure controls and procedures are effective to
ensure that all material information related to the company and its
consolidated subsidiary is made known to them, particularly during the
period when our periodic reports are being prepared. Subsequent to the date
the Chief Executive Officer and Chief Financial Officer completed their
evaluation, there have been no significant changes in our internal
controls, or in other factors that could significantly affect the internal
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses. It should be noted that the design of
any system of controls is based in part upon certain assumptions about the
liklihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote.
ESPEY MFG. & ELECTRONICS CORP.
PART II: Other Information and Signatures
Item 4. Submission of Matters to a Vote of Security Holders
None during the quarter.
Item-5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None during the quarter
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
6 November 2002
- ---------------
Date
8
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Howard Pinsley, certify that:
1. I have reviewed this annual report on Form 10-Q of Espey Mfg. & Electronics
Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a)
designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared; b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and c) presented in
this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002
/s/ Howard Pinsley
----------------------------------
Howard Pinsley,
President and
Chief Executive Officer
9
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, David A. O'Neil, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Espey Mfg. &
Electronics Corp.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 6, 2002
/s/ David A. O'Neil
-----------------------------
David A. O'Neil,
Treasurer and
Principal Financial Officer
10
Certification of Chief Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Espey Mfg. &
Electronics Corp. (the "Company"), I, Howard Pinsely, President and Chief
Executive Officer of the Company, certify , pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of the Company
Date: November 6, 2002
/s/ Howard Pinsley
----------------------------
Howard Pinsley,
President and
Chief Executive Officer
Certification of Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Espey Mfg. &
Electronics Corp. (the "Company"), I, David A. O'Neil, Treasurer and Principal
Financial Officer of the Company, certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that:
1. The report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. The information contained in this report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: November 6, 2002
/s/ David A. O'Neil
----------------------------
David A. O'Neil,
Treasurer and
Principal Financial Officer
11