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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2005
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
---------------------------
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 16, 2005
----- ---------------------------
Common stock, $.33-1/3 par value 1,006,694 shares
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 (Unaudited) -
March 31, 2005 and June 30, 2004 1
Statements of Income (Unaudited) -
Three and Nine Months Ended March 31, 2005 and 2004 3
Statements of Cash Flows (Unaudited)-
Nine Months Ended March 31, 2005 and 2004 4
Notes to Financial Statements (Unaudited) 5
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 3 Quantitative and Qualitative Disclosures About
Market Risk 10
Item 4 Controls and Procedures 10
PART II OTHER INFORMATION 11
Item 1 Legal Proceedings 11
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 11
Item 3 Defaults on Senior Securities 11
Item 4 Submission of Matters to a Vote of Security Holders 11
Item 5 Other Information 11
Item 6 Exhibits 11
SIGNATURES 12
PART I: FINANCIAL INFORMATION
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets (Unaudited)
March 31, 2005 and June 30, 2004
--------------------------------
A S S E T S
2005 2004
March 31, June 30,
----------- -----------
ASSETS:
Cash and cash equivalents $10,159,787 $12,310,972
Short term investments 2,688,000 1,056,000
Trade accounts receivable, net 2,658,061 2,140,397
Other receivables 8,065 1,809
Inventories:
Raw materials and supplies 1,736,095 1,543,930
Work-in-process 3,621,414 3,390,133
Costs relating to contracts in
process, net of advance payments of
$ 348,336 at March 31, 2005 and
$ 905,646 at June 30, 2004 4,570,202 5,151,234
----------- -----------
Total inventories 9,927,711 10,085,297
----------- -----------
Deferred income taxes 76,876 76,876
Prepaid expenses and other current assets 497,763 359,393
----------- -----------
Total current assets 26,016,263 26,030,744
----------- -----------
Property, plant and equipment, net 3,069,322 3,100,516
----------- -----------
Total assets $29,085,585 $29,131,260
=========== ===========
See accompanying notes to the financialstatements. (Continued)
1
ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets (Unaudited), Continued
March 31, 2005 and June 30, 2004
--------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
2005 2004
March 31, June 30,
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable $ 576,870 $ 250,675
Accrued expenses:
Salaries, wages and commissions 60,026 44,519
Employees' insurance costs -- 7,487
Vacation 456,500 451,516
Other 54,656 50,370
Payroll and other taxes withheld and accrued 43,503 26,000
Income taxes payable 10,919 134,471
------------ ------------
Total current liabilities 1,202,474 965,038
------------ ------------
Deferred income taxes 356,510 324,316
------------ ------------
Total liabilities 1,558,984 1,289,354
------------ ------------
Common stock, par value .33-1/3 per share. Authorized 10,000,000
shares; issued 1,514,937 shares on March 31, 2005 and June 30,
2004. Outstanding 1,006,694 and 1,014,618 on
March 31, 2005 and June 30, 2004, respectively 504,979 504,979
Capital in excess of par value 10,408,095 10,411,915
Retained earnings 24,796,481 24,911,920
------------ ------------
35,709,555 35,828,814
Less: Cost of 508,243 and 500,319 shares on
March 31, 2005 and June 30, 2004
respectively of common stock in treasury (8,182,954) (7,986,908)
------------ ------------
Total stockholders' equity 27,526,601 27,841,906
------------ ------------
Total liabilities and
stockholders' equity $ 29,085,585 $ 29,131,260
============ ============
See accompanying notes to the financial statements.
2
ESPEY MFG. & ELECTRONICS CORP.
Statements of Income (Unaudited)
Three and Nine Months Ended March 31, 2005 and 2004
---------------------------------------------------
Three Months Nine Months
2005 2004 2005 2004
--------------------------- ---------------------------
Net sales $ 4,219,861 $ 6,116,221 $13,846,929 $17,083,213
Cost of sales 3,568,971 5,398,659 11,774,510 14,737,602
----------- ----------- ----------- -----------
Gross profit 650,890 717,562 2,072,419 2,345,611
Selling, general and
administrative expenses 565,145 671,575 1,746,362 1,905,972
----------- ----------- ----------- -----------
Operating income 85,745 45,987 326,057 439,639
----------- ----------- ----------- -----------
Other income
Interest and
dividend income 66,420 24,588 144,908 69,817
Other 7,816 2,707 14,182 25,521
----------- ----------- ----------- -----------
74,236 27,295 159,090 95,338
----------- ----------- ----------- -----------
Income before income taxes 159,981 73,282 485,147 534,977
Provision for income taxes 47,994 19,274 145,544 138,574
----------- ----------- ----------- -----------
Net Income $ 111,987 $ 54,008 $ 339,603 $ 396,403
=========== =========== =========== ===========
Net income per share:
Basic $ .11 $ .05 $ .34 $ .39
Diluted $ .11 $ .05 $ .33 $ .39
----------- ----------- ----------- -----------
Weighted average number
of shares outstanding :
Basic 1,010,671 1,011,416 1,011,744 1,013,545
Diluted 1,023,303 1,021,908 1,022,558 1,021,874
=========== =========== =========== ===========
See accompanying notes to the financial statements.
3
ESPEY MFG. & ELECTRONICS CORP.
Statements of Cash Flows (Unaudited)
Nine Months Ended March 31, 2005 and 2004
-----------------------------------------
March 31,
2005 2004
------------ ------------
Cash Flows From Operating Activities:
Net income $ 339,603 $ 396,403
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 411,499 431,919
Loss on disposal of assets -- 22,121
Deferred income tax 32,194 99,108
Changes in assets and liabilities:
Increase in trade receivables, net (517,664) (711,872)
Increase in income taxes receivable -- (13,639)
(Increase) Decrease in other receivables (6,256) 6,332
Decrease in inventories 157,586 1,974,766
Increase in prepaid expenses and other current assets (138,370) (152,818)
Increase (Decrease) in accounts payable 326,195 (109,547)
Increase (Decrease) in accrued salaries, wages and commissions 15,507 (48,234)
(Decrease) Increase in accrued employees' insurance costs (7,487) 1,557
Increase in other accrued expenses 4,286 10,584
Increase (Decrease) in vacation accrual 4,984 (290)
Increase (Decrease) in payroll and other taxes withheld and accrued 17,503 (473)
(Decrease) in income taxes payable (123,552) (350,232)
Increase in ESOP payable -- 403,238
------------ ------------
Net cash provided by operating activities 516,028 1,958,923
------------ ------------
Cash Flows From Investing Activities:
Additions to property, plant & equipment (380,305) (211,860)
Purchase of short term investments (2,304,000) (1,056,000)
Maturity of short term investments 672,000 --
------------ ------------
Net cash used by investing activities (2,012,305) (1,267,860)
------------ ------------
Cash Flows From Financing Activities:
Dividends on common stock (455,042) (885,776)
Purchase of treasury stock (215,366) (272,328)
Proceeds from exercise of stock options 15,500 113,105
------------ ------------
Net cash used in financing activities (654,908) (1,044,999)
------------ ------------
Decrease in cash and cash equivalents (2,151,185) (353,936)
Cash and cash equivalents, beginning of period 12,310,972 10,996,483
------------ ------------
Cash and cash equivalents, end of period 10,159,787 10,642,547
============ ============
Income Taxes Paid $ 236,902 $ 403,337
============ ============
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.
These financial statements should be read in conjunction with the Company's most
recent audited financial statements included in its 2004 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.
Note 3. Employee Stock Ownership Plan
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. Effective June 30, 2004, the ESOP loan was paid in
full and all shares in the ESOP are allocated to participant's accounts.
Therefore, in fiscal 2005 no contributions to the ESOP have been made. As of
March 31, 2005, there were 230,120 shares allocated to participants.
Note 4. 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.
5
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
--------- --------- --------- ---------
Net income as reported $ 111,987 $ 54,008 $ 339,603 $ 396,403
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects (8,286) (7,867) (26,660) (26,321)
--------- --------- --------- ---------
Pro forma net income $ 103,701 $ 46,141 $ 312,943 $ 370,082
========= ========= ========= =========
Net Income per share:
Basic-as reported $ .11 $ .05 $ .34 $ .39
========= ========= ========= =========
Basic-pro forma $ .10 $ .05 $ .31 $ .36
========= ========= ========= =========
Diluted-as reported $ .11 $ .05 $ .33 $ .39
========= ========= ========= =========
Diluted-pro forma $ .10 $ .05 $ .31 $ .36
========= ========= ========= =========
Note 5. 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 $39,300 at March 31, 2005. 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 are asserted against the
Company. It is not possible at this time to predict the outcome of all such
actions. However, management is of the opinion that it has good defenses against
such actions and believes that none of these matters will have a material effect
on the consolidated financial position, results of operations or cash flows of
the Company.
Note 6. Recently Issued Accounting Standards
In November 2004, the FASB issued SFAS No. 151, "Accounting for Unexpected
Production Defects and Waste." SFAS No. 151 requires that "abnormal freight,
handling costs, and amounts of wasted materials (spoilage)" should be treated as
current-period costs. Under this concept, if the costs associated with the
actual level of spoilage or production defects are greater than the costs
associated with the range of normal spoilage or defects, the difference should
be charged to current-period expense. SFAS No. 151 is effective for annual
periods beginning after June 15, 2005. 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 adoption of SFAS No. 151 and SFAS No. 123R are not
expected to have a material impact on the Company's results of operations and
financial condition.
In December 2004, the FASB issued Staff Position FAS 109-1 regarding Income from
Domestic Production Activities which was effective immediately. Staff Position
FAS 109-1 clarifies SFAS No. 109's guidance that applies to the new deduction
for qualified domestic production activities. The staff position clarifies that
the deduction should be accounted for as a special deduction under SFAS No. 109.
The adoption of Staff Position FAS 109-1 did not have a material impact on the
Company's results of operations or financial condition.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
- - Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary
Transactions. SFAS No. 153 requires that exchanges should be recorded and
measured at the fair value of the assets exchanged, with certain exceptions.
SFAS No. 153 is effective for nonmonetary exchanges occurring in fiscal periods
beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to
have a significant impact on the Company's results of operations or financial
position.
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 and 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 from 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.
Business Outlook
Management is optimistic about the future of the Company. In the first nine
months of fiscal 2005, the Company received approximately $12.7 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 getting involved in long-term high quantity military and industrial
products.
The Company has received another approximately $20.0 million in new orders in
the fourth quarter of fiscal 2005. These orders increased the Company's backlog
to approximately $33.1 million at May 16, 2005 from $14.7 million on February
14, 2005, as reported in the Company's report on Form 10-Q for the period ended
December 31, 2004. Shipments of products with respect to these orders are
expected over the next four years. Many additional potential orders are
currently being discussed and negotiated with our customers. Some of these
orders management expected to receive in the first half of fiscal 2005. The
delay in placing these orders may be due to several factors including the war in
Iraq. In addition to the backlog, the Company currently has outstanding
quotations representing in excess of $26.2 million in the aggregate for both
repeat and new programs. 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.
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 alternatives on a periodic basis.
As stated in the Company's Form 10-K filed for the year ended June 30, 2004, the
Company anticipated a decrease in sales for fiscal 2005. During fiscal 2004,
while net sales increased, new orders received by the Company did not keep pace
with backlog relieved. Thus, while the sales backlog of approximately $15.4
million at June 30, 2004 gave the Company a solid base of future sales, the
Company has experienced the reduction of sales during fiscal 2005 that it
anticipated.
7
Critical Accounting Policies and Estimates
We believe our most critical accounting policies include revenue recognition and
estimates to completion.
Revenue recognition and estimation
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
The Company's operating cycle is long-term and includes various types of
products and varying delivery schedules. Accordingly, results of a particular
period or period-to-period comparison of recorded revenues and income may not be
indicative of future operating results. The following comparative analysis
should be viewed in this context.
Net sales for the three months ended March 31, 2005 were $4,219,861 as compared
to $6,116,221 for the same period in 2004, representing a 31% decrease. Net
sales for the nine months ended March 31, 2005 were $13,846,929 as compared to
$17,083,213 for the same period in 2004, representing an 18.9% decrease. The
Company's decrease in sales for the three month and nine month period ended
March 31, 2005 is due primarily to lower backlog levels (see Business Outlook
discussion). The backlog at March 31, 2005 was approximately $14.2 million
compared to approximately $14.0 million at March 31, 2004 and approximately
$20.9 million at September 30, 2003. New orders for the three months ended March
31, 2005 were approximately $4.4 million. New orders for the nine-month period
ended March 31, 2005 were approximately $12.7 million. Management continues to
market the engineering and production capabilities of the Company. Currently,
approximately $26.2 million in quotations are outstanding to various customers
of the Company.
The primary factor in determining gross profit and net income is product mix. In
any given accounting period, the mix of product shipments between higher margin
mature programs and less mature programs and loss contracts, has a significant
impact on gross profit and net income. The table below presents the statement of
income line items as a percentage of net sales for period-to-period comparison
purposes.
Three Months Ended March 31, Nine Months Ended March 31,
2005 2004 2005 2004
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 84.6% 88.3% 85.0% 86.3%
------ ------ ------ ------
Gross profit 15.4% 11.7% 15.0% 13.7%
Selling, general and administrative expenses 13.4% 11.0% 12.6% 11.2%
------ ------ ------ ------
Operating income 2.0% 0.8% 2.4% 2.6%
Other income
Interest and dividend income 1.6% 0.4% 1.0% 0.4%
Other 0.2% 0.0% 0.1% 0.1%
------ ------ ------ ------
1.8% 0.4% 1.1% 0.6%
Income before income taxes 3.8% 1.2% 3.5% 3.1%
Provision for income taxes 1.1% 0.3% 1.0% 0.8%
------ ------ ------ ------
Net income 2.7% 0.9% 2.5% 2.3%
====== ====== ====== ======
8
For the three months ended March 31, 2005, gross profit as a percentage of net
sales was 3.7% higher as compared to the three months ended March 31, 2004. The
improved gross profit percentage relates to favorable product mix, and lower
ESOP contribution expense offset partially by decreased sales. ESOP contribution
expense was zero for the three-month period ended March 31, 2005, and $134,413
for the three-month period ended March 31, 2004 (see Note 3 to the financial
statements). Net income expressed in dollars for the same period improved due to
a decrease in selling, general and administrative expenses and an increase in
other income, offset partially by a decrease in gross profit caused by the
decrease in sales. For the nine months ended March 31, 2005 gross profit as a
percentage of net sales increased by 1.3% as compared to the nine months ended
March 31, 2004. The ESOP contribution expense was zero for the nine-month period
ended March 31, 2005, and $403,238 for the nine-month period ended March 31,
2004. This decrease in expense had a positive impact on gross profit, which was
offset by lower sales. Net income was slightly lower for the same period due to
lower sales, partially offset by lower selling, general and administrative
expenses and higher interest income due to higher yielding investments.
As reported in the prior quarter's Form 10-Q, the Company has encountered
performance problems with one customer due to technical problems associated with
a product. Several shipments of hardware have been made to this customer. The
customer and the Company are working together to resolve the technical problems
and to date the customer has not asserted any liability claims against the
Company. Currently Management believes that it has a solution to the technical
problems and is working with the customer to create technical specifications
that will help the customer meet all the required specifications placed on their
system. The cost of this solution is being shared by the Company and the
customer. Management has added the expected additional funding and additional
costs to contract estimates to cover the anticipated work necessary to resolve
the technical issues.
Selling, general and administrative expenses were $565,145 for the three months
ended March 31, 2005, a decrease of $106,430 compared to the three months ended
March 31, 2004. The decrease is primarily due to a decrease in professional fees
offset partially by increased selling salaries. Selling, general and
administrative expenses were $1,746,362 for the nine months ended March 31,
2005, a decrease of $159,610 compared to the nine months ended March 31, 2004.
The decrease is primarily due to a decrease in professional fess, administrative
salaries and ESOP contribution expense. Employment at March 31, 2005 was 171
people compared to 190 people at March 31, 2004.
Other income for the three months ended March 31, 2005 was $74,236 as compared
to $27,295 for the three months ended March 31, 2004. Other income for the nine
months ended March 31, 2005 increased to $159,090 as compared to $95,338 for the
nine months ended March 31, 2004. The increase for both periods is due to higher
returns on short-term investments and cash equivalents. The Company does not
believe there is significant risk associated with its investment policy, since
at March 31, 2005 all of the investments are primarily represented by short-term
liquid investments including certificates of deposit and money market funds.
The Company estimates its income taxes using an estimated effective tax rate for
the annual period. The effective income tax rate at March 31, 2005 and 2004 was
30% and 26%, respectively. The effective tax rate fluctuates between periods and
is less than the statutory tax rate mainly due to the foreign exportation
benefit the Company receives on its foreign sales.
Liquidity and Capital Resources
As of March 31, 2005, the Company had working capital of $24.8 million compared
to $24.6 million at March 31, 2004. The Company meets its short-term financing
needs through cash flow from operations and when necessary, from its existing
cash and cash equivalents.
The table below presents the summary of cash flow for the periods indicated:
Nine Months Ended March 31,
2005 2004
----------- -----------
Net cash provided by operating activities $ 516,028 $ 1,958,923
Net cash used by investing activities (2,012,305) (1,267,860)
Net cash used in financing activities (654,908) (1,044,999)
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. The change in net cash used by investing activities is due to
the purchase of short-term certificates of deposit. The decrease in net cash
used in financing activities is due mainly to decreased dividends. The first
quarter of fiscal year ended June 30, 2004 included the payment of a special
dividend in the amount of $506,357 or $.50 per share.
9
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. Management, if necessary, has at its disposal a
$3,000,000 line of credit to help fund further growth. For the first nine months
of fiscal 2005 capital expenditures were $380,305.
Stock options exercised under the Company's existing stock option plan for the
three-month period ended March 31, 2005 and the nine-month period ended March
31, 2005 were 0 and 800, respectively. During the three month period ended March
31, 2005, 4,710 shares of common stock were repurchased by the Company at a cost
of $125,051. For the nine-month period ended March 31, 2005, a total of 8,724
shares of common stock were repurchased by the company at a cost of $215,366. As
of March 31, 2005, under existing Board authorizations, approximately $327,200
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
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 small business as defined under Security and Exchange
Commission rule 12b-2 and therefore files Form 10-Q utilizing the exemption
available to small business issuers for Item 305 of Regulation S-K, quantitative
and qualitative disclosures about market risk, and therefore does not provide
the information for this item.
Item 4. 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.
10
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 nine-month period ended March 31, 2005,
800 stock options were exercised under the
Company's existing stock option plan. The
securities were sold for cash and 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, 2005 4,710 $26.55 4,710 $327,200
-----------------------------------------------------------------------------------------
Total 4,710 4,710
=========================================================================================
(1) The Board of Directors has authorized the Company to repurchase up
to $327,200 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
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
11
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 16, 2005
- ---------------
Date
12