ESPEY MFG & ELECTRONICS CORP files 10-Q in a filing on Feb 13.
The Company has one employee stock option plan under which options or stock awards may be granted, the 2017 Stock Option and Restricted Stock Plan (the “2017 Plan”). The Board of Directors may grant options to acquire shares of common stock to employees and non-employee directors of the Company at the fair market value of the common stock on the date of grant. The maximum aggregate number of shares of Common Stock subject to options or awards to non-employee directors is 133,000 and the maximum aggregate number of shares of Common Stock subject to options or awards granted to non-employee directors during any single fiscal year is the lesser of 13,300 and 33 1/3% of the total number of shares subject to options or awards granted in such fiscal year. The maximum number of shares subject to options or awards granted to any individual employee may not exceed 15,000 in a fiscal year. Generally, 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. Options covering 400,000 shares are authorized for issuance under the 2017 plan, of which 109,804 have been granted as of December 31, 2018. While no further grants of options may be made under the Company’s 2007 Stock Option and Restricted Stock Plan, as of December 31, 2018, 161,650 options were outstanding under such plan of which are all vested and exercisable.
The company estimates that approximately $11.5 million of the company’s backlog at December 31, 2018 will be recognized after December 31, 2019. Estimated shipments of this backlog are expected in the following fiscal years: 40% in 2020; 38% in 2021, and 22% in 2022.
A significant portion of the Company’s business is the production of military and industrial electronic equipment for use by the U.S. and foreign governments and certain industrial customers. Net sales to two significant customers represented 49.4% of the Company’s total sales for the three-month period ended December 31, 2018 and net sales to three significant customers represented 63.2% of the Company’s total sales for the three-month period ended December 31, 2017. Net sales to two significant customers represented 54.4% and 61.0% of the Company’s total sales for the six-month period ended December 31, 2018 and 2017, respectively. This high concentration level with these customers presents significant risk. A loss of one of these customers or programs related to these customers could significantly impact the Company. Historically, a small number of customers have accounted for a large percentage of the Company’s total sales in any given fiscal year.
Gross profits for the three months ended December 31, 2018 and 2017 were $1,516,235 and $3,075,598, respectively. Gross profit as a percentage of sales was 20.8% and 26.7%, for the same periods, respectively. For the six months ended December 31, 2018 and 2017, gross profits were $2,509,169 and $4,536,752, respectively. Gross profit as a percentage of sales was 16.0% and 23.8%, for the same periods, respectively. The primary factors in determining the change in gross profit and net income are overall sales levels and product mix. The gross profits on mature products and build to print contracts are typically higher as compared to products which are still in the engineering development stage or in early stages of production. In the case of the latter, the Company can incur what it refers to as ‘loss contracts,’ meaning engineering design contracts in which the Company invests with the objective of developing future product sales. In any given accounting period the mix of product shipments between higher margin programs and less mature programs, and expenditures associated with loss contracts, has a significant impact on gross profit and net income. The gross profit percentage decreased in the three and six months ended December 31, 2018 as compared to the same period in 2017 primarily due to the impact of incurred spending related to a specific engineering design contract. This increase in spending reduced the gross profit percentage by 7.2% and 8.0% for the three and six month periods, respectively.
The Company’s effective tax rates for the three and six months ended December 31, 2018, were 20.5% and 16.2%, respectively, compared to 24.4% and 25.5% for the three and six months ended December 31, 2017. The statutory tax rate was reduced from 34% to 21% under the Tax Cuts and Jobs Act (the ‘Tax Act’) effective on January 1, 2018. The effective tax rate in fiscal 2019 is less than the statutory tax rate mainly due to the benefit derived from the ESOP dividends paid on allocated shares and for the tax benefit received in the first quarter of fiscal 2019 from the exercise of stock options. The effective tax rate in fiscal 2018 is less than the statutory tax rate mainly due to the benefit the Company received on its ‘qualified production activities’ under The American Jobs Creation Act of 2004 which expired after the end of fiscal 2018 and the benefit derived from the ESOP dividends paid on allocated shares.
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