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 March 31,  September 30, 2011
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 YORK14-1387171
(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
£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 November May 12,7, 2011, there were 2,319,7602,324,891 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 -
 
  
March 31,September 30, 2011 (Unaudited) and June 30, 20102011
1
    
  
Statements of Income (Unaudited) -
 
  
Three and Nine Months Ended March 31,September 30, 2011 and 2010
3
    
  
Statements of Cash Flows (Unaudited)-
 
  
NineThree Months Ended March 31,September 30, 2011 and 2010
4
    
  
Notes to Financial Statements (Unaudited)
5
    
 
Item 2
Management's Discussion and Analysis ofFinancial Condition and Results of Operations
8
 
Financial Condition and Results of Operations
    
 
Item 3
Quantitative and Qualitative Disclosures About Market Risk
11
    
 
Item 4
Controls and Procedures
11
    
    
PART II
OTHER INFORMATION AND SIGNATURES
12
    
 
Item 1
Legal Proceedings
12
    
 
Item 2
Unregistered Sales of Equity Securities
12
    
 
Item 3
Defaults Upon Senior Securities
12
 
Item 4Submission of Matters to a Vote of Security Holders12
    
 
Item 5
Other Information
12
    
 
Item 6
Exhibits
12
    
 
SIGNATURES
1413




 
 

PARTPART I:  FINANCIAL INFORMATIONINFORMATION

ESPEYESPEY MFG. & ELECTRONICSELECTRONICS CORP.
Balance SheeBtsalance Sheets
March 31,September 30, 2011 (Unaudited) and June 30, 20102011


 2011  2010  2011  2011 
 March 31,  June 30,  September 30,  June 30, 
            
ASSETS:            
            
Cash and cash equivalents $7,971,634  $4,475,066  $10,336,395  $9,695,811 
Short term investments  2,841,182   7,111,182 
Investment securities  2,546,502   1,946,214 
Trade accounts receivable, net  3,727,178   5,495,251   5,298,866   6,266,765 
Income tax receivable  75,875   -- 
                
Inventories:                
Raw materials  1,305,839   1,233,597   1,372,158   1,273,582 
Work-in-process  1,280,196   1,490,749   1,239,278   1,085,278 
Costs relating to contracts in process, net of advance        
payments of $150,171 at March 31, 2011 and        
$142,492 at June 30, 2010  8,789,705   8,217,040 
Costs relating to contracts in process, net of progress        
payments of $27,963 at September 30, 2011 and        
$126,361 at June 30, 2011  8,251,765   8,220,200 
Total inventories  11,375,740   10,941,386   10,863,201   10,579,060 
                
Deferred income taxes  228,584   229,086   368,907   360,553 
Prepaid expenses and other current assets  179,307   185,832   148,361   208,904 
Total current assets  26,323,625   28,437,803   29,638,107   29,057,307 
                
Property, plant and equipment, net  2,958,095   2,717,330   2,635,057   2,703,014 
Loan receivable  118,346   11,546   98,185   108,303 
                
Total assets $29,400,066  $31,166,679  $32,371,349  $31,868,624 
                
                
See accompanying notes to the financial statements.     (Continued) 

 
See accompanying notes to the financial statements.(Continued)

 


 
1



ESPEY MFG. & ELECTRONICS CORP.
Balance Sheets
March 31,September 30, 2011 (Unaudited) and June 30, 20102011


 2011  2010  2011  2011 
 March 31,  June 30,  September 30,  June 30, 
            
LIABILITIES AND STOCKHOLDERS' EQUITY:            
            
Accounts payable $1,041,840  $1,607,147  $1,613,290  $1,453,707 
Accrued expenses:                
Salaries, wages and commissions  277,594   203,435   464,384   412,555 
Vacation  567,103   544,021   586,554   623,757 
ESOP payable  61,837   -- 
ESOP Payable  92,323   -- 
Other  101,641   177,086   70,721   121,026 
Payroll and other taxes withheld and accrued  43,717   46,330   46,724   44,085 
Income taxes payable  118,906   14,793   --   277,746 
Total current liabilities  2,212,638   2,592,812   2,873,996   2,932,876 
                
Deferred income taxes  154,397   127,148   252,763   270,729 
Total liabilities  2,367,035   2,719,960   3,126,759   3,203,605 
                
Common stock, par value $.33-1/3 per share.                
Authorized 10,000,000 shares; issued 3,029,874 shares        
on March 31, 2011 and June 30, 2010. Outstanding        
2,311,860 and 2,319,876 (includes 162,916 and 179,166        
Unearned ESOP Shares on March 31, 2011 and        
June 30, 2010, respectively)  1,009,958   1,009,958 
Authorized 10,000,000 shares; Issued 3,029,874 shares        
on September 30, 2011 and June 30, 2011. Outstanding        
2,324,891 and 2,320,960 (includes 152,292 and 157,500        
Unearned ESOP Shares) on September 30, 2011 and        
June 30, 2011, respectively  1,009,958   1,009,958 
                
Capital in excess of par value  14,390,675   14,172,284   14,783,420   14,674,189 
        
Accumulated other comprehensive income (loss)  (1,692)  -- 
                
Retained earnings  21,819,709   23,002,981   23,219,627   22,780,026 
  37,220,342   38,185,223   39,011,313   38,464,173 
                
Less: Unearned ESOP shares  (2,588,954)  (2,588,954)  (2,275,872)  (2,275,872)
                
Treasury shares, cost of 718,014 shares on March        
31, 2011 and 709,998 shares on June 30, 2010  (7,598,357)  (7,149,550)
Treasury shares, cost of 704,983 and 708,914 shares on        
September 30, 2011 and June 30, 2011, respectively  (7,490,851)  (7,523,282)
Total stockholders’ equity  27,033,031   28,446,719   29,244,590   28,665,019 
                
Total liabilities and stockholders' equity $29,400,066  $31,166,679  $32,371,349  $31,868,624 



See accompanying notes to the financial statements.


 
2

ESPEY MFG. & ELECTRONICSELECTRONICS CORP.
 Statements of IncomeIncome (Unaudited)
Three and Nine Months Ended March 31,September 30, 2011 and 2010


  Three Months 
  2011  2010 
       
Net sales $7,993,927  $6,026,330 
Cost of sales  5,992,119   4,375,798 
Gross profit  2,001,808   1,650,532 
         
         
Selling, general and administrative expenses  742,867   692,709 
         
Operating income  1,258,941   957,823 
         
Other income        
         
Interest income  10,167   16,824 
Other  26,883   75,048 
   37,050   91,872 
         
Income before income taxes  1,295,991   1,049,695 
         
Provision for income taxes  369,087   296,156 
         
Net income $926,904  $753,539 
         
Net income per share:        
         
Basic $0.43  $0.35 
Diluted $0.42  $0.35 
         
Weighted average number of shares outstanding:        
         
Basic  2,164,202   2,141,447 
Diluted  2,196,104   2,153,627 
         
Dividends per share: $0.2250  $0.2250 
  Three Months  Nine Months 
  2011  2010  2011  2010 
             
Net sales $7,005,795  $6,955,827  $19,613,467  $19,697,098 
Cost of sales  4,958,639   5,117,045   14,290,980   14,338,021 
Gross profit  2,047,156   1,838,782   5,322,487   5,359,077 
                 
Selling, general and                
  administrative expenses  663,544   753,414   2,100,027   2,302,549 
                 
Operating income  1,383,612   1,085,368   3,222,460   3,056,528 
                 
Other income (expense)                
                 
Interest and dividend income  13,616   15,890   43,925   84,554 
Other  13,048   9,314   97,734   27,399 
   26,664   25,204   141,659   111,953 
                 
Income before income taxes  1,410,276   1,110,572   3,364,119   3,168,481 
                 
Provision for income taxes  398,245   301,849   948,802   852,824 
                 
Net income $1,012,031  $808,723  $2,415,317  $2,315,657 
                 
Net income per share:                
                 
Basic $.47  $.38  $1.12  $1.09 
Diluted $.46  $.38  $1.11  $1.08 
                 
Weighted average number of                
  shares outstanding:                
                 
Basic  2,157,427   2,127,135   2,150,330   2,127,514 
Diluted  2,181,559   2,138,898   2,173,518   2,135,836 
                 
Dividends per share: $.2250  $.2250  $1.6750  $1.6750 


See accompanying notes to the financial statements.





 
3

ESPEY MFG. & ELECTRONICS CORP.
 Statements of CashCash Flows (Unaudited)
NineThree Months Ended March 31,September 30, 2011 and 2010

      
 March 31,  September 30, 
 2011  2010  2011  2010 
Cash Flows From Operating Activities:            
Net income $2,415,317  $2,315,657  $926,904  $753,539 
                
Adjustments to reconcile net income to net cash provided by operating activities:                
Excess tax benefits from share-based compensation  10,939   3,138   (39,028)   (4,488) 
Stock-based compensation  54,374   76,408   16,316   16,040 
Depreciation  349,723   342,405   108,248   113,645 
ESOP compensation expense  361,941   310,273   127,761   107,033 
Loss on disposal of assets  15   1,802   79   -- 
Deferred income tax  27,751   (17,579)
Deferred income tax benefit  (26,320)  9,452 
Changes in assets and liabilities:                
Decrease in trade receivables, net  1,768,073   801,518 
Increase in income taxes receivable  --   (175,844)
Increase in ESOP receivable due to dividends on unallocated shares  --   (27,518)
(Increase) decrease in inventories    (434,354)    484,198 
Decrease in prepaid expenses and other current assets  6,525   41,000 
(Decrease) increase in accounts payable  (565,307)  395,653 
Increase (decrease) in accrued salaries, wages and commissions  74,159   (62,079)
Increase in vacation accrual  23,082   25,328 
Decrease in trade receivable, net  967,899   1,458,295 
Increase in income taxes receivables  (75,875)  (88,991)
Increase in inventories  (284,141)  (248,205)
Decrease (increase) in prepaid expenses and other current assets  60,543   (49,417)
Increase (decrease) in accounts payable  159,583   (426,338)
Increase in accrued salaries, wages and commissions  51,829   32,038 
Decrease in vacation accrual  (37,203)  (34,781)
Decrease in ESOP payable  (300,104)  (310,273)  (35,438)  (40,312)
Decrease in other accrued expenses  (75,445)  (2,686)   (50,305)    (143,458) 
(Decrease) increase in payroll & other taxes withheld and accrued  (2,613)  3,165 
Increase (decrease) in income taxes payable  93,174   (270,029)
Increase (decrease) in payroll and other taxes withheld and accrued  2,639   (4,367)
Decrease in income taxes payable  (238,718)  (10,305)
Net cash provided by operating activities  3,807,250   3,934,537   1,634,773   1,439,380 
                
Cash Flows From Investing Activities:                
Additions to property, plant & equipment  (590,503)  (386,029)
Payment for loan receivable  (125,000)  -- 
Additions to property, plant and equipment  (40,370)  (107,247)
Proceeds from loan receivable  18,200   17,994   10,118   4,600 
Purchase of short term investments  (2,690,000)  (7,594,731)
Maturity of short term investments  6,960,000   6,173,601 
Net cash provided by (used in) investing activities  3,572,697   (1,789,165)
Purchase of investment securities  (1,611,980)  (1,778,000)
Maturity of investment securities  1,010,000   4,128,000 
Net cash (used in) provided by investing activities  (632,232)  2,247,353 
                
Cash Flows From Financing Activities:                
Sale of treasury stock  12,081   326,752   58,974   12,081 
Dividends on common stock  (3,598,589)  (3,571,058)  (487,303)  (481,800)
Purchase of treasury stock  (575,246)  (452,155)
Proceeds from exercise of stock options  267,436   135,580   27,344   79,660 
Excess tax benefits from share-based compensation  10,939   3,138   39,028   4,488 
Net cash used in financing activities  (3,883,379)  (3,557,743)  (361,957)  (385,571)
                
Increase (decrease) in cash and cash equivalents  3,496,568   (1,412,371)
Increase in cash and cash equivalents  640,584   3,301,162 
Cash and cash equivalents, beginning of period  4,475,066   2,775,319   9,695,811   4,475,066 
Cash and cash equivalents, end of period  7,971,634   1,362,948  $10,336,395  $7,776,228 
                
Supplemental disclosures of cash flow information:        
Supplemental Schedule of Cash Flow Information:        
Income taxes paid $806,000  $1,310,000  $710,000  $386,000 

See accompanying notes to the financial statements.


 
4

ESPEY MFG. & ELEECLTRONICSECTRONICS 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, 2010.2011. Certain reclassifications may have been made to the prior year financial statements to conform to the current year presentation.

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 net income-per-shareearnings-per-share computations.

Note 3. Stock Based Compensation

The Company follows 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 may be settled by the issuance of those equity instruments.  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.  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 March 31,September 30, 2011 and 2010, was $16,735$16,316 and $25,552,$16,040, respectively, before income taxes.  The related total deferred tax benefit was approximately $1,427$1,489 and $2,043$1,328 for the three month period ended March 31, 2011 and 2010, respectively.  Total stock-based compensation expense recognized in the Statement of Income for the nine month period ended March 31, 2011 and 2010, was $54,374 and $76,408, respectively, before income taxes.  The related total deferred tax benefit was approximately $4,589 and $6,703 for the nine month period ended March 31, 2011 and 2010, respectively.same periods.  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 March 31,September 30, 2011, there was approximately $62,144$153,575 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the next 1.52 years.  The total deferred tax benefit related to these awards is approximately $5,569.$16,680.

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, 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 supersedessupercedes the Company's 2000 Stock Option Plan (the "2000 Plan").  Options covering 400,000 shares wereare authorized for issuance under the 2007 Plan, of which 99,800128,900 have been granted and 82,400106,300 are outstanding as of March 31,September 30, 2011.  While no further grants of options may be made under the 2000 Plan, as of March 31,September 30, 2011, 59,60053,600 options remain outstanding, vested and exercisable from the 2000 Plan.

 
5



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 nine monthsquarter ended:

       
  September 30,  September 30, 
  2011  2010 
Dividend yield  3.59%   4.69% 
Expected stock price volatility  33.82%   33.13% 
Risk-free interest rate  0.64%   1.08% 
Expected option life (in years) 3.6 yrs  4.1 yrs 
Weighted average fair value per share of options granted during the period $4.757  $3.335 
  2011 2010
Dividend yield  4.69%  5.3%
Expected stock price volatility  33.13%  31.41%
Risk-free interest rate  1.08%  1.79%
Expected option life (in years) 4.1yrs 4.3 yrs
Weighted average fair value per share of options granted during the period $3.335 $2.767

The Company pays dividends quarterly and anticipates that it will be able to continue to pay dividends in the foreseeable future.  While the Company has paid a special cash dividend of $1.00 per share in each of December 2009fiscal years 2011 and 2010, there is no assurance that the Board of Directors will declare a comparable special dividend in 2011.fiscal year 2012.  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 ninethree months ended March 31,September 30, 2011:

  Employee Stock Options Plan
      Weighted   
  Number of Weighted Average   
  Shares Average Remaining Aggregate
  Subject Exercise Contractual Intrinsic
  To Option Price Term Value
Balance at July 1, 2010  127,600  $18.31   7.02    
Granted  31,100  $19.20   9.38    
Exercised  (14,700) $18.19   --    
Forfeited or expired  (2,000) $17.09   --    
Outstanding at March 31, 2011  142,000  $18.53   6.95  $913,023 
Vested or expected to vest at March 31, 2011  137,138  $18.52   6.87  $883,612 
Exercisable at March 31, 2011  108,400  $18.40   6.22  $711,422 
  Employee Stock Options Plan 
        Weighted    
  Number of  Weighted  Average    
  Shares  Average  Remaining  Aggregate 
  Subject  Exercise  Contractual  Intrinsic 
  To Option  Price  Term  Value 
Balance at July 1, 2011  132,400  $18.62   6.80    
Granted  29,100  $19.32   9.90    
Exercised  (1,600) $17.09   --    
Forfeited or expired  --   --   --    
Outstanding at September 30, 2011  159,900  $18.76   7.15  $595,777 
Vested or expected to vest at September 30, 2011  151,522  $18.73   7.03  $578,108 
Exercisable at September 30, 2011  100,200  $18.46   5.82  $473,683 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing sale price of the company’sCompany’s common stock as reported on the NYSE-Amex on March 31,September 30, 2011 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders if all option holders had exercised their options on March 31,September 30, 2011.  This amount changes based on the fair market value of the company’sCompany’s common stock.  The total intrinsic values of the options exercised during the ninethree months ended March 31,September 30, 2011 and 2010 was $66,929$9,360 and $23,046,$3,563, respectively.

Note 4.Commitments4.    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 March 31, 2011.  AsSeptember 30, 2011 and 2010.  The Company, as a governmentU.S. Government contractor, the Company is continually subject to auditaudits, reviews, and investigations by various agencies of the U.S. government related to its negotiation and performance of government contracts and its accounting for such contracts. Failure to comply with applicable U.S. Government to determine compliance with various procurement lawsstandards by a contractor may result in suspension from eligibility for award of any new government contract and regulations.a guilty plea or conviction may result in debarment from eligibility for awards. The government may, in certain cases, also terminate existing contracts, recover damages, and impose other sanctions and penalties. As a result of such audits and as part of normal business operations of the Company, various claims and charges can be asserted against the Company.  It is not possible to predict the outcome of such actions.  Currentlya pending U.S. government audit the Company has no claimsdetermined a range of possible outcomes none of which the Company believes would have a materially adverse effect on the Company's financial position or assertions pending or threatened against it.

results of operations.  In accordance with ASC 450 “Contingencies” the Company has accrued the amount within the range that appears to be its best estimate of a possible outcome.

 
6



Note 5.    Recently Issued Accounting Standards

In September 2009,May 2011, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements”Accounting Standards Update No. 2011-04, topic 820, Fair Value Measurement, to amend ASC 605-25, “Revenue Recognition: Multiple-Element Arrangements.”  This new standard impactsimprove the determinationcomparability of whenfair value measurements presented and disclosed in financial statements prepared in accordance with United States GAAP and International Financial Reporting Standards. Some of the individual deliverables included inamendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a multiple-element arrangement mayparticular principle or requirement for measuring fair value or for disclosing information about fair value measurements. Specifically, the guidance requires additional disclosures for fair value measurements that are based on significant unobservable inputs. The updated guidance is to be treated as separate unitsapplied prospectively and is effective for the Company’s interim and annual periods beginning January 1, 2012. The adoption of accounting.  Additionally, this new standard modifies the manner in which the transaction considerationguidance is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. Adoption of ASU 2009-13 had no effectnot expected to have a material impact on the Company'sCompany’s consolidated financial statements.

In July 2010, the FASB Accounting Standards Update 2011-05, "Presentation of Comprehensive Income," was issued ASU 2010-20, “Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”  The standard amends ASC Topic 310, “Receivables”in June 2011 to enhance disclosures about the credit quality of financing receivables and the allowance for credit losses by requiring an entity to provide a greater level of disaggregated information and to disclose credit quality indicators, past due information, and modifications of its financing receivables.  ASU 2010-20 wasbe effective for interim or annual fiscal years beginning after December 15, 2010 for public entities2011. Comprehensive income includes certain items that are recognized as "other comprehensive income" ("OCI") and had noare excluded from net income. Examples include unrealized gains/losses on certain investments and gains/losses on derivative instruments designated as hedges. Under provisions of the update, the components of OCI must be presented in one of two formats: either (i) together with net income in a continuous statement of comprehensive income or (ii) in a second statement of comprehensive income to immediately follow the income statement. An existing option to present the components of OCI as part of the statement of changes in shareholders' equity is being eliminated. The Company expects the update to have minimal effect on the Company’sits 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 718-40.  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 net income-per-shareearnings-per-share (EPS) computations.  ESOP compensation expense was $126,533 and $110,530$127,761 for the three month periodsthree-month period ended March 31,September 30, 2011 and 2010, respectively.  ESOP compensation expense was $361,941 and $310,273$107,033 for the nine month periodsthree-month period ended March 31, 2011 and 2010, respectively.September 30, 2010.  The ESOP shares as of March 31,September 30, 2011 and 2010 were as follows:

 September 30,  September 30, 
 2011  2010  2011  2010 
Allocated Shares  422,273   431,061   440,023   445,729 
Committed-to-be-released shares  16,250   16,875   5,208   5,417 
Unreleased shares  162,916   184,791   152,292   173,749 
                
Total shares held by the ESOP  601,439   632,727   597,523   624,895 
                
Fair value of unreleased shares $4,066,383  $3,714,299  $3,531,651  $3,752,978 



 
7


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

Overview

Espey Mfg. & Electronics Corp. (the “Company”(“Espey”) is a power electronics design and original equipment manufacturing (OEM) company with a long history of developing and delivering highly reliable products for use in military and severe environment applications. All design, manufacturing, and testing is performed in our 150,000+ square foot facility located at 233 Ballston Ave, Saratoga Springs, New York. Espey is classified as a “smaller reporting company” for purposes of the reporting requirements under the Securities Exchange Act of 1934, as amended.  Espey’s common stock is publicly-traded on the NYSE-Amex under the symbol “ESP.”

Espey began operations after incorporation in New York in 1928.  We strive to remain competitive as a leader in high power energy conversion and transformer solutions through the design and manufacture of new and improved products by using advanced and “cutting edge” electronics technologies.

Espey is ISO 9001:2008 certified and our primary products are power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, ups systems, antennas and high power radar systems. The applications of these products include AC and DC locomotives, shipboard power, shipboard radar, airborne power, airborne radar, ground-based radar, and ground mobile power.

Espey services include design and development to specification, build to print, design services, design studies, environmental testing services, metal fabrication, plating and painting services, and development of automatic testing equipment. Espey manufacturing is vertically integrated, meaning that the Company produces individual components (including inductors), populates printed circuit boards, fabricates metalwork, paints, plates, wires, qualifies, and fully tests items, mechanically, electrically and environmentally, in house.  Portions of the manufacturing process are subcontracted to vendors from time to time.

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.  Espey contracts with the government of the United StatesFederal Government under cage code 20950 as Espey Mfg. & Electronics Corp. and cage code 98675 as Espey Mfg. & Electronics Corp., Saratoga Industries Division.

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 ninethree months of fiscal 20112012 were approximately $30.1$9.4 million, representing a 120%38.5% increase from the amount of new orders received in the first ninethree months of fiscal 2010.2011.  These new 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 $41.5approximately $40.1 million at March 31,September 30, 2011 which includes $29.9$27.2 million from threetwo significant customers compared to $33.1$31.8 million at March 31,September 30, 2010 which included $21.3$20.3 million from three significant customers.  The backlog for the Company represents the estimated remaining sales value of work to be performed under firm contracts.

The sales backlog gives the Company a solid base of future sales. Based upon the backlog and the anticipated schedule for the fulfillment of orders, management expects net sales for fiscal 2011 to remainrevenues in line with fiscal year 2010 sales.2012 to exceed net sales revenues in fiscal year 2011.  In addition to the backlog, the Company currently has outstanding quotations and potential business representing approximately $45 $49 million in the aggregate for both repeat and new programs.

 
8




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 defenseDepartment of Defense spending and factors affecting the defense industry and military procurement generally.

Net sales to twothree significant customers for the three-month period ended March 31, 2011 represented 69.7 %76.3% of the Company's total sales whilefor the three month period ended September 30, 2011 and net sales to three significant customers for the three-month period ended March 31, 2010 represented 64.0%69.1% of the Company's total sales.  Net sales to two significant customers for the nine-monthfirst three month period ended March 31, 2011 represented 61.1% ofSeptember 30, 2010.  These sales are from long term programs in which the Company’s total sales while net sales to threeCompany is a significant customers for the nine-month period ended March 31, 2010 represented 50.9% of the Company’s total sales.subcontractor.  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 makeup of those customers often changes from year to year.  ManagementFor 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 in order to diversify its customer base.  The defense industry itself tends to be concentrated with a few large tier one defense contractors which limits the amount of diversity the Company can achieve with its customer base.

Management, along with the Board of Directors, continues to evaluate the need and use of the Company’s working capital.  Capital expenditures are expected to be approximately $300,000 for fiscal 2012.  Expectations are that the working capital will be requiredused to fund orders, dividend payments, and general operations of the business.  business, and dividend payments.

From time to time, management along with the Mergers and Acquisitions Committee of the Board of Directors examine opportunities involving acquisitions or other strategic options, including buying certain products or product lines.  The criteria for consideration are synergies with the Company’s existing product base and accretion to earnings.

Critical Accounting Policies and Estimates

Management believes our most critical accounting policies include revenue recognition and estimates to completion.

A significant portion of our business is comprised of development and production contracts.  Generally, revenues on long-term fixed-price contracts are recorded on a percentage of completion basis using units of delivery as the measurement basis for progress toward completion.

Percentage of completion accounting requires judgment relative to expected sales, estimating costs and making assumptions related to technical issues and delivery schedule.  Contract costs include material, subcontract costs, labor and an allocation of overhead costs.  The estimation of cost at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract.  Given the significance of the estimation processes and judgments described above, it is possible that materially different amounts of expected sales and contract costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process.  When a change in expected sales value or estimated cost is determined, changes are reflected in current period earnings.

Results of Operations

Net sales for the three months ended March 31,September 30, 2011 were $7,005,795$7,993,927 as compared to $6,955,827$6,026,330 for the same period in 2010, representing a 0.7%32.7% increase. Net sales for the nine months ended March 31, 2011 were $19,613,467 as compared to $19,697,098 for the same period in 2010, representing a 0.4% decrease.   Generally, these fluctuations can be attributed to the contract specific nature of the Company's business.  The increase for the three months ended March 31, 2011 was due to an overall increase in power supply shipments offset by a decrease in antenna and spare part shipments.  The decrease for the nine months ended March 31,September 30, 2011 was primarily due to the shipment of a decrease in engineering design related billings andhigh power radar system that the overall timing of contract shipments offset by an increase in power supply shipments.

9


Company does not regularly build.

For the three months ended March 31,September 30, 2011 and 2010 gross profits were $2,047,156$2,001,808 and $1,838,782,$1,650,532, respectively.  Gross profit as a percentage of sales was 29.2%25.0% and 26.4%27.4%, for the three months ended March 31, 2011 and 2010, respectively.  For the nine months ended March 31, 2011 and 2010 gross profits were $5,322,487 and $5,359,077, respectively.  Gross profit as a percentage of sales was 27.1% and 27.2%, for the nine months ended March 31,September 30, 2011 and 2010, respectively.  The primary factorfactors in determining gross profit and net income isare overall sales levels and 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 percentage decrease in the three months ended March 31,September 30, 2011 as compared to September 30, 2010 was primarily the result of favorable product mix.  The gross profit andone large order shipped during the quarter that had a lower gross profit percentage inthan the nine months ended March 31, 2011 and 2010average gross profit percentage from the previous period.  This order was very consistent, primarily the result of consistent sales, product mix and minor cost overruns relatedfor a high power radar system referred to certain products.above.

9



Selling, general and administrative expenses were $663,544$742,867 for the three months ended March 31,September 30, 2011; a decreasean increase of $89,870,$50,158, compared to the three months ended March 31, 2010.  Selling, general and administrative expenses were $2,100,027 for the nine months ended March 31, 2011; a decrease of $202,522 compared to the nine months ended March 31,September 30, 2010.  The decreaseincrease for the three and nine months ended March 31,September 30, 2011 relates primarily to a decreasean increase in salary expense.expense and training seminars.

Interest income for the three and nine months ended March 31,September 30, 2011 decreased as compared to the three and nine months ended March 31,September 30, 2010 due to decreased interest rates and related interest income on the Company’s cash and cash equivalents and short-term investments.investment securities. Other income increased for the three and nine months ended March 31, 2011decreased due to an increasea decrease in scrap sales and funds received related to an insurance claim.

The Company does not believe there is significant risk associated with its investment policy, since at March 31,September 30, 2011 all of the investments were primarily represented by short-term liquid investments.

The effective income tax rate at March 31,September 30, 2011 and 2010 was 28.2%28.5% and 26.9%28.2%, 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” under The American Jobs Creation Act of 2004 and the benefit derived from the ESOP dividends paid on allocated shares.

Net income for the three months ended March 31,September 30, 2011, was $1,012,031$926,904 or $.47$.43 and $.46$.42 per share, basic and diluted, respectively, compared to $808,723$753,539 or $.38$.35 per share, both basic and diluted, for the three months ended March 31, 2010.  Net income for the nine months ended March 31, 2011, was $2,415,317 or $1.12 and $1.11 per share, basic and diluted, respectively, compared to $2,315,657 or $1.09 and $1.08 per share, basic and diluted, respectively, for the nine months ended March 31,September 30, 2010.  The increase in net income per share was primarilymainly due to lower selling,higher sales and gross profit offset by higher general and administrative expenses.expenses.

Liquidity and Capital Resources

The Company's working capital is an appropriate indicator of the liquidity of its business, and during the past threetwo 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 March 31,September 30, 2011 and 2010 was approximately $24.1 million and $24.5 million, respectively.$26.8 million. During the three months ended March 31,September 30, 2011 and 2010 the Company repurchased 19,794 and 0did not repurchase any shares respectively, of its common stock from the Company's Employee Retirement Plan and Trust ("ESOP") for a purchase price of $491,584 and $0, respectively.  During the nine months ended March 31, 2011 and 2010 the Company repurchased 23,342 and 23,513 shares, respectively, of its common stock from the Company's Employee Retirement Plan and Trust ("ESOP") for a total purchase price of $575,246 and $452,155, respectively.stock.  Under existing authorizations from the Company's Board of Directors, as of March 31,September 30, 2011, management is authorized to purchase an additional $661,054$2 million of Company stock.

  Nine Months Ended March 31, 
  2011  2010 
Net cash provided by operating activities $3,807,250  $3,934,537 
Net cash provided by (used in) investing activities  3,572,697   (1,789,165)
Net cash used in financing activities  (3,883,379)  (3,557,743)


10


  Three Months Ended 
  September 30,  September 30, 
  2011  2010 
Net cash provided by operating activities $1,634,773  $1,439,380 
Net cash (used in) provided by investing activities  (632,232)  2,247,353 
Net cash used in financing activities  (361,957)  (385,571)

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.  payable.  Net cash provided byused in investing activities increased in the first ninethree months of fiscal 20112012 due to more short-term investments maturing and a reduction in the amount of short-term investmentsinvestment securities purchased during the current period.  The increaseslight decrease in cash used in financing activities is due primarily to dividends on common stock with the increase purchaseoffsetting effect of Treasury Stock and the decreased sale of Treasury Stock.treasury 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.

During the ninethree months ended March 31,September 30, 2011 and 2010, the Company expended $590,503$40,370 and $386,029,$107,247, respectively, for plant improvements and new equipment. The Company hadhas budgeted approximately $500,000$300,000 for new equipment and plant improvements in fiscal 2011.  Currently total expenditures are expected to be approximately $700,000.2012.  Management anticipates that the funds required will be available from current operations.

10




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 March 31, 2011 and March 31, 2010.September 30, 2011.


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 QualitativeQualitative Disclosures AboutAbout 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 4. Controls and PrProceduroeceduress

(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
Item 1.        Legal Proceedings
Legal Proceedings

 None

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

 (a)Securities Sold -For the three and nine monththree-month period ended March 31,September 30, 2011, the Company sold 0 and 6262,331 shares to the ESOP respectively.in connection with participants of the ESOP electing to reinvest dividends paid on ESOP shares.  The aggregate gross proceeds from the shares of common stock sold were $0 and $5,165 respectively.$19,231.  The securities were sold for cash and the sales were made without registration under the Securities Act in reliance upon the exemption from registration afforded under Section 4(2) of the Securities Act of 1933.  Proceeds were used for general working capital purposes.

 (c)Securities Repurchased  - None

 Purchases of Equity Securities 
       
    Total NumberMaximum Number 
    of Shares(or Approximate 
    PurchasedDollar Value) 
    as Part ofof Shares 
  TotalAveragePubliclythat May Yet 
  NumberPriceAnnouncedBe Purchased 
  of SharesPaidPlan orUnder the Plan 
 PeriodPurchasedper ShareProgramor Program (1) 
 March 1 to     
 March 31, 201119,794$24.83519,794$661,054 
Item 3
Defaults Upon Senior Securities

 (1)Pursuant to a prior Board of Directors authorization, as of March 31, 2011 the Company can repurchase up to $661,054 of its common stock pursuant to an ongoing plan.None

Item 3
Defaults Upon SItenior Securitiesm 5.
Other Information

None

Item 5.    Other Information

None

Item 6.    Exhibits

 None

Ite31.1m 6.
Exhibits
31.1Certification 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

10.5
Retired Director Compensation Program and Mandatory Retirement Agreement






 
12



10.6
Retired Director Compensation Program and Mandatory Retirement Agreement – Paul Corr

10.7
Retired Director Compensation Program and Mandatory Retirement Agreement – Carl Helmetag

10.8
Retired Director Compensation Program and Mandatory Retirement Agreement – Barry Pinsley

10.9
Retired Director Compensation Program and Mandatory Retirement Agreement – Howard Pinsley

10.10
Retired Director Compensation Program and Mandatory Retirement Agreement – Alvin Sabo

10.11
Retired Director Compensation Program and Mandatory Retirement Agreement – Michael Wool





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/ Mark St. Pierre
 Mark St. Pierre President and
 President and Chief Executive Officer
  
 /s/ David O'Neil
 David O'Neil Treasurer and
 Treasurer and Principal Financial Officer

May 12,November 9, 2011
           Date
 
 
 
 
 
1413