Business context and reporting period
Espey Mfg. & Electronics Corp. (NYSE American: ESP) designs and manufactures power electronics, transformers and related equipment, primarily for military, rail and industrial applications. This 10-K covers the fiscal year ended June 30, 2022—not calendar 2021. The filing also reports the fourth quarter ended June 30, 2022.
Financial results and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $32.10 million | $27.73 million |
| Gross profit / margin | $5.47 million / 17.0% | $3.36 million / 12.1% |
| Operating income (loss) | $1.53 million | $(0.43) million |
| Net income (loss) | $1.27 million | $(0.18) million |
| Diluted EPS | $0.52 | $(0.08) |
| Cash from operating activities | $2.22 million | $0.59 million |
| Capital expenditures | $0.30 million | $0.04 million |
FY2022 sales increased approximately 16%. Gross margin improvement reflected higher sales, product mix, increased shipments of mature products and build-to-print work, and customer cost adjustments. SG&A rose $157,000 to $3.94 million. The effective tax rate was 20.6%, versus a 50.7% tax benefit in FY2021.
For FY2022 Q4, sales were $8.48 million, gross profit $1.18 million, net income $277,000 and diluted EPS $0.11. In FY2021 Q4, those figures were $9.30 million, $1.71 million, $880,000 and $0.36, respectively.
At June 30, 2022, cash and cash equivalents were $8.10 million, investment securities $3.71 million, working capital approximately $29.5 million, and total liabilities $7.80 million. The company reported no borrowings and had an unused $3.0 million line of credit, expiring February 28, 2023. Management said operating cash and, as needed, cash reserves should meet foreseeable funding needs. No dividends were paid in FY2022; regular dividends were suspended in March 2021.
Material changes and operating developments
- Backlog increased to approximately $76.8 million from $65.6 million; $76.4 million was funded. Management expected at least $35 million of the June 2022 backlog to ship in FY2023.
- New orders were $43.2 million in FY2022. Management reported outstanding quotations exceeding $74.6 million as of August 31, 2022, but noted there is no assurance they will become orders.
- Four customers generated approximately 57% of FY2022 sales, compared with 59% in FY2021. Four customers represented 74% of year-end receivables, creating substantial concentration exposure.
- Export sales declined to approximately $1.64 million from $2.02 million.
- Prior-year results were affected by an approximately 10-day COVID-related facility closure and an inventory write-down following cancellation of an airline-industry contract. These specific charges did not recur in FY2022.
Outlook, risks and unusual items
Management expected FY2023 revenue and EPS to exceed FY2022 levels and expected new orders to be higher than FY2022. It also cautioned that inflation and parts shortages were likely to pressure FY2023 operating income. Planned FY2023 capital expenditures were approximately $500,000.
- Electronic-component shortages, supplier delays, inflation in materials, freight, utilities and labor, and workforce absences could delay shipments and raise costs. Fixed-price contracts may require the company to absorb cost increases.
- Management cited technical and scheduling delays in major development programs; engineering programs in funded and unfunded backlog totaled $7.3 million.
- A significant production contract incurred unexpected material-cost increases. The company requested an equitable price adjustment from its customer; approval was not assured.
- Government contract funding, appropriations, customer deferrals, contract changes or termination, and audits may affect performance and revenue timing. A small number of customers and programs account for a significant share of sales and backlog.
- The auditor issued an unqualified opinion on the financial statements and identified estimating total costs to complete contracts-in-process and work-in-process inventory as a critical audit matter. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
- The company disclosed routine government-contract oversight and cybersecurity threats, but said there were no pending legal matters believed to have a material adverse effect and no material impact from prior cyberattacks.
Important facts for investors to verify
- Whether the $76.8 million backlog converts to shipments and revenue on the anticipated schedule, especially the FY2023 minimum-shipment estimate.
- Whether component availability, labor constraints and inflation affect delivery performance, contract costs and gross margins.
- Customer and program concentration, including the collectability of receivables and the status of large customer programs.
- Whether the requested equitable adjustment on the fixed-price contract is granted and how related costs are ultimately recognized.
- Renewal or replacement of the $3.0 million credit line and any future change to the suspended dividend policy.