Espey Mfg. & Electronics Corp. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019; comparative period is FY2018. Although the request metadata says “2018 Q4,” this filing is an annual report for FY2019. Unaudited fourth-quarter results are shown separately below. The independent auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal control effectiveness.
Business context
Espey designs and manufactures power electronics and related equipment, primarily for military, rail, and industrial applications, at its Saratoga Springs, New York facility. A substantial portion of its work is performed under fixed-price contracts, so actual costs differing from estimates can materially affect margins.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $36.48 million | $32.52 million |
| Gross profit / margin | $7.06 million / 19.4% | $7.66 million / 23.6% |
| Operating income | $2.65 million | $3.85 million |
| Net income | $2.34 million | $3.08 million |
| Basic / diluted EPS | $0.99 / $0.98 | $1.32 / $1.31 |
| Cash flow from operations | $(3.60) million | $0.26 million |
Sales increased 12%, but gross profit fell about 8% and net income fell about 24%. The gross-margin decline reflected approximately $1.1 million of additional direct costs on two power-transformer contracts, including design changes, material and labor costs, and first-build scrap and other costs. SG&A rose $602,000 to $4.41 million, partly from higher staffing and compensation, a customer bad-debt expense, sales commissions, and freight. The effective tax rate declined to 18.7% from 24.4%.
FY2019 unaudited fourth-quarter sales were $11.62 million, gross profit $2.40 million, net income $1.14 million, and diluted EPS $0.47. FY2018 fourth-quarter results were $7.83 million, $1.87 million, $0.70 million, and $0.29, respectively.
Liquidity, balance sheet and capital allocation
- At June 30, 2019, cash and cash equivalents were $1.46 million and investment securities were $5.68 million, down from $4.30 million and $11.52 million, respectively, a year earlier.
- Working capital was $28.38 million, versus $29.74 million; current assets were $31.86 million and current liabilities $3.48 million.
- The company reported no borrowings in the last two fiscal years. It had an unused, uncommitted $3.0 million line of credit, secured by receivables if drawn.
- Operating cash outflow was primarily associated with a $6.69 million increase in receivables and a $1.82 million increase in inventory. Investing activities provided $5.23 million, while financing used $4.47 million.
- Dividends were $2.00 per share in FY2019, including a $1.00 special dividend, versus $1.00 per share in FY2018. Total dividends paid were $4.74 million and $2.33 million, respectively. A $0.25-per-share FY2020 first-quarter regular dividend was authorized.
Backlog, outlook and material risks
- Year-end backlog was approximately $45.6 million, down from $48.1 million; $42.9 million was funded and $2.7 million unfunded. Management expected at least $32.7 million of year-end backlog to ship in FY2020. Backlog is not equivalent to guaranteed revenue, particularly for unfunded work.
- Management expected FY2020 revenue to approximate FY2019 revenue and gross margin to improve, citing a backlog mix expected to have lower production costs. Capital spending was budgeted at approximately $300,000.
- Outstanding quotations exceeded $52 million as of August 31, 2019, but Espey cautioned that there was no assurance these opportunities would become orders.
- Customer concentration remained substantial: three customers generated 54% of FY2019 sales. Loss or deferral of a major customer or program could significantly affect results. The filing reports receivables concentration of 51% at two customers in one discussion and 46.2% at one customer elsewhere; these disclosures merit reconciliation.
- Component shortages and longer supplier lead times constrained shipments and were expected to continue affecting some FY2020 deliveries. The company also cited design and scheduling delays, supplier non-conformances, competitive pricing pressure, and potential cost increases from tariffs.
- Government appropriations, program funding, contract termination rights, and audits pose risks. The filing reports no material expected effect from ordinary-course litigation and no outstanding standby-letter-of-credit liabilities at year-end. Cybersecurity threats are ongoing, though prior incidents had not materially affected results.
Important facts for investors to verify
- Whether the two transformer contracts’ cost overruns are fully reflected in estimates and whether any further fixed-price contract losses are probable.
- Collection timing and credit quality of the sharply higher receivables, including reconciliation of the customer concentration figures.
- Conversion and funding of backlog, the timing of the expected FY2020 shipments, and whether quoted opportunities produce firm orders.
- Whether component availability, engineering delays, customer concentration, or government funding changes affect FY2020 revenue and the projected margin improvement.
- Dividend sustainability given FY2019 negative operating cash flow and dividend payments exceeding net income; also verify the renewal status of the uncommitted credit line.