Espey Mfg. & Electronics Corp. — FY2012 Form 10-K
Reporting period: Fiscal year ended June 30, 2012, compared with fiscal 2011. Although the request metadata says “2011 Q4,” this filing reports FY2012; it also includes unaudited quarterly data.
Business context
Espey designs and manufactures power electronics and related equipment, primarily for military and severe-environment applications, at its Saratoga Springs, New York facility. Sales depend substantially on U.S. and foreign government programs and a small number of customers.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $32.04 million | $29.50 million |
| Gross profit | $8.82 million | $8.21 million |
| Gross margin | 27.5% | 27.8% |
| Operating income | $5.99 million | $5.30 million |
| Net income | $4.39 million | $3.86 million |
| Basic / diluted EPS | $2.02 / $1.99 | $1.79 / $1.77 |
| Operating cash flow | $7.39 million | $4.91 million |
- Sales increased 8.6%, principally from higher shipments of power supplies and transformers. Gross profit rose with sales volume; gross margin was slightly lower. SG&A declined 2.7% to $2.83 million.
- Cash and cash equivalents were $11.52 million and investment securities were $3.18 million at year-end. Working capital was $27.20 million, versus $26.12 million a year earlier.
- The company said it had not borrowed during the prior two fiscal years. The balance sheet reports total liabilities of $3.22 million and no borrowings identified; its Saratoga Springs property is not mortgaged.
- Investing activities used $1.46 million, chiefly reflecting net purchases of investment securities. Financing activities used $4.10 million, including $4.12 million of dividends. Capital expenditures were $268,000.
- Total dividends were $1.90 per share, including a $1.00 special dividend. A $0.225 quarterly dividend was authorized for fiscal 2013; future regular or special dividends are not assured.
Backlog, outlook, and material risks
- Year-end backlog was approximately $50.8 million, up from $38.7 million; approximately $48.6 million was funded and $2.3 million unfunded. Backlog was approximately $46.6 million on September 13, 2012. Management anticipated at least $30 million of year-end backlog shipments in FY2013, subject to change.
- Management expected FY2013 revenue to increase and product mix and margins to remain favorable. New FY2012 orders were approximately $44.4 million. Outstanding quotations exceeded $32 million, but the filing cautions that these are not booked orders and may not be won.
- Customer concentration is substantial: two customers accounted for 60% of FY2012 sales, versus 62% in FY2011. They represented 52% and 10% of year-end backlog. The company identifies loss of a major customer or program as a significant risk.
- Management cited potential U.S. defense budget cuts, government contract cancellations or funding delays, competition and pricing pressure, fixed-price contract cost overruns, and dependence on limited- or single-source components. It warned that competition may pressure margins and require greater upfront product-development spending.
- Revenue and cost estimates on long-term fixed-price contracts rely on delivery progress and estimates of costs to completion; changes in estimates affect current-period earnings. Government audits may adjust contract costs or fees. A pending U.S. government audit had an accrued best estimate; management said no outcome in the estimated range was expected to materially adversely affect results or financial position. The possible range and accrual amount are not stated in the supplied filing text.
- The filing reports no legal proceedings and no contingent liability on standby letters of credit at year-end. The independent auditor gave an unqualified opinion on the financial statements; the company reported effective disclosure controls and internal control, with no auditor attestation of internal control.
Most important facts for investors to verify
- Whether FY2013 sales and margins met management’s outlook, and how much of the $50.8 million backlog converted to revenue.
- Funding, delivery timing, and cancellation exposure for the unfunded backlog and major government programs.
- Customer concentration and the status of efforts to diversify sales and reduce pricing pressure.
- Actual margins and cost estimates on fixed-price and early-stage contracts, including any contract losses or cost-to-complete revisions.
- The outcome and financial impact of the pending government audit, and the sustainability of dividends and other cash uses.