Espey Mfg. & Electronics Corp. — FY2016 Form 10-K
Reporting period: Fiscal year ended June 30, 2016, compared with fiscal 2015. The request metadata identifies “2015 Q4,” but the filing is an annual report for FY2016; the filing also includes unaudited quarterly figures.
Business context
Espey designs and manufactures power electronics and related equipment, primarily for military and severe industrial applications. Its products include power supplies, converters, transformers, power distribution equipment, and radar systems. The company operates from its owned Saratoga Springs, New York facility.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $27.47 million | $26.83 million | +2.4% |
| Gross profit | $7.37 million | $7.14 million | +3.2% |
| Gross margin | 26.8% | 26.6% | +0.2 percentage points |
| Operating income | $4.34 million | $4.43 million | −1.9% |
| Net income | $3.18 million | $3.18 million | −0.2% |
| Basic / diluted EPS | $1.39 / $1.38 | $1.40 / $1.39 | Lower by $0.01 per share |
| Operating cash flow | $5.76 million | $0.67 million | Increased |
- FY2016 sales growth primarily reflected a $1.1 million increase in magnetic shipments, partly offset by lower build-to-print sales. SG&A rose 11.7% to $3.03 million, principally due to compensation and additional sales and program-management staffing.
- Cash and cash equivalents were $10.03 million and investment securities were $5.58 million at year-end. Working capital was $30.24 million, up from $28.66 million.
- Total liabilities were $2.06 million; the company reported no borrowings in either of the last two fiscal years. An unused, uncommitted line of credit allows borrowing up to $3.0 million.
- Investing cash flow was an outflow of $1.70 million and financing cash flow was an outflow of $2.89 million. Dividends were $1.00 per share for each year; the board authorized a $0.25 FY2017 first-quarter dividend.
Material changes and quarterly context
- Backlog increased to approximately $39.1 million at June 30, 2016, from $36.4 million a year earlier; it was fully funded. Management expected at least $23 million of the year-end backlog to ship in FY2017.
- For the fourth quarter of FY2016, sales were $6.73 million, gross profit $1.67 million, and net income $710,376. In Q4 FY2015, the corresponding figures were $8.97 million, $1.64 million, and $546,455.
- FY2015 gross profit included a favorable one-time $560,000 cost-of-sales reduction from a settlement relating to a previously cancelled program. FY2016 had fewer loss-contract incidents, but higher SG&A and the prior-year benefit affected year-over-year earnings comparisons.
Outlook, risks, and contingencies
- Management expected FY2017 revenue to be below FY2016, mainly because a significant industrial customer planned substantially lower purchases amid declining rail demand. A new product for another customer could partly offset the decline if design and qualification testing succeeded; shipments were expected to begin in FY2017’s third quarter, subject to successful testing.
- Two customers represented 49% of FY2016 sales; two customers accounted for 62% of year-end backlog. Management identified customer concentration, potential delivery deferrals, rail-market weakness, and defense-budget and appropriation uncertainty as significant risks.
- Management cited intense price competition and expected margin pressure on new and some legacy business. It planned to continue pursuing new programs, strengthen sales and operational staffing, and implement plant-layout improvements. FY2017 capital expenditures were budgeted at approximately $750,000.
- Government contracts may be terminated for convenience or default and are subject to audits and cost reviews. The filing reported no outstanding contingent liabilities under standby letters of credit at year-end and no legal proceedings. Management said cash from operations and existing cash and investments should meet foreseeable funding needs.
- Management’s outlook and contract-cost estimates are forward-looking and subject to risks, including supplier performance, energy and raw-material prices, and government contract funding. The company had not yet determined the adoption impact or method for the new revenue-recognition standard.
Most important facts to verify
- Whether the major industrial customer’s planned purchase reductions have materialized, and their effect on FY2017 revenue and margins.
- Progress and qualification results for the new product expected to provide a partial offset to lower rail-related demand.
- Backlog conversion, shipment timing, funding status, and customer concentration, particularly the customers comprising 62% of year-end backlog.
- Whether operating cash generation, capital spending, and dividends remain consistent with management’s liquidity expectations.
- Effects of competitive pricing, contract estimates, government funding changes, and future adoption of revenue-recognition guidance.