Espey Mfg. & Electronics Corp. — FY2023 Form 10-K
Period: Fiscal year ended June 30, 2023. The filing is an annual report, not a standalone Q4 filing; it also provides unaudited fourth-quarter results. Comparisons below are to fiscal 2022 unless noted.
Business context and reporting period
Espey designs and manufactures power electronics, transformers, power supplies, and related equipment, primarily for military and industrial applications. It serves defense contractors, U.S. and foreign governments, and industrial customers. The company operates from its owned facility in Saratoga Springs, New York.
Financial performance and liquidity
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $35.59 million | $32.10 million |
| Gross profit / margin | $8.05 million / 22.6% | $5.47 million / 17.0% |
| Operating income | $4.30 million | $1.53 million |
| Net income | $3.68 million | $1.27 million |
| Basic / diluted EPS | $1.50 / $1.49 | $0.52 / $0.52 |
| Operating cash flow | $3.90 million | $2.22 million |
| Working capital at year-end | $33.2 million | $29.5 million |
FY2023 net sales rose approximately 10.9%. Higher shipments, favorable product mix, and improved margins on certain magnetics and build-to-print contracts lifted gross profit; higher interest income and lower SG&A also contributed to the increase in net income. Results were partly offset by significant costs on a fixed-price power-supply design contract affected by design complexity and obsolete or long-lead-time components.
Cash and cash equivalents were $2.75 million at June 30, 2023, down from $8.10 million; investment securities increased to $11.96 million from $3.71 million. Investing cash outflow was $8.77 million, primarily reflecting purchases of investment securities. Financing cash outflow of $489,268 reflected dividends. The company reported no borrowings in either year and had an unused $3 million credit line expiring February 28, 2024. Total liabilities were $11.62 million; the filing reports no material mortgage or other property encumbrance.
FY2023 Q4 net sales were $8.34 million, gross profit $2.00 million, net income $895,535, and EPS $0.37 basic and $0.36 diluted. Q4 FY2022 results were $8.48 million sales, $1.18 million gross profit, $276,506 net income, and $0.11 basic and diluted EPS.
Material changes and business indicators
- Backlog increased to approximately $83.6 million at June 30, 2023, from $76.8 million. Approximately $83.5 million was funded; management expects at least $39.5 million of the year-end backlog to ship in FY2024.
- Contract liabilities rose to $8.08 million from $3.38 million, primarily due to advance cash collections on contracts.
- Five domestic customers accounted for 81% of FY2023 sales, versus four customers accounting for 57% in FY2022. Five customers represented 81% of year-end receivables, versus 74% for four customers a year earlier.
- Export sales declined to approximately $550,000 from $1.64 million, mainly due to the timing of power-supply deliveries.
- The company reinstated quarterly dividends in March 2023 and paid $0.20 per share in FY2023; it paid no dividends in FY2022.
Outlook, risks, and unusual items
Management expects FY2024 revenue and net income per share to exceed FY2023 levels, and expects new orders to be higher than FY2023 orders. These are expectations, not guarantees. Outstanding quotations exceeded $69 million as of August 31, 2023, but Espey cautions that it may not win the anticipated business. Management budgeted up to $300,000 for ordinary FY2024 capital spending and expects to spend up to $7.1 million on a Navy-funded facility and equipment upgrade, with spending reimbursed through milestones. The Navy award was $7.4 million; the first milestone, approximately $969,000, had been achieved and reimbursed by September 19, 2023.
- Supply-chain shortages, component obsolescence, and lead times that can approach a year or more may delay deliveries. Hiring challenges and shortages of specialized labor could also disrupt schedules.
- Fixed-price contract cost overruns, design complexity, and inflation in materials can reduce margins or delay backlog conversion. The auditor identified contract-in-process and work-in-process inventory valuation, including estimates of costs to complete, as a critical audit matter.
- Customer and program concentration, defense-budget appropriations, government contract changes or termination, and competitive pricing pose material business risks. Steel and aluminum tariffs could raise costs, although the company reported no significant tariff-related sourcing or financial issues at the time of filing.
- Government contract audits may adjust costs or fees; cybersecurity incidents could affect operations or reputation. Management reported no material impact from prior cyberattacks.
- The company reported no currently pending litigation matters and no outstanding standby-letter-of-credit contingent liabilities at year-end. Management considers ordinary-course claims not likely to have a material adverse effect.
Most important facts for investors to verify
- Whether FY2024 revenue and EPS meet management’s expectations, and whether the $83.6 million backlog converts to shipments on schedule.
- Whether customer concentration remains elevated and whether the company secures new awards, including opportunities represented by outstanding quotations.
- Progress, reimbursement timing, and cash-tax implications of the Navy facility and equipment upgrade.
- Whether supply constraints, labor availability, and the fixed-price design contract affect delivery schedules, inventory estimates, or gross margins.
- Renewal or replacement of the $3 million credit line before its February 2024 expiration and the sustainability of the reinstated dividend.