Espey Mfg. & Electronics Corp. — FY2020 Form 10-K
Period clarification: This filing covers the fiscal year ended June 30, 2020, with FY2019 comparatives; it is not a standalone 2019 Q4 filing. Unaudited quarterly data for FY2020 is included below.
Business context
Espey designs and manufactures power electronics, transformers, and related equipment, primarily for military, rail, and industrial applications. Its operations are concentrated at a single facility in Saratoga Springs, New York, and it serves government and commercial customers.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $31.53 million | $36.48 million |
| Gross profit / margin | $5.56 million / 17.6% | $7.06 million / 19.4% |
| Operating income | $1.17 million | $2.65 million |
| Net income | $1.16 million | $2.34 million |
| Diluted EPS | $0.49 | $0.98 |
| Operating cash flow | $5.97 million | $(3.60) million |
| Cash and cash equivalents | $5.40 million | $1.46 million |
| Investment securities | $5.14 million | $5.68 million |
| Working capital | $27.99 million | $28.38 million |
Sales declined 13.6%. Lower power-supply and build-to-print shipments were partly offset by higher magnetic-product shipments. Lower gross margin reflected product mix, added costs from a recurring power-supply failure, losses on several build-to-print contracts, and engineering delays and supplier issues. SG&A decreased slightly to $4.39 million; the effective tax rate fell to 11.1% from 18.7%.
The company reported no borrowings in the last two fiscal years and had an unused, uncommitted $3.0 million line of credit. Current liabilities were $6.75 million and total liabilities $6.98 million at June 30, 2020. Operating cash flow improved mainly through collections of receivables and increased customer advances. Capital expenditures were $214,421; approximately $200,000 was budgeted for FY2021.
FY2020 regular dividends totaled $1.00 per share; FY2019 included $1.00 regular and $1.00 special dividends. The board authorized a $0.25 FY2021 first-quarter dividend, but future dividends are not assured.
Material changes and quarterly detail
- Backlog rose to approximately $54.9 million from $45.6 million; about $53.9 million was funded. Management expected at least $32 million of the June 2020 backlog to ship in FY2021.
- Two customers accounted for approximately 38% of FY2020 sales, versus three customers accounting for 54% in FY2019. Four customers represented 52% of FY2020 backlog.
- FY2020 unaudited Q4 sales were $12.12 million, gross profit $2.03 million, and net income $956,693, or $0.40 per basic and diluted share. FY2019 Q4 sales were $11.62 million and net income $1.14 million, or $0.48 basic and $0.47 diluted per share.
Outlook, risks, and unusual items
Management expected FY2021 revenue and net income per share to exceed FY2020, based on backlog, and anticipated new orders approximately matching FY2020 orders. It cited more than $84 million of outstanding quotations as of September 10, 2020, but noted there was no assurance those opportunities would become orders.
- COVID-19 had a minor impact on shipments in the third and fourth quarters. Management anticipated possible supplier-related delivery disruptions in the first half of FY2021, then expected them to be minimal.
- Engineering and schedule delays continued on major development programs; engineering work in backlog totaled $5.1 million. Delays, cost overruns, fixed-price contract losses, component shortages, and supplier non-conformances could affect delivery timing and profitability.
- After year-end, a customer requested a temporary work stoppage on a contract for at least 120 days. The company reported no immediate financial statement impact but said it would continue evaluating the effects.
- Government budget changes, contract termination rights, customer concentration, and limited-source components are material business risks. The company also identified cybersecurity threats, though prior attacks had not materially affected results.
- No litigation matters were pending, and the company said ordinary-course claims were not expected to have a material adverse effect. Standby letters of credit were zero at year-end.
The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether FY2021 revenue and earnings guidance was achieved, and how much of the $54.9 million backlog shipped on schedule.
- Whether the requested contract pause, engineering delays, and component shortages affected revenue, margins, or contract estimates.
- How customer concentration and the reliance on government-funded programs evolved.
- Whether the $3.0 million line of credit was renewed and whether dividend levels remained sustainable.
- Whether the reported cash-flow improvement from receivable collections and customer advances was recurring.