Espey Mfg. & Electronics Corp. — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014; comparisons are with the year ended June 30, 2013. The filing also reports fourth-quarter results for the three months ended June 30, 2014. Espey designs and manufactures power electronics and related equipment, primarily for military and severe-environment applications.
Financial performance
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $27.14 million | $34.30 million |
| Gross profit / gross margin | $4.53 million / 16.7% | $10.70 million / 31.2% |
| Operating income | $1.32 million | $7.78 million |
| Net income | $1.17 million | $5.56 million |
| Basic / diluted EPS | $0.52 / $0.51 | $2.52 / $2.48 |
| Operating cash flow | $5.39 million | $3.29 million |
| Cash and cash equivalents at year-end | $9.56 million | $9.89 million |
| Investment securities at year-end | $4.91 million | $3.89 million |
| Working capital | $27.25 million | $29.59 million |
- Sales declined 21%; power-supply sales fell $6.5 million and transformer sales fell $3.0 million, partly offset by a $2.5 million increase in electromechanical and spare-parts shipments.
- Net income fell about 79%. Gross profit was pressured by lower sales and losses on two engineering programs. SG&A rose 10% to $3.21 million, primarily due to severance and added personnel.
- FY2014 net cash used in investing was $1.71 million, including $709,972 of capital expenditures. Net cash used in financing was $4.01 million, reflecting $4.48 million in dividends, partly offset by stock-option proceeds.
- The company reported no borrowings in the last two fiscal years and had an unused, uncommitted $3.0 million credit line. Total liabilities were $2.75 million at June 30, 2014; the filing reports no material mortgage debt.
Material changes, outlook and risks
- Management expected FY2015 revenue to be below FY2014, while anticipating favorable product mix and margins. It estimated at least $18 million of FY2014 year-end backlog would ship in FY2015 and budgeted approximately $200,000 for FY2015 capital expenditures.
- Backlog fell to approximately $35.7 million at June 30, 2014 from $42.1 million a year earlier; approximately $33.4 million was funded and $2.3 million unfunded. New orders during FY2014 were approximately $21 million. Backlog was approximately $34 million on September 4, 2014.
- Two cancelled engineering programs reduced backlog by approximately $2.6 million. One program cancellation reduced FY2014 gross profit by $263,000; a separate military-vehicle design contract cancellation resulted in a $3.6 million gross-profit loss. The filing identifies the latter cancellation as a subsequent event and says its impact was included in FY2014 results.
- Fourth-quarter sales were $7.10 million, but the quarter recorded a gross loss of $239,029 and a net loss of $698,204, compared with $4.10 million gross profit and $2.29 million net income in the prior-year quarter.
- Customer concentration is material: three customers represented 59% of FY2014 sales; two customers accounted for 66% of year-end backlog. The filing also states that two domestic customers and one U.K. customer represented 47% and 12% of sales, respectively; the presentation of these percentages is not fully clear in the source text.
- Risks include U.S. defense-budget and appropriations uncertainty, program delays or cancellations, government termination rights and contract audits, fixed-price contract cost overruns, customer concentration, limited-source suppliers, and pricing pressure. Management cautioned that revenues, backlog and opportunities could continue to decline in the foreseeable future.
- The board authorized a FY2015 first-quarter dividend of $0.25 per share. FY2014 dividends totaled $2.00 per share, including a $1.00 special dividend; future dividend levels are not assured.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the financial statements; the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Whether forecast FY2015 shipments and funded backlog convert to revenue on schedule, and whether new orders replace declining backlog.
- Whether the cancelled programs create any further costs, claims, recoveries, or effects on follow-on production opportunities.
- The sustainability of gross margins given the FY2014 contract losses, product mix, and competitive pricing pressures.
- The extent of customer and program concentration in sales, receivables and backlog, and the status of government funding for key programs.
- Future dividend decisions and liquidity needs; operating cash flow benefited substantially from collections and working-capital movements.