Espey Mfg. & Electronics Corp. — FY2013 Form 10-K
Reporting period: Fiscal year ended June 30, 2013, compared with fiscal 2012. The filing also reports fourth-quarter results for the three months ended June 30, 2013. Espey designs and manufactures power-electronics and transformer products, primarily for military and severe-environment uses.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $34.30 million | $32.04 million |
| Gross profit / margin | $10.70 million / 31.2% | $8.82 million / 27.5% |
| Operating income | $7.78 million | $5.99 million |
| Net income | $5.56 million | $4.39 million |
| Basic / diluted EPS | $2.52 / $2.48 | $2.02 / $1.99 |
| Net cash from operations | $3.29 million | $7.39 million |
- Annual sales grew 7%; net income increased about 27%. Management attributed improved gross profit mainly to favorable product mix and higher engineering and production sales.
- Fourth-quarter sales were $11.55 million, gross profit $4.10 million, and net income $2.29 million, versus $8.12 million, $2.23 million, and $1.13 million, respectively, in the year-earlier quarter.
- Operating cash flow declined despite higher earnings, primarily reflecting a $3.99 million increase in trade receivables. Investing used $0.99 million and financing used $3.93 million in FY2013.
- At year-end, cash and equivalents were $9.89 million and investment securities $3.89 million. Working capital was $29.59 million, up from $27.20 million. Total liabilities were $3.70 million; the company reported no borrowing in the prior two fiscal years.
- Capital spending was $0.32 million in FY2013; approximately $0.80 million was budgeted for FY2014. Cash dividends were $1.975 per share in FY2013, including a $1.00 special dividend.
Backlog, outlook and material changes
- Year-end backlog was approximately $42.1 million, down from $50.8 million a year earlier; approximately $42.0 million was funded and $114,000 unfunded. At September 10, 2013, backlog was approximately $40.5 million.
- Management expected at least $27 million of year-end backlog to ship in FY2014, but forecast FY2014 revenue below FY2013. It expected favorable product mix and margins to continue. These are estimates, not assurances.
- FY2013 new orders were approximately $26.1 million. Outstanding quotations and opportunities exceeded $56 million, but awards depend on customer decisions and government funding.
- Exports fell to approximately $2.67 million from $5.09 million, principally because of a large customer-specific transmitter shipment in FY2012.
Risks, contingencies and other notable matters
- Customer concentration is significant: three customers generated 63% of FY2013 sales; two customers accounted for 68% of year-end backlog. Loss of a major customer or program could materially affect results.
- Defense-budget uncertainty, sequestration-related procurement delays, government contract termination rights, and aggressive competitor pricing may pressure orders and margins. Fixed-price contract cost estimates and delivery timing are important accounting judgments.
- Some components have limited or single-source suppliers. International sales are denominated in U.S. dollars, creating a competitiveness risk if the dollar strengthens.
- A pending U.S. government audit has a recorded accrual; management said the range of possible outcomes was not expected to materially adversely affect financial position or results. No contingent liability on standby letters of credit was outstanding at year-end. Legal proceedings: none reported.
- The union pension plan entered “critical status” for 2013; trustees adopted a funding improvement plan with scheduled future contribution increases. The company was pursuing AS9100 aerospace quality certification.
- The independent auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal controls.
Key facts for investors to verify
- Whether backlog converts to shipments and revenue as expected, particularly given the FY2014 revenue decline forecast and lower September backlog.
- Customer/program concentration and the status of key government-funded contracts and procurement delays.
- Receivables collection and operating cash conversion after the substantial FY2013 cash-flow decline.
- Actual margins on new and legacy programs amid competitive pricing and fixed-price contract cost risks.
- Outcome and recorded accrual for the pending government audit, and the funding trajectory of the union pension plan.