ESPEY MFG & ELECTRONICS CORP annual report, FY2021

Business context and reporting period

Espey Mfg. & Electronics Corp. designs and manufactures power electronics and related equipment, primarily for defense, rail, and industrial applications. This 10-K covers the fiscal year ended June 30, 2021, with fiscal 2020 comparatives. Although the request metadata says “2020 Q4,” the filing is for FY2021; it separately reports quarterly results, including the quarter ended June 30, 2021.

Financial results and liquidity

Metric	FY2021	FY2020
Net sales	$27.73 million	$31.53 million
Gross profit / margin	$3.36 million / 12.1%	$5.56 million / 17.6%
Operating income (loss)	$(426,139)	$1.17 million
Net income (loss)	$(181,543); $(0.08) per share	$1.16 million; $0.49 per share
Operating cash flow	$594,996	$5.97 million

• Investing cash flow was $2.01 million provided; financing cash flow was $1.20 million used, principally dividends. Cash rose to $6.80 million from $5.40 million.
• At June 30, 2021, working capital was $27.5 million; current assets were $34.99 million and current liabilities $7.48 million. Cash plus investment securities totaled $9.89 million. The company reported no borrowings and had an unused $3.0 million line of credit.
• Total liabilities were $7.65 million and stockholders’ equity was $30.33 million. No mortgage indebtedness was reported on the company-owned facility.
• FY2021 capital expenditures were $43,554; approximately $200,000 was budgeted for FY2022.
• FY2021 fourth-quarter sales were $9.30 million, gross profit $1.71 million, and net income $879,753 ($0.36 per share). The comparable FY2020 quarter had sales of $12.12 million, gross profit of $2.03 million, and net income of $956,693 ($0.40 per share).

Material changes versus prior year

• Sales declined 12%, mainly from lower power-supply and magnetic-component sales, reduced rail procurement, and no sales on a military contract that had contributed in FY2020. Build-to-print shipments partly offset the decline.
• Gross margin fell to 12.1% from 17.6%. Management cited higher estimated costs on two engineering/design-and-production contracts, a $710,207 inventory write-down after an airline customer cancelled a contract, and a product mix weighted toward lower-margin work.
• SG&A declined by $600,561 to $3.79 million, partly due to lower compensation, travel, and selling-related costs. Despite this reduction, operating results moved from income to loss.
• Operating cash flow fell to $595,000 from $5.97 million, affected by the net loss, inventory purchases, lower customer advances, and increased vendor payments, partly offset by receivable collections.
• Backlog increased to $65.6 million from $54.9 million, including $63.5 million funded and $2.1 million unfunded. Approximately $38 million was expected to ship in FY2022.
• The company suspended regular quarterly dividends effective March 9, 2021. Dividends paid were $0.50 per share in FY2021 versus $1.00 in FY2020.

Outlook, risks, and unusual items

• Management expected FY2022 revenue to exceed FY2021 and a return to net income per share, relying on orders already in backlog. It expected new FY2022 orders to approximate FY2021 orders of $38.5 million. These are expectations, not guarantees.
• Management reported more than $75.3 million of outstanding quotation opportunities as of August 31, 2021, but noted that there is no assurance the company will win those orders. Backlog conversion depends on engineering completion, customer approvals, production execution, and timely supply.
• COVID-19-related facility closure, workforce absences and turnover, supplier delays, and electronic-component shortages constrained production and deliveries. Management did not expect identified development delays to impair FY2022 fulfillment projections, but acknowledged cost-overrun and schedule risks.
• Customer concentration remains material: four customers accounted for approximately 59% of FY2021 sales, and four customers represented 76% of year-end receivables. Five customers represented 67% of backlog. Loss or deferral of a major customer program could significantly affect results.
• Other principal risks include government budget and appropriation changes, contract termination rights, fixed-price contract cost overruns, supplier and raw-material price volatility, tariffs, and cybersecurity threats. Management said prior cyberattacks had not materially affected results; future effects cannot be assured.
• The effective tax rate was 50.7% despite a pretax loss, with a $186,654 income-tax benefit. The filing attributes the unusual rate partly to ESOP dividend effects and the tax-rate differential on an NOL carryback; it recorded an approximately $120,000 CARES Act NOL carryback benefit.
• The company sold 300,000 shares to its ESOP for $5.487 million, financed by a 15-year company loan to the ESOP at 3% interest. Auditors issued an unqualified opinion on the financial statements and identified contract-in-process inventory valuation and estimated costs to complete as a critical audit matter. No litigation matters were pending; the filing says ordinary-course claims are not expected to have a material adverse effect.

Most important facts for investors to verify

• Whether FY2022 sales and earnings improved as forecast, and whether the $65.6 million backlog converted to shipments on schedule and at expected margins.
• How contract cost estimates, loss-contract exposure, and the airline-contract inventory write-down develop; these estimates were a critical audit matter.
• Whether component shortages, supplier delays, workforce constraints, and COVID-related disruptions continue to affect delivery schedules and costs.
• The sustainability of customer relationships and the high concentration in sales, receivables, and backlog.
• Cash generation and working-capital needs, including the growth in contract costs in process and the implications of the ESOP loan and suspended dividend.
• Note the filing’s fiscal-year basis: the annual comparison is FY2021 versus FY2020, not calendar-year 2020.