Espey Mfg. & Electronics Corp. — FY2017 Form 10-K
Reporting period: Fiscal year ended June 30, 2017, compared with fiscal 2016. Although the request metadata refers to “2016 Q4,” this filing reports FY2017 annual results and includes quarterly data.
Business context
Espey designs and manufactures power electronics and related equipment, primarily for military and industrial applications, including rail, shipboard, radar and airborne systems. Operations are concentrated at its Saratoga Springs, New York facility. The business is contract-driven, with significant customer and government-program concentration.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $22.52 million | $27.47 million |
| Gross profit; gross margin | $4.71 million; 20.9% | $7.37 million; 26.8% |
| Operating income | $1.53 million | $4.34 million |
| Net income | $1.14 million | $3.18 million |
| Basic/diluted EPS | $0.49 / $0.49 | $1.39 / $1.38 |
| Operating cash flow | $6.42 million | $5.76 million |
| Capital expenditures | $0.35 million | $0.28 million |
- Sales fell 18%; gross profit declined about 36% and net income about 64%. Management cited lower rail-customer procurement, contract delivery timing and mix, competitive pricing, and investment in new-product engineering.
- FY2017 fourth-quarter sales were $5.46 million and net income was $192,000, versus $6.73 million and $710,000 in the prior-year quarter.
- At June 30, 2017, cash and cash equivalents were $10.06 million and investment securities were $9.43 million. Working capital was $29.85 million, versus $30.24 million a year earlier.
- Total liabilities were $3.60 million; the company reported no borrowings in the last two fiscal years. An unused, uncommitted $3.0 million credit line was available, secured by accounts receivable.
- Cash used in investing was $4.20 million, primarily reflecting investment-security purchases; cash used in financing was $2.19 million, including $2.31 million of dividends. Cash and equivalents ended the year at $10.06 million.
- The company paid $1.00 per share in dividends for FY2017 and FY2016; the board authorized a $0.25 FY2018 first-quarter dividend. Future dividend levels are not assured.
Changes, outlook and risks
- Management expected FY2018 revenue to exceed FY2017, supported by existing backlog. At June 30, 2017, backlog was $43.1 million, up from $39.1 million; $35.6 million was funded and $7.5 million unfunded. Management anticipated shipping at least $26.3 million of that backlog in FY2018.
- A new military-market product completed development and qualification testing; full-rate production began in FY2017’s fourth quarter, with shipments expected in the first or second quarter of FY2018. Management expected this to partly offset continued reductions from a significant rail customer.
- New orders were approximately $26.7 million in FY2017. Outstanding quotations exceeded $59 million as of August 15, 2017, but there was no assurance they would become orders.
- Two customers represented 45% of FY2017 sales; three customers represented 23%, 20% and 18% of backlog. One major rail customer’s sales to Espey declined 37% in FY2017, and management expected further decline. Customer loss, order deferrals, government budget changes, contract termination and fixed-price cost overruns are key risks.
- Management attributed the lower gross margin partly to product mix and competition; engineering investment in a new power supply reduced the margin by 4 percentage points in FY2017. Planned FY2018 capital expenditures were approximately $2.5 million, mainly for production-flow improvements, equipment and technology.
- Additional risks include limited or single-source components, supplier or program performance, energy and raw-material prices, and stronger U.S. dollar effects on export competitiveness. Government contract audits can result in cost or fee adjustments. No legal proceedings or material environmental impact were reported.
- 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 attest to internal-control effectiveness.
Important facts for investors to verify
- Whether FY2018 shipments, backlog funding and the new military product’s production ramp met management’s expectations.
- Whether rail-customer demand continued to weaken, and whether customer concentration and the associated revenue risk declined.
- Whether the quoted opportunities converted into firm, funded orders and whether the unfunded backlog received appropriations.
- Whether gross margins recovered as product mix changed and engineering investment transitioned into production.
- Whether planned capital spending and dividends were supported by operating cash flow and liquidity.