ESPEY MFG & ELECTRONICS : Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K) Leave a comment


Business Outlook

Management expects revenues in fiscal year 2022 to be higher than revenues
during fiscal year 2021 and expects to generate net income per share as compared
to the net loss per share realized during fiscal year 2021. These expectations
are driven by orders already in our sales backlog.

Management continues to closely monitor the impact of evolving workforce and
supplier constraints, primarily from the effects from the pandemic, to our
planned delivery schedules. We continue to experience disruptions from workforce
absences due to COVID-19 illnesses and direct contact exposures, resulting in
self-isolating protocols to be followed to ensure the safety of company
personnel. In addition, we are experiencing disruptions from workforce turnover,
as local businesses emerging from the pandemic compete for personnel. Many of
our positions require certain skillsets resulting in longer than average time to
fill position vacancies. Some company suppliers continue to incur similar
disruptions, in addition to incurring longer lead times on certain raw
materials.

Successful conversion of engineering program backlog into sales is largely
dependent on the execution and completion of our engineering design efforts. It
is not uncommon to experience technical or scheduling delays which arise from
time to time as a result of, among other reasons, design complexity, the
availability of personnel with the requisite expertise, and the requirements to
obtain customer approval at various milestones. Cost overruns which may arise
from technical and schedule delays could negatively impact the timing of the
conversion of backlog into sales, or the profitability of such sales. We
continue to experience technical and schedule delays with certain development
programs. However, these delays are being resolved as they arise and we do not
expect any negative impact on our customer order fulfillment projections for
fiscal year 2022. In April 2021, we received qualification approval on a
significant engineering design and production contract which allows us to begin
the manufacturing of end units. Engineering programs in both the funded and
unfunded portions of the current backlog aggregate $8.9 million.

The Company currently expects new orders in fiscal 2022 to approximate those
received in fiscal year 2021. As market factors including competition and
product costs impact gross profit margins, management will continue to evaluate
our sales strategy, employment levels, and facility costs.

During fiscal year 2021 the Company received $38.5 million in new orders. Our
total backlog at June 30, 2021 was $65.6 million, as compared to $54.9 million
at June 30, 2020. Currently, we expect a minimum of $38 million of orders
comprising the June 30, 2021 backlog will be filled during the fiscal year
ending June 30, 2022. This $38 million will be supplemented by shipments which
may be made against orders received during the 2022 fiscal year.

In addition to the backlog, the Company currently has outstanding opportunities
representing in excess of $75.3 million in the aggregate as of August 31, 2021,
for both repeat and new programs. The outstanding quotations encompass various
new and previously manufactured power supplies, transformers, and subassemblies.
However, there can be no assurance that the Company will acquire any of the
anticipated orders described above, many of which are subject to allocations of
the United States defense spending and factors affecting the defense industry.
Four significant customers represented approximately 59.4% of the Company’s
total sales in fiscal year 2021 and two significant customers represented 38% of
the Company’s total sales in fiscal year 2020. These sales are in connection
with multiyear programs in which the Company is a significant contractor. The
June 30, 2021 backlog of $65.6 million included orders from five customers that
represent 15%, 15%, 14%, 13%, and 10%, respectively, of the total backlog. The
June 30, 2020 backlog of $54.9 million includes orders from four customers that
represent 19%, 13%, 10%, and 10%, respectively, of the total backlog. Although
improvement has been made in customer concentrations, this high customer
concentration level continues to present significant risk. A loss of one of
these customers or programs related to these customers, or customer requested
deferrals of product delivery could significantly impact the Company.

Historically, a small number of customers have accounted for a large percentage
of the Company’s total sales in any given fiscal year. Management continues to
pursue opportunities with current and new customers with an overall objective of
lowering the concentration of sales, mitigating excessive reliance upon a single
major product of a particular program and minimizing the impact of the loss of a
single significant customer. Given the nature of our business, we believe our
existing sales order backlog is fairly diversified in terms of customers and the
category of products on order.

Management, along with the Board of Directors, continues to evaluate the need
and use of the Company’s working capital. Capital expenditures, primarily for
machinery and equipment, are expected to be approximately $200,000 for fiscal
year 2022. A majority of these expenditures will be made to stay competitive in
the marketplace and to meet the needs of current contracts. Expectations are
that the working capital will be required to fund orders, general operations of
the business and dividend payments when applicable. Management along with the
Mergers and Acquisitions Committee of the Board of Directors will examine
opportunities involving acquisitions or other strategic options, including
buying certain products or product lines, provided that such opportunities
demonstrate synergies with the Company’s existing product base and accretion to
earnings.


                                       7



Results of Operations



Net sales for the years ended June 30, 2021 and 2020 were $27,734,598 and
$31,526,231, respectively, a 12% decrease. The decrease in net sales in fiscal
year 2021 is primarily due to a decrease in power supply and magnetics sales
offset, in part, by an increase in build to print shipments. In general, sales
fluctuations within product categories will occur during a comparable fiscal
period as the direct result of product mix, influenced by the duration of
specific programs and the contractual terms of firm orders placed for product
and services under those programs including contract value, scope of work and
duration. Deliverables within firm contracts are often subject to delivery
schedules. Internal and external constraints, at times, impact our ability to
ship. Sales results during the twelve months ended June 30, 2021 were impacted
by our inability to manufacture and ship product during the third quarter due to
an unplanned facility closure resulting from a significant workforce COVID-19
exposure. This closure lasted approximately 10 days with the facility re-opening
at less than full capacity. These delays in production placed strain on an
already aggressive production and shipment schedule in place for the fourth
quarter. Also impacting sales during the fiscal year ended June 30, 2021,
specific to power supply shipments, is the decline in procurement for product
supporting the rail industry and the decrease in shipments against a single
military contract which had no sales in the fiscal year when compared to the
prior year. This decline was offset, in part, by an increase in build to print
contracts of varying size, scope and duration.

In addition, we continued to be constrained by (i) engineering design changes
required to meet customer requirements, (ii) certain supplier product
non-conformances, (iii) delays in obtaining timely resolutions on issues
encompassing build to print customer-owned drawings, and (iv) an increase in
lead times for many parts, including certain electronic components due to
industry shortages and volatility within the power electronics industry. We are
also experiencing an increase in delays with certain supplier deliveries
resulting from effects of the COVID-19 pandemic. Engineering, program
management, and supply chain personnel are working closely with our customers
and suppliers to execute on our past due deliveries and we do not expect this
situation to affect future business opportunities. We anticipate that many of
these issues will be resolved in the near future. As of April 2021, we received
qualification approval on a significant engineering design and production
contract which allows us to begin the manufacturing of end units.

Gross profits for the twelve months ended June 30, 2021 and 2020 were $3,359,607
and $5,558,615, respectively. Gross profit as a percentage of sales was
approximately 12.1% and 17.6%, for the same periods, respectively. The primary
factors in determining the change in gross profit and net income (loss) are
overall sales levels and product mix. The gross profits on mature products and
build to print contracts are typically higher as compared to products which are
still in the engineering development stage or in early stages of production. In
the case of the latter, the Company can incur what it refers to as “loss
contracts,” primarily on engineering design contracts in which the Company
invests with the objective of developing future product sales. In any given
accounting period the mix of product shipments between higher margin programs
and less mature programs, and expenditures associated with loss contracts, has a
significant impact on gross profit and net income. Impacting sales and gross
profits in the current fiscal year, when compared to the prior year, was an
unplanned facility shutdown during the third quarter which lasted approximately
10 days due to the COVID-19 pandemic.

Several additional factors contributed to a decrease in the gross profit and the
gross profit percentage in the twelve months ended June 30, 2021 as compared to
the same period in 2020. Most significantly, the Company recognized as a
reduction to income, increased costs on two specific engineering design and
production contracts, one of which incurred an increase in both material and
labor anticipated costs and the other primarily consisting of unforeseen
material escalation costs to complete the production builds. Second, the Company
wrote down the value of inventory pertaining to a certain design and production
contract serving the airline industry which was cancelled by the customer during
the second quarter of the fiscal year. Finally, sales on several build to print
contracts and one specific large magnetics contract, which yielded lower
margins, represented a higher volume of the overall product mix in fiscal 2021,
thereby resulting in lower gross profit realized in the year.

Selling, general and administrative expenses were $3,785,746 for the fiscal year
ended June 30, 2021; a decrease of $600,561 compared to the fiscal year ended
June 30, 2020. The decrease for the fiscal year ended June 30, 2021 as compared
to the same period in 2020 relates primarily to the decrease in costs incurred
for employee compensation, travel, board of director’s fees due to a reduction
of one director, outside services supporting sales leads, outside selling costs
for commissions paid on certain contracts, and outgoing freight costs due to a
decrease in shipments. These decreases were offset in part by an increase in
costs associated with recruiting for position vacancies. Employee compensation
decreased due to a reduction in workforce and cost reduction measures
implemented that included forgoing cost of living increases and the payment of
bonuses during the current fiscal year.

                                       8

Other income for the fiscal year ended June 30, 2021 and 2020 was $57,942 and
$136,881, respectively. The decrease in the twelve months ended is primarily due
to a decrease in interest income. Interest income is a function of the level of
investments and investment strategies that generally tend to be conservative.
The decrease in interest income in the current fiscal year resulted from the
reduction and timing of investments made, offset in part, by a gradual decrease
in overall current yield percentages earned on those investments.

The Company’s effective tax rate was 50.7% in the fiscal year 2021 and 11.1% in
fiscal year 2020. The effective tax rate in fiscal 2021 and 2020 varies from the
statutory tax rate mainly due to the benefit derived from the ESOP dividends
paid on allocated shares. The increase in the effective tax rate between periods
is primarily due to the reduction in income before taxes and the benefits
received in the current fiscal year on the ESOP dividends paid as well as the
tax rate differential associated with the net operating loss carryback which
resulted from the net loss incurred in the current fiscal year.

The Company had a net loss for fiscal year 2021 of $(181,543) or $(0.08) per
share, basic and diluted compared to net income of $1,163,668 or $0.49 per
share, basic and diluted, for fiscal year 2020. The decrease in net income in
the twelve months ended June 30, 2021 compared to the same period in 2020 is
primarily attributable to lower sales, a lower gross profit margin percentage,
and a decrease in other income offset, in part, by a decrease in selling,
general, and administrative expenses and the benefit derived from the increase
in the effective tax rate, all discussed above.

Liquidity and Capital Resources

The Company’s working capital is an appropriate indicator of the liquidity of
its business, and during the past two fiscal years, the Company, when possible,
has funded all of its operations with cash flows resulting from operating
activities and when necessary from its existing cash and investments. The
Company did not borrow any funds during the last two fiscal years. Management
has available a $3,000,000 line of credit to help fund further growth or working
capital needs, if necessary, but does not anticipate the need for any borrowed
funds in the foreseeable future. Contingent liabilities on outstanding standby
letters of credit agreements aggregated to zero at June 30, 2021 and 2020. The
line of credit is reviewed annually in November for renewal by December 1st.

The Company’s working capital as of June 30, 2021 and 2020 was $27.5 million and
approximately $28 million, respectively. The Company may at times be required to
repurchase shares at the ESOP participants’ request at the fair market value.
During the twelve months ended June 30, 2021 the Company did not repurchase any
shares held by the ESOP. During the twelve months ended June 30, 2020 the
Company repurchased 2,180 shares of its common stock previously held by the ESOP
for a purchase price of $47,949. Under existing authorizations from the
Company’s Board of Directors, as of June 30, 2021, management is authorized to
purchase an additional $783,460 of Company stock.

The table below presents the summary of cash flow information for the fiscal
years indicated:


                                                    2021             2020

Net cash provided by operating activities $ 594,996 $ 5,968,511
Net cash provided by investing activities 2,006,910 326,010
Net cash used in financing activities (1,201,316 ) (2,355,160 )

Net cash provided by operating activities fluctuates between periods primarily
as a result of differences in sales and net income, provision for income taxes,
the timing of the collection of accounts receivable, purchase of inventory, and
payment of accounts payable. The decrease in cash provided by operating
activities compared to the prior year primarily relates to the decrease in net
income, the increase in inventory purchases, the decrease in cash collected from
customers as cash advances and an increase in payments to vendors offset, in
part, by an increase in trade accounts receivables collected. Net cash provided
by investing activities increased in the twelve months ended June 30, 2021 as
compared to the same period in 2020 primarily due to maturing investments that
were not reinvested during this period when compared to the same period last
year. Cash used in financing activities decreased during the fiscal year ended
June 30, 2021. The decrease is primarily due to the suspension and non-payment
of the quarterly dividend during the last two quarters of the fiscal year and a
decrease in cash proceeds collected from the exercise of stock options, offset
by the decrease in the purchase of treasury stock as compared to the same period
last year.



                                       9


The Company currently believes that the cash flow generated from operations and
when necessary, from cash and cash equivalents will be sufficient to meet its
long-term funding requirements for the foreseeable future.

During the fiscal years ended June 30, 2021 and 2020, the Company expended
$43,554 and $214,421, respectively, for plant improvements and new equipment.
The Company has budgeted approximately $200,000 for new equipment and plant
improvements in fiscal year 2022. Management anticipates that the funds required
will be available from current operations.

Management believes that the Company’s reserve for bad debts of $3,000 is
adequate given the customers with whom the Company does business. Historically,
bad debt expense has been minimal.









                                      10

© Edgar Online, source Glimpses



Source link

Leave a Reply

Your email address will not be published.

SHOPPING CART

close