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ESP > SEC Filings for ESP > Form 10-K on 12-Sep-2013All Recent SEC Filings

Show all filings for ESPEY MFG & ELECTRONICS CORP

Form 10-K for ESPEY MFG & ELECTRONICS CORP


12-Sep-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Outlook

Management expects revenues in fiscal 2014 to be less than fiscal year 2013 revenues. Expectations are for product mix and margins to remain favorable for fiscal year 2014. During fiscal 2013 new orders received by the Company were approximately $26.1 million. The order backlog of approximately $42.1 million at June 30, 2013 gives the Company a solid base of future sales. It is presently anticipated that a minimum of $27 million of orders comprising the June 30, 2013 backlog will be filled during the fiscal year ending June 30, 2014. The minimum of $27 million does not include any shipments, which may be made against orders subsequently received during the fiscal year ending June 30, 2014. See discussions below for further detail on the customer mix included in the backlog.

In addition to the backlog, the Company currently has outstanding opportunities representing in excess of $56 million in the aggregate 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 or all 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 and military procurement generally.

Three significant customers represented 63% of the Company's total sales in fiscal 2013 and two significant customers represented 60% of the Company's total sales in fiscal 2012. These sales are in connection with multiyear programs in which the Company is a significant subcontractor. The June 30, 2013 backlog of $42.1 million includes orders from two customers that represent 57% and 11% of the total backlog. A loss of one of these customers or programs related to these customers 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. For several years, management has pursued 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. Management continues to evaluate its business development functions and potential revised courses of action in order to diversify its customer base. The Company currently has a very high concentration level with two customers and this presents significant risk.

Management, along with the Board of Directors, continues to evaluate the need and use of the Company's working capital. Capital expenditures are expected to be approximately $800,000 for fiscal 2014. Expectations are that the working capital will be required to fund orders, dividend payments, and general operations of the business. From time to time, management along with the Mergers and Acquisitions Committee of the Board of Directors examine opportunities involving acquisitions or other strategic options, including buying certain products or product lines. The criteria for consideration are synergies with the Company's existing product base and accretion to earnings.

Results of Operations

Net sales for fiscal years ended June 30, 2013 and 2012, were $34,298,210 and $32,037,357, respectively, a 7% increase. This increasecan be attributed to the contract specific nature of the Company's business and the timing of deliveries on these contracts. More specifically, engineering sales increased by approximately $3.1 million while shipments of transformers and spare parts increased by approximately $1.2 million each.

For the fiscal years ended June 30, 2013 and 2012 gross profits were $10,699,569 and $8,820,163, respectively. Gross profit as a percentage of sales increased to 31.2% for fiscal 2013, up from 27.5% in fiscal 2012. The primary factor in determining gross profit and net income is product mix. The gross profits on mature products and build to print contracts are higher as compared to products that are still in the engineering development stage or in the early stages of production. In any given accounting period the mix of product shipments between higher margin mature programs and less mature programs including loss contracts, has a significant impact on gross profit and net income. The increased gross profit in fiscal 2013 as compared to fiscal 2012 was primarily the result of an increased sales backlog for both engineering and production with a favorable product mix, offset by the impact of investments in future programs.

Selling, general and administrative expenses were $2,917,140 for the fiscal year ended June 30, 2013, an increase of $88,731, or 3% as compared to the prior year. The increase for fiscal 2013 relates primarily to increases in salary and employee related expenses.

Employment of full time equivalents at June 30, 2013 was 170 people compared with 165 people at June 30, 2012.

Other income remained consistent for the fiscal years ended June 30, 2013 and 2012 was $83,758 and $89,702, respectively.

The effective income tax rate was 29.3% in fiscal 2013 and 27.8% in fiscal 2012. The effective tax rate is less than the statutory tax rate mainly due to the benefit the Company receives on its "qualified production activities" under The American Jobs Creation Act of 2004 and the benefit derived from the dividends paid on allocated ESOP shares.

Net income for fiscal 2013, was $5,562,425or $2.52 and $2.48 per share, basic and diluted, respectively, compared to net income of $4,390,268 or $2.02 and $1.99 per share, basic and diluted, respectively, for fiscal 2012. The increase in net income per share was primarily due to higher sales, higher gross profit on sales, offset slightly by higher selling, general and administrative expenses.

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.

The Company's working capital as of June 30, 2013 and 2012 was $29,591,453 and $27,199,385, respectively. During the three months ended June 30, 2013 and 2012 the Company did not repurchase any shares of its common stock. During the fiscal years ended June 30, 2013 and 2012 the Company repurchased 5,753 and 6,269 shares, respectively, of its common stock from the Company's Employee Retirement Plan and Trust ("ESOP") and in other open market transactions, for a total purchase price of $150,020 and $143,731, respectively. Under existing authorizations from the Company's Board of Directors, as of June 30, 2013, management is authorized to purchase an additional $1,706,248 million of Company stock.

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

                                                    2013             2012
Net cash provided by operating activities   $  3,285,630     $  7,386,326
Net cash used in investing activities           (990,225 )     (1,463,276 )
Net cash used in financing activities         (3,930,201 )     (4,095,437 )

Net cash provided by operating activities fluctuates between periods primarily as a result of differences in net income, level of sales, the timing of the collection of accounts receivable, purchase of inventory and payments of accounts payable. Net cash used in investing activities decreasedin fiscal 2013 due to an increase in purchases of investment securities offset by an increase in proceeds from maturity of investment securities. The decrease in cash used in financing activities is due primarily to an increase in the proceeds from the exercise of stock options.

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.

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.

During fiscal year 2013 and fiscal 2012, the Company expended $322,507 and $267,983, respectively, for plant improvements and new equipment. The Company has budgeted approximately $800,000 for new equipment and plant improvements in fiscal 2014. Management anticipates that the funds required will be available from current operations.

Critical Accounting Policies and Estimates

Our significant accounting policies are described in note 2 to the financial statements. We believe our most critical accounting policies include revenue recognition and cost estimation on our contracts.

Revenue Recognition and Estimates

A significant portion of our business is comprised of development and production contracts. Generally revenues on long-term fixed-price contracts are recorded on a percentage of completion basis using units of delivery as the measurement basis for progress toward completion.

Percentage of completion accounting requires judgment relative to expected sales, estimating costs and making assumptions related to technical issues and delivery schedules. Contract costs include material, subcontract costs, labor and an allocation of overhead costs. The estimation of cost at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Given the significance of the estimation processes and judgments described above, it is possible that materially different amounts of expected sales and contract costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process. When a change in expected sales value or estimated cost is determined, changes are reflected in current period earnings.

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