# Espey MFG & Electronics Corp: Form 10-K for the period ended Jun 30, 2022 - Company: [Espey MFG & Electronics Corp](/companies/esp.md) (CIK 33533) - Form: 10-K - Filed: 2022-09-22 - Accepted by EDGAR: Sep 22, 2022, 16:44 ET - Period: 2022-06-30 - Accession: 0001174947-22-001033 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/33533/000117494722001033/esp10k0622.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/33533/000117494722001033/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2022-06-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2022-04-01 to 2022-06-30 | $8.5m | us-gaap:Revenues | | Revenue | 12 months, 2021-07-01 to 2022-06-30 | $32.1m | us-gaap:Revenues | | Cost of revenue | 12 months, 2021-07-01 to 2022-06-30 | $26.6m | us-gaap:CostOfRevenue | | Gross profit | 3 months, 2022-04-01 to 2022-06-30 | $1.2m | us-gaap:GrossProfit | | Gross profit | 12 months, 2021-07-01 to 2022-06-30 | $5.5m | us-gaap:GrossProfit | | Selling, general and administrative | 12 months, 2021-07-01 to 2022-06-30 | $3.9m | us-gaap:SellingGeneralAndAdministrativeExpense | | Operating income | 12 months, 2021-07-01 to 2022-06-30 | $1.5m | us-gaap:OperatingIncomeLoss | | Income tax | 12 months, 2021-07-01 to 2022-06-30 | $328.0k | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2022-04-01 to 2022-06-30 | $276.5k | us-gaap:NetIncomeLoss | | Net income | 12 months, 2021-07-01 to 2022-06-30 | $1.3m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.11 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 12 months, 2021-07-01 to 2022-06-30 | $0.52 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2022-04-01 to 2022-06-30 | $0.11 | us-gaap:EarningsPerShareBasic | | Basic EPS | 12 months, 2021-07-01 to 2022-06-30 | $0.52 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2021-07-01 to 2022-06-30 | 2,431,904 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2021-07-01 to 2022-06-30 | $2.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2021-07-01 to 2022-06-30 | $303.6k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2022-06-30 | $8.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2022-06-30 | $37.1m | us-gaap:AssetsCurrent | | Total assets | at 2022-06-30 | $39.9m | us-gaap:Assets | | Current liabilities | at 2022-06-30 | $7.6m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2022-06-30 | $7.8m | us-gaap:Liabilities | | Shareholders' equity | at 2022-06-30 | $32.1m | us-gaap:StockholdersEquity | ## Business As filed, 15,390 characters. General Espey Mfg. & Electronics Corp. (“Espey”) is a power electronics design and original equipment manufacturing (OEM) company with a long history of developing and delivering highly reliable products for use in military and severe environment applications. Design, manufacturing, and testing is performed in our 150,000+ square foot facility located at 233 Ballston Ave., Saratoga Springs, New York. Espey is classified as a “smaller reporting company” for purposes of the reporting requirements under the Securities Exchange Act of 1934, as amended. Espey’s common stock is publicly-traded on the NYSE American under the symbol “ESP.” Espey began operations after incorporation in New York in 1928. We strive to remain competitive as a leader in high power energy conversion and transformer solutions through the design and manufacture of new and improved products by using advanced and “cutting edge” electronics technologies. Espey is ISO 9001:2015 and AS9100:2016 certified. Our primary products are power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, UPS systems, antennas and high power radar systems. The applications of these products include AC and DC locomotives, shipboard power, shipboard radar, airborne power, ground-based radar, and ground mobile power. Espey’s services include design and development to specification, build to print, design services, design studies, environmental testing services, metal fabrication, painting services, and development of automatic testing equipment. Espey is vertically integrated, meaning that the Company produces individual components (including inductors), populates printed circuit boards, fabricates metalwork, paints, wires, qualifies, and fully tests items, mechanically, electrically and environmentally, in house. Portions of the manufacturing and testing process are subcontracted to vendors from time to time. In fiscal years ended June 30, 2022 and 2021, the Company's total sales were $32,104,774 and $27,734,598, respectively. Sales to four domestic customers, accounted for 17%, 16%, 14% and 11%, respectively, of total sales in 2022. Sales to four domestic customers accounted for 16%, 15%, 14% and 14%, respectively, of total sales in 2021. This concentration level presents significant risk. A loss of one of these customers or programs related to these customers could significantly impact the financial performance of 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. Export sales in fiscal years 2022 and 2021 were approximately $1,644,000 and $2,019,000, respectively. The decrease is primarily due to the decrease in power supply sales offset, in part, by an increase in build to print shipments. Sources of Raw Materials The Company has at least two potential sources of supply for a majority of its raw materials. However, certain components used in its products are available from a single or a limited number of sources. Despite the risk associated with single or limited source suppliers, the benefits of higher quality goods and timely delivery minimize and often limit any potential risk and can eliminate problems with part failures during production. At times, replacements are required to cover obsolete parts. For the past several years, the growth and continuing demand in the power electronics industry across multiple manufacturing sectors has created volatility and unpredictability in the availability of certain electronic components and, in some cases, creates industry shortages. These shortages have and will likely continue to impact our ability to support our customer’s schedule demands, as lead times for these components have, in some instances, increased from readily available to waiting times of nearly a year or more. In addition, we continue to incur delays in material deliveries from some company suppliers due to effects from global events, including the COVID-19 pandemic, resulting in supply chain disruptions. We continue to work with our customers to mitigate any adverse impact upon our ability to service their requirements. The President of the United States continued the imposition of tariffs on steel and aluminum imports from various countries in 2022. Although we are not currently experiencing any significant financial or raw material sourcing issues resulting from the product tariffs, the Company cannot provide any assurance that the existing tariffs, the potential of additional tariffs, and the associated volatility arising from the Administration’s foreign trade policies, will not have a negative impact on our future earnings by increasing our raw material prices and augmenting the lead time for the availability of raw materials. From time to time the Company must identify parts to replace parts which are no longer produced. Sales Backlog The total backlog at June 30, 2022 was approximately $76.8 million compared to approximately $65.6 million at June 30, 2021. The Company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts. The funded portion of this backlog at June 30, 2022 is approximately $76.4 million. This includes items that have been authorized and appropriated by Congress and/or funded by the customer. The unfunded backlog at June 30, 2022 is approximately $0.4 million and represents two multi-year orders from a single customer for which funding has not yet been appropriated by Congress or funded by our customer. While there is no guarantee that future budgets and appropriations will provide funding for individual programs, management has included in unfunded backlog only those programs that it believes are likely to receive funding based on discussions with customers and program status. The unfunded backlog at June 30, 2021 was approximately $2.1 million, comprised of the same multi-year orders from a single customer. Contracts are subject to modification, change or cancellation, and the Company accounts for these changes as they are probable and estimable. The Company evaluates the impact of any scope modifications and will adjust reserves as information is known and estimable. It is presently anticipated that a minimum of $35 million of orders comprising the June 30, 2022 backlog will be filled during the fiscal year ending June 30, 2023. The minimum of $35 million does not include any shipments which may be made against orders received subsequently to the fiscal year ending June 30, 2022. The estimate of the June 30, 2022 backlog to be shipped in fiscal year 2023 is subject to future events, which may cause the amount of the backlog actually shipped to differ from such estimate. Marketing and Competition The Company markets its products primarily through its own direct sales organization and through outside sales representatives. Business is solicited from large industrial manufacturers and defense companies, the government of the United States, foreign governments and major foreign electronic equipment companies. Espey is also on the eligible list of contractors with the United States Department of Defense. We pursue opportunities for prime contracts directly with the Department of Defense and are generally automatically solicited by Department of Defense procurement agencies for their needs falling within the major classes of products produced by the Company. Espey contracts with the Federal Government under cage code 20950 as Espey Mfg. & Electronics Corp. There is competition in all classes of products manufactured by the Company ranging from divisions of the largest electronic companies, to many small companies. The Company's sales do not represent a significant share of the industry's market for any class of its products. The principal methods of competition for electronic products of both a military and industrial nature include, among other factors, price, product performance, the experience of the particular company and history of its dealings in such products. Our business is not seasonal. However, the concentration of our business in the rail industry, and in equipment for military applications and industrial applications and our customer concentrations expose us to on-going associated risks. These risks include, without limitation, requirements for power supplies in the rail industry, dependence on appropriations from the United States Government and the governments of foreign nations, program allocations, the potential of governmental termination of orders for convenience, and the general strength of the industry sectors in which our customers transact business. Future procurement needs supporting the military and the rail industry continue to drive competition. Many of our competitors have invested, and they continue to invest aggressively in upfront product design costs and accept lower profit margins as a strategic means of maintaining existing business and enhancing market share. This continues to put pressure on the pricing of our current products and has lowered our profit margins on some of our new business. In order to compete effectively for new business, in some cases we have invested in upfront design costs, thereby reducing initial profitability as a means of procuring new long-term programs. As part of our strategy, we adjust our pricing in order to achieve a balance which enables us both to retain repeat programs while being more competitive in bidding on new programs. We continue to place an emphasis on securing “build to print” opportunities, which allows production work to go directly to the manufacturing floor, limiting the impact on our engineering staff. This allows us to keep our manufacturing team busy while the products being developed in-house transition to production. Research and Development Some of the Company's engineers and technicians spend varying amounts of time on either the development of new products or improvements to existing products. A majority of the resulting costs we incur relate to research that is required to support a request for quotation from a customer product-specific need usually associated with stringent size and weight requirements. We do very little pure research as our business primarily is driven by customer product needs and custom product development with some customer funding. The Company's expenditures for research and development were approximately $32,362 and $40,912 in fiscal year 2022 and 2021, respectively. Employees The Company had 150 employees as of August 31, 2022. Approximately 35% of the employees are represented by the International Brotherhood of Electrical Workers. The current collective bargaining agreement expires on June 30, 2025. Relations with the Union are considered good. Government Regulations Compliance with federal, state and local laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, did not in fiscal year 2022, and the Company believes will not in fiscal year 2023, have a material effect upon the capital expenditures, net income, or competitive position of the Company. The Company’s U.S. Government contract and subcontract orders are funded by government budgets, which operate on an October-to-September fiscal year. Normally, in February of each year, the President of the United States presents to Congress a proposed budget for the upcoming fiscal year. This budget includes recommended appropriations for every federal agency and is the result of months of policy and program reviews throughout the executive branch. From February through September of each year, the appropriations and authorization committees of Congress review the President’s budget proposals and establish the funding levels for the upcoming fiscal year in appropriations and authorization legislation. Once these levels are enacted into law, the Executive Office of the President administers the funds to the agencies. There are two primary risks associated with this process. First, the process may be delayed or disrupted because of congressional schedules, negotiations over funding levels for programs or unforeseen world events, which could, in turn, alter the funding for a program or contract. Second, funding for multi-year contracts can be changed by future appropriations, which could affect the timing of funds, schedules and program content. Also, our international sales are denominated in United States dollars. Consequently, a strengthening of the United States dollar against foreign currencies could increase the price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’ products. U.S. Government Defense Contracts and Subcontracts Generally, U.S. Government contracts are subject to procurement laws and regulations. Some of the Company’s contracts are governed by the Federal Acquisition Regulation (FAR), which lays out uniform policies and procedures for acquiring goods and services by the U.S. Government, and agency-specific acquisition regulations that implement or supplement the FAR. For example, the Department of Defense implements the FAR through the Defense Federal Acquisition Regulation (DFAR). The FAR also contains guidelines and regulations for managing a contract after award, including conditions under which contracts may be terminated, in whole or in part, at the government’s convenience or for default. If a contract is terminated for the convenience of the government, a contractor is entitled to receive payments for its allowable costs and, in general, the proportionate share of fees or earnings for the work done. If a contract is terminated for default, the government generally pays for only the work it has accepted. These regulations also subject the Company to financial audits and other reviews by the government of its costs, performance, accounting and general business practices relating to its contracts, which may result in adjustment of the Company’s contract-related costs and fees. Cyber or Other Security Threats or Other Disruptions We routinely experience cybersecurity threats in the form of unauthorized attempts to gain access to our sensitive information. The threats we face vary from attacks common to most industries to more advanced attacks with the specific objective of accessing national security information. We believe our threat detection and mitigation processes and procedures are above adequate. The processes and procedures in place are designed to detect, manage and prevent current threats and respond quickly to detect and mitigate new threats. To ensure our systems remain protected, we continually assess and acquire, as appropriate, new available technology and provide employee training to utilize effectively our technological assets. Prior cyberattacks directed at us have not had a material impact on our financial results nor restricted us from being awarded contracts from other defense companies or directly from the United States Department of Defense. However, we can provide no assurance that the occurrence of any future event would not adversely affect our internal operations, our reputation and competitive advantage, and our future financial results. ## Properties As filed, 1,316 characters. The Company's entire operation, including administrative, manufacturing and engineering facilities, is located in Saratoga Springs, New York. The Saratoga Springs plant, which the Company owns, consists of various adjoining buildings on a 22 acre site, approximately eight acres of which is unimproved. The property is not subject to mortgage indebtedness or any other material encumbrance. The plant has a sprinkler system throughout and contains approximately 151,000 square feet of floor space, of which 90,000 is used for manufacturing, 24,000 for engineering, 33,000 for shipping and climatically secured storage, and 4,000 for offices. The offices, engineering and some manufacturing areas are air-conditioned. In addition to assembly and wiring operations, the plant includes facilities for varnishing, potting, impregnation and spray-painting operations. The manufacturing operation also includes a complete machine shop, with welding and sheet metal fabrication facilities adequate for substantially all of the Company's current operations. Besides normal test equipment, the Company maintains a sophisticated on-site environmental test facility. In addition to meeting all of the Company's in-house needs, the machine shop and environmental facilities are available to other companies on a contract basis. ## Legal proceedings As filed, 277 characters. We are party to various litigation matters and claims arising from time to time in the ordinary course of business. There are no such pending matters which we believe will have a material adverse effect on our business, financial condition, results of operations or cash flows. ## Management's discussion and analysis As filed, 20,715 characters. Business Outlook Management expects revenues in fiscal year 2023 to be higher than revenues during fiscal year 2022 and expects net income per share to be higher in fiscal 2023 as compared to the net income per share realized during fiscal year 2022. These expectations are driven by orders already in our sales backlog. Creating consistency in our quarter to quarter financial performance will remain a challenge as we navigate a current difficult environment of inflation and parts shortages. We saw improvement to our operations in the second half of fiscal year 2022 and expect continued improvement in fiscal year 2023. However, we continue to be constrained by (i) engineering design changes required to meet customer requirements, (ii) delays in obtaining timely resolutions on issues encompassing build to print customer-owned drawings, and (iii) an increase in lead times for many parts, including certain electronic components due to industry shortages and volatility within the power electronics industry. 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. Effects from global events and the resulting supply chain disruptions continue to place pressure on the cost of raw materials, freight, utility, labor and other production and administrative costs. These inflationary cost challenges are expected to continue to have a negative impact on operating income in fiscal year 2023. Volatile raw material indexes and shortages have led to wide-spread vendor price increases. For our executed fixed-priced contracts, we will continue to either singularly or combined be 1) required to absorb the increased costs 2) continue to mitigate costs down through the identification of additional supply chain buying strategies or 3) submit for price remediation assistance from our customers. To minimize exposure on future fixed-priced contracts, we continue to incorporate inflationary increases to product quotations provided to our customers, some of which have resulted in significant price increases. Additionally, to minimize our exposure, we have, in many instances, reduced the time in which certain product quotations remain valid and have also extended lead times for product deliveries. We continue to work with our customers to mitigate any adverse impact upon our ability to service their requirements. Management continues to closely monitor the impact of evolving workforce labor constraints, primarily from the effects from the pandemic, on our planned delivery schedules. Although declining, we continue to experience periodic 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. Disruptions from workforce turnover has stabilized. Combined, with supply chain constraints, future unforeseen labor disruptions could delay shipments and result in missing our backlog fulfillment projections and recognizing lower operating income. 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 and increased raw material costs 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 major development programs. To date, we have been able to resolve various technical and scheduling delays and continue to work with our customers on newly arising delays. Engineering programs in both the funded and unfunded portions of the current backlog aggregate $7.3 million. The Company currently expects new orders in fiscal 2023 to be greater than those received in fiscal year 2022. 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 2022 the Company received $43.2 million in new orders. Our total backlog at June 30, 2022 was approximately $76.8 million, as compared to $65.6 million at June 30, 2021. Currently, we expect a minimum of $35 million of orders comprising the June 30, 2022 backlog will be filled during the fiscal year ending June 30, 2023. This $35 million will be supplemented by shipments which may be made against orders received during the 2023 fiscal year. In addition to the backlog, the Company currently has outstanding opportunities representing in excess of $74.6 million in the aggregate as of August 31, 2022, 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 57.2% of the Company’s total sales in fiscal year 2022 and four significant customers represented approximately 59.4% of the Company’s total sales in fiscal year 2021. These sales are in connection with multiyear programs in which the Company is a significant contractor. The June 30, 2022 backlog of $76.8 million included orders from five customers that represent approximately 16%, 16%, 15%, 13%, and 12%, respectively, of the total backlog. The June 30, 2021 backlog of $65.6 million included orders from five customers that represented approximately 15%, 15%, 14%, 13%, and 10%, respectively, of the total backlog. 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 and for a building roof restoration project not completed in fiscal 2022 due to the backorder of materials, are expected to approximate $500,000 for fiscal year 2023. 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. Results of Operations Net sales for the years ended June 30, 2022 and 2021 were $32,104,774 and $27,734,598, respectively, an approximate 16% increase. The increase in net sales in fiscal year 2022 is primarily due to an increase in magnetic and power supply 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 which also contributes to sales fluctuations between comparable periods. We saw improvement to our operations in the second half of the year which eased our previous inability to ship on specific contracts. We processed and converted certain past due supply chain deliveries into product shipments and completed certain past due engineering milestone deliverables. We expect continued improvement on current engineering delays as new employees come up to speed on contracts and related statement of work specifications and material delays. In addition, contracts impeded by actions required from our customers have been resolved or are moving forward towards resolution. However, the impact of ongoing global events, most notably the COVID-19 pandemic, is expected to continue to impact operational instability primarily in our supply chain, with increased lead times and increased costs from inflationary pricing. Unplanned employee absences due to sickness and self-isolating protocols continues, but have been significantly less when compared to the prior year. Disruptions from workforce turnover has stabilized. Our focus remains to work with our customers and suppliers to identify alternative strategies to reduce lead times and maximize sales and operating income. Specific to net sales for the twelve month periods discussed above, the sales fluctuations when compared to the same periods last year were primarily the direct result of an unplanned facility closure which occurred in March 2021 due to a significant workforce COVID-19 exposure. The closure lasted approximately 10 days with the facility re-opening at less than full capacity. In addition, the increase in sales in the current fiscal year was influenced by product mix, contractual due dates, and our ability to deliver on certain past due customer orders which had been delayed due to extended raw material lead times. Specific to magnetic shipments, sales increased from more shipments on specific contracts related to a family of power distribution transformers for a single customer when compared to the prior year. In addition, an increase in magnetic sales is attributable to increased deliveries against a large magnetics contract for transformers originally designed in-house and an increase in milestone deliveries on a large on-going development program for a power distribution panel. Specific to power supply shipments, the increase in sales is primarily attributable to product supporting the rail industry when compared to a year ago, also attributable to the timing of deliveries on existing contracts and additional follow-on orders received. Gross profits for the twelve months ended June 30, 2022 and 2021 were $5,472,158 and $3,359,607, respectively. Gross profit as a percentage of sales was 17% and 12.1%, 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. The improvement in gross profit in the twelve months ended June 30, 2022 as compared to the same period in 2021 resulted from an increase in sales and overall product mix comprising shipments. In addition, gross profit for the twelve month period improved when compared to the prior year as specific items which negatively impacted prior year results did not have a negative impact on gross profit recognized in the current year. Reductions to gross profit in the prior year included lower sales as the result of an unplanned facility shutdown in the third quarter of last year and the costs incurred for an inventory write-down for a design and production contract serving the airline industry which was cancelled by the customer during the prior fiscal year and with respect to which the Company was unsuccessful in being awarded restitution. Last year, two specific engineering design and production contracts, on which we incurred increased costs, had a larger negative impact on gross profit when compared to the current year. Specific to the current fiscal year, the Company recognized higher gross profit on increased sales, primarily from mature power supply, magnetic and build to print shipments when compared to the same period last year. Additionally, the Company showed an improvement to gross profit on a specific power supply contract resulting from adjustments recovered from the customer for costs previously incurred. Finally, the Company was successful in securing several additional equitable adjustments on other contracts in the second half of the fiscal year which had a favorable impact on gross profit. These improvements to gross profit were offset, in part, by increased costs, primarily labor, incurred on a power supply engineering design and production contract and a build to print power supply contract requiring engineering efforts, both of which contracts had no adverse impact on the prior year results. Finally, gross profit was reduced by an unforeseen significant increase in material costs on a large production contract, a direct result of inflationary and volatile pricing for certain raw materials and components. We have submitted a formal request to the customer for an equitable adjustment to this long-term fixed price contract supporting the US military. There is no guaranty that the customer will agree to a pricing adjustment. Selling, general and administrative expenses were $3,942,991 for the fiscal year ended June 30, 2022; an increase of $157,245 compared to the fiscal year ended June 30, 2021. The increase is attributable to costs incurred as the result of a change in senior management which occurred in the second quarter of fiscal 2022, higher costs incurred to recruit and fill company-wide position vacancies, an increase in professional service expenses, an increase in travel costs, and an increase in utility expenses. These increases were offset, in part, by a decrease in overall employee compensation costs for program management personnel due to a reduction in headcount when compared to the same period last year, and a decrease in board of director’s fees due to a reduction of two non-employee directors. Other income for the fiscal year ended June 30, 2022 and 2021 was $63,914 and $57,942, respectively. The increase is primarily due to an increase in other income primarily composed of income from scrap sales, offset, in part, by 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 Company’s effective tax rate was a provision of 20.6% in the fiscal year 2022 and a benefit of 50.7% in fiscal year 2021. The effective tax rate in fiscal 2022 and 2021 varies from the statutory tax rate mainly due to the benefit derived from the ESOP dividends paid on allocated shares. The decrease in the effective tax rate between periods is the direct result of higher income before taxes in the current fiscal year and a decreased benefit derived from fewer ESOP dividends paid on allocated shares. In the prior fiscal year, the higher effective tax rates was primarily due to the incurred net operating loss before taxes, in addition to the benefits received in the prior fiscal year on higher ESOP dividends paid as well as a benefit received on the tax rate differential associated with the net operating loss carryback which resulted from the net loss incurred in the prior fiscal year. The Company generated net income for fiscal year 2022 of $1,265,127 or $0.52 per share, basic and diluted, compared to net loss of $(181,543) or $(0.08) per share, basic and diluted, for fiscal year 2021. The increase in net income in the twelve months ended June 30, 2022 compared to the same period in 2021 is primarily attributable to higher sales, a higher gross profit margin percentage, a slight increase in other income offset, in part, by an increase in selling, general, and administrative expenses and an increase in tax expense, 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, 2022 and 2021. The existing line of credit was extended and expires February 28, 2023. The Company's working capital as of June 30, 2022 and 2021 was approximately $29.5 million and $27.5 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, 2022 and 2021, the Company did not repurchase any shares held by the ESOP. Under existing authorizations from the Company's Board of Directors, as of June 30, 2022, 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: | | 2022 | 2021 | | --- | ---: | ---: | | Net cash provided by operating activities | $2,219,687 | $594,996 | | Net cash (used in) provided by investing activities | (918,339) | 2,006,910 | | Net cash used in financing activities | — | (1,201,316) | 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 increase in cash provided by operating activities compared to the prior year primarily relates to the increase in net income, the decrease in inventory purchases offset, in part, by a decrease in trade accounts receivables collected and the decrease in cash collected from customers as cash advances. Net cash used in investing activities increased in the twelve months ended June 30, 2022 as compared to the same period in 2021 primarily due to the reinvestment of matured securities when compared to the same period last year. During the twelve months ended June 30, 2022, there was no cash used for financing activities primarily resulting from the suspension of dividend payments. In the prior year, cash used in financing activities resulted from the payment of regular dividends for the first two fiscal quarters. 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, 2022 and 2021, the Company expended $303,561 and $43,554, respectively, for plant improvements and new equipment. The Company has budgeted approximately $500,000 for new equipment and plant improvements in fiscal year 2023. 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. ## Controls and procedures As filed, 2,718 characters. Evaluation of Controls and Procedures (a) The Company's management, with the participation of the Company's chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. (b) There have been no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. Management’s Report on Internal Control over Financial Reporting Management of our Company is responsible for establishing and maintaining adequate internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on our evaluation using the criteria set forth in Internal Control-Integrated Framework, management has concluded that our internal control over financial reporting was effective as of June 30, 2022. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Our report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report. Filed Sep 22, 2022. Source: SEC EDGAR, the filing index for accession 0001174947-22-001033. Last ingested by Listed: Oct 26, 2026, 09:04 ET. No prices; not investment advice.