
PART I: FINANCIAL INFORMATION Item 1: Financial Statements The company's financial statements show increased assets and net income despite a decline in six-month sales Balance Sheets Total assets grew to $36.6 million, driven by higher cash and inventories, while trade receivables decreased sharply Balance Sheet Comparison (Unaudited) | Account | Dec 31, 2019 | June 30, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $6,110,846 | $1,462,761 | | Trade accounts receivable, net | $4,421,611 | $10,995,783 | | Total inventories | $15,588,251 | $13,225,137 | | Total current assets | $32,839,310 | $31,862,102 | | Total assets | $36,555,998 | $35,687,513 | | Liabilities & Equity | | | | Accounts payable | $1,913,449 | $2,160,433 | | Contract liabilities | $1,803,340 | $6,054 | | Total current liabilities | $5,160,639 | $3,484,934 | | Total liabilities | $5,419,111 | $3,762,009 | | Total stockholders' equity | $31,136,887 | $31,925,504 | Statements of Comprehensive Income Net income rose for both the three and six-month periods despite a 15.5% decrease in six-month net sales Income Statement Highlights (Unaudited) | Metric | Three Months Ended Dec 31, 2019 | Three Months Ended Dec 31, 2018 | Six Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2018 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $7,286,674 | $7,303,109 | $13,210,493 | $15,640,508 | | Gross Profit | $1,480,148 | $1,516,235 | $2,616,496 | $2,509,169 | | Operating Income | $230,406 | $220,548 | $282,542 | $203,938 | | Net Income | $228,964 | $217,758 | $310,740 | $279,430 | | Diluted EPS | $0.10 | $0.09 | $0.13 | $0.12 | | Dividends per share | $0.25 | $0.25 | $0.50 | $1.50 | Statements of Changes in Stockholders' Equity Stockholders' equity decreased to $31.1 million, primarily due to dividend payments exceeding net income - Key changes in stockholders' equity for the six months ended Dec 31, 2019 include: Net income of $310,740, dividends paid of $1,193,977 ($0.50 per share), proceeds from stock option exercises of $50,280, and treasury stock purchases of $47,94911 Statements of Cash Flows Operating cash flow saw a significant positive swing to a $6.0 million inflow, driven by strong receivables collection Cash Flow Summary (Unaudited) | Cash Flow Activity | Six Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2018 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $6,001,368 | $(3,015,611) | | Net cash (used in) provided by investing activities | $(161,637) | $5,379,283 | | Net cash used in financing activities | $(1,191,646) | $(3,350,612) | | Increase (decrease) in cash | $4,648,085 | $(986,940) | | Cash at end of period | $6,110,846 | $3,311,856 | Notes to Financial Statements Notes detail the adoption of ASC 606, a sales backlog of $58.4 million, and other key accounting policies - The company adopted ASC 606 revenue recognition standard using the modified retrospective method, reclassifying customer advance payments to contract liabilities, which totaled $1,803,340 as of December 31, 201930 - The company's sales backlog at December 31, 2019 was $58.4 million, with 40% expected to be recognized in fiscal 2020, 34% in 2021, 19% in 2022, and 7% thereafter35 - ESOP compensation expense was $165,820 for the six months ended December 31, 2019, compared to $203,809 for the same period in 201839 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses a strong order backlog and improved gross margins despite lower sales, with stable revenue expected for FY2020 Overview Espey Mfg. & Electronics Corp. is a power electronics design and OEM company for military and severe environment applications - Espey is a power electronics design and original equipment manufacturing (OEM) company focused on products for military and severe environment applications44 - Primary products include power supplies, power converters, filters, power transformers, and high power radar systems for various industrial and defense platforms45 Backlog, Orders, and Outlook The company's total backlog grew to $58.4 million, with new orders nearly doubling year-over-year Backlog and New Orders | Metric | As of/For Period Ended Dec 31, 2019 | As of/For Period Ended Dec 31, 2018 | | :--- | :--- | :--- | | Total Backlog | $58.4 million | $45.8 million | | New Orders (First Six Months) | $26.0 million | $13.4 million | - Management expects fiscal year 2020 revenues to approximate fiscal year 2019, with gross profit margins also expected to be similar to 2019 levels54 - A significant portion of sales comes from a few key customers; for the six-month period, one customer represented 25.2% of total sales57 Results of Operations Six-month net sales decreased to $13.2 million, but an improved gross margin led to higher net income - Six-month net sales decreased to $13.2 million in FY2020 from $15.6 million in FY2019 due to a decrease in build to print and power supply sales68 - Six-month gross profit margin increased to 19.8% in FY2020 from 16.0% in FY2019, primarily due to improved profitability on a specific engineering design contract7071 - Six-month net income increased to $310,740 in FY2020 from $279,430 in FY2019, driven by higher gross profit and a lower effective tax rate76 Liquidity and Capital Resources Liquidity improved with working capital at $27.7 million and a significant positive swing in operating cash flow - Working capital was approximately $27.7 million as of December 31, 201977 - Net cash provided by operating activities for the six months ended Dec 31, 2019 was $6.0 million, a significant improvement from the $3.0 million used in the prior-year period, mainly due to the collection of trade receivables77 - The company has budgeted approximately $300,000 for new equipment and plant improvements in fiscal year 2020, expected to be funded from operations80 Item 3: Quantitative and Qualitative Disclosures about Market Risk The company is exempt from market risk disclosures as a "smaller reporting company" - As a smaller reporting company, Espey is not required to provide information for this item84 Item 4: Controls and Procedures Management concluded that disclosure controls and procedures were effective as of the end of the reporting period - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report85 - No material changes in internal controls over financial reporting occurred during the quarter86 PART II: Other Information Item 1: Legal Proceedings The company is involved in ordinary course litigation that is not expected to have a material adverse effect - The company does not expect the outcome of ordinary course litigation to have a material adverse effect on its business, financial condition, results of operations, or cash flows89 Item 2: Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1,847 shares during the quarter, with $783,460 remaining authorized for future repurchases Issuer Purchases of Equity Securities (Quarter Ended Dec 31, 2019) | Period | Total Shares Purchased | Average Price Paid per Share | Maximum Dollar Value for Future Purchases | | :--- | :--- | :--- | :--- | | Oct 2019 | 424 | $24.90 | $812,561 | | Nov 2019 | 0 | N/A | $812,561 | | Dec 2019 | 1,423 | $20.45 | $783,460 | Item 3: Defaults Upon Senior Securities The company reports no defaults upon senior securities - None reported91 Item 4: Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable91 Item 5: Other Information The company reports no other information for this period - None reported91 Item 6: Exhibits The report lists required CEO and CFO certifications pursuant to the Sarbanes-Oxley Act as exhibits Signatures The report is duly signed by the company's authorized officers