What changed in this filing

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Item 7. Management’s Discussion and Analysis

2020-09-21 compared with 2019-09-16 · 143 added, 123 removed, 70 unchanged (79% of the section changed)

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Management expects revenues in fiscal

year 2020 to approximate revenues during fiscal year 2019 and expects the gross profit margin to be higher in fiscal year 2020

than the gross profit margin during fiscal year 2019.

This expectation is driven primarily by orders already in our backlog that

will be shipped in fiscal year 2020 with lower anticipated aggregate production costs than with the product mix shipped during

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.

year 2021 to be higher than revenues during fiscal year 2020 and expects the net income per share to be higher in fiscal year 2021

than the net income per share during fiscal year 2020.

This expectation is driven by orders already in our sales backlog.

The Company currently expects new orders

in fiscal 2021 to approximate those received in fiscal year 2020.

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 2020 the Company received

approximately $33.9 million in new orders.

Our total backlog at June 30, 2019 was approximately $45.6 million, as compared to $48.1

million at June 30, 2018.

Currently, we expect a minimum of $32.7 million of orders comprising the June 30, 2019 backlog will be

filled during the fiscal year ending June 30, 2020.

This $32.7 million will be supplemented by shipments which may be made against

orders received during the 2020 fiscal year.

$40.9 million in new orders.

Our total backlog at June 30, 2020 was $54.9 million, as compared to $45.6 million at June 30, 2019.

Currently, we expect a minimum of $32 million of orders comprising the June 30, 2020 backlog will be filled during the fiscal year

ending June 30, 2021.

This $32 million will be supplemented by shipments which may be made against orders received during the 2021

Successful conversion of engineering program

backlog into sales is largely dependent on the execution and completion of our engineering design efforts.

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

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.

While during the past two fiscal years we experienced some technical

and schedule delays with our major development programs, these delays were resolved as they arose and we do not currently expect

any negative impact on our customer order fulfillment projections for fiscal year 2020.

Engineering programs in both the

funded and unfunded portions of the current backlog aggregate $5.4 million.

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 our major development

The issues causing the delays are being resolved as they arise.

Engineering programs in both the funded and unfunded

portions of the current backlog aggregate $5.1 million.

The global outbreak of the novel strain of

coronavirus COVID-19 disease was declared a pandemic by The World Health Organization (WHO) during March 2020.

This resulted in

initial country and state-wide mandated closures of non-essential businesses lasting various durations as determined under local

jurisdictions.

In most instances, businesses have since re-opened, some with limited or reduced capacity due to adherence and compliance

with reopening and mitigation guidelines set in place to help prevent workplace exposures.

Deemed an essential business, authorized

by the Department of Homeland Security, we remained open and continue to be fully operational.

Global supply chain disruptions

from closures had a minor impact on our ability to ship product during the third and fourth quarters.

However, because the effects

of the pandemic continue, world-wide, we believe it is likely we will continue to experience some trickle-down effects to our direct

supply base which may impact our ability to ship certain scheduled deliveries during the first half of fiscal 2021.

we expect these disruptions to be minimal in nature and could result in our suppliers extending lead times for materials or, in

some rare instances, require us to procure materials from an alternate supplier in order to meet contractual dates which could

impact our anticipated material costs.

To date, we have experienced some slowdown in customer procurements and government contract

We continue to work with our customers and suppliers to mitigate issues as they become known.

In addition to the backlog, the Company currently

has outstanding opportunities representing in excess of $52 million in the aggregate as of August 31, 2019, 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.

Three significant customers

represented 54% of the Company’s total sales in fiscal year 2019 and two significant customers represented 60% of the Company’s

total sales in fiscal year 2018.

These sales are in connection with multiyear programs in which the Company is a significant contractor.

The June 30, 2019 backlog of $45.6 million included orders from five customers that represent 16%, 13%, 11%, 11% and 10%, respectively,

of the total backlog.

The June 30, 2018 backlog of $48.1 million includes orders from three customers that represent 23%, 16% 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.

has outstanding opportunities representing in excess of $84 million in the aggregate as of September 10, 2020, 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.

significant customers represented approximately 38% of the Company’s total sales in fiscal year 2020 and three significant

customers represented 54% of the Company’s total sales in fiscal year 2019.

These sales are in connection with multiyear

programs in which the Company is a significant contractor.

The June 30, 2020 backlog of $54.9 million included orders from four

customers that represent 19%, 13%, 10%, and 10%, respectively, of the total backlog.

The June 30, 2019 backlog of $45.6 million

includes orders from five customers that represent 16%, 13%, 11%, 11% 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.

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

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upon a single major product of a particular program and minimizing the impact of the loss of a single significant customer.

continue to evaluate the Company’s business development functions and the implementation of potential alternative courses

of action in order to diversify the Company’s customer base.

The quotations for non-repeat programs referred to above include

several new customers.

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,

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Net sales for the years ended June 30, 2020

and 2018 were $36,477,851 and $32,517,883, respectively, a 12% increase.

The increase in net sales in fiscal year 2019 is primarily

due to an increase in build to print sales for product which had no shipments in the prior fiscal year, an increase in magnetic

sales consisting of certain engineering deliverables, and product shipments on one long-term program, offset, in part, by a decrease

in power supply shipments.

Although shipments supporting the rail industry increased and remain strong, the overall decline in

power supply shipments in fiscal year 2019 relates primarily to the timing of shipments related to one military contract which

had significant shipments in the prior fiscal year.

Our ability to ship product was constrained

during fiscal years 2019 and 2018 by engineering design changes required to meet customer requirements, certain supplier product

non-conformances and an increase in lead times for many parts including certain electronic components due to industry shortages

and volatility within the power electronics industry.

We expect these factors will continue to affect certain product shipments

during fiscal year 2020.

Gross profits for the fiscal years

ended June 30, 2019 and 2018 were $7,063,173 and $7,662,252, respectively.

Gross profit as a percentage of sales was 19.4%

and 23.6%, for the same periods, respectively.

The primary factors in determining the change in gross profit and net income

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.

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 gross profit percentage decreased in the fiscal year ended June 30, 2019 as compared to the same period in 2018 primarily

due to the increase in cost resulting from the change in estimates on two separate contracts for the design and production

of power transformers, offset in part, by an increase in sales when compared to the same period in 2018.

The gross profit

percentage was further reduced by a slight overall decline in the gross profit percentage on product shipments.

in gross profit related to the change in estimates on two specific contracts resulted from an increase in direct costs, material

and labor, of approximately $1.1 million.

The net increase in direct costs is attributable to in process design changes required

to meet contract specifications, changes to the bill of materials and operations, and scrap and other costs incurred typically

associated with first time builds.

and 2019 were $31,526,231 and $36,477,851, respectively, a 13.6% decrease.

The decrease in net sales in fiscal year 2020 is primarily

due to a decrease in power supply and build to print sales offset, in part, by an increase in magnetic shipments.

in power supply sales is mainly due to reduced demand from one significant customer in the rail industry offset, in part, by an

increase in shipments against a single military contract.

The decline in build to print sales is primarily due to the timing of

shipments across multiple contracts of varying size, scope and duration.

The increase in magnetic shipments is primarily due to

an increase in sales related to one major engineering development program, an increase in shipments on several repeat and new magnetic

orders, offset, in part, by a decline in sales on another major engineering development program based on scheduled performance

In addition, sales were significantly impacted

by our ability to meet contractual milestones on certain engineering design contracts and delays on several build to print orders.

We continued to be constrained by engineering design changes required to meet customer requirements, certain supplier product non-conformances,

obtaining timely resolutions on issues encompassing build to print customer-owned drawings and 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.

We anticipate that many of

these issues will be resolved during fiscal 2021.

Gross profits for the fiscal years ended June

30, 2020 and 2019 were $5,558,615 and $7,063,173, respectively.

Gross profit as a percentage of sales was 17.6% and 19.4%, for

the same periods, respectively.

The primary factors in determining the change in gross profit and net income 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 gross profit percentage decreased in

the twelve months ended June 30, 2020 compared to the same period in 2019.

This decrease resulted from product mix,

specifically related to the decrease in power supply shipments.

This portfolio of products consists of many mature products

which typically yield higher margins.

The Company also incurred an increase in cost on a specific power supply contract due

to the replacement cost associated with a recurring product failure stemming from an engineering design issue.

the Company incurred specific program losses on several large build to print contracts due to higher than expected material

costs and first time build and quality control inspections costs, as well as, a large engineering contract due to engineering

delays, third-party supplier issues and additional testing required.

These decreases were offset, in part, by an improved

gross profit percentage on a separate large engineering design contract when compared to the same period in 2019.

improvement on the engineering contract resulted from reduced spending on the program and from additional funded and

anticipated funding for required testing.

Selling, general and administrative expenses

were $4,386,307 for the fiscal year ended June 30, 2020;

an increase of $601,839 compared to the fiscal year ended June 30, 2018.

The increase for the fiscal year ended June 30, 2019 as compared to the same period in 2018 relates primarily to an increase in

headcount and related employee compensation costs in support of our business growth, the incurrence of a bad debt expense related

to a single customer, cost associated with the appointment of a new Class B Director effective June 1, 2018, professional services

consisting primarily of commissions earned by outside sales representatives, and an increase in freight costs resulting from higher

a decrease of $23,927 compared to the fiscal year ended June 30, 2019.

The decrease for the fiscal year ended June 30, 2020 as compared to the same period in 2019 relates primarily to the decrease in

bad debt expense, conferences and training costs, travel and entertainment expenses and product shipment costs.

This decrease was

offset, in part, by an increase in employee compensation costs.

Other income for the fiscal year ended June

30, 2020 and 2019 was $136,881 and $228,694, respectively.

The increase in the twelve months ended is primarily due an increase

The decrease in the twelve months ended is primarily due to a decrease

in interest income on investments and income received from the sale of scrap metal.

The increase in interest income resulted from

the gradual increase in current yield percentages earned on investment securities offset, in part, by a reduction in investment

The decrease in interest income resulted from

the gradual decrease in current yield percentages earned on investment securities offset, in part, by a reduction in investment

Interest income is a function of the level of investments and investment strategies which generally tend to be conservative.

The increase in income from scrap metal sales is primarily due to an increase in saleable metal remnants resulting from the overall

increase in material purchases during the current year when compared to the prior year.

The decrease in income from scrap metal sales is primarily due to a decrease in saleable metal remnants resulting from the overall

decrease in material purchases during the current year when compared to the prior year.

The Company’s effective tax rate was

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and Jobs Act (the “Tax Act’) effective on January 1, 2018.

The effective tax rate in fiscal 2019 is less than the statutory

tax rate mainly due to the benefit derived from the dividends paid on allocated shares in the Company’s Employee Retirement

Plan and Trust (“ESOP”).

The effective tax rate in fiscal 2018 is less than the statutory tax rate mainly due to the

benefit the Company received on its “qualified production activities”

under The American Jobs Creation Act of 2004

which expired after the end of fiscal 2018 and the benefit derived from the ESOP dividends paid on allocated shares.

The effective tax rate in fiscal 2020 and 2019 is less than

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 fiscal years is primarily due to a decrease in income before taxes and the benefit derived from the

ESOP special cash dividend paid on the allocated shares.

Net income for fiscal year 2020 was $1,163,668

$2,342,694 or $0.99 and $0.98 per share, basic and diluted, respectively compared to $3,075,797 or $1.32 and $1.31 per share,

basic and diluted, respectively for fiscal year 2018.

The decrease in net income per share for the twelve months ended June 30,

2019 was due to a lower gross profit percentage resulting primarily from an increase in expenditures related to engineering

design investments made by the company when compared to the prior year and an increase in selling, general, and

administrative expenses when compared to the same periods in 2018 as discussed above.

These increases were offset, in part,

by an increase in sales and a reduction in the Company’s effective tax rate discussed above.

or $0.49 per share, basic and diluted compared to $2,342,694 or $0.99 and $0.98 per share, basic and diluted, respectively for

fiscal year 2019.

The decrease in net income in the twelve months ended June 30, 2020 compared to the same period in 2019 is primarily

attributable to lower sales, a lower gross profit margin percentage, a decrease in other income offset, in part, by a decrease

in selling, general, and administrative expenses and the benefit derived from the decrease in the effective tax rate, all discussed

Liquidity and Capital Resources

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of cash flow information for the fiscal years indicated:

Net cash (used in) provided by operating activities

Net cash provided (used in) by operating activities

$ (3,604,406 )

Net cash provided by (used in) investing activities

Net cash provided by investing activities

Net cash used in financing activities

Net cash used in 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 used in

operating activities compared to the prior year primarily relates to a decrease in net income, a decrease in accrued salaries and

wages and an increase in inventories and accounts receivable offset, in part, by an increase in accounts payable, a decrease in

prepaid expenses and other current assets and a decrease in contract liabilities.

The increase in cash provided by investing activities

in the current fiscal year is primarily related to a decrease in spending for the purchase of property, plant and equipment and

the reduction of investment security purchases.

This reduction is primarily due to the late fiscal year shipment of product representing

accounts receivable not yet converted into cash and the payment of a special dividend.

The increase in cash used in financing activities

in the current fiscal year is primarily related to the cash expended for the special dividend totaling $1.00 per share declared

and paid in fiscal 2019 offset, in part, by proceeds received from the exercise of stock options during the current fiscal year.

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 collection of trade receivables and the increase in contract liabilities for

the collection of customer advances offset, in part, by an increase in prepaid expenses and other current assets and the decline

in net income.

Net cash provided by investing activities decreased in the twelve months ended June 30, 2020 as compared to the

same period in 2019 primarily due to the reinvestment of maturing investments when compared to the same period in 2019.

prior period, cash received from maturing investments was used, in part, for the payment of the special dividend.

in cash used in financing activities in the current period when compared to the prior period is primarily due to the fact that

a special dividend totaling $1.00 per share was declared and paid in the prior period.

The Company currently believes that

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis