Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019. The interim financial statements are unaudited. Espey designs and manufactures power electronics and related equipment, primarily for military, government, rail, and industrial uses.
Key financial results
| Metric | Three months ended Dec. 31, 2019 | Prior-year quarter | Six months ended Dec. 31, 2019 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $7.29 million | $7.30 million | $13.21 million | $15.64 million |
| Gross profit / margin | $1.48 million / 20.3% | $1.52 million / 20.8% | $2.62 million / 19.8% | $2.51 million / 16.0% |
| 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 |
- Six-month operating cash flow was $6.00 million, versus cash used of $3.02 million in the prior-year period. The improvement primarily reflected collections of receivables, lower inventory purchases, and customer advances.
- Cash and cash equivalents were $6.11 million at December 31, 2019, up from $1.46 million at June 30, 2019. Investment securities were $5.67 million. Working capital was approximately $27.7 million.
- The company reported no borrowings and said it had not borrowed in the prior two fiscal years. It had a $3.0 million line of credit available and did not anticipate borrowing in the foreseeable future.
- Six-month investing cash flow was a $162,000 use; financing cash flow was a $1.19 million use, including $1.19 million of dividends. Capital expenditures were $178,000.
- At December 31, total liabilities were $5.42 million and stockholders’ equity was $31.14 million. Current liabilities included $1.80 million of contract liabilities, mostly customer progress payments.
Changes and operating drivers
- Six-month sales fell 15.5%, mainly from lower build-to-print and power-supply sales, partly offset by increased magnetic shipments. Quarterly sales were nearly flat year over year.
- Six-month gross margin improved to 19.8% from 16.0%, principally because of improved cost expectations on a specific engineering design contract. Quarterly gross margin eased to 20.3% from 20.8%, primarily due to product mix.
- Six-month net income increased despite lower sales, reflecting higher gross profit and a lower effective tax rate, partly offset by higher SG&A and lower other income. The six-month effective tax rate was 15.7%, versus 16.2%.
- Dividends were $0.50 per share for the six months, compared with $1.50 in the prior-year period, which included a $1.00 special dividend. A regular quarterly dividend of $0.25 per share was paid in the reported quarter.
Outlook, risks, and other notable items
- Management expected fiscal 2020 revenue to approximate fiscal 2019 revenue. In light of product-mix forecasts and higher-than-expected job costs, particularly on engineering design contracts, management expected the gross profit margin to approximate fiscal 2019 results.
- Backlog was $58.4 million at December 31, 2019, compared with $45.8 million a year earlier. Approximately $55.7 million was funded and $2.7 million unfunded; the company reported that an additional $1.5 million of the unfunded balance was funded by January 31, 2020. Management expected at least $23.3 million of year-end backlog to ship in fiscal 2020. Backlog timing and conversion are not assured.
- New orders received in the first half were approximately $26 million, versus $13.4 million in the prior-year period. Outstanding quotations and opportunities totaled approximately $85.6 million as of February 5, 2020; there is no assurance they will become orders.
- Management cited ongoing technical and schedule delays in major development programs, engineering design changes, supplier non-conformances, and longer lead times for some components. It said delays were being addressed and were not expected to affect fiscal 2020 customer fulfillment projections.
- Customer concentration is material: three customers represented 42% of quarterly sales. The filing warns that losing a significant customer or program could materially affect the company. Backlog included $30 million from four significant customers.
- Risks include dependence on government appropriations and program funding, contract terminations, competition and price erosion, fixed-price contract cost overruns, supply constraints, and successful completion and acceptance of engineering programs. Contract-cost estimates may affect current or future gross profit.
- Standby letter-of-credit contingencies were zero at December 31. The company disclosed ordinary-course litigation and potential government contract audits; management did not expect litigation to have a material adverse effect. No specific material loss contingency amount was provided.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether backlog converts to revenue on the expected schedule, especially the funded status of government and multi-year programs.
- Whether engineering contract estimates, cost overruns, and product mix support management’s fiscal 2020 gross-margin outlook.
- Customer concentration and the effect of customer or program changes on sales and cash generation.
- Whether collections, inventory levels, and progress payments sustain operating cash flow as receivables and contract activity change.
- The renewal and availability of the $3.0 million credit line, and any developments from government contract audits or ordinary-course claims.