Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: The filing covers the fiscal quarter and nine months ended March 31, 2019, filed May 14, 2019. This differs from the request metadata of “2018 Q3.” Espey designs and manufactures power electronics and related equipment, primarily for defense, rail, and industrial applications.
Key financial results
| Metric | Three months ended March 31, 2019 | Year-over-year change | Nine months ended March 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $9.22 million | Up from $5.66 million | $24.86 million | Up from $24.69 million |
| Gross profit / margin | $2.15 million / 23.3% | Up from $1.26 million / 22.2% | $4.66 million / 18.7% | Down from $5.79 million / 23.5% |
| Operating income | $1.08 million | Up from $0.36 million | $1.29 million | Down from $3.04 million |
| Net income | $0.92 million; $0.39 per diluted share | Up from $0.32 million; $0.14 per share | $1.20 million; $0.50 per diluted share | Down from $2.38 million; $1.02 per share |
- Cash flow: Nine-month operating cash flow was negative $4.12 million, versus positive $1.11 million a year earlier. The main working-capital uses were increases in receivables ($3.64 million) and inventories ($3.54 million). Investing activities provided $5.15 million, primarily reflecting investment maturities; financing activities used $3.84 million, including $4.14 million of dividends.
- Liquidity and debt: At March 31, cash and cash equivalents were $1.49 million and investment securities were $5.83 million, compared with $4.30 million and $11.52 million, respectively, at June 30, 2018. Current assets were $30.72 million and current liabilities $3.49 million; management reported working capital of approximately $27.2 million. The company reported no borrowings and said it had not borrowed in the prior two fiscal years. A $3 million line of credit was available; management did not anticipate needing to borrow.
- Balance sheet: Total assets were $34.61 million, down from $36.82 million at June 30, 2018; stockholders’ equity was $30.97 million, down from $33.48 million. Contract-related inventory rose to $12.57 million from $8.88 million.
- Capital returns and investment: Espey paid a $1.00-per-share special dividend in addition to $0.75 per share of regular dividends during the nine months. Capital expenditures were $0.54 million; fiscal 2019 planned equipment and facility spending was approximately $0.75 million.
Material changes and management commentary
- Third-quarter sales increased mainly because of magnetic-product engineering deliverables and shipments on a long-term program, as well as rail-related power-supply shipments. Nine-month sales were nearly flat: increased build-to-print and magnetic sales were largely offset by lower power-supply shipments, partly reflecting timing on a military contract.
- Nine-month gross margin fell primarily because of increased engineering-development investment on a specific contract; management said this reduced the margin by 5.9 percentage points. SG&A rose by $0.62 million for the nine months, mainly due to employee compensation and professional services.
- The effective tax rate was 17.7% for the nine months, versus 25.2% in the prior-year period. Management attributed the current-period rate partly to ESOP dividend benefits and tax benefits from stock-option exercises; the prior-year comparison also included a production-activities tax benefit that expired after fiscal 2018.
- Backlog was approximately $45.4 million at March 31, 2019, compared with $47.0 million a year earlier. Approximately $41.9 million was funded and $3.5 million unfunded. Three significant customers accounted for $20.9 million of backlog. Management estimated at least $12.2 million of March backlog would ship in fiscal 2019, excluding later orders. New orders received in the first nine months were approximately $22.2 million, versus $28.6 million.
- Management expected fiscal 2019 revenue to exceed fiscal 2018 revenue, but expected lower gross margin, citing lower-margin backlog shipments and engineering-development investment. It also reported approximately $58 million in outstanding opportunities as of May 1, 2019, with no assurance these opportunities would become orders.
Risks, contingencies, and other items
- Two customers represented 47.2% of third-quarter sales; three customers represented 58.1% of nine-month sales. Management warned that losing a major customer or program could significantly affect the company.
- Shipments faced constraints from design changes, supplier non-conformances, and longer lead times amid electronic-component shortages and industry volatility. Management was working through past-due deliveries and did not expect the issue to affect future business.
- Management noted that technical or scheduling delays and contract cost overruns could delay backlog conversion or reduce profitability. It said recent development-program delays had been resolved and did not expect an adverse effect on fiscal 2019 fulfillment projections.
- Unfunded backlog depends on future appropriations or customer funding. The company is also exposed to government-contract audits and potential sanctions, termination, or damages for noncompliance. It reported no outstanding standby-letter-of-credit liabilities and said ordinary-course litigation was not expected to have a material adverse effect.
- Approximately $10.7 million of backlog was expected to be recognized after March 31, 2020. The filing reported regular one-year product warranties and no identified variable consideration requiring allocation to the transaction price.
- Disclosure controls were concluded to be effective; no material changes to internal control over financial reporting were reported. The filing does not provide a numerical full-year revenue or earnings forecast.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the filing is for the quarter ended March 31, 2019, not 2018 Q3.
- Track whether receivables and contract inventory convert to cash and whether operating cash flow improves.
- Monitor engineering-contract costs, gross-margin recovery, shipment delays, and the timing and funding of backlog conversion.
- Assess customer concentration, new orders, and whether the $58 million of quoted opportunities converts into firm business.
- Review the sustainability of dividends and liquidity after the special dividend, as well as reliance on the available credit line if working-capital needs increase.