Espey Mfg. & Electronics Corp. — Form 10-Q
Reporting period: Third quarter and nine months ended March 31, 2013. The company designs and manufactures power electronics, primarily for military, defense, and severe-environment applications. Fiscal year ends June 30.
Financial results
| Metric | Three months ended March 31, 2013 | Three months ended March 31, 2012 | Nine months ended March 31, 2013 | Nine months ended March 31, 2012 |
|---|---|---|---|---|
| Net sales | $6.80 million | $7.66 million | $22.74 million | $23.92 million |
| Gross profit / gross margin | $1.97 million / 29.0% | $2.40 million / 31.4% | $6.60 million / 29.0% | $6.59 million / 27.5% |
| Operating income | $1.24 million | $1.74 million | $4.46 million | $4.49 million |
| Net income | $0.92 million | $1.26 million | $3.27 million | $3.26 million |
| Diluted earnings per share | $0.41 | $0.58 | $1.46 | $1.48 |
- Quarterly sales fell 11.3% and net income fell 27.5% year over year. Management attributed lower sales to reduced shipments to a major customer and said deferred shipments are expected to occur in future periods.
- Nine-month sales declined 4.9%; gross profit was nearly unchanged, while gross margin improved to 29.0%. Management cited favorable product mix and increased backlog, partly offset by investment in future programs.
- For the nine months, operating cash flow was $1.81 million, down from $5.52 million. Increased receivables, inventory, and income-tax receivable contributed to the decline. Investing activities used $0.67 million; financing activities used $3.45 million, primarily reflecting $3.80 million of dividends.
- Cash and equivalents were $9.22 million at March 31, 2013, versus $11.52 million at June 30, 2012; investment securities were $3.68 million. Current assets were $30.27 million and current liabilities $3.06 million, yielding working capital of approximately $27.21 million. Total liabilities were $3.24 million. The filing says the company did not borrow during the prior two fiscal years.
Business, outlook, and risks
- New orders for the first nine months were approximately $20.3 million, down 9% from the comparable period. Backlog was approximately $47.9 million at March 31, 2013, up from $36.9 million a year earlier; approximately $47.6 million was funded. Two customers accounted for $31.6 million of current backlog.
- Management expected fiscal 2013 sales to exceed fiscal 2012 sales, based on backlog and expected delivery timing. Outstanding quotations and potential business totaled approximately $26 million, but awards were not assured. Planned fiscal 2013 capital expenditures were approximately $250,000; $203,500 had been spent through March 31.
- Two customers represented 59.4% of quarterly sales and 54.4% of nine-month sales. Management identified customer concentration, defense-budget uncertainty and sequestration, competitive pricing pressure, and potential margin reductions as risks. Competitors’ investments in design and lower margins may require Espey to spend more upfront to win new programs.
- Management said regular quarterly dividends were anticipated to continue for the foreseeable future, subject to board review. The company had paid a $1.00-per-share special dividend in each of fiscal 2013 and 2012, but gave no assurance of another special dividend. Nine-month dividends per share were $1.725 in 2013 and $1.675 in 2012.
- A pending U.S. government audit of contracts resulted in an accrued estimate within management’s range of possible outcomes; management did not expect a material adverse effect on financial position or results. Outstanding standby letters of credit were zero. The filing reports no legal proceedings and no material changes to internal controls.
Important facts for investors to verify
- Whether deferred customer shipments occur as expected and support the fiscal 2013 sales outlook.
- Backlog funding, customer concentration, and the timing and conversion rate of the approximately $26 million in potential business.
- Whether competitive bidding, upfront design investment, and loss-contract exposure affect margins and cash generation.
- Developments in the government audit and defense-budget appropriations, including any effect on contracts or funding.
- The board’s future dividend decisions, particularly whether any special dividend is declared.