Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2012 (fiscal 2013); comparable periods ended December 31, 2011. Espey designs and manufactures power electronics and related equipment, principally for military and severe-environment applications.
Financial performance
- Quarter: Sales were $8.05 million, down 2.6% year over year. Gross profit was $2.14 million and gross margin was 26.6%, versus 26.4%. Operating income was $1.46 million; net income was $1.07 million, essentially unchanged. Diluted EPS was $0.48 versus $0.49.
- Six months: Sales were $15.94 million, down 1.9%. Gross profit increased to $4.63 million from $4.18 million, and gross margin rose to 29.0% from 25.7%. Operating income was $3.22 million versus $2.75 million; net income was $2.35 million versus $2.00 million. Diluted EPS was $1.05 versus $0.91.
- Management attributed the six-month gross-margin and earnings improvement primarily to favorable product mix, higher engineering and production backlog, and no significant loss contracts. The quarter’s lower gross profit reflected slightly lower sales.
- Cash flow: Six-month operating cash flow was $0.10 million, down from $3.52 million. Increased receivables used $1.61 million of cash, alongside inventory growth and other working-capital movements. Investing activities used $0.66 million; financing activities used $2.80 million, including $3.25 million of dividends.
- Liquidity and debt: At December 31, cash and equivalents were $8.17 million and investment securities were $3.70 million; cash was $11.52 million at June 30, 2012. Working capital was approximately $26.9 million. Total liabilities were $2.73 million, with no reported borrowings; management said it had not borrowed during the prior two fiscal years and expected available resources to meet foreseeable needs.
- Six-month capital spending was $164,000; the fiscal 2013 budget was approximately $200,000. Dividends were $1.475 per share for the six months, including the company’s $1.00-per-share special dividend. Retained earnings declined to $22.15 million from $23.05 million at June 30.
Business, outlook, and risks
- New orders in the first six months were approximately $14 million, 1.5% above the comparable prior-year period. Backlog was approximately $48.5 million at December 31, including $48.2 million funded, compared with $36.1 million a year earlier. Two customers represented $31.8 million of current backlog.
- Management expected fiscal 2013 sales to exceed fiscal 2012 sales, based on backlog and anticipated delivery schedules. Approximately $37 million of quotations and potential business was outstanding, but awards were not assured.
- Defense budget uncertainty, possible sequestration and delayed federal spending decisions may defer orders. Management also cited stronger competition and pricing pressure, potentially requiring lower margins on legacy work and greater upfront investment to win new programs.
- Customer concentration remains significant: three customers generated 64.8% of six-month sales, versus 67.9% in the prior-year period. Management aims to broaden the customer base.
- A pending U.S. government audit could result in contract-related exposure; the company accrued its best estimate and said no outcome in its estimated range was expected to materially adversely affect financial position or results. No contingent liabilities on standby letters of credit were reported at December 31.
- The company anticipated regular quarterly dividends for the foreseeable future, but stated there was no assurance of another special dividend. Management identified contract revenue recognition and cost-to-completion estimates as critical judgments. Disclosure controls were reported effective, with no material change in internal controls.
Key facts for investors to verify
- Whether the elevated backlog converts to revenue on schedule, and how much remains funded, particularly given reliance on two major backlog customers.
- Whether receivables and operating cash flow improve; six-month earnings materially exceeded operating cash generation.
- Effects of federal budget delays, defense spending decisions, customer concentration, and competitive pricing on new awards and margins.
- Progress and potential financial impact of the pending government audit.
- Dividend sustainability, including the distinction between regular quarterly dividends and discretionary special dividends.