Espey Mfg. & Electronics Corp. — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended December 31, 2023. Espey designs and manufactures power electronics and related equipment, primarily for defense, rail, and industrial applications. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months 2023 | Three months 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $10.30 million | $8.80 million | $18.87 million | $17.44 million |
| Gross profit | $3.14 million | $2.26 million | $5.39 million | $4.07 million |
| Gross margin | 30.5% | 25.7% | 28.6% | 23.4% |
| Operating income | $2.09 million | $1.39 million | $3.31 million | $2.36 million |
| Net income | $1.80 million | $1.15 million | $2.89 million | $1.91 million |
| Diluted EPS | $0.72 | $0.47 | $1.16 | $0.78 |
Six-month operating cash flow was $5.94 million, versus $4.68 million a year earlier. Investing cash outflow was $4.40 million, including $3.47 million of property and equipment additions; financing cash outflow was $0.68 million, principally dividends. Cash and cash equivalents were $3.60 million at December 31, 2023, and investment securities were $13.87 million. Working capital was approximately $33.1 million. Total liabilities were $12.14 million; the company reported no borrowings in the last two fiscal years. Its $3 million credit line was due to expire February 28, 2024, and management expected renewal.
Changes and drivers
- Sales increased 17.0% for the quarter and 8.2% for the six-month period. Management attributed growth to higher shipments on transformer, power-supply, and power-distribution work, new engineering work, and a one-time build-to-print shipment; timing and lower sales on other contracts partly offset growth.
- Gross profit and margins improved year over year. Drivers included higher sales, favorable completion costs on a one-time unit, and recognition of part of a customer economic price adjustment of approximately $1.6 million for previously incurred material costs. Most of that adjustment is expected to be recognized in gross profit as future program shipments occur.
- SG&A rose to $2.07 million for the six months, up $0.36 million, mainly from employee compensation, including a new business-development employee. Higher investment balances and interest rates lifted six-month interest income to $0.31 million from $0.07 million.
- Six-month dividends were $0.30 per share, compared with none in the prior-year period.
Outlook, risks, and notable items
- Management expects FY2024 revenue and EPS to exceed FY2023 levels, and new orders to be greater than FY2023. It anticipated filling at least $20.6 million of the December 31 backlog during FY2024, subject to stated risks. New orders in the first six months were approximately $20.1 million versus $19 million a year earlier.
- Backlog was approximately $84.8 million, up from $78.3 million a year earlier; $5.4 million was unfunded. Five significant customers represented $57.4 million of backlog. The company projected backlog recognition of 24% in 2024, 49% in 2025, 21% in 2026, and 6% thereafter. Outstanding quotations totaled approximately $78 million as of February 5, 2024; orders are not assured.
- Customer concentration is material: five customers generated approximately 86% of quarterly sales and 82% of six-month sales. Dependence on customer programs and government funding, order timing, competition and pricing, fixed-price contract cost estimates, engineering execution, supply constraints, and hiring challenges could affect deliveries and profitability.
- Electronic-component shortages and extended lead times remain a production risk; some components have lead times approaching a year or more. Management said inflationary costs were not expected to significantly affect FY2024 operating income, but unforeseen labor or supply disruptions could delay shipments.
- A Navy award of up to $7.4 million supports facility and equipment upgrades, with completion targeted by the end of calendar 2024. At December 31, $2.63 million of related assets had been recorded net of $0.97 million in reimbursements; approximately $0.70 million of eligible upgrade costs was in accounts payable. The second milestone, approximately $3.3 million, was achieved and submitted for reimbursement by January 31, 2024; payment was expected within 30 days of submission.
- Management reported no pending litigation it believed would materially affect the company and no outstanding standby-letter-of-credit liabilities at December 31. The company adopted the expected-credit-loss standard in FY2024 and said the effect was immaterial. Disclosure controls were assessed as effective, with no material change in internal controls reported.
Important facts for investors to verify
- Whether the credit line was renewed after its February 28, 2024 expiration.
- Receipt of the submitted Navy milestone reimbursement and progress, remaining costs, and timing of the upgrade project.
- Conversion, funding, and delivery timing of the $84.8 million backlog and $78 million of quotations, including the unfunded $5.4 million.
- How much of the approximately $1.6 million customer price adjustment remains to be recognized, and its effect on future margins as shipments occur.
- Whether customer concentration, component lead times, labor availability, and fixed-price engineering costs affect forecast shipments or profitability.