Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended March 31, 2022, the third quarter and first nine months of Espey’s fiscal 2022 year—not calendar 2021. Espey designs and manufactures power electronics and related equipment, primarily for military, government, rail, and industrial customers.
Financial performance
| Metric | Three months ended Mar. 31, 2022 | Three months ended Mar. 31, 2021 | Nine months ended Mar. 31, 2022 | Nine months ended Mar. 31, 2021 |
|---|---|---|---|---|
| Net sales | $8.62 million | $4.21 million | $23.62 million | $18.43 million |
| Gross profit (loss) | $1.73 million | $(0.19) million | $4.29 million | $1.65 million |
| Gross margin | 20.1% | (4.5)% | 18.2% | 9.0% |
| Operating income (loss) | $0.80 million | $(1.18) million | $1.18 million | $(1.20) million |
| Net income (loss) | $0.66 million | $(1.07) million | $0.99 million | $(1.06) million |
| Diluted EPS | $0.27 | $(0.44) | $0.41 | $(0.44) |
| Operating cash flow | Not presented by quarter | $0.81 million | $2.19 million |
At March 31, 2022, cash and cash equivalents were $7.28 million and investment securities were $3.21 million. Working capital was approximately $28.7 million. Total liabilities were $7.48 million; the company reported no borrowings and said it did not anticipate needing debt. A $3.0 million line of credit was available and extended through February 28, 2023. Cash rose $0.48 million during the nine-month period. Capital expenditures were $216,500.
Changes versus comparable periods
Sales rose 105% in the quarter and 28% for the nine-month period, with increases attributed mainly to power supply, magnetic, and build-to-print shipments and completed engineering milestones. The prior-year quarter was affected by a roughly 10-day COVID-related facility closure, reduced operating capacity, and an inventory write-down on a canceled airline-industry contract. Those items contributed to the prior-year gross loss and make the year-over-year profit comparison more favorable. Current-period gross profit also benefited from higher sales of mature products and build-to-print work, partly offset by rising contract material costs.
Nine-month operating cash flow declined to $0.81 million from $2.19 million, primarily reflecting lower cash collections from receivables, partly offset by higher net income and lower inventory purchases. No dividends were paid in the 2022 nine-month period; the comparable 2021 period included $1.20 million of dividend payments. The regular dividend had been suspended effective March 9, 2021.
Outlook, risks, and contingencies
- Management expected fiscal 2022 revenue to exceed fiscal 2021 revenue and expected positive EPS versus a fiscal 2021 loss, citing existing backlog. It expected fiscal 2022 new orders to approximate fiscal 2021’s $38.5 million. These are expectations, not guarantees.
- Backlog was approximately $76.2 million at March 31, 2022, versus $67.3 million a year earlier; approximately $75.8 million was funded and $0.4 million unfunded. Management expected at least $10 million of backlog shipments in the remainder of fiscal 2022, subject to operating and market factors. Outstanding opportunities totaled about $62 million as of May 11, 2022, with no assurance they would become orders.
- Four significant customers represented about 61% of quarterly sales and 55% of nine-month sales. Four customers accounted for $47.5 million of backlog. Customer concentration, program deferrals, government appropriations, competition, and contract changes could affect results.
- Management cited electronic-component shortages and long lead times, supplier delays, inflation in materials, freight, utilities, and labor, workforce constraints, and engineering or scheduling delays. These could delay shipments, raise costs, and reduce operating income. A large fixed-price U.S. military production contract incurred significant unforeseen material cost increases; the company was pursuing potential equitable adjustments with the customer.
- Engineering programs represented $7.2 million of backlog. Technical or schedule delays and cost overruns could defer sales or reduce contract profitability. The company also noted possible government contract audits, reviews, and investigations; it reported no pending litigation expected to have a material adverse effect and no standby letter-of-credit contingent liabilities at March 31, 2022.
- Fiscal 2022 capital spending was revised to approximately $400,000, including an accelerated roof restoration project. Management expected to fund it from operations. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Key facts investors should verify
- Whether backlog converts to shipments and revenue on schedule, particularly the stated minimum $10 million expected in the rest of fiscal 2022.
- Whether component availability, supplier performance, labor capacity, and inflation continue to constrain production or erode margins.
- Progress on cost recovery or other customer adjustments for the large fixed-price contract affected by material-cost escalation.
- Changes in customer concentration, funded backlog, new orders, and the status of the $62 million opportunity pipeline.
- Operating cash conversion and liquidity as receivables, inventory, contract costs, and capital expenditures change.