Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, the first quarter of fiscal 2021. The filing metadata labels this “2020 Q1,” but the filing reports fiscal 2021 Q1. Comparisons below are with the three months ended September 30, 2019 unless noted.
Financial results and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $7.27 million | $5.92 million | Up 22.6% |
| Gross profit / margin | $1.13 million / 15.5% | $1.14 million / 19.2% | Profit slightly lower; margin down 3.7 percentage points |
| Operating income | $212,748 | $52,136 | Up |
| Net income / diluted EPS | $189,824 / $0.08 | $81,776 / $0.03 | Net income up 132% |
| Cash from operations | $1.38 million | $3.73 million | Down $2.35 million |
At September 30, 2020, cash and cash equivalents were $9.07 million, investment securities were $2.83 million, current assets were $34.89 million, and current liabilities were $7.17 million. Management reported working capital of approximately $27.7 million. Total liabilities were $7.38 million; the company reported no borrowings and had a $3.0 million credit line available. Cash increased by $3.67 million during the quarter, including $2.60 million of investment maturities and sales. Capital expenditures were $19,807.
Material changes and business developments
- Sales growth primarily reflected higher build-to-print and magnetic shipments, partly offset by lower power-supply shipments. SG&A declined by $169,586, contributing to higher operating and net income.
- Gross margin fell despite higher sales. Management attributed the decline to a build-to-print program with negligible gross profit and increased spending on a large engineering contract affected by delays, supplier issues, and additional testing.
- Backlog was $62 million, up from $46.6 million a year earlier; approximately $61.5 million was funded. Management expected 43% of backlog to be recognized in fiscal 2021, 40% in fiscal 2022, 11% in fiscal 2023, and 6% thereafter. New orders in the quarter were $14.3 million, versus approximately $7.0 million a year earlier.
- Four customers represented 61.9% of quarterly sales, compared with three customers representing 56.7% a year earlier. The filing identifies this concentration as a significant risk.
Outlook, risks, and other notable items
- Management expected fiscal 2021 revenue and EPS to exceed fiscal 2020 levels, based on existing backlog, and expected new orders to approximate fiscal 2020 orders. At least $26.7 million of September 30 backlog was anticipated to ship in fiscal 2021; this estimate is subject to change.
- A customer requested a temporary stop-work period of at least 120 days on a contract representing $1.7 million of backlog expected in fiscal 2022. Management reported no immediate impact and said it would continue assessing the effect.
- COVID-19 supply-chain disruptions had a minor effect on first-quarter shipments. Management expected possible further supplier delays and, in limited cases, alternate sourcing that could increase material costs, but anticipated disruptions would remain minimal.
- Engineering and schedule delays, supplier non-conformances, component shortages, contract cost overruns, government appropriations and contract changes, competition, and customer concentration may affect deliveries and profitability. Engineering programs in backlog totaled $8.3 million.
- The company declared a $0.25-per-share dividend, totaling $600,658, accrued at quarter-end but not paid during the quarter. It had paid the same per-share dividend in the prior-year quarter. No legal matters were pending; management said ordinary-course claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the low-margin build-to-print work and engineering-contract cost pressures improve, and how they affect future gross margins.
- Progress on the $1.7 million stop-work contract and the $8.3 million of engineering programs subject to delays.
- Backlog conversion, funding and customer concentration, including whether expected fiscal 2021 shipments and orders materialize.
- Whether supply-chain disruptions, component lead times, and COVID-19 effects alter delivery schedules or contract costs.
- Cash generation and working-capital needs, particularly as receivables, contract inventory, and the accrued dividend change.