Espey Mfg. & Electronics Corp. — Form 10-Q
Business context and reporting period. The company designs and manufactures power electronics, transformers, and related equipment, principally for defense, industrial, and rail applications. This unaudited report covers the quarter and six months ended December 31, 2020, the second quarter of fiscal 2021.
Key financial results
| Metric | Three months ended Dec. 31, 2020 | Prior-year quarter | Six months ended Dec. 31, 2020 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $6.96 million | $7.29 million | $14.23 million | $13.21 million |
| Gross profit / margin | $0.71 million / 10.2% | $1.48 million / 20.3% | $1.84 million / 12.9% | $2.62 million / 19.8% |
| Operating income (loss) | $(0.23) million | $0.23 million | $(0.02) million | $0.28 million |
| Net income (loss) | $(0.18) million; $(0.08) per share | $0.23 million; $0.10 per share | $0.009 million; $0.00 per share | $0.31 million; $0.13 per share |
- For the quarter, sales declined about 4% year over year; for the six-month period, sales increased about 8%. Quarterly sales weakness reflected lower magnetic and power-supply sales, partly offset by build-to-print shipments.
- Gross profit fell in both periods, with margin pressure from product mix and a $335,000 inventory write-down tied to a cancelled airline-industry contract. Lower SG&A partly offset the decline.
- Six-month operating cash flow was $2.93 million, versus $6.00 million a year earlier. Cash and cash equivalents were $9.04 million at December 31, 2020, up from $5.40 million at June 30, 2020. Investing activities provided $1.91 million, principally reflecting investment maturities; financing activities used $1.20 million, mainly for dividends.
- Working capital was approximately $27.1 million. The balance sheet reported no borrowings; management said the company had not borrowed in the prior two fiscal years and had a $3 million credit line available. Total current assets were $33.56 million and current liabilities $6.47 million at December 31.
- Dividends were $0.25 per share for the quarter and $0.50 per share for the six months, unchanged from the comparable periods.
Material changes, outlook, and risks
- Cancelled contract: A customer cancelled a design-and-production contract for an airline-industry product during the quarter. The company reduced the contract value from $1.7 million to about $0.4 million and wrote down $335,000 of inventory after the customer rejected its initial settlement proposal. Discussions continue; the company is reviewing legal options. Any future recovery will be recognized if and when received.
- Backlog and orders: Backlog was $60.1 million at December 31, 2020, versus $58.4 million a year earlier; $57.7 million was funded and $2.4 million unfunded. Three customers represented $26.5 million of backlog. New orders in the first six months were $19.4 million, compared with $26 million a year earlier. Management expected at least $16.3 million of year-end backlog to ship during fiscal 2021, subject to change. Outstanding quoted opportunities were approximately $80.8 million as of February 5, 2021; these were not booked orders.
- Management outlook: Management expected fiscal 2021 revenue to approximate fiscal 2020 revenue, but expected lower earnings per share, reflecting lower sales expectations and the inventory write-down. It expected fiscal 2021 new orders to approximate fiscal 2020’s $40.9 million. Management said current engineering and scheduling delays were being addressed and did not expect them to negatively affect fiscal 2021 customer-fulfillment projections.
- Operating risks: COVID-19-related supply-chain disruption, component shortages, longer lead times, and supplier delays could affect deliveries and material costs. Customer and program concentration is significant: three customers accounted for 47% of quarterly sales and four customers for 58% of six-month sales. The company also cited dependence on government appropriations, contract changes or cancellations, competition, and execution of engineering programs.
- ESOP transaction: On December 1, 2020, the company sold 300,000 shares to its ESOP for $5.487 million, or $18.29 per share, and loaned the purchase price to the ESOP. The loan is repayable in 15 equal annual principal installments at 3% interest. At December 31, 297,061 shares were reported as unearned ESOP shares.
- The company reported no pending litigation matters at the filing date and said ordinary-course claims were not expected to have a material adverse effect. It remains subject to U.S. government contract audits and reviews. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the cancelled-contract settlement or legal review results in any recovery beyond the amount already reflected, and whether further inventory or margin adjustments are needed.
- Conversion of the $60.1 million backlog into shipments and revenue, including funding of the $2.4 million unfunded portion and the timing of engineering programs.
- Customer concentration, new-order trends, and the status of the $80.8 million in quoted opportunities, which are not guaranteed awards.
- Whether supply-chain constraints and lower-margin product mix persist, and how they affect gross margins and management’s fiscal 2021 outlook.
- Cash generation, dividend sustainability, and the ESOP loan’s repayment and share-release effects on equity and per-share results.