Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Business and period: Espey designs and manufactures power electronics and related equipment, primarily for military and severe-environment applications. This report covers the quarter and six months ended December 31, 2014, the second quarter of fiscal 2015. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended Dec. 31, 2014 | Three months ended Dec. 31, 2013 | Six months ended Dec. 31, 2014 | Six months ended Dec. 31, 2013 |
|---|---|---|---|---|
| Net sales | $5.70 million | $6.57 million | $11.39 million | $13.49 million |
| Gross profit / margin | $2.26 million / 39.6% | $0.90 million / 13.7% | $4.07 million / 35.7% | $3.09 million / 22.9% |
| Operating income | $1.63 million | $0.11 million | $2.84 million | $1.54 million |
| Net income | $1.22 million | $0.11 million | $2.13 million | $1.16 million |
| Diluted EPS | $0.54 | $0.05 | $0.93 | $0.51 |
- Six-month operating cash flow was $1.64 million, versus $2.84 million a year earlier. Investing activities provided $0.46 million, while financing activities used $1.42 million. Cash increased $0.68 million to $10.24 million.
- At December 31, 2014, cash and cash equivalents were $10.24 million, available-for-sale investments were $4.39 million, and working capital was approximately $28.1 million. Total liabilities were $2.22 million; the company reported no borrowings in the last two fiscal years and had a $3 million credit line available.
- Capital expenditures were $54,050 for the six months; fiscal 2015 spending was expected to be approximately $200,000, primarily to expand transformer production capability.
Changes, outlook, and risks
- Sales fell 13% year over year in the quarter and 16% for the six-month period, mainly because of lower engineering-design contract sales and a slight decline in electromechanical and transformer shipments.
- Gross profit improved despite lower sales, reflecting product mix and the absence of prior-year losses on two engineering programs that were later cancelled. A December 2014 final settlement on one cancelled program reduced cost of sales by $560,000, a material benefit to reported results.
- Management expects fiscal 2015 sales to be below fiscal 2014. It anticipated shipping at least $14 million of the December 31 backlog during fiscal 2015; this estimate excludes later orders and is subject to change. Backlog was approximately $41.2 million, including $2.3 million unfunded, versus $37.8 million a year earlier. New orders in the first half were approximately $16.8 million, versus $9.3 million.
- Backlog included $26.2 million from two significant customers. Sales concentration was also substantial: three customers represented 62.9% of quarterly sales, while two represented 50.7% of six-month sales. Management identified customer and program concentration, defense-budget dependence, order timing, competition, and pricing pressure as risks. The company has adjusted pricing, refocused its sales organization, and is pursuing customer diversification and new opportunities; approximately $20 million of quoted opportunities had not been awarded.
- A pending U.S. government contract audit had a range of possible outcomes, but management believed none would materially adversely affect the company; no contingency was accrued. Outstanding standby-letter-of-credit contingent liabilities were zero. The filing reported no legal proceedings.
- The board had not declared a special dividend for fiscal 2015. Management cautioned that neither regular dividend levels nor any special dividend are assured. The company repurchased 13,553 shares during the six months for $320,504; $1,385,744 remained authorized for repurchases.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting. Adoption of the new revenue-recognition standard was under evaluation; its impact and transition method were not yet determined.
Important facts for investors to verify
- How much of the $560,000 contract-settlement benefit is nonrecurring, and how reported margins perform without it.
- Whether backlog converts to funded orders and shipments on the timetable management expects, particularly the unfunded portion.
- Developments in major-customer concentration, defense appropriations, pricing pressure, and program cancellations or delays.
- The outcome of the pending government audit and any changes to the company’s estimates for contract costs and completion.
- Future cash generation, capital spending, share repurchases, and dividend decisions.