Espey Mfg. & Electronics Corp. — Q1 FY2024 10-Q Summary
Reporting period: Three months ended September 30, 2023; comparative period is the three months ended September 30, 2022. Financial statements are unaudited. Espey designs and manufactures power electronics and related equipment, primarily for military, rail, and industrial applications.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $8.568 million | $8.636 million | Down 0.8% |
| Gross profit / margin | $2.245 million / 26.2% | $1.812 million / 21.0% | Margin up 5.2 percentage points |
| Operating income | $1.222 million | $0.973 million | Up 25.6% |
| Net income | $1.095 million | $0.768 million | Up 42.5% |
| Diluted EPS | $0.44 | $0.31 | Up $0.13 |
| Operating cash flow | $2.615 million | $0.973 million | Up $1.642 million |
Higher gross profit reflected product mix, production and supply-chain savings, and increased sales on a follow-on power-distribution-panel order. Prior-year gross profit was affected by costs on engineering work and a fixed-price contract with design and component-sourcing challenges. SG&A rose $185,000 to $1.024 million, mainly from employee compensation, including a business-development hire. Other income rose to $162,000, primarily from higher interest income. The effective tax rate was 20.9%, versus 22.1%.
Balance sheet, cash flow, and liquidity
- At September 30, 2023, cash and cash equivalents were $3.065 million and investment securities were $13.065 million; total assets were $49.391 million.
- Working capital was approximately $32.8 million, compared with $30.4 million at September 30, 2022. Current assets were $45.425 million and current liabilities $12.670 million.
- The filing reports no borrowings during the last two fiscal years. A $3.0 million credit line was available, expiring February 28, 2024; management said it did not anticipate borrowing in the foreseeable future.
- Operating cash flow was $2.615 million. Investing activities used $2.358 million, including $2.229 million in capital spending; financing provided $59,000 from stock-option exercises. Cash increased $316,000 during the quarter.
- Investment securities were primarily certificates of deposit, municipal bonds, and Treasury bills, classified as available-for-sale and described as highly liquid and primarily investment grade.
Material changes and operating developments
- Backlog was approximately $87.1 million at quarter-end, up from $81.2 million a year earlier. Approximately $4.3 million was unfunded; management expects at least $30.9 million of quarter-end backlog to ship in FY2024, subject to stated risks.
- New orders were $12.1 million in the quarter, compared with $13.1 million in the prior-year quarter. Outstanding opportunities totaled approximately $76 million as of October 31, 2023; awards are not assured.
- Three customers represented 69% of quarterly sales, versus four customers representing 80% a year earlier. Five significant customers accounted for approximately $59.9 million of backlog.
- The company declared a $0.15-per-share quarterly dividend; dividends per share were zero in the prior-year quarter. The balance sheet included $406,000 of dividends payable.
- Espey spent $2.229 million on plant and equipment, including upgrades eligible for reimbursement under a Navy award of up to $7.4 million. It received $969,000 in grant proceeds during the quarter. The award supports facility and equipment upgrades, with completion slated for calendar 2024; the company says related income-tax cash outlays are expected to be recaptured in future periods.
Outlook, risks, and contingencies
Management expects FY2024 revenue and EPS to exceed FY2023 levels and expects new orders in FY2024 to exceed FY2023 orders. It said inflationary costs are expected to continue but are not expected to significantly affect FY2024 operating income. These are forward-looking expectations, not guaranteed results.
- Component shortages, extended lead times, obsolescence, and labor-recruiting challenges could delay deliveries, disrupt backlog conversion, and reduce income.
- Customer concentration, dependence on government appropriations and defense programs, contract changes or cancellations, competition, pricing pressure, and product mix may affect results.
- Engineering complexity, schedule delays, and cost overruns could affect revenue timing and contract profitability; estimates of contract costs and inventory completion are significant judgments.
- The company is subject to government audits and reviews as a government contractor. It reported no pending litigation matters it believes would materially adversely affect the company, and no contingent liabilities on standby letters of credit at quarter-end.
- Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether FY2024 revenue and EPS meet management’s expectations and whether new orders convert into funded backlog and shipments.
- Progress, eligible costs, reimbursements, and tax effects associated with the Navy facility-upgrade award.
- Whether supply-chain and staffing constraints affect delivery schedules, contract costs, or gross margins.
- Customer concentration and the funding status of the $4.3 million unfunded backlog component.
- Renewal or replacement of the $3.0 million credit line before its February 28, 2024 expiration, and the sustainability of investment income and dividends.