Espey Mfg. & Electronics Corp. — Form 10-Q
Period and business: Unaudited results for the quarter and nine months ended March 31, 2023, the third quarter of the company’s fiscal year. Espey designs and manufactures power electronics and related equipment, primarily for military, rail, and industrial applications. The request metadata says “2022 Q3,” but the filing itself covers fiscal 2023 Q3.
Financial results
| Metric | Three months ended March 31, 2023 | Nine months ended March 31, 2023 | Comparable 2022 period |
|---|---|---|---|
| Net sales | $9.81 million | $27.25 million | $8.62 million; $23.62 million |
| Gross profit / margin | $1.97 million / 20.1% | $6.05 million / 22.2% | $1.73 million / 20.1%; $4.29 million / 18.2% |
| Operating income | $0.96 million | $3.32 million | $0.80 million; $1.18 million |
| Net income / diluted EPS | $0.87 million / $0.35 | $2.78 million / $1.13 | $0.66 million / $0.27; $0.99 million / $0.41 |
| Operating cash flow | Not stated quarterly | $7.06 million | $0.81 million |
For the nine-month period, cash and cash equivalents were $4.58 million and investment securities were $13.88 million, versus $8.10 million and $3.71 million, respectively, at June 30, 2022. Working capital was approximately $32.3 million. The company reported no borrowings; a $3.0 million credit line was available and extended through February 28, 2024. Total liabilities were $11.76 million, including $6.57 million of current contract liabilities. Capital expenditures were $0.18 million. Dividends paid during the nine months totaled $0.24 million, or $0.10 per share.
Changes and drivers
- Sales increased 13.8% for the quarter and 15.3% year to date, reflecting higher backlog shipments, including build-to-print work and power supply and transformer contracts.
- Nine-month gross margin rose to 22.2% from 18.2%, supported by sales mix and improved margins on certain contracts. Quarterly gross margin was unchanged at 20.1%.
- Nine-month SG&A declined by $0.39 million, largely because the prior-year period included nonrecurring senior-management transition costs. Quarterly SG&A increased by $0.08 million.
- Interest income increased as investment balances and interest rates rose. Nine-month operating cash flow improved substantially; the filing attributes this partly to higher customer advances, reflected in contract liabilities, as well as collections and accounts payable timing.
Outlook, risks, and other notable items
- Management expected fiscal 2023 revenue and EPS to exceed fiscal 2022 levels and expected new orders to approximate fiscal 2022’s $43.2 million. New orders were $32.6 million for the first nine months, versus $34.1 million a year earlier.
- Backlog was approximately $82.1 million at March 31, 2023, compared with $76.2 million a year earlier; $32,000 was unfunded. Management projected backlog recognition of 11% in fiscal 2023, 47% in 2024, 27% in 2025, and 15% thereafter. Approximately $88 million of outstanding quotations and opportunities were reported as of May 8, 2023; conversion is not assured.
- Management cited inflation, component shortages and extended lead times, vendor price increases, and technical or scheduling delays. These pressures may affect delivery timing and margins, particularly on fixed-price contracts. The company reported ongoing complexity and added part-screening costs on a fixed-price power-supply engineering program and had requested an equitable price adjustment; recovery was not assured or recognized.
- Customer concentration is material: two customers represented 60% of quarterly sales, and four represented 73% of nine-month sales. Backlog included approximately $66.3 million from six significant customers.
- The company received a $7.4 million Navy award for facility and equipment upgrades, with completion planned for 2024. Payments are tied to invoiced milestones and are limited by specified milestone caps.
- Management expected operating cash flows and available cash to meet foreseeable funding needs and did not anticipate borrowing. Litigation was described as ordinary-course with no pending matter believed material; no standby letter-of-credit contingent liabilities were outstanding. Management said disclosure controls were effective and reported no material change in internal controls.
Investor verification points
- Confirm the fiscal-period labeling: the filing is for the quarter ended March 31, 2023, despite the request’s “2022 Q3” designation.
- Track backlog conversion, new orders, and customer/program concentration, including any changes to the $32,000 unfunded portion.
- Monitor fixed-price contract costs, supply availability, delivery delays, and the status of the requested price adjustment.
- Assess operating cash flow quality and the timing and terms of customer advances and the Navy-funded upgrade work.
- Review subsequent dividends, credit-line availability, and adoption of the expected-loss accounting standard planned for fiscal 2024.