Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the three months ended September 30, 2022. Comparisons below are to the three months ended September 30, 2021 unless stated otherwise. Espey designs and manufactures power electronics and related equipment, principally for military, rail, and industrial customers.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $8.64 million | $7.55 million | +14.5% |
| Gross profit | $1.81 million | $1.35 million | +33.9% |
| Gross margin | Approximately 21% | Approximately 18% | Up about 3 percentage points |
| Operating income | $973,112 | $358,276 | Higher |
| Net income | $768,266 | $306,061 | Higher |
| Diluted EPS | $0.31 | $0.13 | Higher |
| Operating cash flow | $973,212 | $1,587,693 | Lower |
Sales growth reflected increased magnetics and power supply shipments, partly offset by lower build-to-print shipments. Gross profit benefited from product mix, improved build-to-print profitability, and approximately $60,000 of Employee Retention Credit (ERC) benefits. SG&A declined to $839,030 from $994,822, including approximately $27,000 of ERC benefits and lower personnel, director, and selling costs. The effective tax rate was approximately 22%, versus 19%.
Financial position and liquidity
- At September 30, 2022, cash and cash equivalents were $7.32 million and investment securities were $5.41 million, compared with $8.10 million and $3.71 million, respectively, at June 30, 2022.
- Current assets were $38.33 million and current liabilities were $7.96 million; reported working capital was approximately $30.4 million. Total assets were $41.06 million and stockholders’ equity was $32.93 million.
- The filing reports no borrowings during the past two fiscal years. A $3.0 million credit line was available, extended through February 28, 2023; management said it did not expect to need borrowing in the foreseeable future.
- Operating cash flow was lower year over year, primarily reflecting less cash collected from receivables and customer advances, partly offset by higher net income and accounts payable. Investing activities used $1.76 million, mainly due to purchases of investment securities. Capital spending was $50,482.
Backlog, outlook, and key risks
- Backlog was approximately $81.2 million at September 30, 2022, up from $75.2 million a year earlier; approximately $66.3 million was associated with six significant customers. Backlog was fully funded except for $32,000. Management projected 32% of backlog would be recognized in FY2023, 47% in FY2024, 17% in FY2025, and 4% thereafter.
- Management expected FY2023 revenue and EPS to exceed FY2022 levels, based on existing backlog, and expected new orders to approximate FY2022’s $43.2 million. First-quarter orders were approximately $13.1 million, compared with $17.1 million a year earlier. Management anticipated filling at least $26.4 million of September 30 backlog during FY2023, subject to stated risks.
- Outstanding sales opportunities totaled approximately $91 million as of November 1, 2022; the filing cautions that there is no assurance these opportunities will become orders. Management also cited inflation and parts shortages as likely pressures on FY2023 operating income.
- Component shortages, extended supplier lead times, pandemic-related delivery and workforce disruptions, and engineering or scheduling delays could impede shipments and backlog conversion. Raw-material, freight, utility, and labor cost inflation may reduce margins, particularly on fixed-price contracts.
- Customer concentration is significant: four customers generated approximately 80% of quarterly sales, versus five customers generating 78% in the prior-year quarter. Government appropriations, program changes or cancellations, and customer delivery deferrals are additional risks.
- Results included approximately $87,000 of ERC benefits across gross profit and SG&A. The company had no outstanding contingent liabilities under standby letters of credit. Management reported no pending litigation it believes would have a material adverse effect.
Important facts for investors to verify
- Whether management’s FY2023 revenue and EPS outlook is being achieved, and whether the projected backlog shipments convert on schedule.
- Whether component availability, supplier delays, labor constraints, and inflation affect delivery timing and profitability, especially on fixed-price contracts.
- How customer concentration and government funding or program decisions affect orders, backlog, and sales.
- How much reported profitability benefited from the ERC and whether margins remain resilient without that benefit.
- The $3.0 million credit line’s availability and renewal status after its stated February 28, 2023 expiration.