Espey Mfg. & Electronics Corp. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended September 30, 2021; comparisons are with the three months ended September 30, 2020 unless noted. Espey designs and manufactures power electronics and related equipment, primarily for military, rail, and industrial applications.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $7.55 million | $7.27 million | +3.8% |
| Gross profit | $1.35 million | $1.13 million | +20.0% |
| Gross margin | 17.9% | 15.5% | +2.4 percentage points |
| Operating income | $358,276 | $212,748 | +68.4% |
| Net income | $306,061 | $189,824 | +61.2% |
| Basic and diluted EPS | $0.13 | $0.08 | Up $0.05 |
| Operating cash flow | $1.59 million | $1.38 million | +15.2% |
Net margin was approximately 4.1%, versus 2.6%. Management attributed improved gross profit mainly to higher sales and product mix, including magnetics, build-to-print work, and higher-margin legacy products. SG&A rose $80,196 to $994,822, mainly from compensation and recruiting costs, including costs associated with the leveraged ESOP.
Financial position and liquidity
At September 30, 2021, cash and cash equivalents were $8.30 million, investment securities were $3.14 million, and working capital was approximately $27.9 million. Current assets were $35.14 million against current liabilities of $7.22 million. Total assets were $38.06 million, total liabilities $7.37 million, and stockholders’ equity $30.69 million. The filing reports no borrowings during the prior two fiscal years; a $3.0 million credit line was available, and management did not anticipate borrowing in the foreseeable future.
Operating cash flow was $1.59 million. Investing activities used $91,691, including $45,691 in capital expenditures and net investment-security purchases; financing cash flow was zero. Cash increased $1.50 million during the quarter to $8.30 million. The company budgeted approximately $200,000 for equipment and plant improvements in FY2022 and expected to fund these from operations.
Backlog, outlook, and material risks
- Backlog was approximately $75.2 million at September 30, 2021, up from $62.0 million a year earlier. Approximately $74.6 million was funded; $0.6 million was unfunded. Management projected recognition of backlog revenue across FY2022–FY2024 and thereafter.
- Management expected FY2022 revenue to exceed FY2021 revenue and expected positive EPS versus FY2021’s net loss per share. It anticipated FY2022 new orders to approximate FY2021’s $38.5 million; first-quarter new orders were about $17.1 million versus $14.3 million a year earlier. At least $30.5 million of September backlog was expected to ship in FY2022, subject to stated risks.
- Management cited component shortages and extended lead times, COVID-related supplier and workforce disruptions, employee turnover, engineering and scheduling delays, supplier non-conformances, and customer approval delays. These factors could delay deliveries, backlog conversion, and profitability.
- Five significant customers represented 78% of quarterly sales, compared with four customers representing 61.9% a year earlier. Management warned that losing a significant customer or program, or customer delivery deferrals, could materially affect results. Four significant customers accounted for approximately $48 million of backlog.
- Competition and pricing pressure, contract cost estimates, design execution, government appropriations, and potential contract modifications or cancellations are additional risks. The company reported continued technical and schedule delays in major development programs; related engineering programs totaled $7.6 million.
- The regular quarterly dividend was suspended effective March 9, 2021; no dividend was paid in the quarter. No litigation matters were pending, and management stated ordinary-course claims were not expected to have a material adverse effect. No standby-letter-of-credit contingent liabilities were outstanding.
Important facts for investors to verify
- Whether component availability, supplier performance, and workforce constraints improve enough to meet projected delivery schedules and convert backlog into revenue.
- How concentrated sales and backlog remain among major customers, and whether the reported backlog is converted on schedule and at expected margins.
- Whether contract cost estimates, development delays, or loss-contract spending materially affect future gross profit.
- Management’s FY2022 revenue, earnings, and order expectations, including the assumptions behind the projected $30.5 million of backlog shipments.
- The implications of the dividend suspension and ESOP obligations for future cash allocation and liquidity.