Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Period clarification: The filing is for the fiscal third quarter ended March 31, 2020, and the nine months then ended. This conflicts with the request metadata’s “2019 Q3.” Figures below are unaudited; amounts are in U.S. dollars.
Business context and key results
Espey designs and manufactures power electronics and related products, primarily for defense, government, rail and industrial customers. Its work includes engineering and fixed-price production contracts.
| Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Nine months ended March 31, 2020 | Nine months ended March 31, 2019 |
|---|---|---|---|---|
| Net sales | $6.19 million | $9.22 million | $19.40 million | $24.86 million |
| Gross profit / margin | $0.91 million / 14.7% | $2.15 million / 23.3% | $3.53 million / 18.2% | $4.66 million / 18.7% |
| Operating income (loss) | $(0.15) million | $1.08 million | $0.14 million | $1.29 million |
| Net income (loss) | $(0.10) million | $0.92 million | $0.21 million | $1.20 million |
| Diluted EPS | $(0.04) | $0.39 | $0.09 | $0.50 |
Financial position, cash flow and capital
- At March 31, 2020, cash and cash equivalents were $4.39 million and investment securities were $5.72 million. Current assets were $33.16 million and current liabilities $5.99 million; management reported working capital of approximately $27.2 million.
- Total assets were $36.76 million and stockholders’ equity was $30.52 million. The balance sheet reports no borrowings; management said it had not borrowed during the prior two fiscal years. A $3.0 million line of credit was available, and management did not anticipate needing to borrow in the foreseeable future.
- Operating cash flow was $4.93 million for the nine months, versus cash used of $4.12 million a year earlier. The improvement reflected receivable collections and higher customer advances, partly offset by inventory growth and lower earnings. Cash increased $2.93 million to $4.39 million.
- Capital spending was $0.21 million; fiscal 2020 equipment and plant-improvement spending was budgeted at approximately $0.30 million. Dividends paid were $0.75 per share for the nine months, versus $1.75 a year earlier, which included a $1.00 special dividend.
Changes, outlook and risks
- Year-over-year sales fell 32.8% in the quarter and 22.0% for the nine months. Management attributed the declines mainly to lower power-supply and build-to-print sales; nine-month magnetic shipments partly offset the decline.
- Quarterly gross margin fell to 14.7%, primarily due to product mix, higher material and first-build/inspection costs on two production contracts, and a charge related to a recurring power-supply design issue. Management said that issue was resolved. Nine-month gross margin was 18.2%, compared with 18.7%.
- Management expected fiscal 2020 revenue and gross profit to be below fiscal 2019, citing engineering-design delays and supplier lead times. It said revenue projections were difficult to estimate because time and resources needed to resolve design issues varied.
- Backlog was $59.8 million at March 31, 2020, versus $45.4 million a year earlier; $58.6 million was funded and $1.2 million unfunded. Management expected 24% of backlog to be recognized in fiscal 2020, 46% in 2021, 21% in 2022 and 9% thereafter. New orders for the first nine months were $33.6 million, versus $22.2 million. These are expectations, not guarantees.
- Engineering and schedule delays, customer-required design changes, supplier non-conformances and component shortages were affecting shipments. COVID-19 had a minor impact on third-quarter shipments; management warned that supply-chain disruption could affect fourth-quarter and first-half fiscal 2021 deliveries, though it expected impacts to be minimal. The company remained operational as an essential defense-industry business.
- Customer concentration is significant: one customer accounted for 33% of quarterly sales and one customer 27.7% of nine-month sales. Management also cited dependence on government appropriations, customer programs, competition, cost overruns and contract-estimate judgments as risks.
- Management reported no material expected adverse effect from ordinary-course litigation; standby letter-of-credit exposure was zero. Disclosure controls were deemed effective, with no reported material change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers fiscal Q3 2020, not 2019 Q3.
- Track whether engineering delays, supplier constraints and COVID-related disruptions affect shipments, backlog conversion and fiscal 2020 results.
- Monitor gross margins and contract cost estimates, particularly on fixed-price and development contracts.
- Assess backlog quality, funding and customer/program concentration; backlog and quoted opportunities do not assure future revenue.
- Review liquidity and cash generation alongside inventory levels, customer advances, dividend policy and the availability and renewal of the credit line.