Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Quarter and six months ended December 31, 2018 (second quarter of fiscal 2019). Espey designs and manufactures power electronics, principally for military, rail, and other industrial applications. Results are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 |
|---|---|---|
| Net sales | $7.30 million, down from $11.53 million | $15.64 million, down from $19.03 million |
| Gross profit / margin | $1.52 million / 20.8%; prior year $3.08 million / 26.7% | $2.51 million / 16.0%; prior year $4.54 million / 23.8% |
| Operating income | $220,548; prior year $2.09 million | $203,938; prior year $2.68 million |
| Net income / diluted EPS | $217,758 / $0.09; prior year $1.61 million / $0.69 | $279,430 / $0.12; prior year $2.06 million / $0.88 |
For the six months, operating cash flow was negative $3.02 million, versus positive $597,000 a year earlier. Investing activities provided $5.38 million, while financing activities used $3.35 million, including the special dividend. Cash declined $987,000 to $3.31 million. Investment securities were $5.79 million at period-end, versus $11.52 million at June 30, 2018.
At December 31, current assets were $30.93 million and current liabilities $4.19 million; reported working capital was approximately $26.7 million. The company reported no borrowings and said it had a $3 million line of credit available, with no foreseeable borrowing need anticipated. The filing gives no standalone cash-flow margin measure.
Changes and operating drivers
- Sales fell 36.7% for the quarter and 17.8% for the six-month period, primarily because of shipment timing on a military power-supply contract and lower rail shipments. Engineering changes, supplier non-conformances, and electronic-component shortages also delayed deliveries.
- Gross margin declined in both periods. Management attributed a 7.2 percentage-point quarterly and 8.0 percentage-point six-month margin impact to spending on a specific engineering design contract. SG&A rose, mainly due to added program-management compensation and professional services.
- Operating cash use reflected lower earnings and a $4.33 million increase in inventories, partly offset by collections, higher accounts payable, and lower prepaid expenses.
- Espey adopted ASC 606 effective July 1, 2018 using the modified retrospective method; no opening retained-earnings adjustment was required. Prior-period revenue was not restated.
Outlook, risks, and contingencies
- Management expects fiscal 2019 revenue to exceed fiscal 2018 revenue, but expects a lower gross margin, largely due to lower-margin orders in backlog. It did not provide a specific revenue or margin target.
- Backlog was approximately $45.8 million, including $42.9 million funded and $2.9 million unfunded; $24.0 million was attributable to three significant customers. Management estimated at least $24.4 million of the December backlog would ship in fiscal 2019. Approximately $11.5 million was expected to be recognized after December 2019, with estimated shipments in fiscal 2020–2022.
- First-half new orders were approximately $13.4 million, compared with $14.3 million a year earlier. Outstanding opportunities totaled approximately $60 million at January 31, 2019; there is no assurance they will become orders.
- Customer concentration is material: two customers represented 49.4% of quarterly sales and 54.4% of six-month sales. Management cited possible risks from customer/program losses, government appropriations, competition, delivery delays, supply constraints, and contract cost overruns. It said current development delays were being addressed and did not expect an adverse impact on fiscal 2019 fulfillment projections.
- Management said ordinary-course litigation was not expected to have a material adverse effect. The company is subject to government contract audits and reviews; standby letter-of-credit contingent liabilities were zero. Capital spending was $355,000 in the first half, with approximately $750,000 budgeted for fiscal 2019.
- The company declared and paid a $1.00-per-share special dividend in addition to $0.50 per share of regular dividends during the six months. Total dividends reported in the income statement were $1.50 per share for the six-month period.
Key facts for investors to verify
- Whether delayed shipments, engineering changes, and component shortages are resolved, and whether management’s fiscal 2019 shipment and revenue expectations are achieved.
- How the engineering design contract and lower-margin backlog affect future gross margins and contract cost estimates.
- Backlog conversion and funding, particularly the $2.9 million unfunded portion and the $11.5 million expected after December 2019.
- Exposure to the two major customers and the effect of any program, appropriation, or order changes.
- Working-capital demands: inventory rose materially while operating cash flow was negative; also verify the sustainability of dividends and liquidity after the special distribution.