Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended March 31, 2016; the filing was signed May 12, 2016. The request metadata says “2015 Q3,” but the filing itself reports fiscal 2016 Q3.
Business context and financial results
Espey designs and manufactures power electronics and related equipment, principally for military and severe-environment applications. Its customers include the U.S. government, defense contractors, and industrial companies.
| Metric | Three months ended March 31, 2016 | Three months ended March 31, 2015 | Nine months ended March 31, 2016 | Nine months ended March 31, 2015 |
|---|---|---|---|---|
| Net sales | $7.22 million | $6.47 million | $20.74 million | $17.86 million |
| Gross profit / margin | $2.15 million / 29.8% | $1.44 million / 22.2% | $5.70 million / 27.5% | $5.51 million / 30.8% |
| Operating income | $1.37 million | $0.67 million | $3.42 million | $3.51 million |
| Net income | $0.97 million | $0.51 million | $2.47 million | $2.64 million |
| Diluted EPS | $0.43 | $0.22 | $1.08 | $1.15 |
For the quarter, sales rose about 12% and net income about 92% year over year, with stronger gross margin attributed mainly to product mix. For the nine-month period, sales rose about 16%, while net income fell about 6%; the prior-year period benefited from a $560,000 contract-settlement reduction in cost of sales. SG&A increased $289,000 for the nine months, and the effective tax rate rose to 29.5% from 26.0%.
Cash, liquidity, and capital
- At March 31, 2016, cash and cash equivalents were $9.55 million and investment securities were $5.39 million, compared with $8.86 million and $4.16 million at June 30, 2015.
- Working capital was approximately $29.5 million. Total liabilities were $2.48 million; the company reported no borrowings during the last two fiscal years and had a $3.0 million credit line available. Management did not anticipate needing to borrow in the foreseeable future.
- Nine-month operating cash flow was $4.45 million, versus $1.26 million a year earlier. Investing used $1.37 million and financing used $2.39 million; cash increased $688,000.
- Dividends were $0.25 per share for the quarter and $0.75 per share for the nine months, unchanged from the comparable periods. The company repurchased 14,303 shares for $355,418 during the nine months.
Outlook, risks, and other notable items
- Management expected fiscal 2016 revenue to increase from fiscal 2015, while expecting lower gross margins due to product mix, competitive pricing, investment in new programs, and the prior-year one-time cost reduction. No specific full-year revenue or earnings target was provided.
- Backlog was approximately $41.6 million at March 31, 2016, up from $38.4 million a year earlier. It included a $10.1 million federal-government delivery order for which revenue was not expected until fiscal 2017. Management anticipated filling at least $6 million of backlog during the remainder of fiscal 2016. Quoted opportunities exceeded $51 million, but conversion was not assured.
- Customer concentration is significant: four customers represented 68.6% of quarterly sales, and two represented 49.5% of nine-month sales. Dependence on government appropriations, individual customers and programs, defense-spending uncertainty, competition, and pricing pressure are identified risks.
- The filing reports no outstanding standby-letter-of-credit contingent liabilities and no legal proceedings. As a government contractor, the company is subject to government contract audits and reviews. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $10.1 million government order and other backlog convert to funded, deliverable revenue on the expected schedule.
- How customer concentration, government budget decisions, and competitive pricing affect future sales and margins.
- Whether margins and earnings can be sustained absent the prior-year $560,000 favorable settlement adjustment.
- The board’s future dividend and share-repurchase decisions; the filing cautions that dividends are not assured.
- The effect of pending accounting standards, particularly revenue recognition, which the company was still evaluating.