Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2013, the first quarter of fiscal 2014. The company designs and manufactures power electronics and related equipment, primarily for military and severe-environment uses.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $6.92 million | $7.89 million | Down 12.3% |
| Gross profit | $2.20 million | $2.48 million | Down 11.6% |
| Gross margin | 31.7% | 31.5% | Up 0.2 percentage points |
| Operating income | $1.43 million | $1.76 million | Down 18.9% |
| Net income | $1.05 million | $1.28 million | Down 18.1% |
| Basic / diluted EPS | $0.47 / $0.46 | $0.59 / $0.57 | Lower year over year |
| Operating cash flow | $2.41 million | $36,325 | Higher, largely reflecting working-capital movements |
Sales declined primarily because of lower power-supply sales. SG&A rose $45,386 to $767,975, mainly from higher salary costs associated with new hires and directors’ fees. The company said current-quarter loss contracts were offset by mature profitable contracts; product mix and contract cost estimates can materially affect margins and earnings.
Financial position and cash flow
- Cash and cash equivalents were $11.61 million at September 30, 2013, up from $9.89 million at June 30; investment securities were $3.89 million.
- Working capital was approximately $30.1 million. Total assets were $35.85 million and total liabilities were $3.30 million. The filing reports no borrowing during the prior two fiscal years.
- Operating cash flow of $2.41 million included a $2.08 million decrease in trade receivables; investing cash outflow was $317,000 and financing cash outflow was $371,000, including $559,000 of dividends.
- Capital expenditures were $328,311 in the quarter; approximately $800,000 was budgeted for fiscal 2014, primarily to expand transformer production capability.
- The quarterly dividend was $0.25 per share, versus $0.225 in the prior-year quarter. Management anticipated regular quarterly dividends for the foreseeable future but gave no assurance of an increase or special dividend.
Material changes, outlook, and risks
- New orders were approximately $5.4 million, down from $7.2 million in the prior-year quarter. Backlog was approximately $40.5 million, versus $50.1 million a year earlier; $27.7 million of current backlog was attributable to two significant customers.
- Management expected fiscal 2014 net sales to be below fiscal 2013. It anticipated shipping at least $27 million of orders from the June 30, 2013 backlog during fiscal 2014, subject to change. Outstanding quotations and potential business totaled about $49.9 million, but there was no assurance they would convert to orders.
- Four customers represented 76.2% of quarterly sales, compared with three customers representing 66.1% in the prior-year quarter. Management identified the high concentration in one customer as a significant risk.
- Management cited sequestration, defense budget uncertainty, procurement delays, and more aggressive competition and pricing as constraints on orders and margins. It said it had adjusted pricing and may need to invest in upfront design work to win new programs.
- A pending U.S. government audit relates to government contracts. The company accrued its best estimate within a range of possible outcomes and said none was expected to materially adversely affect financial position or results. Standby letter-of-credit contingent liabilities were zero.
- Management said cash generated from operations and existing cash would be sufficient for foreseeable funding needs. The filing also notes risks from customer acceptance and development of new products, price erosion, manufacturing constraints, and government funding or contract termination.
Important facts for investors to verify
- Whether order intake and backlog stabilize, and whether the expected fiscal 2014 shipments are realized.
- How much sales and backlog remain concentrated in the largest customer and two major customers.
- Whether competition, new-program design costs, and contract mix pressure future margins.
- The eventual outcome of the pending government audit and any changes to the accrued estimate.
- Whether planned capital spending and dividend payments remain supported by operating cash flow.