Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Period: Fiscal second quarter and first six months ended December 31, 2011; comparable periods ended December 31, 2010. Financial statements are unaudited. Espey designs and manufactures power electronics and related equipment, primarily for military and severe-environment uses.
Financial results
| Metric | Three months ended Dec. 31, 2011 | Three months ended Dec. 31, 2010 | Six months ended Dec. 31, 2011 | Six months ended Dec. 31, 2010 |
|---|---|---|---|---|
| Net sales | $8.27 million | $6.58 million | $16.26 million | $12.61 million |
| Gross profit / margin | $2.18 million / 26.4% | $1.62 million / 24.7% | $4.18 million / 25.7% | $3.28 million / 26.0% |
| Operating income | $1.49 million | $0.88 million | $2.75 million | $1.84 million |
| Net income | $1.07 million | $0.65 million | $2.00 million | $1.40 million |
| Diluted earnings per share | $0.49 | $0.30 | $0.91 | $0.65 |
- For the six months, operating cash flow was $3.52 million, versus $3.28 million a year earlier. Investing activities used $1.38 million, chiefly reflecting purchases of investment securities; financing activities used $3.10 million, mainly for dividends.
- Cash and cash equivalents were $8.74 million at December 31, 2011, down from $9.70 million at June 30, 2011. Investment securities were $3.19 million, compared with $1.95 million at June 30.
- Working capital was approximately $25.1 million. Current assets were $27.83 million and current liabilities $2.70 million. Management reported no borrowings during the last two fiscal years. Total liabilities were $2.94 million.
- Six-month dividends per share were reported at $1.45, unchanged from the comparable period; the quarter’s reported dividend was $1.225 per share.
Changes and operating developments
- Sales increased 25.6% for the quarter and 29% for the six months. Management attributed growth to higher shipments of power supplies on existing programs and, for the half-year, shipment of a high-power radar system.
- Quarterly gross margin improved to 26.4%; six-month margin edged down to 25.7% from 26.0%. Management cited the lower margin on the radar-system order as a factor in the half-year comparison. Product mix, contract maturity, and cost overruns can materially affect margins.
- SG&A declined slightly year over year for the six months, to $1.43 million. Net income rose in both comparison periods, reflecting higher sales and gross profit and, for the quarter, lower SG&A.
- New orders in the first six months of fiscal 2012 were approximately $13.8 million, down 44% from the prior-year period. Backlog was $36.1 million at December 31, 2011, versus $42.9 million a year earlier; $25.6 million was attributable to two customers.
Outlook, risks, and notable items
- Management expects fiscal 2012 net sales to exceed fiscal 2011, based on backlog and anticipated delivery schedules. Planned fiscal 2012 capital expenditures are approximately $300,000. Management believes operating cash flow and cash on hand will meet funding needs for the foreseeable future.
- Outstanding quotations and potential business totaled approximately $51.1 million, including $31.7 million for repeat programs and $19.4 million for new programs. These are not firm orders; the company cautioned that it may not win them and that defense spending and procurement affect awards.
- Customer concentration remains significant: three customers represented 67.9% of six-month sales, compared with 66.4% in the prior-year period. Management is pursuing diversification, but notes that the defense industry’s structure limits this effort.
- Risks include reliance on government and defense spending, competition and price pressure, supply or manufacturing constraints, customer acceptance and development of new products, contract terminations, and estimates of costs and completion under long-term contracts.
- A pending U.S. government audit relates to government contracts. The company accrued its best estimate within a range of possible outcomes and stated that none of the outcomes it identified was expected to materially adversely affect financial position or results.
- The company paid a $1.00-per-share special cash dividend in each of fiscal 2012 and fiscal 2011; it gave no assurance of a comparable special dividend in fiscal 2013. No contingent liabilities were outstanding under standby letters of credit at December 31, 2011.
- Management concluded disclosure controls were effective at period-end and reported no material change in internal control over financial reporting. No legal proceedings were listed.
Key facts for investors to verify
- Whether the $36.1 million backlog converts to scheduled revenue, particularly given the decline in new orders.
- Exposure to the two customers comprising $25.6 million of backlog and the broader concentration of sales among a few customers.
- Actual margins and costs on the high-power radar order and other developing or potentially loss-making contracts.
- Results and any financial consequences of the pending government audit, and the basis for the recorded accrual.
- Whether fiscal 2012 sales exceed fiscal 2011 and whether expected cash generation supports dividends and planned capital spending.