Espey Mfg. & Electronics Corp. — Q2 FY2022 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2021. Espey designs and manufactures power electronics and related equipment, primarily for military, rail, and industrial applications. Results are unaudited.
Financial results
| Metric | Three months ended Dec. 31, 2021 | Year-over-year comparison | Six months ended Dec. 31, 2021 | Year-over-year comparison |
|---|---|---|---|---|
| Net sales | $7.46 million | Up from $6.96 million | $15.00 million | Up from $14.23 million |
| Gross profit / margin | $1.21 million / 16.2% | Up from $0.71 million / 10.2% | $2.56 million / 17.1% | Up from $1.84 million / 12.9% |
| Operating income (loss) | $20,649 | Compared with $(232,017) | $378,925 | Compared with $(19,269) |
| Net income (loss) | $21,201; $0.01 per share | Compared with $(181,006); $(0.08) per share | $327,262; $0.14 per share | Compared with $8,817; $0.00 per share |
For the six months, net cash provided by operating activities was $277,858, versus $2.93 million a year earlier. Investing activities used $62,288, compared with providing $1.91 million; financing activities used no cash, versus $1.20 million used for dividends in the prior period. Cash and cash equivalents were $7.02 million at December 31, 2021, and investment securities were $3.06 million.
At December 31, 2021, total assets were $38.19 million, current assets $35.35 million, current liabilities $7.30 million, and stockholders’ equity $30.75 million. Management reported working capital of approximately $28.1 million, compared with $27.1 million at December 31, 2020. The filing reports no borrowings in the last two fiscal years; a $3.0 million line of credit was available and due to expire February 28, 2022, with management expecting renewal.
Material changes and drivers
- Higher gross profit reflected stronger magnetic and build-to-print shipments and product mix. The prior-year comparison also benefited from the absence of an inventory write-down tied to a customer-cancelled airline contract.
- SG&A increased to $1.19 million for the quarter and $2.18 million for the six months. Management cited senior-management transition costs, recruiting and vacancies, stock-option and ESOP costs, professional services, and travel.
- Revenue gains were partly constrained by component shortages and longer lead times, COVID-related supplier and workforce disruptions, engineering changes, supplier non-conformances, and delays in customer approvals.
- The regular quarterly dividend was suspended effective March 9, 2021; no dividends were paid in the current six-month period, versus $0.50 per share in the prior-year period.
Outlook, risks, and contingencies
- Management expects FY2022 revenue to exceed FY2021 revenue and expects positive EPS versus a FY2021 loss, based on existing backlog. It expects FY2022 new orders to approximate FY2021’s $38.5 million; first-half FY2022 orders were approximately $19.5 million versus $19.4 million a year earlier.
- Backlog was approximately $70.1 million at December 31, 2021, including $69.7 million funded; approximately $45.8 million was attributable to four significant customers. Management projected 30% of backlog for FY2022, 43% for FY2023, 21% for FY2024, and 6% thereafter. Approximately $21 million of backlog was anticipated to ship in the fiscal year ending June 30, 2022, subject to stated constraints.
- Engineering and delivery delays, cost overruns, component shortages, workforce constraints, customer concentration, competition and pricing pressure, and dependence on government funding may affect sales, margins, and backlog conversion. Four customers accounted for 59% of quarterly sales; five accounted for 67% of six-month sales.
- Management said cash from operations and available cash should meet foreseeable funding needs. Planned FY2022 capital spending was approximately $200,000. There were no pending litigation matters reported, and standby letter-of-credit contingencies were zero.
- Management identified no material weakness: disclosure controls were effective and there were no material changes in internal control over financial reporting. Effective January 1, 2022, the company entered a one-year employment agreement with its Corporate Secretary, Director of Human Resources and Facility Security Officer, at a $140,400 annual base salary, with discretionary bonus eligibility and specified severance provisions.
Key facts for investors to verify
- Whether the line of credit was renewed after its February 28, 2022 expiration.
- Whether component supply, staffing, and engineering delays improved and backlog converted to shipments on schedule and at expected margins.
- Whether projected FY2022 revenue, earnings, and new orders were achieved, and whether customer concentration changed.
- Whether suspended dividends remain in place and how cash generation and working capital develop.