Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended September 30, 2018; comparisons are primarily with the three months ended September 30, 2017. The company designs and manufactures power electronics and related equipment, principally for defense, rail, and industrial markets.
Financial performance
| Metric | Three months ended Sep. 30, 2018 | Three months ended Sep. 30, 2017 |
|---|---|---|
| Net sales | $8.34 million | $7.50 million |
| Gross profit / gross margin | $0.99 million / 11.9% | $1.46 million / 19.5% |
| Operating income (loss) | $(16,610) | $582,334 |
| Income before taxes | $59,460 | $623,730 |
| Net income / diluted EPS | $61,671 / $0.03 | $442,764 / $0.19 |
| Net cash used in operating activities | $(1.63) million | $(0.20) million |
| Capital expenditures | $611,995 | $28,758 |
Sales increased approximately 11%, but gross profit fell about 32% and net income fell about 86%. Management attributed the margin decline principally to spending on a specific engineering design contract, which reduced the quarter’s gross margin by 8.6 percentage points. SG&A increased $130,724 to $1.01 million, primarily from added program-management compensation. Other income rose to $76,070, mainly from higher investment income. The tax line was a $2,211 benefit, versus $180,966 of tax expense a year earlier; management cited the option-exercise tax adjustment and ESOP-related benefits.
Financial position and liquidity
- At September 30, 2018, cash and cash equivalents were $6.34 million, investment securities $7.45 million, current assets $33.91 million, and current liabilities $7.31 million. Working capital was approximately $26.6 million, compared with $29.5 million at September 30, 2017.
- Total liabilities were $7.37 million and stockholders’ equity was $30.79 million. The filing reports no borrowings in the last two fiscal years; a $3.0 million line of credit was available, and management did not expect to need borrowing in the foreseeable future.
- Operating cash use reflected higher receivables and inventories, partly offset by higher accounts payable and lower prepaid expenses. Receivables increased $1.42 million and inventories increased $2.35 million during the quarter.
- Investing activities provided $3.46 million, mainly from investment maturities and sales; financing activities provided $200,123 from stock-option exercises. Cash increased $2.04 million to $6.34 million.
Material changes, outlook, and risks
- Sales growth was driven primarily by build-to-print work, partly offset by lower power-supply shipments, including timing differences on a military contract. The two largest customers accounted for 62.5% of quarterly sales, versus 73.9% in the prior-year quarter.
- Backlog was approximately $46.7 million at September 30, 2018, up from $42.6 million a year earlier; $43.6 million was funded and $3.1 million unfunded. Three significant customers represented $23.0 million of backlog. Management estimated at least $33.7 million of the September backlog would ship in fiscal 2019, subject to change; approximately $10 million of backlog was expected to be recognized after September 30, 2019.
- Management expected fiscal 2019 revenue to exceed fiscal 2018 revenue, but gross margin to be lower, primarily due to lower-margin orders already in backlog. New orders in the quarter were approximately $6.9 million, about the same as the prior-year quarter. Outstanding quotations exceeding $69.5 million were opportunities, not awarded orders.
- Management said recent technical and scheduling delays on major development programs had been resolved and did not then expect an adverse effect on fiscal 2019 fulfillment projections. Risks include further development delays or cost overruns, competitive pricing and margin pressure, customer concentration, and dependence on government appropriations and program funding.
- The company declared a regular $0.25-per-share dividend and a special $1.00-per-share dividend. The combined $2.995 million was recorded as a dividend payable at quarter-end and paid in the second fiscal quarter; no dividend cash payment occurred in this quarter.
- ASC 606 was adopted July 1, 2018 using the modified retrospective method, with no opening retained-earnings adjustment. Customer advances were reclassified from inventory to contract liabilities. The filing reports ordinary-course litigation and government-contract audit exposure, but management did not expect pending matters to have a material adverse effect; standby-letter-of-credit contingent liabilities were zero.
Important facts for investors to verify
- Whether engineering-contract spending, cost estimates, and the resulting margin pressure persist or ease in subsequent quarters.
- Conversion and timing of funded and unfunded backlog into shipments, including customer funding and milestone approvals.
- Sales concentration and the impact of orders from the two largest customers and government programs.
- Cash conversion and working-capital needs, particularly receivables and contract-related inventory, alongside the dividend and planned fiscal 2019 capital spending of approximately $750,000.
- The precise timing and basis for the declared special dividend and the filing’s reported dividend payable and subsequent payment.