Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: The filing covers the three and nine months ended March 31, 2021, the company’s fiscal third quarter of 2021. The request metadata says “2020 Q3,” but that does not match the filing period.
Business context
Espey designs and manufactures power electronics and related equipment, primarily for military, rail, industrial, and severe-environment applications. It is a smaller reporting company listed on NYSE American under ESP. Results are unaudited.
Financial performance
| Metric | Three months ended Mar. 31, 2021 | Three months ended Mar. 31, 2020 | Nine months ended Mar. 31, 2021 | Nine months ended Mar. 31, 2020 |
|---|---|---|---|---|
| Net sales | $4.21 million | $6.19 million | $18.43 million | $19.40 million |
| Gross profit (loss) | $(0.19) million | $0.91 million | $1.65 million | $3.53 million |
| Gross margin | (4.5)% | 14.7% | 9.0% | 18.2% |
| Operating income (loss) | $(1.18) million | $(0.15) million | $(1.20) million | $0.14 million |
| Net income (loss) | $(1.07) million | $(0.10) million | $(1.06) million | $0.21 million |
| Basic and diluted EPS | $(0.44) | $(0.04) | $(0.44) | $0.09 |
| Operating cash flow | Not separately presented for the quarter | $2.19 million | $4.93 million |
Lower quarterly and year-to-date sales reflected reduced power-supply and magnetic-product sales, rail-market softness, and constraints on manufacturing and shipments. Gross profit was also pressured by higher estimated costs on two engineering and production contracts and an inventory write-off after an airline-industry customer cancelled a contract. The filing does not provide a clear dollar amount for that write-off.
Liquidity, balance sheet, and capital
- At March 31, 2021, cash and cash equivalents were $8.49 million and investment securities were $3.01 million, versus $5.40 million and $5.14 million, respectively, at June 30, 2020.
- Current assets were $33.64 million and current liabilities $7.49 million; reported working capital was $26.1 million. Total assets were $36.74 million and total liabilities $7.67 million.
- The balance sheet reports no bank borrowings. The company has a $3.0 million credit line and said it did not anticipate borrowing in the foreseeable future. It believes operating cash flow and cash on hand will meet funding needs.
- Nine-month investing cash flow was positive $2.10 million, mainly reflecting investment maturities not reinvested; financing cash outflow was $1.20 million, primarily dividends.
- The company suspended its regular quarterly dividend effective March 9, 2021. Dividends paid during the first nine months were $0.50 per share, versus $0.75 in the prior-year period.
Backlog, outlook, and risks
- Backlog was $67.3 million at March 31, 2021, up from $59.8 million a year earlier. About $65.2 million was funded and $2.1 million unfunded. Five significant customers accounted for $43.6 million of backlog.
- Management expected fiscal 2021 revenue and EPS to be below fiscal 2020 levels, citing pandemic-related workforce and supplier constraints, the cancelled airline contract and inventory write-off, and increased costs on programs. It expected fiscal 2021 new orders to exceed fiscal 2020’s $40.9 million; orders received in the first nine months were $30.8 million.
- Management anticipated shipping at least $12.8 million of the March 31 backlog during the fiscal year ending June 30, 2021. It also cited approximately $90 million of outstanding quoting opportunities as of May 3, 2021, with no assurance of award.
- A COVID-19 exposure led to an approximately 10-day facility shutdown in March 2021; operations resumed below full capacity and the company reported continued workforce and supply-chain disruptions. Management said it was then fully operational and did not expect identified program delays to harm fulfillment projections for the remainder of fiscal 2021 or fiscal 2022.
- Sales concentration is substantial: five customers represented 66.1% of quarterly sales, and four customers represented 57.3% of nine-month sales. Government funding, customer/program concentration, contract changes or cancellations, cost overruns, technical delays, and component shortages are key risks.
- The company reported no pending litigation matters and no contingent liabilities on standby letters of credit. It remains subject to government contract audits and related potential sanctions. 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 sharp margin decline and losses reflect temporary shipment disruption or persistently higher contract costs and weaker product mix.
- Progress in resolving engineering, supplier, and workforce constraints, including conversion of the $67.3 million backlog into shipments and cash collections.
- Funding and timing for the $2.1 million of unfunded backlog, and the extent to which customer concentration affects order continuity.
- The financial effect and potential recovery, if any, related to the cancelled airline-industry contract and inventory write-off; the filing does not quantify the write-off clearly.
- Effects of the dividend suspension and the ESOP share purchase: the ESOP bought 300,000 shares for $5.49 million using a 15-year loan from the company at 3% interest.
- Actual full-year results versus management’s outlook, including whether new orders exceeded fiscal 2020’s $40.9 million.