Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2019, the first quarter of fiscal 2020. The company designs and manufactures power electronics and related equipment, primarily for military, rail, and industrial applications.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $5.92 million | $8.34 million | Down 29.0% |
| Gross profit / margin | $1.14 million / 19.2% | $0.99 million / 11.9% | Margin up 7.3 percentage points |
| Operating income (loss) | $52,136 | $(16,610) | Returned to operating profit |
| Net income | $81,776 | $61,671 | Up 32.6% |
| Diluted earnings per share | $0.03 | $0.03 | Unchanged |
| Operating cash flow | $3.73 million | $(1.63) million | Improved |
Cash and cash equivalents were $4.66 million at quarter-end, versus $1.46 million at June 30, 2019; investment securities were $5.57 million. Working capital was approximately $28.0 million. Total liabilities were $4.35 million; the company reported no borrowings and had a $3.0 million credit line, with no borrowing anticipated in the foreseeable future. Capital expenditures were $94,070. The company paid a regular dividend of $0.25 per share; the prior-year quarter included a $1.00 special dividend in addition to the $0.25 regular dividend.
Comparisons and operating developments
- Sales fell mainly because of lower build-to-print sales. Gross profit and margin increased largely because spending on a specific engineering design contract declined versus the prior-year quarter; lower sales partly offset the benefit.
- Accounts receivable declined to $6.65 million from $11.00 million at June 30, contributing substantially to operating cash generation. Inventory increased to $14.84 million from $13.23 million.
- Backlog was approximately $46.6 million, broadly level with $46.7 million a year earlier. Approximately $43.9 million was funded and $2.7 million unfunded. Management expected at least $29.2 million of the September backlog to ship in fiscal 2020.
- Three customers generated 56.7% of quarterly sales, compared with two customers generating 62.5% in the prior-year quarter. Five significant customers accounted for $29.5 million of backlog.
Outlook, risks, and contingencies
- Management expected fiscal 2020 revenue to approximate fiscal 2019 revenue and gross margin to exceed fiscal 2019, citing the expected cost and product mix of backlog shipments. New orders in the quarter were approximately $7.0 million, versus $6.9 million a year earlier.
- Management reported ongoing technical and scheduling delays in major development programs, along with design changes, supplier non-conformances, and longer lead times for parts. It said the delays were being addressed and were not expected to affect fiscal 2020 customer-order fulfillment projections.
- Execution risks include contract cost overruns, engineering delays, competition and pricing, supply constraints, customer concentration, and dependence on government budgets and appropriations. Approximately $5.6 million of backlog related to engineering programs; unfunded orders depend on future customer or government funding.
- Outstanding sales opportunities totaled approximately $55 million as of November 5, 2019, but the filing cautions there is no assurance these opportunities will become orders.
- The company disclosed ordinary-course litigation and government-contract audit exposure, but management did not expect these matters to have a material adverse effect. Standby letter-of-credit contingencies were zero. Management stated disclosure controls were effective and reported no material change in internal controls.
Important facts for investors to verify
- Whether backlog converts to shipments and revenue on the schedule management projected, particularly given engineering and supplier delays.
- Whether the higher gross margin is sustainable as product mix and engineering-program costs change.
- Customer concentration, funding status of the unfunded backlog, and reliance on government appropriations.
- Quarterly cash generation’s dependence on working-capital movements, including collections, inventory, and contract advances.
- Progress toward fiscal 2020 revenue and margin expectations; the filing provides no numerical revenue or margin guidance.