Business context and reporting period
Espey Mfg. & Electronics Corp. designs and manufactures power electronics and related equipment, primarily for military, rail, and other severe-environment applications. This filing covers the quarter and nine months ended March 31, 2017, in the fiscal year ending June 30, 2017. The request metadata says “2016 Q3,” but the filing itself reports fiscal 2017 Q3.
Financial performance and position
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $5.32 million, down 26.2% from $7.22 million | $17.06 million, down 17.7% from $20.74 million |
| Gross profit and margin | $1.13 million; 21.2%, versus $2.15 million and 29.8% | $3.55 million; 20.8%, versus $5.70 million and 27.5% |
| Operating income | $344,000, versus $1.37 million | $1.24 million, versus $3.42 million |
| Net income and diluted EPS | $279,000; $0.12, versus $972,000 and $0.43 | $944,000; $0.41, versus $2.47 million and $1.08 |
Management attributed weaker results primarily to lower shipments, a scaled-back rail customer procurement plan, product mix, and engineering investment in a military power-supply program. That design investment reduced gross margin by 2.1 percentage points in the quarter and 3.1 points for the nine-month period. SG&A was broadly stable year over year. The nine-month effective tax rate was 29.0%, versus 29.5%.
For the nine months, operating cash flow was $4.93 million, compared with $4.45 million a year earlier. Investing used $3.96 million, chiefly reflecting purchases of investment securities; financing used $1.61 million, including $1.73 million of dividends. Cash declined $646,000 to $9.39 million. At March 31, cash and investment securities totaled $18.60 million. Working capital was approximately $29.7 million. Total liabilities were $2.14 million; the company reported no borrowings in the prior two fiscal years and said it had no foreseeable need to borrow. A $3 million credit line was available.
Material changes, outlook, and risks
- Backlog was approximately $38.7 million at March 31, down from $41.6 million a year earlier; two customers represented $20.4 million of current backlog. A subsequent April award of $8.4 million lifted backlog to more than $47 million. It was initially funded for $933,000, with further funding expected quarterly over four years.
- New orders for the first nine months were approximately $16.8 million, versus $26.0 million a year earlier. Management expects fiscal 2017 revenue to be below fiscal 2016. It anticipated at least $5.4 million of March-quarter backlog shipments in fiscal Q4, subject to change.
- A new military product had completed design and qualification, with full-rate production expected to begin in fiscal Q4; shipments awaited customer approval and delivery of a required technical manual. Qualification delays on another military program could delay production orders. Further government contract orders are not guaranteed and depend on funding approvals.
- Rail demand weakness, customer concentration, federal and foreign government spending and appropriations, competition and pricing pressure, new-product qualification and customer acceptance, and manufacturing or supply constraints could affect results. Two customers accounted for 43.2% of nine-month sales, versus 49.5% a year earlier.
- The company is subject to government contract audits and investigations; noncompliance could lead to contract termination, penalties, suspension, or debarment. No standby-letter-of-credit contingent liabilities were outstanding, and the filing reported no legal proceedings. 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 $8.4 million award receives expected funding and converts into shipments on schedule.
- Whether rail-sector demand and the significant customer’s procurement recover, and how customer concentration evolves.
- Whether military programs complete qualification and production ramp-up as expected, including the delayed program and technical-manual approval.
- Whether margins stabilize as product mix changes and engineering investment continues; management’s revenue outlook is not a guarantee.
- The timing and cash implications of the $0.75-per-share dividends paid during the nine-month period and planned fiscal 2017 capital expenditures of approximately $750,000.