Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2015. Comparisons are with the corresponding 2014 periods unless noted. Espey designs and manufactures power electronics and related equipment, principally for military and severe-environment applications.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Six months ended Dec. 31, 2015 | Six months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Net sales | $7.24 million | $5.70 million | $13.52 million | $11.39 million |
| Gross profit / margin | $1.59 million / 21.9% | $2.26 million / 39.6% | $3.56 million / 26.3% | $4.07 million / 35.7% |
| Operating income | $0.83 million | $1.63 million | $2.05 million | $2.84 million |
| Net income | $0.61 million | $1.22 million | $1.49 million | $2.13 million |
| Diluted earnings per share | $0.27 | $0.54 | $0.65 | $0.93 |
| Dividends per share | $0.25 | $0.25 | $0.50 | $0.50 |
- Quarterly sales increased approximately 27%, and six-month sales increased approximately 19%, mainly from higher shipments of power supplies and magnetics, partly offset by lower spare-part sales.
- Profitability weakened despite higher sales: quarterly net income fell about 50% and six-month net income about 30%. Management cited unfavorable product mix, competitive pricing and investment in new programs, higher SG&A, and a prior-year one-time $560,000 reduction in cost of sales from a contract settlement.
- SG&A rose to $0.75 million for the quarter and $1.50 million for six months, primarily due to higher compensation, professional fees and outside selling costs. The six-month effective tax rate was 29.4%, versus 25.9%, mainly reflecting a reduced tax benefit related to deductible ESOP dividends.
Financial position, cash flow and capital
- At December 31, 2015, cash and cash equivalents were $9.55 million and investment securities were $5.22 million. Total assets were $33.46 million; working capital was approximately $28.9 million.
- Total liabilities were $2.37 million, including $2.19 million of current liabilities. The company reported no borrowings in the last two fiscal years and had a $3.0 million line of credit available; management did not anticipate borrowing in the foreseeable future.
- Six-month operating cash flow was $3.82 million, up from $1.64 million. Cash increased $0.69 million to $9.55 million. Investing activities used $1.15 million, and financing activities used $1.98 million, principally for dividends and treasury-stock purchases.
- Capital expenditures were $82,341 in the first half; approximately $250,000 was budgeted for fiscal 2016. The company repurchased 14,303 shares for $355,418 and had authorization to purchase a further $1.03 million of stock as of December 31.
Outlook, risks and other notable items
- Management expected fiscal 2016 revenue to increase approximately 6% versus fiscal 2015, while gross margins were expected to be lower because of product mix, competitive pricing, new-program investment and the prior-year one-time cost-of-sales benefit.
- Backlog was approximately $43.0 million at December 31, 2015, including $27.4 million from two significant customers. Management expected at least $13 million of that backlog to be filled during fiscal 2016. Backlog included a $10.1 million government delivery order, with revenue not expected until fiscal 2017. New orders in the first half were approximately $20.2 million, compared with $16.8 million a year earlier; outstanding quotations exceeded $50.2 million as of February 1, 2016. Orders and quotations are not assured.
- Customer concentration is significant: two customers represented 54.7% of six-month sales, versus 50.7% a year earlier. The filing warns that loss of a major customer or program could materially affect results.
- Other risks include reliance on government appropriations and program funding, potential contract termination, competition and price erosion, timely product development and acceptance, and supply or manufacturing constraints. Government audits and investigations of government contractors may result in sanctions, contract termination or debarment if requirements are not met.
- Standby letter-of-credit contingent liabilities were zero at December 31, 2015. The company reported no legal proceedings. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
- The company was evaluating the impact of the new revenue-recognition standard and deferred-tax classification guidance; it did not expect the new inventory measurement standard to have a material impact.
Important facts for investors to verify
- Whether the expected fiscal 2016 sales growth and margin outlook are being achieved, especially given the sharp year-over-year margin decline.
- Timing, funding and conversion of the $43.0 million backlog, including the $10.1 million government delivery order and the expected fiscal 2017 revenue.
- Ongoing dependence on a small number of customers and defense-related appropriations, and the status of new orders and quoted opportunities.
- Share-count discrepancy in the filing: the cover reports 2,354,184 shares outstanding at February 11, 2016, while the balance sheet reports 2,352,184 shares outstanding at December 31, 2015 and the cover text elsewhere in the supplied filing gives a different date. Verify against the original filing and subsequent disclosures.