Business context and reporting period
Espey Mfg. & Electronics Corp. designs and manufactures power electronics and related equipment, primarily for military and severe-environment applications. This Form 10-Q covers the three months ended September 30, 2015, the first quarter of fiscal 2016; comparisons are with the three months ended September 30, 2014.
Financial results and liquidity
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $6.279 million | $5.693 million |
| Gross profit / margin | $1.968 million / 31.3% | $1.810 million / 31.8% |
| Operating income | $1.219 million | $1.212 million |
| Net income | $878,530 | $911,221 |
| Diluted EPS | $0.38 | $0.40 |
| Cash from operations | $2.951 million | $688,594 |
Sales increased, primarily on higher shipments of power supplies and magnetics, partly offset by lower build-to-print sales. Gross profit rose, but gross margin eased. SG&A increased by $151,448, mainly from compensation and training costs; higher taxes also contributed to lower net income. The effective tax rate was 29.4%, versus 25.9%.
At September 30, 2015, cash and cash equivalents were $10.428 million and investment securities were $4.995 million. Current assets were $32.544 million, current liabilities $3.436 million, and working capital approximately $29.1 million. The company reported no borrowings and said it did not anticipate borrowing in the foreseeable future; a $3 million credit line is available. Total liabilities were $3.638 million. Cash increased $1.568 million during the quarter. Operating cash flow benefited substantially from a $2.575 million reduction in receivables, partly offset by higher inventory. Capital expenditures were $5,751; the company budgeted approximately $250,000 for fiscal 2016 equipment and plant improvements.
Material changes and operating position
Compared with the prior-year quarter, sales and gross profit increased, while gross margin and net income per share declined. Cash provided by operations increased from $688,594 to $2.951 million, primarily reflecting lower trade receivables. The company purchased more investment securities, resulting in $841,029 of net investing cash outflow, versus $397,290 of investing cash inflow in the prior-year quarter.
Backlog was approximately $33.6 million at September 30, 2015, compared with $35.1 million a year earlier. The current backlog includes $20.5 million from two significant customers; unfunded backlog was zero. A $10.1 million U.S. government order received September 8, 2015 is excluded pending a bid-protest decision expected on or before February 1, 2016. New orders in the quarter were approximately $3.4 million, excluding that order, versus $5.0 million in the prior-year quarter.
Outlook, risks, and other notable items
Management expects fiscal 2016 revenue to increase approximately 6% over fiscal 2015, with favorable product mix and margins. It expects at least $21 million of the September 30 backlog to be filled during fiscal 2016. Outstanding quotations and opportunities exceeded $41.7 million as of November 9, 2015; management cautioned that orders are not assured. The outlook is subject to customer demand, contract awards, and funding.
Two customers accounted for 60.4% of quarterly sales, versus 58.6% in the prior-year quarter, creating significant concentration risk. Management also cited uncertainty in defense spending, competition and price erosion, pressure on margins, new-product development and acceptance, and possible supply or manufacturing constraints. Long-term contract revenue and costs depend on estimates, including delivery progress and costs to completion. Government-contract audits and investigations could result in sanctions or contract termination if requirements are not met.
The company paid a quarterly dividend of $0.25 per share; management gave no assurance that future dividends will continue at the same level. Investment securities were available-for-sale, primarily certificates of deposit and municipal bonds; management considered unrealized losses temporary. No legal proceedings or standby letter-of-credit contingencies were reported. Management concluded disclosure controls were effective and reported no material change in internal controls over financial reporting.
Important facts for investors to verify
- Outcome and timing of the protest affecting the excluded $10.1 million government order.
- Conversion of backlog and the more than $41.7 million of quoted opportunities into funded contracts and recognized revenue.
- Whether customer concentration, defense-budget uncertainty, and competitive pricing continue to pressure sales and margins.
- Cash-flow sustainability, given the quarter’s significant receivables collection and inventory increase.
- Progress toward the fiscal 2016 revenue, product-mix, margin, and capital-spending expectations.