Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: The filing covers the quarter ended March 31, 2015, and the nine months then ended (fiscal 2015 Q3). Although the request metadata says 2014 Q3, the filing itself reports fiscal 2015. Dollar amounts are U.S. dollars.
Business context
Espey designs and manufactures power electronics and related equipment, primarily for military and severe-environment applications. Its business includes U.S. and foreign government and industrial customers; sales are not described as seasonal.
Financial performance
| Metric | Three months ended March 31, 2015 | Three months ended March 31, 2014 | Nine months ended March 31, 2015 | Nine months ended March 31, 2014 |
|---|---|---|---|---|
| Net sales | $6.47 million | $6.55 million | $17.86 million | $20.04 million |
| Gross profit / margin | $1.44 million / 22.2% | $1.68 million / 25.6% | $5.51 million / 30.8% | $4.77 million / 23.8% |
| Operating income | $0.67 million | $0.92 million | $3.51 million | $2.45 million |
| Net income | $0.51 million | $0.71 million | $2.64 million | $1.87 million |
| Diluted earnings per share | $0.22 | $0.31 | $1.15 | $0.82 |
| Dividends per share | $0.25 | $0.25 | $0.75 | $1.75 |
For the nine-month period, operating cash flow was $1.26 million, compared with $3.42 million a year earlier. Investing activities provided $0.50 million, versus using $1.41 million; financing activities used $1.88 million, versus $3.63 million. Cash declined $0.12 million to $9.44 million during the nine months.
Financial position and liquidity
- At March 31, 2015, cash and cash equivalents were $9.44 million and investment securities were $4.25 million. Total assets were $33.74 million.
- Current assets of $31.24 million less current liabilities of $3.10 million imply working capital of approximately $28.14 million. Total liabilities were $3.30 million; the company reported no borrowings in the prior two fiscal years.
- Management had a $3.0 million credit line available and did not anticipate borrowing in the foreseeable future. It expected operating cash flow and existing cash to meet foreseeable funding needs.
- Capital spending was $0.16 million year to date; approximately $0.25 million was budgeted for fiscal 2015, mainly to expand transformer production capability.
Material changes and management commentary
- Quarterly sales decreased 1.2%; nine-month sales decreased 10.9%. Management attributed the nine-month decline principally to lower build-to-print and power-supply shipments, including completion of a large spares order that was filled mainly in fiscal 2014.
- Nine-month gross profit rose despite lower sales, primarily because fiscal 2015 had substantially fewer loss contracts than fiscal 2014, when losses on several programs occurred before those programs were cancelled. In the March quarter, lower build-to-print revenue and product mix reduced gross profit and margin.
- Nine-month SG&A fell to $2.00 million from $2.32 million, mainly due to lower salary expense following workforce reductions. Quarterly SG&A was broadly unchanged and included one-time hiring-agreement costs.
- New orders received in the first nine months were approximately $20.5 million, compared with $10.1 million in the prior-year period. Backlog was approximately $38.4 million at March 31, 2015, versus $31.9 million a year earlier; $2.3 million was unfunded. Management expected at least $7.5 million of the March 31 backlog to ship by June 30, 2015.
- Management expected fiscal 2015 net sales to be below fiscal 2014. It cited competitive pricing pressure, possible lower margins on new and legacy business, and the cost of investing in upfront design work to compete for longer-term programs. Approximately $33 million of outstanding quotations and opportunities was not guaranteed to result in orders.
Risks, contingencies, and unusual items
- Customer concentration is significant: two customers represented 63.8% of quarterly sales; three customers represented 59.5% of nine-month sales. Management noted that losing a major customer or program could materially affect results.
- The company depends on government appropriations, program funding, and procurement timing. Development work may not lead to production, and production can be delayed indefinitely or not occur. Government contracts may be audited or investigated, and noncompliance can result in sanctions or loss of contract eligibility.
- Revenue recognition on many fixed-price contracts uses percentage of completion measured by units delivered. Estimates of contract costs, sales, technical issues, and delivery schedules involve judgment; revisions can affect current-period earnings.
- No contingent liabilities on standby letters of credit were outstanding at March 31, 2015. Legal proceedings were reported as none. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
- The prior-year nine-month dividend per share included a $1.00 special dividend. The board had not declared a special dividend for fiscal 2015 and gave no assurance about future dividend levels.
Important facts for investors to verify
- Whether backlog, especially the $2.3 million unfunded portion, receives funding and converts to shipments on management’s expected schedule.
- Whether customer concentration and government-program dependence change, and how any lost or delayed programs affect revenue and margins.
- Whether the improved year-to-date gross margin is sustainable as product mix changes and competitive pricing pressure continues.
- Whether inventory growth and lower operating cash flow reverse as contracts progress and receivables are collected.
- Future capital spending, share repurchases, and regular or special dividend decisions; the filing does not guarantee future dividends.