Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, the three months ended September 30, 2011. Comparisons are with the three months ended September 30, 2010 unless noted. The company designs and manufactures power electronics, primarily for military and severe-environment applications. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $7.99 million | $6.03 million | +32.7% |
| Gross profit | $2.00 million | $1.65 million | +21.3% |
| Gross margin | 25.0% | 27.4% | Down 2.4 percentage points |
| Operating income | $1.26 million | $0.96 million | +31.5% |
| Net income | $0.93 million | $0.75 million | +23.0% |
| Basic / diluted earnings per share | $0.43 / $0.42 | $0.35 / $0.35 | Higher |
| Operating cash flow | $1.63 million | $1.44 million | Higher |
Sales growth primarily reflected shipment of a high-power radar system that the company does not regularly build. That order had a lower gross margin than the prior-period average; product mix and contract maturity can materially affect margins. SG&A increased by $50,158, mainly due to salary expense and training. Interest income and other income declined. The effective tax rate was 28.5%, versus 28.2%.
Liquidity, cash flow and capital
- At September 30, 2011, cash and cash equivalents were $10.34 million and investment securities were $2.55 million. Current assets were $29.64 million and current liabilities were $2.87 million; reported working capital was approximately $26.8 million.
- Cash increased $0.64 million during the quarter. Investing activities used $0.63 million, principally reflecting net purchases of investment securities; financing activities used $0.36 million, including $0.49 million of dividends.
- Capital expenditures were $40,370 in the quarter; approximately $300,000 is budgeted for fiscal 2012. The company reported that it had not borrowed during the preceding three fiscal years and expects operating cash flow and available cash to meet foreseeable funding needs.
- Quarterly dividends were $0.225 per share, unchanged from the prior-year quarter. The company cautions that comparable special dividends are not assured.
Orders, outlook and risks
- New orders were approximately $9.4 million, up 38.5% year over year. Backlog was approximately $40.1 million at September 30, 2011, versus $31.8 million a year earlier. Management expects fiscal 2012 sales to exceed fiscal 2011 sales, based on backlog and anticipated order fulfillment.
- Outstanding quotations and potential business totaled approximately $49 million; these are not firm orders, and the company gives no assurance they will be won. Orders and outlook are exposed to U.S. defense appropriations, procurement decisions, competition and customer acceptance.
- Three significant customers accounted for 76.3% of quarterly sales, compared with 69.1% a year earlier. Two significant customers represented $27.2 million of backlog. Management says it is pursuing customer diversification, while noting limits from defense-industry concentration.
- A pending U.S. government audit concerns government contracting and accounting. The company accrued its best estimate within a range of possible outcomes and stated that none of the outcomes it considered would materially adversely affect financial position or results. The accrual amount is not specified in the filing text.
- Other stated risks include contract cost and completion estimates, supply or manufacturing constraints, price competition, and dependence on new orders. No outstanding standby-letter-of-credit contingent liabilities were reported at September 30, 2011. No legal proceedings were reported.
Important facts for investors to verify
- Whether the large radar shipment is a one-time sales boost and how subsequent product mix affects gross margins.
- Conversion of the $40.1 million backlog and approximately $49 million of quotations into shipped revenue and firm orders, including the timing and concentration of customer deliveries.
- The outcome and financial implications of the pending government audit; the filing does not state the accrued amount.
- Whether operating cash flow, the planned capital spending and dividend policy remain consistent with management’s liquidity outlook.