Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Period: The filing covers the quarter and nine months ended March 31, 2018 (fiscal 2018 third quarter), not 2017 Q3 as stated in the request metadata. Financial statements are unaudited.
Business context and results
Espey designs and manufactures power electronics, transformers, and related equipment, primarily for military, rail, and industrial applications. The company reports that its business is not seasonal, but results depend on contract timing, product mix, customer demand, and government funding.
| Metric | Three months ended March 31, 2018 | Year-over-year | Nine months ended March 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Net sales | $5.66 million | Up 6.4% | $24.69 million | Up 44.7% |
| Gross profit / margin | $1.26 million / 22.2% | Up from 21.2% | $5.79 million / 23.5% | Up from 20.8% |
| Operating income | $360,075 | Up from $343,916 | $3.04 million | Up from $1.24 million |
| Net income | $317,764 | Up from $279,173 | $2.38 million | Up from $944,076 |
| Diluted EPS | $0.14 | Up from $0.12 | $1.02 | Up from $0.41 |
Management attributed higher sales principally to shipments under a new significant military power-supply contract, partly offset by lower magnetic-product shipments due to contract timing and completion. Improved gross margins reflected product mix and, for the nine-month period, higher sales. SG&A increased to $895,129 for the quarter and $2.76 million for nine months, mainly due to compensation and professional-service costs, with outside selling expense and freight also contributing to the nine-month increase.
Cash flow, liquidity, and capital
- Operating cash flow was $1.11 million for the nine months, versus $4.93 million a year earlier. Management cited higher receivables and inventory and lower accounts payable, partly offset by higher earnings.
- Cash and equivalents were $6.91 million at March 31, 2018, down from $10.06 million at June 30, 2017. Investment securities were $11.40 million, up from $9.43 million. Cash plus investments totaled approximately $18.31 million.
- Working capital was approximately $30.0 million. Current assets were $33.13 million and current liabilities were $3.08 million. The filing reports no outstanding debt; the company has a $3.0 million line of credit and management does not anticipate borrowing in the foreseeable future.
- Investing cash outflow was $2.61 million, including $632,023 of capital expenditures; financing cash outflow was $1.65 million, primarily dividends. Capital spending budgeted for fiscal 2018 was approximately $2.5 million, with $533,100 of purchase commitments at March 31.
- Dividends were $0.25 per share for the quarter and $0.75 per share for nine months, unchanged from the comparable periods. Management cautions there is no assurance the dividend will be maintained.
Backlog, outlook, risks, and notable items
- Backlog was approximately $47.0 million at March 31, 2018, versus $38.7 million a year earlier. Approximately $42.5 million was funded and $4.5 million unfunded. Management expected fiscal 2018 revenue to exceed fiscal 2017, driven primarily by existing backlog and the new military contract; it anticipated at least $7.0 million of March 31 backlog would ship by June 30, excluding later orders.
- New orders for the first nine months were approximately $28.6 million, versus $16.8 million in the prior-year period. Outstanding quoted opportunities exceeded $68.4 million as of May 1, 2018; these are opportunities, not secured orders.
- Customer concentration is material: two customers accounted for 50.6% of quarterly sales and 58.6% of nine-month sales, compared with 40.7% and 43.2%, respectively, in the prior-year periods. Management warns that losing a major customer or program could significantly affect results.
- Management reported technical and schedule delays in major development programs. Delays, cost overruns, engineering execution, product acceptance, pricing pressure, supply constraints, and reliance on defense appropriations and rail-industry demand could delay backlog conversion or reduce profitability. Engineering programs represented $8.8 million of backlog.
- The Tax Cuts and Jobs Act contributed to lower effective tax rates: 23.6% for the quarter and 25.2% for nine months, versus 28.7% and 29.0%. The company recorded a provisional $35,200 tax expense in the second quarter for deferred-tax remeasurement.
- The company expected to adopt the new revenue-recognition standard on July 1, 2018 using the modified retrospective method and did not expect a material impact. Existing long-term contract revenue recognition relies on percentage of completion using units of delivery and management estimates of contract costs and schedules.
- Government contract audits and investigations are possible; noncompliance could result in contract termination, damages, penalties, or suspension/debarment. No standby letter-of-credit contingent liabilities were outstanding at March 31, 2018. The filing reports no legal proceedings.
Most important facts for investors to verify
- Whether the military contract and backlog convert to shipments and revenue on expected schedules, particularly given reported development delays and $4.5 million of unfunded backlog.
- Whether customer concentration remains elevated and whether major programs or customers change or are lost.
- Whether higher sales and margins persist as product mix shifts, engineering investments continue, and SG&A and capital spending rise.
- Whether operating cash flow improves as receivables, inventory, and supplier-payment timing normalize.
- The realized effect of revenue-standard adoption, tax-law adjustments, and any changes to the dividend or capital-allocation plans.