Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Business context and period: Espey designs and manufactures power electronics and related equipment, primarily for military and severe-environment applications. This report covers the three months ended September 30, 2014, the first quarter of fiscal 2015, and compares results with the quarter ended September 30, 2013.
Financial performance and position
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $5.69 million | $6.92 million |
| Gross profit / gross margin | $1.81 million / 31.8% | $2.20 million / 31.7% |
| Operating income | $1.21 million | $1.43 million |
| Net income | $911,221 | $1.05 million |
| Diluted earnings per share | $0.40 | $0.46 |
| Operating cash flow | $688,594 | $2.41 million |
| Capital expenditures | $18,588 | $328,311 |
At September 30, 2014, cash and cash equivalents were $9.87 million, investment securities were $4.49 million, and total current assets were $30.17 million. Current liabilities were $2.70 million; working capital was approximately $27.5 million, compared with $30.1 million at September 30, 2013. Total liabilities were $2.95 million, and the company reported no borrowings. It had a $3.0 million line of credit available and said it did not expect to need to borrow in the foreseeable future. Cash increased $315,271 during the quarter to $9.87 million.
The quarterly dividend was $0.25 per share, unchanged from the prior-year quarter. The company repurchased 9,909 shares for $234,834 and had authorization to repurchase an additional $1.47 million of stock.
Changes versus the prior comparable period
- Sales declined 17.7%, primarily due to lower electromechanical and transformer shipments. Net income fell approximately 13.1%.
- Gross margin remained broadly stable at 31.8%, versus 31.7%. SG&A decreased by $169,773, primarily due to lower salary expense associated with fewer employees.
- Operating cash flow decreased to $688,594 from $2.41 million. The filing cites changes in collections, taxes, inventory, and payments; the current quarter included an $838,678 increase in receivables, partly offset by a $742,429 increase in accounts payable.
- Backlog was approximately $35.1 million at September 30, 2014, down from $40.5 million a year earlier. New orders were approximately $5.0 million, versus $5.4 million.
Outlook, risks, and other notable items
- Management expects fiscal 2015 net sales to be lower than fiscal 2014. It anticipated shipping at least $18 million of orders from the June 30, 2014 backlog during fiscal 2015; this estimate is subject to change and excludes later orders.
- Backlog included $2.3 million of unfunded orders, compared with none a year earlier. Management considered the programs likely to be funded, but noted that future funding is not assured. The company also reported approximately $21 million of outstanding quoted opportunities, with no assurance they will result in orders.
- Management cited uncertainty in U.S. defense spending, procurement delays, pricing pressure and competition, as well as uncertainty about whether development programs will proceed to production. Sales to two customers represented 58.6% of quarterly sales, creating customer and program concentration risk.
- A pending U.S. government audit is being addressed through an accrual for management’s best estimate of a possible outcome. The company said none of the outcomes it considered would be materially adverse to financial position or results. Standby letters of credit had no contingent liabilities outstanding.
- Management expected approximately $200,000 of fiscal 2015 capital expenditures, primarily to expand transformer production capability. It cautioned that future regular or special dividends are not assured.
- The company was evaluating the impact and transition method for the new revenue recognition standard, ASU 2014-09. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the backlog converts to funded orders and shipments on the expected schedule, particularly given the forecast of lower fiscal 2015 sales.
- Customer concentration, defense-budget exposure, and the potential effects of competitive pricing and program delays on future margins.
- The trajectory of receivables, operating cash flow, and working capital as sales and contract activity change.
- The eventual resolution and financial impact, if any, of the pending government audit.
- Whether the board maintains the regular dividend or authorizes future special dividends or share repurchases.