Espey Mfg. & Electronics Corp. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2022; filed February 13, 2023. Espey designs and manufactures power electronics and related products, principally for military, rail, and industrial applications.
Financial performance
| Metric | Three months ended Dec. 31, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Net sales | $8.80 million, up 18.0% | $17.44 million, up 16.2% |
| Gross profit / margin | $2.26 million / 25.7% | $4.07 million / 23.4% |
| Operating income | $1.39 million | $2.36 million |
| Net income | $1.15 million; $0.47 per share | $1.91 million; $0.78 per share |
- For the comparable 2021 periods, net sales were $7.46 million and $15.00 million; gross margins were 16.2% and 17.1%; and net income was $21,201 and $327,262, respectively.
- Six-month operating cash flow was $4.68 million, versus $278,000 in the prior-year period. The company attributed the improvement to higher earnings, collections of receivables and customer advances, and increased accounts payable, partly offset by higher prepaid assets.
- Cash and cash equivalents were $6.33 million at December 31, 2022, and investment securities were $10.07 million. Working capital was approximately $31.6 million. Total liabilities were $10.48 million; the balance sheet reported no borrowings.
- Six-month investing cash outflow was $6.46 million, primarily reflecting purchases of investment securities. Capital expenditures were $104,000.
Changes and operating drivers
- Revenue growth was driven mainly by higher shipments on power-distribution transformer contracts and sales on new or repeat programs. Supply-related delays and lower or absent shipments on certain power-supply, magnetic, and build-to-print programs partly offset growth.
- Gross profit and margins improved with sales growth, product mix, and manufacturing improvements on certain contracts. Current-period results were pressured by overruns on a power-supply engineering contract and test-related overruns on a build-to-print contract. Prior-year comparisons were also affected by cost overruns and an engineering-program inventory charge.
- SG&A declined by $311,000 for the quarter and $467,000 for the six-month period, mainly because the prior year included one-time senior-management transition expenses, along with lower board, selling, and recruiting costs.
- Backlog was approximately $78.3 million, up from $70.1 million a year earlier; $32,000 was unfunded. Six significant customers represented about $64.2 million of backlog. Management projected backlog revenue recognition of 24% in fiscal 2023, 49% in 2024, 13% in 2025, and 14% thereafter.
Outlook, risks, and other items
- Management expected fiscal 2023 revenue and earnings per share to exceed fiscal 2022 levels, based on backlog, while cautioning that consistent quarterly performance would be difficult. Fiscal 2023 new orders were expected to approximate fiscal 2022’s $43.2 million; first-half orders were about $19 million versus $19.5 million.
- Management cited inflation and shortages of electronic components, with some lead times approaching a year or more. Higher material, freight, utility, and labor costs may pressure operating income, especially on fixed-price contracts. The company is using purchasing strategies, customer price-remediation requests, and revised quotation validity and delivery lead times to mitigate cost and supply pressures.
- Four significant customers accounted for 69% of quarterly sales; five accounted for 83% of six-month sales. Loss or deferral of a major customer or program could materially affect results.
- The company had approximately $105 million of outstanding sales opportunities as of February 6, 2023, but there is no assurance they will become orders. Technical and schedule delays, design complexity, cost overruns, customer approvals, and government funding or contract changes may delay backlog conversion or reduce profitability.
- A subsequent event disclosed a $7.4 million U.S. Navy award for facility and equipment upgrades, with work at the company’s Saratoga Springs site expected to be completed in 2024. Payments are tied to milestones, expenses above milestone limits are not reimbursed, and the award may create an income-tax cash outlay.
- A $3.0 million credit line was available and expected to be renewed at its February 28, 2023 expiration; management did not anticipate borrowing. No standby letter-of-credit liabilities were outstanding. No pending litigation was identified as material. The company suspended its dividend, affecting the tax benefit otherwise associated with ESOP dividends.
Investor facts to verify
- Whether the $78.3 million backlog converts to revenue on schedule, including the small unfunded portion and programs subject to technical delays or government funding.
- Whether component availability and inflation continue to affect delivery timing, fixed-price contract costs, and margins.
- How concentrated revenue and backlog remain among major customers and programs.
- Renewal terms for the credit line and the cash-flow and tax implications of the Navy facility-upgrade award.