Business Context and Reporting Period
Company: Espey Mfg. & Electronics Corp.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2011
Business Overview: A smaller reporting company specializing in power electronics design and original equipment manufacturing (OEM) for military and severe environment applications. Primary products include power supplies, converters, transformers, and radar systems. The company operates a vertically integrated facility in Saratoga Springs, New York.
Key Financial Metrics
| Metric | Three Months Ended Mar 31, 2011 | Nine Months Ended Mar 31, 2011 |
|---|---|---|
| Net Sales | $7,005,795 | $19,613,467 |
| Gross Profit | $2,047,156 (29.2% margin) | $5,322,487 (27.1% margin) |
| Operating Income | $1,383,612 | $3,222,460 |
| Net Income | $1,012,031 | $2,415,317 |
| Diluted EPS | $0.46 | $1.11 |
| Cash and Cash Equivalents | $7,971,634 (as of Mar 31, 2011) | |
| Working Capital | ||
| Total Debt | None reported (No borrowings in last 3 years) |
Material Changes vs. Prior Period
- Revenue: Net sales increased 0.7% for the quarter compared to the prior year but decreased 0.4% for the nine-month period. The quarterly increase was driven by higher power supply shipments, offset by lower antenna and spare part sales.
- Profitability: Net income rose 25.1% for the quarter and 4.3% for the nine-month period. The quarterly improvement was primarily due to a favorable product mix (higher margin mature products) and a $89,870 reduction in selling, general, and administrative (SG&A) expenses.
- Backlog: Backlog increased to $41.5 million at March 31, 2011, from $33.1 million in the prior year. New orders received in the first nine months of fiscal 2011 were approximately $30.1 million, a 120% increase year-over-year.
- Liquidity: Cash and cash equivalents increased significantly from $4.48 million to $7.97 million, driven by strong operating cash flows ($3.8 million) and net proceeds from short-term investment maturities.
Guidance, Outlook, and Risks
- Outlook: Management expects sales for fiscal 2011 to remain in line with fiscal 2010 sales, supported by the current backlog and outstanding quotations totaling approximately $45 million.
- Dividends: The company paid $1.6750 per share in dividends for the nine-month period. While the company anticipates continuing quarterly dividends, there is no assurance regarding future special cash dividends.
- Risks:
- Customer Concentration: Sales are highly concentrated; two customers accounted for 69.7% of sales in the quarter and 61.1% for the nine-month period.
- Government Dependence: Significant reliance on U.S. and foreign government appropriations and defense spending allocations.
- Contract Risks: Subject to government termination of orders for convenience and audit claims regarding procurement compliance.
- Unusual Items: Other income increased due to scrap sales and funds received from an insurance claim.
Investor Verification Checklist
- Verify the sustainability of the 120% increase in new orders and the conversion rate of the $45 million in outstanding quotations.
- Monitor the concentration risk associated with the top two customers representing nearly 70% of quarterly sales.
- Confirm the timing of contract shipments, as revenue fluctuations are heavily dependent on the specific delivery schedules of large contracts.
- Review the company's ability to maintain gross margins if the product mix shifts back toward early-stage engineering development contracts.
- Assess the impact of potential government budget cuts on the $29.9 million of backlog attributed to three specific customers.