ESPEY MFG & ELECTRONICS CORP

Previous wording

The total backlog at December 31, 2023 was approximately $84.8 million, which included $57.4 million from five significant customers, compared to $78.3 million at December 31, 2022, which included $64.2 million from six significant customers. The Company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts. The backlog at December 31, 2023 is fully funded except for $5.4 million, representing one firm follow-on multi-year order from a single customer. While there is no guarantee that future budgets and appropriations will provide funding for individual programs, management has included in the unfunded backlog only those programs that it believes are likely to receive funding based on program status and discussions with customers. The unfunded backlog at December 31, 2022 was approximately $32 thousand and represented one firm multi-year order from a single customer for which funding had not yet been appropriated by Congress and/or the customer had funded the program. Contracts are subject to modification, change or cancellation, and the Company accounts for these changes as they are probable and estimable. The Company evaluates the impact of any scope modifications and will adjust reserves as information is known and estimable.

Current wording

The total backlog at March 31, 2024 was $84.2 million, which included approximately $54.5 million from five significant customers, compared to $82.1 million at March 31, 2023, which included approximately $66.3 million from six significant customers. The Company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts. The backlog at March 31, 2024 is fully funded except for $3.3 million, representing one firm follow-on multi-year order from a single customer. While there is no guarantee that future budgets and appropriations will provide funding for individual programs, management has included in the unfunded backlog only those programs that it believes are likely to receive funding based on program status and discussions with customers. Contracts are subject to modification, change or cancellation, and the Company accounts for these changes as they are probable and estimable. The Company evaluates the impact of any scope modifications and will adjust reserves as information is known and estimable.

Previous wording

Successful conversion of engineering program backlog into sales is largely dependent on the execution and completion of our engineering design efforts. It is not uncommon to experience technical or scheduling delays which arise from time to time as a result of, among other reasons, design complexity, the availability of personnel with the requisite expertise, and the requirements to obtain customer approval at various milestones. Cost overruns which may arise from technical and schedule delays and increased raw material costs could negatively impact the timing of the conversion of backlog into sales, or the profitability of such sales. Engineering programs in both the funded and unfunded portions of the current backlog aggregate $8.9 million.

Current wording

Successful conversion of engineering program backlog into sales is largely dependent on the execution and completion of our engineering design efforts. It is not uncommon to experience technical or scheduling delays which arise from time to time as a result of, among other reasons, design complexity, the availability of personnel with the requisite expertise, and the requirements to obtain customer approval at various milestones. Cost overruns which may arise from technical and schedule delays and increased raw material costs could negatively impact the timing of the conversion of backlog into sales, or the profitability of such sales. Engineering programs in both the funded and unfunded portions of the current backlog aggregate $9.5 million.

Previous wording

The Company currently expects new orders in fiscal 2024 to be greater than those received in fiscal year 2023. As market factors including competition and product costs impact gross profit margins, management will continue to evaluate our sales strategy, employment levels, and facility costs.

Current wording

While our previously reported expectation that new orders in fiscal 2024 would exceed new orders in fiscal 2023 remains attainable, prolonged negotiations with certain customers may cause some anticipated orders to be completed in the next fiscal year. As market factors including competition and product costs impact gross profit margins, management will continue to evaluate our sales strategy, employment levels, and facility costs.

Previous wording

New orders received in the first six months of fiscal year 2024 were approximately $20.1 million as compared to approximately $19 million new orders received in the first six months of fiscal year 2023. It is presently anticipated that a minimum of $20.6 million of orders comprising the December 31, 2023 backlog will be filled during the fiscal year ending June 30, 2024 subject, however, to the impact of the factors identified above. The minimum of $20.6 million does not include any shipments, which may be made against orders subsequently received during the fiscal year ending June 30, 2024.

Current wording

New orders received in the first nine months of fiscal year 2024 were approximately $27.8 million as compared to $32.6 million new orders received in the first nine months of fiscal year 2023. It is presently anticipated that a minimum of $10.8 million of orders comprising the March 31, 2024 backlog will be filled during the fiscal year ending June 30, 2024 subject, however, to the impact of the factors identified above. The minimum of $10.8 million does not include any shipments, which may be made against orders subsequently received during the fiscal year ending June 30, 2024.

Previous wording

In addition to the backlog, the Company currently has outstanding opportunities representing approximately $78 million in the aggregate as of February 5, 2024 for both repeat and new programs*.*The outstanding quotations encompass various new and previously manufactured power supplies, transformers, and subassemblies. However, there can be no assurance that the Company will acquire any of the anticipated orders described above, many of which are subject to allocations of the United States defense spending and factors affecting the defense industry.

Current wording

In addition to the backlog, the Company currently has outstanding opportunities representing approximately $84 million in the aggregate as of May 6, 2024 for both repeat and new programs*.*The outstanding quotations encompass various new and previously manufactured power supplies, transformers, and subassemblies. However, there can be no assurance that the Company will acquire any of the anticipated orders described above, many of which are subject to allocations of the United States defense spending and factors affecting the defense industry.

Previous wording

A significant portion of the Company’s business is the production of military and industrial electronic equipment for use by the U.S. and foreign governments and certain industrial customers. Net sales to five significant customers represented approximately 86% of the Company’s total sales for the three-month period ended December 31, 2023. Net sales to four significant customers represented 69% of the Company’s total sales for the three-month period ended December 31, 2022. Net sales to five significant customers represented 82% of the Company’s total sales for the six-month period ended December 31, 2023. Net sales to five significant customers represented 83% of the Company’s total sales for the six-month period ended December 31, 2022. A loss of one of these customers or programs related to these customers, or customer requested deferrals of product delivery could significantly impact the Company.

Current wording

A significant portion of the Company’s business is the production of military and industrial electronic equipment for use by the U.S. and foreign governments and certain industrial customers. Net sales to four significant customers represented 79% of the Company’s total sales for the three-month period ended March 31, 2024. Net sales to two significant customers represented 60% of the Company’s total sales for the three-month period ended March 31, 2023. Net sales to four significant customers represented 74% of the Company’s total sales for the nine-month period ended March 31, 2024. Net sales to four significant customers represented 73% of the Company’s total sales for the nine-month period ended March 31, 2023. A loss of one of these customers or programs related to these customers, or customer requested deferrals of product delivery could significantly impact the Company.

Previous wording

Raw materials are valued at the lower of cost (average cost) or net realizable value. Balances for slow-moving and obsolete inventory are reviewed on a regular basis by analyzing estimated demand, inventory on hand, sales levels, market conditions, and other information and reduce inventory balances based on this analysis.

Current wording

Raw materials are valued at the lower of cost (average cost) or net realizable value. Balances for slow-moving and obsolete inventory are reviewed on a regular basis by analyzing estimated demand, inventory on hand, sales levels, market conditions, and other information. Inventory balances are reduced based on this analysis.

Previous wording

Net sales for the three months ended December 31, 2023 and 2022 were $10,302,541 and $8,804,109, respectively, a 17.0% increase. Net sales for the six months ended December 31, 2023 and 2022 were $18,870,755 and $17,439,904, respectively, an 8.2% increase. In general, sales fluctuations may occur during comparable fiscal periods as the direct result of product mix, directly influenced by the specific contractual terms of those firm orders placed including contract value, scope of work, and contract delivery schedules.

Current wording

Net sales for the three months ended March 31, 2024 and 2023 were $8,254,653 and $9,809,616, respectively, a 15.9% decrease. Net sales for the nine months ended March 31, 2024 and 2023 were comparable and totaled $27,125,408 and $27,249,520, respectively, a 0.5% decrease. In general, sales fluctuations may occur during comparable fiscal periods as the direct result of product mix, directly influenced by the specific contractual terms of those firm orders placed including contract value, scope of work, and contract delivery schedules.

Previous wording

For the three months ended December 31, 2023, the increase in sales when compared to the same period last year is primarily due to (i) increased shipments on a large multi-year magnetics contract for transformers, (ii) sales related to a new engineering design contract in which there were no sales in the prior comparable period, (iii) the shipment of a one-time build to print unit of which there were no sales in the prior year, and (iv) increased shipments on a contract for power supplies used in radar applications. These increases were offset, in part, by a decrease in sales on (i) several build to print contracts which had significantly fewer or no sales in the current reporting period as compared to the same period last year, and (ii) contracts related to a family of power distribution transformers for a single customer primarily due to specified contractual delivery dates.

Current wording

For the three months ended March 31, 2024, the decrease in sales when compared to the same period last year is primarily due to (i) shipments on several build to print contracts which had significantly fewer or no sales in the current reporting period as compared to the same period last year, and (ii) decreased shipments on product used on AESA radar programs when compared to similar product sales in the same period last year. These decreases were offset, in part, by an increase in sales on (i) shipments on a large multi-year magnetics contract for transformers, and (ii) shipments on a large follow-on order for power distribution panels.

Previous wording

For the six months ended December 31, 2023 the increase in sales when compared to the same period last year resulted primarily from (i) sales on a large follow-on order for power distribution panels, (ii) increased shipments on a large multi-year magnetics contract for transformers, (iii) sales on a new engineering development contract in which there were no comparable sales in the prior period, and (iv) the shipment of a one-time build to print unit of which there were no sales in the prior year. These increases were offset, in part, by a decrease in sales on (i) contracts related to a family of power distribution transformers for a single customer due to specified contractual delivery dates, (ii) several build to print contracts which had significantly fewer or no sales in the current reporting period as compared to the same period last year, and (iii) the absence of sales in the current period on a large engineering design and production contract which had sales associated with engineering design deliverables in the prior year.

Current wording

For the nine months ended March 31, 2024 sales were flat when compared to the same period last year. Sales were higher primarily from (i) sales on a large follow-on order for power distribution panels, (ii) increased shipments on a large multi-year magnetics contract for transformers, (iii) sales on a new engineering development contract in which there were no comparable sales in the prior period, and (iv) the shipment of a one-time build to print unit of which there were no sales in the prior year. These increases were offset, in part, by a decrease in sales on (i) contracts related to a family of power distribution transformers for a single customer due to specified contractual delivery dates, (ii) several build to print contracts which had significantly fewer or no sales in the current reporting period as compared to the same period last year, and (iii) the absence of sales in the current period on a large engineering design and production contract which had sales associated with engineering design deliverables in the prior year.

Previous wording

Gross profits for the three months ended December 31, 2023 and 2022 were $3,142,575 and $2,260,722, respectively. Gross profit as a percentage of sales was approximately 30.5% and 25.7%, for the same periods, respectively. Gross profits for the six months ended December 31, 2023 and 2022 were $5,387,952 and $4,072,864, respectively. Gross profit as a percentage of sales was approximately 28.6% and 23.4%for the same periods, respectively.

Current wording

Gross profits for the three months ended March 31, 2024 and 2023 were $2,064,191 and $1,973,429, respectively. Gross profit as a percentage of sales was approximately 25.0% and 20.1%, for the same periods, respectively. Gross profits for the nine months ended March 31, 2024 and 2023 were $7,452,143 and $6,046,293, respectively. Gross profit as a percentage of sales was approximately 27.5% and 22.2%for the same periods, respectively.

Previous wording

The increase in gross profit for the six months ended December 31, 2023 when compared to the same period last year resulted primarily from (i) an overall increase in sales, (ii) the recognition of profit realized on a portion of funding we received from our customer during the current quarter related to an economic price adjustment as reimbursement for significant unanticipated material costs we previously incurred, discussed above, (iii) higher sales on a large follow-on order for power distribution panels which had minimal sales in the prior year and due to the incurred costs in the prior year negatively impacted gross profit, as these costs were associated with the original engineering and design efforts, and (iv) specific to the prior period, gross profit was negatively impacted by significant unanticipated costs incurred on a certain fixed-priced engineering design contract for a power supply due to unforeseen complexity of the design and the unavailability of mil-spec rated parts in the marketplace resulting from part obsolescence or exceptionally long lead times.

Current wording

The increase in gross profit for the nine months ended March 31, 2024 when compared to the same period last year resulted primarily from (i) product mix, (ii) improved margins on shipments related to a large transformer contract due to additional contract funding received in the second quarter of the current fiscal year, (iii) higher sales on a large follow-on order for power distribution panels which had minimal sales in the prior year and due to the incurred costs in the prior year negatively impacted gross profit, as these costs were associated with the original engineering and design efforts, and (iv) specific to the prior period, gross profit was negatively impacted by significant unanticipated costs incurred on a certain fixed-priced engineering design contract for a power supply due to unforeseen complexity of the design and the unavailability of mil-spec rated parts in the marketplace resulting from part obsolescence or exceptionally long lead times. The improvement in the current quarter gross profit was offset, in part, by (i) costs incurred on an engineering development job, and (ii) costs related to a final unit of a build to print contract, likely to be cancelled prior to completion, due to manufacturing complexities, lead time of parts, and rising production costs.

Previous wording

Selling, general and administrative expenses were $1,049,690 for the three months ended December 31, 2023, an increase of $174,759, compared to the three months ended December 31, 2022. Selling, general and administrative expenses were $2,073,371 for the six months ended December 31, 2023, an increase of $359,410 compared to the six months ended December 31, 2022. The increase in spending for the three and six months ended December 31, 2023 as compared to the same period in 2022 relates mainly to the increase in employee compensation costs which includes a new business development employee. In addition, and to a lesser extent, expenses increased related totravel expenses, conference and training expenses, recruiting expenses, and freight costs incurred on outgoing shipments. These increases were offset, in part, by a decrease in utility and outside selling costs related to non-employee sales representatives.

Current wording

Selling, general and administrative expenses were $971,220 for the three months ended March 31, 2024, a decrease of $43,519, compared to the three months ended March 31, 2023. Selling, general and administrative expenses were $3,044,591 for the nine months ended March 31, 2024, an increase of $315,891 compared to the nine months ended March 31, 2023. The decrease in spending for the three months ended March 31, 2024 as compared to the same period in 2023 relates mainly to the decrease in outside selling costs related to non-employee sales representatives, a decrease in conference and training costs, offset in part, by an increase in employee compensation costs which includes a new business development employee. The increase in spending for the nine months ended March 31, 2024 compared to the same period in 2023 mainly relates to the increase in employee compensation costs which includes a new business development employee. In addition, and to a lesser extent, expenses increased related totravel expenses, recruiting expenses, and freight costs incurred on outgoing shipments. These increases were offset, in part, by a decrease in utility and outside selling costs related to non-employee sales representatives.

Previous wording

Other income for the three months ended December 31, 2023 and 2022 was $166,764 and $73,542, respectively. Other income for the six months ended December 31, 2023 and 2022 was $328,337 and $86,116, respectively. The increase for the three and six months ended is primarily due to the increase in interest income resulting from an increase in investment securities and an increase in interest rates. Interest income is a function of the level of investments and investment strategies that generally tend to be conservative.

Current wording

Other income for the three months ended March 31, 2024 and 2023 was $184,821 and $145,810, respectively. Other income for the nine months ended March 31, 2024 and 2023 was $513,158 and $231,926, respectively. The increase for the three and nine months ended is primarily due to the increase in interest income resulting from an increase in investment securities and an increase in interest rates. Interest income is a function of the level of investments and investment strategies that generally tend to be conservative.

Previous wording

The Company’s effective tax rate for the three and six months ended December 31, 2023 was approximately 20.5% and 20.7% respectively, compared to 21.5% and 21.7% for the three and six months ended December 31, 2022. The effective tax rate in fiscal 2024 is less than the statutory tax rate mainly due to the benefit received from ESOP dividends paid on allocated shares as well as the benefit from foreign derived intangible income, offset in part, by the permanent difference for incentive stock option expense recorded for book purposes which is not deductible for tax purposes. The effective tax rate in fiscal 2023 was greater than the statutory tax rate mainly due to the permanent difference for incentive stock option expense recorded for book purposes which is not deductible for tax purposes, in addition to the fact there was no benefit received from ESOP dividends paid on allocated shares due to the suspension of the company dividend in place through February 2023. The effective tax rate in the three and six month periods ended December 31, 2023 was lower than the prior year primarily from the benefit derived from ESOP dividends paid on allocated shares in the current period when compared to same period in the prior year.

Current wording

The Company’s effective tax rate for the three and nine months ended March 31, 2024 was approximately 19.2% and 20.3% respectively, compared to 21.5% and 21.6% for the three and nine months ended March 31, 2023. The effective tax rate in fiscal 2024 is less than the statutory tax rate mainly due to the benefit received from ESOP dividends paid on allocated shares and benefit from foreign derived intangible income, offset in part by permanent differences related to incentive stock options. The effective tax rate in fiscal 2023 is greater than the statutory tax rate mainly due to the permanent difference for incentive stock option expense recorded for book purposes which is not deductible for tax purposes. During this year, there was no benefit received from ESOP dividends paid on allocated shares due to the suspension of the company dividend thru February 2023. The effective tax rate in the three and nine month periods ended March 31, 2024 was lower than the prior year primarily from the benefit derived from ESOP dividends paid on allocated shares, greater benefit derived from foreign derived intangible income and a benefit derived from the exercise of incentive stock options in the current period when compared to same period in the prior year.

Previous wording

Net income for the three months ended December 31, 2023, was $1,795,370 or $0.73 and $0.72 per share, basic and diluted, compared to net income of $1,146,042 or $0.47 per share, basic and diluted, for the three months ended December 31, 2022. Net income for the six months ended December 31, 2023 was $2,889,914 or $1.17 and $1.16 per share, basic and diluted, compared to $1,914,308 or $0.78 per share, basic and diluted, for the six months ended December 31, 2022. The increase in net income in the three and six months ended December 31, 2023 resulted primarily from the increase in gross profit and an increase in interest income, offset in part, by an increase in selling, general and administrative expenses and an increase in the provision for income taxes, all discussed above.

Current wording

Net income for the three months ended March 31, 2024, was $1,031,930 or $0.41 and $0.40 per share, basic and diluted, compared to net income of $867,288 or $0.35 per share, basic and diluted, for the three months ended March 31, 2023. Net income for the nine months ended March 31, 2024 was $3,921,844 or $1.58 and $1.56 per share, basic and diluted, compared to $2,781,596 or $1.13 per share, basic and diluted, for the nine months ended March 31, 2023. The increase in net income in the three months ended March 31, 2024 resulted primarily from the increase in gross profit and an increase in interest income, offset in part, by an increase in the provision for income taxes, all discussed above. The increase in net income in the nine months ended March 31, 2024 resulted primarily from the increase in gross profit and an increase in interest income, offset in part, by an increase in selling, general and administrative expenses and an increase in the provision for income taxes, all discussed above.

Previous wording

The Company's working capital is an appropriate indicator of the liquidity of its business, and during the past two fiscal years, the Company, when possible, has funded all of its operations with cash flows resulting from operating activities and when necessary from its existing cash and investments. The Company did not borrow any funds during the last two fiscal years. Management has available a $3,000,000 line of credit to help fund further growth or working capital needs, if necessary, but does not anticipate the need for any borrowed funds in the foreseeable future. Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at December 31, 2023 and 2022. The existing line of credit expires February 28, 2024. It is our expectation that the line will be renewed.

Current wording

The Company's working capital is an appropriate indicator of the liquidity of its business, and during the past two fiscal years, the Company, when possible, has funded all of its operations with cash flows resulting from operating activities and when necessary from its existing cash and investments. The Company did not borrow any funds during the last two fiscal years. Management has available a $3,000,000 line of credit to help fund further growth or working capital needs, if necessary, but does not anticipate the need for any borrowed funds in the foreseeable future. Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at March 31, 2024 and 2023. The existing line of credit was extended and expires February 28, 2025.

Previous wording

The Company's working capital as of December 31, 2023 and 2022 was approximately $33.1 million and $31.6 million, respectively. The Company may at times be required to repurchase shares at the ESOP participants’ request at fair market value. During the three and six months ended December 31, 2023 and 2022, the Company did not repurchase any shares held by the ESOP. Under an existing authorization from the Company's Board of Directors, as of December 31, 2023, management is authorized to purchase an additional $783,460 of Company stock.

Current wording

The Company's working capital as of March 31, 2024 and 2023 was approximately $36.6 million and $32.3 million, respectively. The Company may at times be required to repurchase shares at the ESOP participants’ request at fair market value. During the three and nine months ended March 31, 2024 and 2023, the Company did not repurchase any shares held by the ESOP. Under an existing authorization from the Company's Board of Directors, as of March 31, 2024, management is authorized to purchase an additional $783,460 of Company stock.

Previous wording

Net cash provided by operating activities fluctuates between periods primarily as a result of differences in sales and net income, provision for income taxes, the timing of the collection of accounts receivable, purchase of inventory, and payment of accounts payable. The increase in cash provided by operating activities compared to the prior year primarily relates to an increase in net income, a decrease in inventories, and a decrease in prepaid expenses and other current assets, offset in part, by a decrease in contract liabilities, and an increase in trade accounts receivable. Net cash used in investing activities increased in the six months ended December 31, 2023 as compared to the same period in 2022 due to an increase in investment securities when compared to the same period last year, in addition to additions to property, plant and equipment, partially offset by proceeds received from the grant award. Cash used in financing activities for the six months ended December 31, 2023 relates primarily to dividend payments on common stock. The Company currently believes that the cash flow generated from operations and when necessary, from cash and cash equivalents will be sufficient to meet its long-term funding requirements for the foreseeable future.

Current wording

Net cash provided by operating activities fluctuates between periods primarily as a result of differences in sales and net income, provision for income taxes, the timing of the collection of accounts receivable, purchase of inventory, and payment of accounts payable. The increase in cash provided by operating activities compared to the prior year primarily relates to an increase in net income, a decrease in prepaid expenses and other current assets, an increase in accounts payable and other accrued expenses, offset in part, by a decrease in contract liabilities, and an increase in trade accounts receivable. Net cash used in investing activities increased in the nine months ended March 31, 2024 as compared to the same period in 2023 due to an increase in investment securities when compared to the same period last year, in addition to additions to property, plant and equipment, partially offset by proceeds received from the grant award. Cash used in financing activities for the nine months ended March 31, 2024 relates primarily to dividend payments on common stock, offset in part, by proceeds from the exercise of stock options. The Company currently believes that the cash flow generated from operations and when necessary, from cash and cash equivalents will be sufficient to meet its long-term funding requirements for the foreseeable future.

Previous wording

During the six months ended December 31, 2023 and 2022, the Company expended $3,469,630 and $103,885, respectively, for plant improvements and new equipment, of which $3,292,313 and $10,576, respectively, was eligible for reimbursement under a not to exceed $7.4 million award received by the company. The award received by the Company is in support of facility and capital equipment upgrades for testing and qualification for the United States Navy. This funding award is part of the Navy’s investment to improve and sustain the Surface Combatant Industrial Base. The Company has budgeted approximately $300,000 for new equipment and plant improvements in fiscal year 2024, not reimbursable under the funding award received. A majority of these expenditures will be made to stay competitive in the marketplace and to meet the needs of current contracts.

Current wording

During the nine months ended March 31, 2024 and 2023, the Company expended $4,501,997 and $178,513, respectively, for plant improvements and new equipment, of which $4,294,632 and $38,650, respectively, was either reimbursed or eligible to be reimbursed under a not to exceed $7.4 million award received by the Company. The award received by the Company is in support of facility and capital equipment upgrades for testing and qualification for the United States Navy. This funding award is part of the Navy’s investment to improve and sustain the Surface Combatant Industrial Base. The Company has budgeted approximately $300,000 for new equipment and plant improvements in fiscal year 2024, not reimbursable under the funding award received. A majority of these expenditures will be made to stay competitive in the marketplace and to meet the needs of current contracts.