ESPEY MFG & ELECTRONICS CORP

Previous wording

Espey Mfg. & Electronics Corp. (“Espey”) is a power electronics design and original equipment manufacturing (OEM) company with a long history of developing and delivering highly reliable products for use in military and severe environment applications. Design, manufacturing, and testing is performed in our in-service 150,000+ square foot facility located at 233 Ballston Ave, Saratoga Springs, New York. Espey is classified as a “smaller reporting company” for purposes of the reporting requirements under the Securities Exchange Act of 1934, as amended. Espey’s common stock is publicly-traded on the NYSE American under the symbol “ESP.”

Current wording

Espey Mfg. & Electronics Corp. (“Espey”) is a power electronics design and original equipment manufacturing (OEM) company with a long history of developing and delivering reliable products for use in military and severe environment applications. Design, manufacturing, and testing is performed in our in-service 150,000+ square foot facility located at 233 Ballston Ave, Saratoga Springs, New York. Espey is classified as a “smaller reporting company” for purposes of the reporting requirements under the Securities Exchange Act of 1934, as amended. Espey’s common stock is publicly-traded on the NYSE American under the symbol “ESP.”

Previous wording

Our sales strategy includes identifying and obtaining multiple new engineering design and development contracts in any given fiscal year to ensure optimal utilization of our engineering personnel in addition to securing follow-on production awards for product previously designed in-house, as well as, new or follow-on build to print opportunities. The Company targets those programs and opportunities which will generate future longer-term production tails in ensuing years. From time to time, we accept work associated with engineering design studies. While unlikely to result in near-term follow-on orders, this positions us competitively on future awards and expands our engineering team’s skillset.

Current wording

Our sales strategy includes identifying and obtaining multiple new engineering design and development contracts in any given fiscal year to ensure optimal utilization of our engineering personnel in addition to securing follow-on production awards for product previously designed in-house, as well as, new or follow-on build to print opportunities. The Company targets those programs and opportunities which will generate future longer-term production tails in ensuing years. From time to time, we accept work associated with engineering design studies. While unlikely to result in near-term follow-on orders, this positions us competitively for future awards and expands our engineering team’s skillset.

Previous wording

The total backlog at September 30, 2024 was approximately $94.6 million, which included $58 million from four significant customers, compared to approximately $87.1 million at September 30, 2023, which included approximately $59.9 million from five significant customers. The Company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts. It is not uncommon to receive orders which include delivery schedules extending beyond a year from the contract purchase date, therefore a customer’s future reorder point may vary. The backlog at September 30, 2024 is fully funded except for $1.7 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.

Current wording

The total backlog at December 31, 2024 was approximately $120.1 million, which included $78.3 million from three significant customers, compared to approximately $84.8 million at December 31, 2023, which included $57.4 million from five significant customers. The Company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts. It is not uncommon to receive orders which include delivery schedules extending beyond a year from the contract purchase date. Due to this, a customer’s future reorder point may vary. The backlog at December 31, 2024 is fully funded, except for approximately $20.4 million, representing two firm follow-on multi-year orders 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 to the extent information is known or estimable.

Previous wording

Management expects revenues in fiscal year 2025 to be higher than revenues recognized during fiscal year 2024 but expects that net income per share will be lower than fiscal 2024 net income per share, although ahead of fiscal 2023 net income per share. This expectation is driven primarily by orders already in our backlog that will be shipped in fiscal year 2025 with higher anticipated aggregate costs than the product mix shipped during fiscal 2024. The expected increase in aggregate costs during fiscal year 2025 includes cost associated with the one time charge attributable to the pension withdrawal obligation recorded in June 2024, explained in greater detail in Financial Statement Note 5. Commitments and Contingencies. Sales fluctuations 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

Management expects revenues in fiscal year 2025 to be higher than revenues recognized during fiscal year 2024 but expects that net income per share will be lower than fiscal year 2024 net income per share, although greater than fiscal year 2023 net income per share. This expectation is driven primarily by orders already in our backlog that will be shipped in fiscal year 2025 with higher anticipated aggregate costs than the product mix shipped during fiscal year 2024.

Previous wording

Ongoing demand in the power electronics industry across multiple manufacturing sectors continues to create shortages and extended lead times. In some instances, waiting times for certain components approach a year or more. We adequately factor supplier-provided lead times into internal planning schedules and new customer quotations. From time to time, we encounter part obsolescence which requires us to identify an alternate part suitable for use. We continue to work with our customers on strategies to mitigate any adverse impact upon our ability to service their requirements. Factors which may arise after the placement of the customer’s order may cause us to miss projected delivery dates. Inflationary costs are expected to continue, but are not expected to have a significant impact on operating income in fiscal year 2025.

Current wording

From time to time, we encounter part obsolescence which requires us to identify an alternate part suitable for use. We continue to work with our customers on strategies to mitigate any adverse impact upon our ability to service their requirements. Factors which may arise after the placement of the customer’s order may cause us to miss projected delivery dates. Inflationary costs are expected to continue, but are not expected to have a significant impact on operating income in fiscal year 2025. Tariffs on steel and aluminum imports from various countries continue to be in effect and the newly inaugurated President has announced the imposition of additional tariffs. Although we are not currently experiencing any significant financial or raw material sourcing issues resulting from the product tariffs, the Company cannot provide any assurance that the existing and newly-imposed tariffs, the potential of additional tariffs, and the associated volatility arising from foreign trade policies, will not have a negative impact on our future earnings by increasing our raw material prices and augmenting the lead time for the availability of raw materials.

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 $9.8 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 scheduling 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 $9.6 million.

Previous wording

It is presently anticipated that a minimum of $33.6 million of orders comprising the September 30, 2024 backlog will be filled during the fiscal year ending June 30, 2025 subject, however, to the impact of the factors identified above. The minimum of $33.6 million does not include any shipments which may be made against orders subsequently received during the fiscal year ending June 30, 2025.

Current wording

It is presently anticipated that a minimum of $19.9 million of orders comprising the December 31, 2024 backlog will be filled during the fiscal year ending June 30, 2025 subject, however, to the impact of the factors identified above. The minimum of $19.9 million does not include any shipments which may be made against orders subsequently received during the fiscal year ending June 30, 2025.

Previous wording

The Company currently expects new orders in fiscal 2025 to be greater than those received in fiscal year 2024. New orders received in the first three months of fiscal year 2025 were approximately $7.8 million as compared to $12.1 million new orders received in the first three months of fiscal year 2024. In addition to the backlog and the new orders already booked in fiscal year 2025, the Company currently has outstanding opportunities representing approximately $124 million in the aggregate as of November 6, 2024 for both repeat and new programs. Included in outstanding opportunities is a large multi-year purchase from a single customer for several products currently being manufactured by the Company, expected to be formalized prior to December 31, 2024. Outstanding opportunities encompass various new and previously manufactured power supplies, transformers, and subassemblies. We consider the value of those opportunities we believe are likely to be awarded based on factors which include: quotation status, communicated award dates, historical ordering, public information on defense programs and program funding, discussion with customers, and our cost competitiveness. However, there can be no assurance that the Company will acquire any of the outstanding opportunities described above, many of which are subject to allocations of the United States defense spending and factors affecting the defense industry, as well as, the fact many solicitations we receive for the procurement of goods and services are associated with competitive bidding processes.

Current wording

The Company currently expects new orders in fiscal year 2025 to be greater than those received in fiscal year 2024. New orders received in the first six months of fiscal year 2025 were approximately $46.9 million as compared to approximately $20.1 million new orders received in the first six months of fiscal year 2024. Included in new orders received during the current fiscal year is an award for $29.5 million, when fully funded, to provide electric power distribution panels for the U.S. Navy’s Columbia class submarines through calendar year 2030. In addition to the backlog and the new orders already booked in fiscal year 2025, the Company currently has outstanding opportunities representing approximately $113 million in the aggregate as of February 4, 2025 for both repeat and new programs. Outstanding opportunities encompass various new and previously manufactured power supplies, transformers, and subassemblies. We consider the value of those opportunities we believe are likely to be awarded based on factors which include: quotation status, communicated award dates, historical ordering, public information on defense programs and program funding, discussion with customers, and our cost competitiveness. However, there can be no assurance that the Company will acquire any of the outstanding opportunities described above, many of which are subject to allocations of the United States defense spending and factors affecting the defense industry. Also, many solicitations we receive for the procurement of goods and services are associated with competitive bidding processes.

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 three significant customers represented 51.8% of the Company’s total sales for the three-month period ended September 30, 2024. Net sales to three significant customers represented 69% of the Company’s total sales for the three-month period ended September 30, 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.

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 62% of the Company’s total sales for the three-month period ended December 31, 2024. 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 five significant customers represented approximately 69% of the Company’s total sales for the six-month period ended December 31, 2024. Net sales to five significant customers represented 82% of the Company’s total sales for the six-month period ended December 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

The majority of our sales are generated from military contracts from defense companies, the Department of Defense, other agencies of the government of the United States and foreign governments, for the design and development and/or manufacture of products. Sales are also generated from industrial manufacturers for similar services. We provide our products and design and development services under fixed-price contracts. Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss.

Current wording

The majority of our sales are generated from military contracts from defense companies, the United States Department of Defense, other agencies of the government of the United States and foreign governments, for the design and development and/or manufacture of products. Sales are also generated from industrial manufacturers for similar services. We provide our products and design and development services under fixed-price contracts. Under fixed-price contracts we agree to perform the specified work for a pre-determined price. To the extent our actual costs vary from the estimates upon which the price was negotiated, we will generate more or less profit or could incur a loss.

Previous wording

Net sales for the three months ended September 30, 2024 and 2023 were $10,443,218 and $8,568,214, respectively, a 21.9% increase. In general, sales fluctuations may occur during comparable fiscal periods as the direct result of sales backlog levels, product mix, and 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 December 31, 2024 and 2023 were $13,608,740 and $10,302,541, respectively, a 32.1% increase. Net sales for the six months ended December 31, 2024 and 2023 were $24,051,958 and $18,870,755, respectively, a 27.5% increase. In general, sales fluctuations may occur during comparable fiscal periods as the direct result of sales backlog levels, product mix, and specific contractual terms of those firm orders placed including contract value, scope of work, and contract delivery schedules.

Previous wording

Gross profits for the three months ended September 30, 2024 and 2023 were $2,800,882 and $2,245,377, respectively. Gross profit as a percentage of sales was approximately 26.8% and 26.2%, for the same periods, respectively. The increase in gross profit for the three months ended September 30, 2024 when compared to the same period last year resulted primarily from the increase in sales. The slight increase in the gross profit percentage resulted primarily from product mix.

Current wording

Gross profits for the three months ended December 31, 2024 and 2023 were $3,163,712 and $3,142,575, respectively. Gross profit as a percentage of sales was approximately 23.2% and 30.5%, for the same periods, respectively. Gross profits for the six months ended December 31, 2024 and 2023 were $5,964,594 and $5,387,952, respectively. Gross profit as a percentage of sales was approximately 24.8% and 28.6%for the same periods, respectively.

Previous wording

Selling, general and administrative expenses were $1,081,669 for the three months ended September 30, 2024, an increase of $57,988, compared to the three months ended September 30, 2023. The increase in spending for the three months ended September 30, 2024 as compared to the same period in 2023 relates mainly to the increase in employee compensation costs, offset in part, by a decrease in travel expenses incurred during the period.

Current wording

Selling, general and administrative expenses were $1,139,275 for the three months ended December 31, 2024, an increase of $89,585, compared to the three months ended December 31, 2023. Selling, general and administrative expenses were $2,220,944 for the six months ended December 31, 2024, an increase of $147,573 compared to the six months ended December 31, 2023. The increase in spending for the three months ended December 31, 2024 as compared to the same period in 2023 relates mainly to the increase in employee compensation costs, outside selling costs related to non-employee sales representatives, an increase in travel expenditures, an increase in outbound freight costs related to higher sales, offset in part, by a decrease in conference expenses incurred during the period. The increase in spending for the six months ended December 31, 2024 as compared to the same period in 2023 relates mainly to the increase in employee compensation costs, outside selling costs related to non-employee sales representatives, an increase in outbound freight costs related to higher sales, and an increase in travel expenditures, offset in part, by a decrease in conference expenses and general office supplies.

Previous wording

Other income for the three months ended September 30, 2024 and 2023 was $278,408 and $161,573, respectively. The increase for the three months ended September 30, 2024 is primarily due to the increase in interest income resulting from an increase in investment securities and an increase in fixed 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 December 31, 2024 and 2023 was $268,425 and $166,764, respectively. Other income for the six months ended December 31, 2024 and 2023 was $546,833 and $328,337, respectively. The increase for the three and six months ended December 31, 2024 is primarily due to the increase in interest income resulting from an increase in investment securities, offset in part, by declining 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 months ended September 30, 2024 was approximately 20.0% compared to 20.9% for the three months ended September 30, 2023. The effective tax rate in fiscal 2025 and 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 the three month period ended September 30, 2024 was lower than the prior year primarily from a greater benefit derived from the ESOP dividends paid on allocated shares and the benefit derived from the exercise of incentive stock options 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 six months ended December 31, 2024 was approximately 16.8% and 18.3% respectively, compared to 20.5% and 20.7% for the three and six months ended December 31, 2023. The effective tax rate in fiscal 2025 and 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 the three and six month period ended December 31, 2024 was lower than the prior year primarily from a greater benefit derived from the ESOP dividends paid on allocated shares and the 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 September 30, 2024, was $1,598,317 or $0.63 and $0.61 per share, basic and diluted, compared to net income of $1,094,544 or $0.44 per share, basic and diluted, for the three months ended September 30, 2023. The increase in net income in the three months ended September 30, 2024 resulted primarily from the increase in gross profit and an increase in other 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 December 31, 2024 was $1,908,499 or $0.74 and $0.71 per share, basic and diluted, compared to net income of $1,795,370 or $0.73 and $0.72 per share, basic and diluted, for the three months ended December 31, 2023. Net income for the six months ended December 31, 2024 was $3,506,816 or $1.37 and $1.32 per share, basic and diluted, compared to $2,889,914 or $1.17 and $1.16 per share, basic and diluted, for the six months ended December 31, 2023. The increase in net income in the three months ended December 31, 2024 when compared to the same period last year resulted primarily from the increase in interest income and lower provision for income taxes. The increase in net income in the six months ended December 31, 2024 when compared to the same period last year resulted primarily from the increase in gross profit and the 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 September 30, 2024 and 2023. The existing line of credit expires February 28, 2025.

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 December 31, 2024 and 2023. The existing line of credit expires February 28, 2025. Management anticipates that the line of credit will be renewed.

Previous wording

The Company's working capital as of September 30, 2024 and 2023 was approximately $38.6 million and $32.8 million, respectively. The Company may at times be required to repurchase shares at the ESOP participants’ request at fair market value. During the three months ended September 30, 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 September 30, 2024, management is authorized to purchase an additional $783,460 of Company stock.

Current wording

The Company's working capital as of December 31, 2024 and 2023 was approximately $40.2 million and approximately $33.1 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, 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 December 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 decrease in cash provided by operating activities compared to the prior year primarily relates to an increase in inventories, the payment of accounts payable and taxes payable, offset in part, by an increase in net income. Net cash used in investing activities decreased in the three months ended September 30, 2024 as compared to the same period in 2023 due to fewer additions to property, plant and equipment and higher investment securities when compared to the same period last year. Cash used in financing activities for the three months ended September 30, 2024 relates primarily to dividend payments on common stock, offset in part, by proceeds from the exercise of stock options. Comparably, the dividend in the prior year was declared but paid in the following quarter of fiscal year 2024. 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 contract liabilities for cash advances received from customers, the decrease in prepaid expenses and other current assets, offset in part by a decrease in accounts payable. Net cash used in investing activities decreased in the six months ended December 31, 2024 as compared to the same period in 2023 due to fewer additions to property, plant and equipment and higher investment securities when compared to the same period last year. Cash used in financing activities for the six months ended December 31, 2024 relates primarily to dividend payments on common stock, offset in part, by proceeds from the exercise of stock options. Comparably, the dividends paid during the prior year were lower and cash received from stock option exercises in the prior year was significantly lower. 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 three months ended September 30, 2024 and 2023, the Company expended $664,351 and $2,228,802, respectively, for plant improvements and new equipment, of which $595,823 and $2,149,160, 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 $500,000 for new equipment and plant improvements in fiscal year 2025, 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 six months ended December 31, 2024 and 2023, the Company expended $1,547,922 and $3,469,630, respectively, for plant improvements and new equipment, of which $1,346,396 and $3,292,313, 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 $500,000 for new equipment and plant improvements in fiscal year 2025, not reimbursable under the funding awards received. A majority of these expenditures will be made to stay competitive in the marketplace and to meet the needs of current contracts.