ESPEY MFG & ELECTRONICS CORP

Previous 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.

Current wording

The total backlog at March 31, 2025 was $138 million, which included approximately $97.7 million from three significant customers, compared to $84.2 million at March 31, 2024, which included approximately $54.5 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 March 31, 2025 is fully funded, except for approximately $33.3 million, representing six 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 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.

Current wording

Management expects revenues and earnings per share to be higher in fiscal year 2025 than fiscal year 2024. This expectation is driven primarily by orders already in our backlog that will be shipped in the final quarter of fiscal year 2025 and the change in product mix shipped during fiscal year 2025 as compared to fiscal year 2024.

Previous 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.

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 a concern. Although we are not currently experiencing any significant financial or raw material sourcing issues resulting from the product tariffs, the Company is continuing to monitor the changes in foreign trade policies and the potential impact they could have on our business moving forward.

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 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.

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 $12.3 million.

Previous 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.

Current wording

It is presently anticipated that a minimum of $9.6 million of orders comprising the March 31, 2025 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 $9.6 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 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.

Current wording

As of March 31, 2025, new orders received year to date have exceeded total new orders received in fiscal 2024. New orders received in the first nine months of fiscal year 2025 were $75.1 million as compared to approximately $27.8 million new orders received in the first nine months of fiscal year 2024. Included in new orders received during the current fiscal year are two awards, one for $29.5 million and the other $19.8 million, when fully funded, to provide electric power distribution panels for the U.S. Navy’s Columbia class submarines through calendar year 2032. In addition to the backlog and the new orders already booked in fiscal year 2025, the Company currently has outstanding opportunities representing approximately $151 million in the aggregate as of May 1, 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 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.

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 five significant customers represented 82% of the Company’s total sales for the three-month period ended March 31, 2025. 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 six significant customers represented approximately 75% of the Company’s total sales for the nine-month period ended March 31, 2025. Net sales to four significant customers represented 74% of the Company’s total sales for the nine-month period ended March 31, 2024. 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

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.

Current wording

Net sales for the three months ended March 31, 2025 and 2024 were $10,302,719 and $8,254,653, respectively, a 24.8% increase. Net sales for the nine months ended March 31, 2025 and 2024 were $34,354,677 and $27,125,408, respectively, a 26.7% 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

For the three months ended December 31, 2024, the increase in sales when compared to the same period last year is primarily due to more deliveries against an overall higher sales backlog and the product mix comprising those shipments. The increase in sales in the current year was primarily related to product supporting magnetics, power supply, and build to print contracts. During the current quarter, sales increased on deliveries for (i) a large follow-on order for power distribution panels, (ii) a large follow-on order for inverters used on armored multi-purpose vehicles, and (iii) numerous deliveries on build to print follow-on orders in which there were no sales in the comparable period last year. These increases were offset, in part, by a decrease in deliveries for (i) a contract for power supplies supporting the AESA radar program and (ii) fewer sales on an engineering development job which had fewer sales when compared to the same period last year.

Current wording

For the three months ended March 31, 2025, the increase in sales when compared to the same period last year is primarily due to more deliveries against an overall higher sales backlog and the product mix comprising those shipments. The increase in sales in the current year was mainly related to our power supply and build to print programs. During the current quarter, sales increased on deliveries for some key build to print and power supply contracts. These increases were partially offset by the completion of a power supply program which had sales in the prior comparable period and a decrease in sales relating to two main magnetics programs. These decreases are attributable to the timing of shipments on certain programs.

Previous 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.

Current wording

Gross profits for the three months ended March 31, 2025 and 2024 were $2,948,384 and $2,064,191, respectively. Gross profit as a percentage of sales was approximately 28.6% and 25.0%, for the same periods, respectively. Gross profits for the nine months ended March 31, 2025 and 2024 were $8,912,978 and $7,452,143, respectively. Gross profit as a percentage of sales was approximately 25.9% and 27.5%for the same periods, respectively.

Previous wording

The primary factors in determining the change in gross profit and net income are overall sales levels and product mix. The gross profits on mature products and build to print contracts are typically higher as compared to products which are still in the engineering development stage or in early stages of production. In the case of the latter, the Company can incur what it refers to as “loss contracts,” primarily on engineering design contracts in which the Company invests with the objective of developing future product sales. In any given accounting period the mix of product shipments between higher margin programs and less mature programs, and expenditures associated with loss contracts, has a significant impact on gross profit and net income.

Current wording

The primary factors in determining the change in gross profit and net income are overall sales levels and product mix. The gross profits on mature products and build to print contracts are typically higher as compared to products which are still in the engineering development stage or in early stages of production. In the case of the latter, the Company can incur what it refers to as “loss contracts,” primarily on engineering design contracts in which the Company invests with the objective of developing future product sales. In any given accounting period the mix of product shipments between higher margin programs, less mature programs, and expenditures associated with loss contracts, has a significant impact on gross profit and net income.

Previous 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.

Current wording

Selling, general and administrative expenses were $1,197,262 for the three months ended March 31, 2025, an increase of $226,042, compared to the three months ended March 31, 2024. Selling, general and administrative expenses were $3,418,206 for the nine months ended March 31, 2025, an increase of $373,615 compared to the nine months ended March 31, 2024. The increase in spending for the three months ended March 31, 2025 as compared to the same period in 2024 relates mainly to the increase in employee compensation costs, outside selling costs related to non-employee sales representatives, an increase in employee recruitment fees, and increases in dues, subscriptions and training costs. The increase in spending for the nine months ended March 31, 2025 as compared to the same period in 2024 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 employee recruitment fees.

Previous 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.

Current wording

Other income for the three months ended March 31, 2025 and 2024 was $336,306 and $184,821, respectively. Other income for the nine months ended March 31, 2025 and 2024 was $883,139 and $513,158, respectively. The increase for the three and nine months ended March 31, 2025 is primarily due to the increase in interest income resulting from an increase in cash held in money markets and investment securities. 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, 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.

Current wording

The Company’s effective tax rate for the three and nine months ended March 31, 2025 was approximately 18.3%, compared to 19.2% and 20.3% for the three and nine months ended March 31, 2024. 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 for the three and nine months ended March 31, 2025 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 the same prior year period.

Previous 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.

Current wording

Net income for the three months ended March 31, 2025 was $1,704,487 or $0.66 and $0.63 per share, basic and diluted, compared to net income of $1,031,930 or $0.41 and $0.40 per share, basic and diluted, for the three months ended March 31, 2024. Net income for the nine months ended March 31, 2025 was $5,211,303 or $2.03 and $1.95 per share, basic and diluted, compared to $3,921,844 or $1.58 and $1.56 per share, basic and diluted, for the nine months ended March 31, 2024. The increase in net income in the three months ended March 31, 2025 when compared to the same period last year resulted primarily from the increase in gross profits and interest income which is slightly offset by an increase in selling, general, and administrative expenses and an increase in the provision for income taxes. The increase in net income in the nine months ended March 31, 2025 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 December 31, 2024 and 2023. The existing line of credit expires February 28, 2025. Management anticipates that the line of credit will be renewed.

Current wording

The Company's working capital is an appropriate indicator of the liquidity of its business. During the past two fiscal years, the Company 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 a $3,000,000 line of credit available to help fund further growth or working capital needs 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, 2025 and 2024. The existing line of credit was renewed in March 2025.

Previous 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.

Current wording

The Company's working capital as of March 31, 2025 and 2024 was approximately $40.8 million and approximately $36.6 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 nine months ended March 31, 2025 and 2024, 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, 2025, 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 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.

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 and an increase in prepaid expenses and other current assets offset in part by a decrease in inventories and decrease in accounts payable. Net cash used in investing activities increased in the nine months ended March 31, 2025 as compared to the same period in 2024 due to higher investment securities offset in part by the increased proceeds from the maturity of investment securities when compared to the same period last year. Cash used in financing activities for the nine months ended March 31, 2025 slightly increased 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, 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.

Current wording

During the nine months ended March 31, 2025 and 2024, the Company expended $2,509,088 and $4,501,997, respectively, for plant improvements and new equipment, of which $2,346,233 and $4,294,632, respectively, was either reimbursed or eligible to be reimbursed under the not to exceed $7.4 million and $3.4 million awards received by the Company. The awards received by the Company are in support of facility and capital equipment upgrades for testing and qualification for the United States Navy. These funding awards are 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.