ESPEY MFG & ELECTRONICS CORP

Previous wording

The total backlog at December 31, 2025 was $134.7 million, which included approximately $88.8 million from three significant customers, compared to approximately $120.1 million at December 31, 2024, which included $78.3 million from three significant customers. A single customer may participate in multiple active programs. Therefore, the loss of one program does not necessarily result in the loss of the customer relationship. For this reason, management believes that the customer backlog concentration poses minimal risk to the Company. 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 origination date. Accordingly, a customer’s future reorder point may vary. The backlog at December 31, 2025 is fully funded, with the exception of $25.3 million, the majority of which represents amounts under multiple 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. Contracts are generally not cancellable without penalty or recourse.

Current wording

The total backlog at March 31, 2026 was approximately $137.1 million, which included approximately $92.7 million from three significant customers, compared to $138 million at March 31, 2025, which included approximately $97.7 million from three significant customers. A single customer may participate in multiple active programs. Therefore, the loss of one program does not necessarily result in the loss of the customer relationship. For this reason, management believes that the customer backlog concentration poses minimal risk to the Company. 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 origination date. Accordingly, a customer’s future reorder point may vary. The backlog at March 31, 2026 is fully funded, with the exception of approximately $14.5 million, the majority of which represents amounts under multiple 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. Contracts are generally not cancellable without penalty or recourse.

Previous wording

Management continues to expect higher revenues in fiscal year 2026 when compared to fiscal year 2025. This expectation is driven primarily by orders already in our backlog that are planned to ship before the end of fiscal year 2026. Although the first-half fiscal 2026 sales were lighter when compared to the first-half of prior year, management is encouraged by current trends and expects stable performance for the remainder of the year. Further, management believes that net income for fiscal year 2026 will approximate net income from fiscal year 2025. The recent government shutdowns have had some impact on short term deliverables but based on current information management does not believe there will be a material impact on the fiscal year-end results. The ultimate impact of such events is inherently uncertain and beyond the Company’s control, and actual results could differ from current expectations.

Current wording

Management expects higher revenues for fiscal year 2026 when compared to fiscal year 2025. This expectation is driven primarily by orders already in our backlog that are planned to ship before the end of fiscal year 2026. Although 2026 sales for the first nine months were lower when compared to the first nine months of the prior year, management anticipates the volume of sales for the fourth quarter to be consistent when compared to the volume of sales in the previous two quarters and expects the fourth quarter results to be higher when compared to prior year. Further, management believes that net income for fiscal year 2026 will exceed net income from fiscal year 2025. The government shutdowns have had some impact on short term deliverables but based on current information management does not believe there will be a material impact on the fiscal year-end results. The ultimate impact of such events is inherently uncertain and beyond the Company’s control, and actual results could differ from current expectations.

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 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 arising from technical challenges, scheduling delays, and increased raw material costs could negatively impact the timing of the conversion of backlog into sales, or the profitability of those sales. Engineering programs in both the funded and unfunded portions of the current backlog aggregate $14.6 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 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 arising from technical challenges, scheduling delays, and increased raw material costs could negatively impact the timing of the conversion of backlog into sales, or the profitability of those sales. Engineering programs in both the funded and unfunded portions of the current backlog aggregate $15.5 million. It is presently anticipated that approximately $15.1 million of orders comprising the March 31, 2026 backlog will be filled during the fiscal year ending June 30, 2026, subject to the impact of the factors identified above which, can affect the actual order amount fulfilled by the end of fiscal year 2026. In addition, we may make shipments against orders received subsequently to March 31, 2026, prior to the end of the current fiscal year.

Previous wording

The Company currently expects new orders in fiscal year 2026 to be lower than those received in fiscal year 2025. During fiscal year 2025, the Company received $86.4 million in new orders which included two significant, multi-year contract awards in an aggregate sum of $49.4 million. New orders received in the first six months of fiscal year 2026 were approximately $16.3 million as compared to approximately $46.9 million of new orders received in the first six months of fiscal year 2025. The Company’s current pipeline and ongoing efforts to secure strategic opportunities position us well for positive long-term results. The Company currently has outstanding opportunities representing approximately $167.1 million in the aggregate as of February 5, 2026, for both repeat and new programs. Outstanding opportunities have grown by roughly 8% when compared to December 31, 2024, highlighting the Company’s continued focus on converting opportunities into tangible results.

Current wording

The Company expects new orders in fiscal year 2026 to be lower than those received in fiscal year 2025. During fiscal year 2025, the Company received $86.4 million in new orders which included two significant, multi-year contract awards in an aggregate sum of $49.4 million. New orders received in the first nine months of fiscal year 2026 were $30 million as compared to $75.1 million of new orders received in the first nine months of fiscal year 2025. Management believes that the Company’s ongoing efforts to secure strategic opportunities positions the Company well for positive long-term results. The Company currently has outstanding opportunities representing approximately $152.5 million in the aggregate as of May 7, 2026, for both repeat and new programs.

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. 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, our generated profit will fluctuate or a loss could be incurred.

Current 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. Additionally, there is a small portion of sales derived from the rail industry. 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, our generated profit will fluctuate or a loss could be incurred.

Previous wording

The Company extends credit to its customers in the normal course of business and collateral is generally not required for trade receivables. Exposure to credit risk is controlled through the use of credit approvals, credit limits, and monitoring procedures. The accounts receivable balance is reported net of an allowance for credit losses. The Company estimates the allowance based on its analysis of historical experience, current economic market conditions, performance of specific account reviews, and other factored considerations to include, but not limited to, contracts covered by government funding and the overall health of the industry. Interest is not charged on past due balances. Based on these factors, there was an allowance for credit losses of $3,000 at December 31, 2025 and June 30, 2025. Changes to the allowance for credit losses are charged to expense and reduced by charge-offs, net of recoveries. The opening accounts receivable balance, net of allowance for credit losses of $3,000, at July 1, 2024 and July 1, 2025 were $6,635,490 and $7,598,888, respectively.

Current wording

The Company extends credit to its customers in the normal course of business and collateral is generally not required for trade receivables. Exposure to credit risk is controlled through the use of credit approvals, credit limits, and monitoring procedures. The accounts receivable balance is reported net of an allowance for credit losses. The Company estimates the allowance based on its analysis of historical experience, current economic market conditions, performance of specific account reviews, and other factored considerations to include, but not limited to, contracts covered by government funding and the overall health of the industry. Interest is not charged on past due balances. Based on these factors, there was an allowance for credit losses of $3,000 at March 31, 2026 and June 30, 2025. Changes to the allowance for credit losses are charged to expense and reduced by charge-offs, net of recoveries.

Previous wording

For the six months ended December 31, 2025, the decrease in sales when compared to the same period last year is primarily due to the product mix and timing of milestone achievement. The decrease in sales in the current year was related to a specific magnetics program, build to print program, and power supply program. A portion of the decline in sales was due to the timing of milestone deliveries for a key magnetics program, which occurred in the prior comparable period and is targeted to be met in a future quarter. Additionally, fewer units were delivered this quarter for a core power supplies contract that has now been fully satisfied. A follow-on order has already been previously accepted and is expected to ship in a future quarter. The remaining sales decline was attributed to a decrease in the number of units delivered on a build to print program when compared to prior year. These decreases were partially offset by the increase in sales for units delivered on main power supply and magnetics programs, different from those mentioned above.

Current wording

For the nine months ended March 31, 2026, the decrease in sales (notwithstanding the increase in sales for the three months ended March 31, 2026) when compared to the same period last year is primarily due to the number of units delivered, product mix, and timing of milestone achievement on key programs. The decrease in sales in the current year was mainly related to two specific power supply programs and a build to print program where there was a decrease in the number of units delivered. Additionally, there was a decrease in sales related to a key magnetics program where a milestone deliverable has shifted due to various factors outside of the company’s control. This decrease was partially offset by an increase in sales for the nine months ended March 31, 2026 related to two other power supply programs where we saw an increase in units delivered, another key magnetics program with increase milestone related revenue, and an increase in our sales for field service support.

Previous wording

Net sales for the three months ended December 31, 2025 and 2024 were $12,136,903 and $13,608,740, respectively. Net sales for the six months ended December 31, 2025 and 2024 were $21,229,779 and $24,051,958, respectively. 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. The subtle decline in sales during the three and six months ended December 31, 2025 when compared to the same period last year reflects the change in timing of shipments and milestone completion on select programs and is not indicative of a sustained change in overall sales trends or order volume. Certain factors outside of the Company’s control, including government approval timelines and vendor related issues can adversely affect our ability to meet deliveries that were originally scheduled within any given quarter. Given the non-seasonal nature of our business, these results are not indicative of management’s current anticipated year-over-year results.

Current wording

In summary, the decline in sales during the nine months ended March 31, 2026 when compared to the same period last year reflects the change in timing of shipments and milestone completion on select programs and is not indicative of a sustained change in overall sales trends or order volume. Certain factors outside of the Company’s control, including government approval timelines and vendor related issues can adversely affect our ability to meet deliveries that were originally scheduled within any given quarter. Given the non-seasonal nature of our business, these results are not indicative of management’s current anticipated year-over-year results.

Previous wording

Gross profits for the three months ended December 31, 2025 and 2024 were $4,212,581 and $3,163,712, respectively. Gross profit as a percentage of sales was 34.7% and approximately 23.2%, for the same periods, respectively. Gross profits for the six months ended December 31, 2025 and 2024 were $7,429,583 and $5,964,594, respectively. Gross profit as a percentage of sales was 35.0% and approximately 24.8%, for the same periods, respectively. We continue to see improvements in gross profits in the first half of fiscal year 2026 compared to the prior year which is being driven by product mix, continued labor cost efficiencies, and further process improvements. The increase in gross profits are being slightly offset by unanticipated costs on certain fixed-price engineering design contracts for power supplies where more testing and effort is being needed than originally anticipated as a result of additional design considerations identified during the development process.

Current wording

Gross profits for the three months ended March 31, 2026 and 2025 were $4,229,345 and $2,948,384. Gross profit as a percentage of sales was 37.0% and 28.6%, for the same periods, respectively. Gross profits for the nine months ended March 31, 2026 and 2025 were $11,658,928 and $8,912,978. Gross profit as a percentage of sales was 35.7% and 25.9%, for the same periods, respectively. Gross profits have continued to improve through the first three quarters of fiscal year 2026 compared with the prior year. Strong gross profits are driven by product mix, labor efficiencies, and process improvements, partially offset by unforeseen investments in certain fixed-price engineering contracts. Specific power supply programs have needed additional testing as a result of further design considerations identified during the development process.

Previous wording

Selling, general and administrative expenses were $1,141,440 for the three months ended December 31, 2025, an increase of $2,165, compared to the three months ended December 31, 2024. Selling, general and administrative expenses were $2,292,706 for the six months ended December 31, 2025, an increase of $71,762 compared to the six months ended December 31, 2024. The slight increase in spending for the three months ended December 31, 2025 as compared to the same period last year relates to an increase in ESOP contributions and professional services. These increases were partially offset by a decrease in employee health expenses, payroll taxes, and stock option expense for the quarter. The increase in selling, general, and administrative expenses for the six months ended December 31, 2025 compared to the same period last year was driven by an increase in total salaries, ESOP contribution expense, facilities expenses, and professional services. These increases were offset in part by a decrease in stock option expense, marketing and advertising costs, and outbound freight.

Current wording

Selling, general and administrative expenses were $1,245,975 for the three months ended March 31, 2026, an increase of $48,713, compared to the three months ended March 31, 2025. Selling, general and administrative expenses were $3,538,681 for the nine months ended March 31, 2026, an increase of $120,475 compared to the nine months ended March 31, 2025. The slight increase in spending for both the three and nine months ended March 31, 2026 as compared to the same period last year was driven by an increase in employee health benefits, ESOP contributions, facility costs, and professional services. These increases were partially offset by a decrease in employee stock option expense, outside selling expenses, travel and entertainment expenses, and advertising costs for both the three and nine months ended March 31, 2026.

Previous wording

Other income for the three months ended December 31, 2025 and 2024 was $444,694 and $268,425, respectively. Other income for the six months ended December 31, 2025 and 2024 was $936,476 and $546,833, respectively. The increase for the three and six months ended December 31, 2025 is due to the increase in interest income resulting from an increase in cash held in money market accounts and investment securities. 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, 2026 and 2025 was $408,050 and $336,306, respectively. Other income for the nine months ended March 31, 2026 and 2025 was $1,344,526 and $883,139, respectively. The primary reason for the increase during the three and nine months ended March 31, 2026 is due to the increase in interest income resulting from an increase in cash held in money market accounts 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, 2025 was approximately 20.2% and 18.1% respectively, compared to approximately 16.8% and 18.3% for the three and six months ended December 31, 2024. The effective tax rate in fiscal year 2026 is slightly less than the statutory tax rate mainly due to the benefit received from ESOP dividends paid on allocated shares, the benefit from stock-based compensation, and FDII deductions, offset in part by the permanent difference in ESOP fair market value and cost which is not deductible for tax purposes. The effective tax rate for the three months ended December 31, 2025 was higher than the same period last year, primarily due to the increase in net income and the decrease in tax benefit for stock forfeitures and ISO exercises within the quarter. The lower effective tax rate for the six months ended December 31, 2025 compared to the same period in 2024 is primarily due to an increased foreign-derived intangible income deduction, partially offset by an increase in net income. In July 2025, the One Big Beautiful Bill Act (the "Tax Act") was enacted, introducing a series of corporate tax changes in the U.S., including 100% bonus depreciation on qualified property and full expensing for research and development expenditures. The impacts of the Tax Act are reflected in our results for the three and six months ended December 31, 2025, and there was no material impact to our income tax expense or effective tax rate.

Current wording

The Company’s effective tax rate for the three and nine months ended March 31, 2026 was 15.5% and 17.2% respectively, compared to approximately 18.3% for the three and nine months ended March 31, 2025. The effective tax rate in fiscal year 2026 is less than the statutory tax rate due to the benefit received from ESOP dividends paid on allocated shares, the benefit derived from stock-based compensation, and FDII deductions, offset in part by the permanent difference in ESOP fair market value and cost which is not deductible for tax purposes. The effective tax rate for the three months ended March 31, 2026 was lower than the same period last year, primarily due to the increased tax benefit for stock forfeitures and stock option exercises within the quarter. The lower effective tax rate for the nine months ended March 31, 2026 compared to the same period in 2025 is primarily due to the increase in tax benefit for stock forfeitures and stock option exercises. In July 2025, the One Big Beautiful Bill Act (the "Tax Act") was enacted, introducing a series of corporate tax changes in the U.S., including 100% bonus depreciation on qualified property and full expensing for research and development expenditures. The impacts of the Tax Act are reflected in our results for the three and nine months ended March 31, 2026 and there was no material impact to our income tax expense or effective tax rate.

Previous wording

Net income for the three months ended December 31, 2025 was $2,805,109 or $1.02 and $0.99 per share, basic and diluted, compared to net income of $1,908,499 or $0.74 and $0.71 per share, basic and diluted, for the three months ended December 31, 2024. Net income for the six months ended December 31, 2025 was $4,974,945 or $1.82 and $1.75 per share, basic and diluted, compared to net income of $3,506,816 or $1.37 and $1.32 per share, basic and diluted, for the six months ended December 31, 2024. The increase in net income in the three and six months ended December 31, 2025 when compared to the same period last year resulted primarily from the increase in gross profit and increase in interest income which was offset in part by the increase in selling, general, and administrative expenses and the provision for income taxes discussed in detail above.

Current wording

Net income for the three months ended March 31, 2026 was $2,864,662 or $1.03 and $0.99 per share, basic and diluted, respectively, compared to net income of $1,704,487 or $0.66 and $0.63 per share, basic and diluted, respectively, for the three months ended March 31, 2025. Net income for the nine months ended March 31, 2026 was $7,839,607 or $2.85 and $2.74 per share, basic and diluted, respectively, compared to net income of $5,211,303 or $2.03 and $1.95 per share, basic and diluted, respectively, for the nine months ended March 31, 2025. The increase in net income in the three and nine months ended March 31, 2026 when compared to the same period last year resulted primarily from the increase in gross profit and increase in interest income which was offset in part by the increase in selling, general, and administrative expenses and the provision for income taxes discussed in detail above.

Previous wording

The Company's working capital as of December 31, 2025 and 2024 was approximately $48.9 million and approximately $40.2 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, 2025 and 2024, the Company did not repurchase any shares held by the ESOP. Under existing authorizations from the Company's Board of Directors, as of December 31, 2025, management is authorized to purchase an additional $783,460 of Company stock.

Current wording

The Company's working capital as of March 31, 2026 and 2025 was approximately $50.5 million and approximately $39.9 million, respectively, including the reclassification disclosed in Note 1. 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, 2026 and 2025, the Company did not repurchase any shares held by the ESOP. Under existing authorizations from the Company's Board of Directors, as of March 31, 2026, 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 an increase in inventories, an increase in accounts receivable, a decrease in accrued expenses, and a decrease in the ESOP payable. This is offset in part by an increase in accounts payable and an increase in contract liabilities for cash advances received from customers. Net cash used in investing activities decreased in the six months ended December 31, 2025 as compared to the same period in 2024 due to an increase in proceeds collected from awarded grants, and proceeds from the sale and maturity of investment securities offset by an increase in property, plant, and equipment. Net cash used in financing activities increased solely due to the increase in dividends paid when compared to the same period last year offset in part by the proceeds collected 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.

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 decrease in cash provided by operating activities compared to the prior year primarily relates to an increase in inventories, prepaid expenses and other current assets, and a decrease in accounts receivable. This is offset in part by an increase in contract liabilities for cash advances received from customers. Net cash used in investing activities decreased in the nine months ended March 31, 2026 as compared to the same period in 2025 due to an increase in proceeds collected from awarded grants, and proceeds from the sale and maturity of investment securities offset by a slight increase in additions to property, plant, and equipment. Net cash used in financing activities increased solely due to the increase in dividends paid when compared to the same period last year offset in part by the proceeds collected 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, 2025, the Company expended $2,612,276 for plant improvements and new equipment, of which $2,029,608 was reimbursed under the $3.4 million award that was received by the Company in the second quarter of fiscal year 2025. During the six months ended December 31, 2024, the Company expended $1,547,922 for plant improvements and new equipment, of which $1,346,396 was eligible to be reimbursed under the $7.4 million award received by the Company in fiscal year 2023. 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 $850,000 for new equipment and plant improvements in fiscal year 2026, not reimbursable under the funding awards received. A majority of these expenditures will be made to upgrade our facilities, stay competitive in the marketplace, and to meet the needs of current contracts.

Current wording

During the nine months ended March 31, 2026, the Company expended $2,800,998 for plant improvements and new equipment, of which $2,029,608 was reimbursed under the $3.4 million award that was received by the Company in the second quarter of fiscal year 2025. During the nine months ended March 31, 2025, the Company expended $2,509,088 for plant improvements and new equipment, of which $2,346,233 was eligible to be reimbursed under the $7.4 million award received by the Company in fiscal year 2023. 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 initially allocated approximately $850,000 for new equipment and plant improvements in fiscal year 2026, which are not reimbursable under the funding awards received. Actual spending at the end of the third quarter surpassed this budget. Excluding any further investments during the fourth quarter, year-to-date additions to property plant and equipment totaled approximately $855,000 which were directed towards essential investments in facility upgrades, expenditures to maintaining market competitiveness, and items needed to fulfill current contractual requirements.