Espey Mfg. & Electronics Corp.

 

Overview

 

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 174,000+ 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.”

 

Espey began operations after incorporation in New York in 1928. We strive to remain competitive as a leader in high power energy conversion and transformer solutions through the design and manufacture of new and improved products by using advanced and “cutting edge” electronic technologies.

 

Espey is an ISO 9001:2015 and AS9100:2016 certified manufacturer of power conversion, advanced magnetics and “build to print” products where specifications are provided by the customer for the rugged industrial and military marketplace. Our primary products are power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, UPS systems, and antennas. The applications of these products include AC and DC locomotives, shipboard power, shipboard radar, airborne power, ground-based radar, and ground mobile power.

 

Espey services include design, development, and build to specifications provided by the customer (build to print), design services, design studies, environmental testing services, metal fabrication, painting services, and development of automatic testing equipment. Espey is vertically integrated, meaning that the Company produces individual components (including inductors), populates printed circuit boards, fabricates metalwork, paints, wires, qualifies, and fully tests items, mechanically, electrically and environmentally, in house. Portions of the manufacturing and testing process are subcontracted to vendors on occasion.

 

The Company markets its products primarily through its own direct sales organization and through outside sales representatives. Business is solicited from large industrial manufacturers and defense companies, the government of the United States, foreign governments and major foreign electronic equipment companies. Espey is also on the eligible list of contractors with the United States Department of Defense. We pursue opportunities for prime contracts directly with the Department of Defense and are generally solicited by Department of Defense procurement agencies for their needs falling within the major classes of products produced by the Company. Espey contracts with the Federal Government under cage code 20950 as Espey Mfg. & Electronics Corp.

 

There is competition in all classes of products manufactured by the Company, ranging from divisions of the largest electronic companies to many small companies. The Company's sales do not represent a significant share of the industry's market for any class of its products. The principal methods of competition for electronic products of both a military and industrial nature include, among other factors, price, product performance, the experience of the particular company and history of its dealings in such products.

 

Our business is not seasonal. However, the concentration of our business in the rail industry, equipment for military and industrial applications, and our customer concentrations expose us to on-going associated risks. These risks include, without limitation, fluctuating requirements for power supplies in the rail industry, dependence on appropriations from the United States Government and the governments of foreign nations, program allocations, the potential of governmental termination of orders for convenience, and the general strength of the industry sectors in which our customers transact business.

 

Future procurement needs supporting the military and the rail industry continue to drive competition. Many of our competitors have invested, and continue to invest, aggressively in upfront product design costs and accept lower profit margins as a strategic means of maintaining existing business and enhancing market share. This continues to put pressure on the pricing of our current products and has lowered our profit margins on some of our new business. In order to compete effectively for new business, in some cases we have invested in upfront design costs, thereby reducing initial profitability as a means of procuring new long-term programs. As part of our strategy, we adjust our pricing in order to achieve a balance which enables us both to retain repeat programs while being more competitive in bidding on new programs.

 

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. Occasionally, 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.

 

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.

 

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.

 

Occasionally, 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 2026. Tariffs on steel and aluminum imports from various countries remain in effect and, while not directly imposed on the Company, have in some cases contributed to higher costs from suppliers. Although we are not currently experiencing any significant financial or raw material sourcing issues resulting from product tariffs, the Company cannot provide any assurance that the existing tariffs, the potential of additional tariffs, and the associated volatility arising from foreign trade policies, will not have a negative impact on future earnings.

 

The labor workforce remains stable. Management continues to closely monitor workforce labor requirements to support our sales backlog and planned delivery schedules. Longer time-to-hire challenges remain for certain positions due to specific skillsets required for those positions. Unemployment rates in the local geographic region trend lower than the national average which has created a competitive recruiting environment. Where possible, the Company continues to offer on-the-job training and when necessary, continues to recruit personnel outside the local region. Combined with supply chain constraints, unforeseen labor disruptions could delay shipments, result in missing our scheduled backlog delivery projections, and adversely affect operating income.

 

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.

 

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.

 

Outstanding opportunities encompass various new and previously manufactured power supplies, transformers, and subassemblies. The stated amount includes only those opportunities that 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 elements affecting the defense industry. Many solicitations we receive for the procurement of goods and services takes place by competitive bidding.

 

Historically, a small number of customers have accounted for a large percentage of the Company’s total sales in any given fiscal year. Management continues to pursue opportunities with current and new customers with an overall objective of lowering the concentration of sales, mitigating excessive reliance upon a single major product of a particular program and minimizing the impact of the loss of a single significant customer. As previously stated above, 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 sales concentration poses minimal risk to the Company. Given the nature of our business, we believe our existing sales order backlog is fairly diversified in terms of customers and the category of products on order.

 

Critical Accounting Policies and Estimates

 

The preparation of our financial statements in accordance with Generally Accepted Accounting Principles requires management to make certain judgments, estimates, and assumptions that affect the reported amounts as presented on the face of the financial statements. These critical accounting policies and estimates are those that are most important to the portrayal of our financial condition and results of operations. We base our estimates on historical experience and other assumptions that we believe to be reasonable. Management continually reviews and evaluates these critical accounting policies and estimates in light of evolving business conditions, regulatory developments, and changes in the economic environment. As future events cannot be determined and their impact on the financial statements are uncertain, actual results may differ from our estimates and could be material to the financial statements. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from established estimates. The critical accounting policies and estimates that we believe have the most significant effect on our financial statements are revenue recognition, inventory valuation, and deferred taxes.

 

Revenue Recognition

 

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.

 

We evaluate the products or services promised in each contract at inception to determine whether the contract should be accounted for as having one or more performance obligations. Significant judgment is required in determining performance obligations. We determine the transaction price for each contract based on the consideration we expect to receive for the products or services being provided under the contract. As the Company does not have standalone observable prices, a contract’s transaction price of each performance obligation is based on the standalone selling price, which is determined using an expected cost plus a margin approach.

 

We account for a contract with a customer after it has been approved by all parties to the arrangement, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collection of substantially all of the amount to which the entity will be entitled in exchange for the goods or services that will be transferred to the customer is probable. We assess each contract at its inception to determine whether it should be combined with other contracts. When making this determination, we consider factors such as whether two or more contracts were negotiated and executed at or near the same time, or were negotiated with an overall profit objective.

 

We recognize revenue using the output method based on the appraisal of results achieved and milestones reached or units delivered based on contractual shipment terms, typically shipping point.

 

Inventory Valuation

 

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

 

Inventoried work relating to contracts in process and work-in-process is valued at actual production cost, including factory overhead incurred to date. Contract costs include material, subcontract costs, labor, and an allocation of overhead costs. Work-in-process represents spare units and parts and other inventory items acquired or produced to service units previously sold or to meet anticipated future orders. Provision for losses on contracts is made when the existence of such losses becomes probable and estimable. The provision for losses on contracts is included in other accrued expenses on the Company’s balance sheet. The costs attributed to units delivered under contracts are based on the estimated average cost of all units expected to be produced. Certain contracts are expected to extend beyond twelve months.

 

The estimation of total cost at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Given the significance of the estimation processes and judgments described above, it is possible that materially different amounts of expected sales and contract costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process. When a change in expected sales value or estimated cost is determined, the change is reflected in current period earnings.

 

Deferred Taxes

 

The Company follows the provisions of the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (ASC) Topic 740-10, “Accounting for Income Taxes."

 

Under the provisions of FASB ASC 740-10, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.

 

Contract Liabilities

 

Contract liabilities include advance payments and billings in excess of revenue recognized.

 

Accounts Receivable and Allowance for Credit Losses

 

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.

 

Results of Operations

 

Net sales for the three months ended March 31, 2026 and 2025 were $11,422,655 and $10,302,719, respectively. Net sales for the nine months ended March 31, 2026 and 2025 were $32,652,434 and $34,354,677, 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 increase in sales during the three months ended March 31, 2026 when compared to the same period last year was entirely attributable to an increase in sales on a few key magnetics programs and an increase in our sales related to a specific field service job, offset in part by a decrease in sales related to three main power supply programs and one build to print program.

 

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.

 

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.

 

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.

 

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.

 

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.

 

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.   

  

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.

 

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.

 

Liquidity and Capital Resources

 

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 related to outstanding standby letters of credit were zero as of March 31, 2026 and 2025. The existing line of credit was renewed in February 2026.

 

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.

 

The table below presents the summary of cash flow information for the fiscal years indicated:

 

	Nine Months Ended March 31,
	2026				2025
Net cash provided by operating activities	$	6,297,074			$	18,219,771
Net cash used in investing activities	$	(1,549,410	)		$	(8,265,308	)
Net cash used in financing activities	$	(2,450,700	)		$	(446,971	)

 

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.

 

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.

 

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE

SECURITIES LITIGATION REFORM ACT OF 1995

 

This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The terms "believe," "anticipate," "intend," "goal," "expect," and similar expressions may identify forward-looking statements. These forward-looking statements represent the Company's current expectations or beliefs concerning future events. The matters covered by these statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including the Company's dependence on timely development, introduction and customer acceptance of new products, the impact of competition and price erosion, supply and manufacturing constraints, potential new orders from customers, the impact of cyber or other security threats or other disruptions to our business, the impact of inflationary pressures on the United States economy and our operations and other risks and uncertainties. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.