10-Q 1 esp-20231231.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

 

QUARTERLY Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended December 31, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-4383

ESPEY MFG. & ELECTRONICS CORP.

(Exact name of registrant as specified in its charter)

New York Trading Symbol 14-1387171
(State of incorporation) ESP (I.R.S. Employer's Identification No.)

 

233 Ballston Avenue, Saratoga Springs, New York 12866

(Address of principal executive offices)

 

(518) 245-4400

(Registrant's telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act

 

Title of each class Trading Symbol Name of each exchange on which registered
Common Stock $.33-1/3 par value ESP NYSE American

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes           ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes           ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

☐ Large accelerated filer Non-accelerated filer
☐ Accelerated filer Smaller reporting company
  Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes No

 

At February 9, 2024, there were 2,710,933 shares outstanding of the registrant's Common stock, $.33-1/3 par value.

 

 

ESPEY MFG. & ELECTRONICS CORP.

Quarterly Report on Form 10-Q

I N D E X

 

PART I FINANCIAL INFORMATION PAGE
       
  Item 1 Financial Statements:  
       
    Balance Sheets - December 31, 2023 (Unaudited) and June 30, 2023 1
       
    Statements of Comprehensive Income (Unaudited) - Three and Six Months Ended December 31, 2023 and 2022 2
       
    Statements of Changes in Stockholders’ Equity (Unaudited) – Three and Six Months Ended December 31, 2023 and 2022 3
       
    Statements of Cash Flows (Unaudited) - Six Months Ended December 31, 2023 and 2022 7
       
    Notes to Financial Statements (Unaudited) 8
       
  Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 14
       
  Item 3 Quantitative and Qualitative Disclosures about Market Risk 20
       
  Item 4 Controls and Procedures 20
       
PART II OTHER INFORMATION 21
       
  Item 1 Legal Proceedings 21
       
  Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 21
       
  Item 3 Defaults Upon Senior Securities 21
       
  Item 4 Mine Safety Disclosures 21
       
  Item 5 Other Information 21
       
  Item 6 Exhibits 21
       
  SIGNATURES 22

 

 

 

PART I: FINANCIAL INFORMATION

ESPEY MFG. & ELECTRONICS CORP.

Balance Sheets

December 31, 2023 (Unaudited) and June 30, 2023

   December 31, 2023   June 30, 2023 
ASSETS        
Cash and cash equivalents  $3,602,933   $2,748,755 
Investment securities   13,871,894    11,964,673 
Trade accounts receivable, less allowance for credit losses of $3,000   5,961,267    5,755,282 
Income tax receivable   
    35,666 
           
Inventories:          
Raw materials   1,870,911    1,889,702 
Work-in-process   938,065    681,300 
Costs related to contracts in process   15,053,283    17,318,579 
Total inventories   17,862,259    19,889,581 
           
Deferred tax assets   75,021    
 
Prepaid expenses and other current assets   3,897,388    4,282,477 
Total current assets   45,270,762    44,676,434 
           
Property, plant and equipment, net   5,092,471    2,825,089 
Total assets  $50,363,233   $47,501,523 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Accounts payable  $2,104,386   $1,212,375 
Accrued expenses:          
Salaries and wages   508,218    890,748 
Vacation   521,543    685,188 
ESOP payable   113,271    
 
Other   984,103    547,747 
Payroll and other taxes withheld   54,256    66,042 
Contract liabilities   7,624,002    8,081,838 
Income taxes payable   229,625    
 
Total current liabilities   12,139,404    11,483,938 
           
Deferred tax liabilities   
    137,827 
Total liabilities   12,139,404    11,621,765 
           
Commitments and contingencies (See Note 5)   
 
    
 
 
           
Common stock, par value $.33-1/3 per share          
Authorized 10,000,000 shares; Issued 3,129,874 shares as of December 31, 2023 and June 30, 2023. Outstanding 2,706,633 and 2,702,633 shares as of December 31, 2023 and June 30, 2023, respectively (includes 222,565 and 233,645 Unearned ESOP shares, respectively)
   1,043,291    1,043,291 
Capital in excess of par value   23,448,890    23,283,245 
Accumulated other comprehensive gain (loss)   2,988    (2,429)
Retained earnings   24,015,739    21,867,720 
    48,510,908    46,191,827 
           
Less: Unearned ESOP shares   (4,273,378)   (4,273,378)
Cost of 423,241 and 427,241 shares of common stock in treasury as of December 31, 2023 and June 30, 2023, respectively   (6,013,701)   (6,038,691)
Total stockholders’ equity   38,223,829    35,879,758 
           
Total liabilities and stockholders' equity  $50,363,233   $47,501,523 

 

The accompanying notes are an integral part of the financial statements.

1 

 

ESPEY MFG. & ELECTRONICS CORP.

Statements of Comprehensive Income (Unaudited)

Three and Six Months Ended December 31, 2023 and 2022

 

   Three Months Ended   Six Months Ended 
   December 31,   December 31, 
   2023   2022   2023   2022 
                 
Net sales  $10,302,541   $8,804,109   $18,870,755   $17,439,904 
Cost of sales   7,159,966    6,543,387    13,482,803    13,367,040 
Gross profit   3,142,575    2,260,722    5,387,952    4,072,864 
                     
Selling, general and administrative expenses   1,049,690    874,931    2,073,371    1,713,961 
Operating income   2,092,885    1,385,791    3,314,581    2,358,903 
                     
Other income                    
Interest income   161,513    64,625    308,943    73,432 
Other   5,251    8,917    19,394    12,684 
Total other income   166,764    73,542    328,337    86,116 
                     
Income before provision for income taxes   2,259,649    1,459,333    3,642,918    2,445,019 
                     
Provision for income taxes   464,279    313,291    753,004    530,711 
                     
Net income  $1,795,370   $1,146,042   $2,889,914   $1,914,308 
                     
Other comprehensive income, net of tax:                    
Unrealized gain on investment securities   3,622    2,678    5,417    915 
                     
Total comprehensive income  $1,798,992   $1,148,720   $2,895,331   $1,915,223 
                     
                     
Net income per share:                    
Basic  $0.73   $0.47   $1.17   $0.78 
Diluted  $0.72   $0.47   $1.16   $0.78 
                     
Weighted average number of shares outstanding:                    
Basic   2,478,588    2,452,064    2,474,340    2,449,233 
Diluted   2,499,210    2,452,064    2,492,499    2,449,791 
                     
Dividends per share:  $0.15   $0.00   $0.30   $0.00 

 

The accompanying notes are an integral part of the financial statements.

 

2 

 

Espey Mfg. & Electronics Corp.

Statements of Changes in Stockholders' Equity (Unaudited)

Three Months Ended December 31, 2023

 

               Accumulated                     
           Capital in   Other               Unearned   Total 
   Outstanding   Common   Excess of   Comprehensive   Retained   Treasury   Treasury   ESOP   Stockholders’ 
   Shares   Amount   Par Value   (Loss) Gain   Earnings   Shares   Amount   Shares   Equity 
Balance as of September 30, 2023   2,706,633   $1,043,291   $23,373,388   $(634)  $22,591,316    423,241   $(6,013,701)  $(4,273,378)  $36,720,282 
                                              
Comprehensive income:                                             
                                              
Net income                       1,795,370                   1,795,370 
                                              
Other comprehensive income,
net of tax of $761
                  3,622                        3,622 
                                              
Total comprehensive income                                           1,798,992 
                                              
Stock-based compensation             75,502                             75,502 
                                              
Dividends paid on common stock
$0.15 per share
                       (370,947)                  (370,947)
                                              
Balance as of December 31, 2023   2,706,633   $1,043,291   $23,448,890   $2,988   $24,015,739    423,241   $(6,013,701)  $(4,273,378)  $38,223,829 

 

The accompanying notes are an integral part of the financial statements.

 

3 

 

Espey Mfg. & Electronics Corp.

Statements of Changes in Stockholders' Equity (Unaudited)

Six Months Ended December 31, 2023

 

               Accumulated                     
           Capital in   Other               Unearned   Total 
   Outstanding   Common   Excess of   Comprehensive   Retained   Treasury   Treasury   ESOP   Stockholders’ 
   Shares   Amount   Par Value   (Loss) Gain   Earnings   Shares   Amount   Shares   Equity 
Balance as of June 30, 2023   2,702,633   $1,043,291   $23,283,245   $(2,429)  $21,867,720    427,241   $(6,038,691)  $(4,273,378)  $35,879,758 
                                              
Comprehensive income:                                             
                                              
Net income                       2,889,914                   2,889,914 
                                              
Other comprehensive income,
net of tax of $1,138
                  5,417                        5,417 
                                              
Total comprehensive income                                           2,895,331 
                                              
Stock options exercised   4,000         34,490              (4,000)   24,990         59,480 
                                              
Stock-based compensation             131,155                             131,155 
                                              
Dividends paid on common stock
$0.30 per share
                       (741,895)                  (741,895)
                                              
Balance as of December 31, 2023   2,706,633   $1,043,291   $23,448,890   $2,988   $24,015,739    423,241   $(6,013,701)  $(4,273,378)  $38,223,829 

 

The accompanying notes are an integral part of the financial statements.

 

4 

 

Espey Mfg. & Electronics Corp.

Statements of Changes in Stockholders' Equity (Unaudited)

Three Months Ended December 31, 2022

 

               Accumulated                     
           Capital in   Other               Unearned   Total 
   Outstanding   Common   Excess of   Comprehensive   Retained   Treasury   Treasury   ESOP   Stockholders’ 
   Shares   Amount   Par Value   (Loss) Gain   Earnings   Shares   Amount   Shares   Equity 
Balance as of September 30, 2022   2,702,633   $1,043,291   $23,165,952   $(3,695)  $19,448,123    427,241   $(6,038,691)  $(4,687,604)  $32,927,376 
                                              
Comprehensive income:                                             
                                              
Net income                       1,146,042                   1,146,042 
                                              
Other comprehensive income,
net of tax of $562
                  2,678                        2,678 
                                              
Total comprehensive income                                           1,148,720 
                                              
Stock-based compensation             41,918                             41,918 
                                              
Balance as of December 31, 2022   2,702,633   $1,043,291   $23,207,870   $(1,017)  $20,594,165    427,241   $(6,038,691)  $(4,687,604)  $34,118,014 

 

The accompanying notes are an integral part of the financial statements.

 

5 

 

Espey Mfg. & Electronics Corp.

Statements of Changes in Stockholders' Equity (Unaudited)

Six Months Ended December 31, 2022

 

               Accumulated                     
           Capital in   Other               Unearned   Total 
   Outstanding   Common   Excess of   Comprehensive   Retained   Treasury   Treasury   ESOP   Stockholders’ 
   Shares   Amount   Par Value   (Loss) Gain   Earnings   Shares   Amount   Shares   Equity 
Balance as of June 30, 2022   2,702,633   $1,043,291   $23,104,693   $(1,932)  $18,679,857    427,241   $(6,038,691)  $(4,687,604)  $32,099,614 
                                              
Comprehensive income:                                             
                                              
Net income                       1,914,308                   1,914,308 
                                              
Other comprehensive income,
net of tax of $192
                  915                        915 
                                              
Total comprehensive income                                           1,915,223 
                                              
Stock-based compensation             103,177                             103,177 
                                              
Balance as of December 31, 2022   2,702,633   $1,043,291   $23,207,870   $(1,017)  $20,594,165    427,241   $(6,038,691)  $(4,687,604)  $34,118,014 

 

The accompanying notes are an integral part of the financial statements.

6 

 

ESPEY MFG. & ELECTRONICS CORP.

Statements of Cash Flows (Unaudited)

Six Months Ended December 31, 2023 and 2022

 

         
   December 31, 2023   December 31, 2022 
Cash Flows from Operating Activities:          
Net income  $2,889,914   $1,914,308 
           
Adjustments to reconcile net income to net cash provided by operating activities:          
Stock-based compensation   131,155    103,177 
Depreciation   233,526    242,357 
ESOP compensation expense   183,364    155,477 
Deferred income tax benefit   (212,848)   (7,889)
Gain on disposal of property, plant and equipment   (150)   (2,500)
Changes in assets and liabilities:          
(Increase) decrease in trade accounts receivable   (205,985)   1,123,730 
Decrease in income taxes receivable   35,666    
 
Decrease (increase) in inventories   2,027,322    (210,057)
Decrease (increase) in prepaid expenses and other current assets   385,089    (1,168,686)
Increase in accounts payable   892,011    826,214 
Decrease in accrued salaries and wages   (382,530)   (226,885)
(Decrease) increase in vacation accrual   (163,645)   20,585 
Decrease in ESOP payable   (70,093)   
 
Increase (decrease) in other accrued expenses   436,356    (217,945)
(Decrease) increase in payroll and other taxes withheld   (11,786)   2,123 
(Decrease) increase in contract liabilities   (457,836)   1,901,599 
Increase in income taxes payable   229,625    227,842 
Net cash provided by operating activities   5,939,155    4,683,450 
           
Cash Flows from Investing Activities:          
Additions to property, plant and equipment   (3,469,630)   (103,885)
Proceeds from grant award   968,722    
 
Proceeds from sale of property, plant and equipment   150    2,500 
Purchase of investment securities   (13,410,242)   (8,515,017)
Proceeds from sale/maturity of investment securities   11,508,438    2,157,334 
Net cash used in investing activities   (4,402,562)   (6,459,068)
           
Cash Flows from Financing Activities:          
Dividends on common stock   (741,895)   
 
Proceeds from exercise of stock options   59,480    
 
Net cash used in financing activities   (682,415)   
 
           
Increase (decrease) in cash and cash equivalents   854,178    (1,775,618)
Cash and cash equivalents, beginning of period   2,748,755    8,104,060 
Cash and cash equivalents, end of period  $3,602,933   $6,328,442 
           
Supplemental Schedule of Cash Flow Information:          
Income taxes paid  $702,000   $311,000 

 

The accompanying notes are an integral part of the financial statements.

 

7 

 

ESPEY MFG. & ELECTRONICS CORP.

Notes to Financial Statements (Unaudited)

 

Note 1. Basis of Presentation

In the opinion of management the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for such periods. The results for any interim period are not necessarily indicative of the results to be expected for the full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, income taxes, and stock-based compensation. Specific to inventories, including work-in-process and contracts in process, management evaluates, quarterly, those estimates used in determining the cost to complete for each contract on Espey Mfg. & Electronics Corp.’s (the “Company”) sales backlog. The change in estimates may affect the reported amount of inventories and gross profit in the current or a future period. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. These financial statements should be read in conjunction with the Company's most recent audited financial statements included in its report on Form 10-K for the year ended June 30, 2023. Certain reclassifications may have been made to the prior year financial statements to conform to the current year presentation.

Note 2. Investment Securities

Accounting Standards Codification (“ASC”) 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The carrying amounts of financial instruments, including cash and cash equivalents, short term investments, accounts receivable, accounts payable and accrued expenses, approximated fair value as of December 31, 2023 and June 30, 2023 because of the immediate or short-term maturity of these financial instruments.

Investment securities at December 31, 2023 and June 30, 2023 consisted of certificates of deposit, municipal bonds and U.S. treasury bills. The Company classifies investment securities as available-for-sale which have been determined to be level 1 assets. The cost, gross unrealized gains, gross unrealized losses and fair value of available-for-sale debt securities by major security type at December 31, 2023 and June 30, 2023 are as follows:

       Gross   Gross     
   Amortized   Unrealized   Unrealized   Fair 
   Cost   Gains   Losses   Value 
December 31, 2023                
Certificates of deposit  $13,330,000   $
   $
   $13,330,000 
Municipal bonds  $290,745   $5,838   $(1,830)  $294,753 
U.S. Treasury Bills  $243,963   $3,178   $
   $247,141 
Total investment securities  $13,864,708   $9,016   $(1,830)  $13,871,894 
                     
June 30, 2023                    
Certificates of deposit  $11,280,000   $
   $
   $11,280,000 
Municipal bonds  $260,475   $165   $(7,843)  $252,797 
U.S. Treasury Bills  $430,952   $1,225   $(301)  $431,876 
Total investment securities  $11,971,427   $1,390   $(8,144)  $11,964,673 

 

8 

 

The portfolio is diversified and highly liquid and primarily consists of investment grade fixed income instruments. At December 31, 2023, the Company did not have any investments in individual securities that have been in a continuous loss position considered to be other than temporary.

As of December 31, 2023 and June 30, 2023, the remaining contractual maturities of available-for-sale debt securities were as follows:

   Years to Maturity     
   Less than   One to     
   One Year   Five Years   Total 
December 31, 2023               
Available-for-sale  $13,530,070   $341,824   $13,871,894 
                
June 30, 2023               
Available-for-sale  $11,711,876   $252,797   $11,964,673 

 

Note 3. Net Income per Share

Basic net income per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. The computation of diluted net income per share excluded options to purchase 149,531 shares of our common stock for the three and six months ended December 31, 2023 and 300,923 shares for the three and six months ended December 31, 2022, as the effect of including them would be anti-dilutive. As unearned shares owned by the Company’s sponsored leveraged employee stock ownership plan (the “ESOP”) are released or committed-to-be-released, the shares become outstanding for earnings-per-share computations.

Note 4. Stock Based Compensation

The Company follows ASC 718 in establishing standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, as well as transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements based on the fair value of the share-based payment. ASC 718 establishes fair value as the measurement objective in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans.

Total stock-based compensation expense recognized in the statements of comprehensive income for the three-month periods ended December 31, 2023 and 2022 was $75,502 and $41,918, respectively, before income taxes. The amount of this stock-based compensation expense related to non-qualified stock options (“NQSOs”) for the three-month periods ended December 31, 2023 and 2022, was $10,290 and $3,877, respectively. The deferred tax benefit related to the NQSOs as of December 31, 2023 and 2022 was approximately $2,161 and $814, respectively. Total stock-based compensation expense recognized in the statements of comprehensive income for the six-month periods ended December 31, 2023 and 2022, was $131,155 and $103,177, respectively, before income taxes. The amount of this stock-based compensation expense related to NQSOs for the six-month periods ended December 31, 2023 and 2022, was $18,545 and $13,481, respectively. The deferred tax benefit related to the NQSOs as of December 31, 2023 and 2022 was approximately $3,894 and $2,831, respectively. The remaining stock option expense in each year related to incentive stock options (“ISOs”) which are not deductible by the corporation when exercised, assuming a qualifying disposition and as such no deferred tax benefit was established related to these amounts.

As of December 31, 2023, there was approximately $345,197 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the next 2 years, of which $303,720 relates to ISOs and $41,477 relates to NQSOs. The total deferred tax benefit related to these awards is expected to be $8,710.

9 

 

The Company has one employee stock option plan under which options or stock awards may be granted, the 2017 Stock Option and Restricted Stock Plan (the "2017 Plan"). The Board of Directors may grant options to acquire shares of common stock to employees and non-employee directors of the Company at the fair market value of the common stock on the date of grant. The maximum aggregate number of shares of Common Stock subject to options or awards to non-employee directors is 133,000 and the maximum aggregate number of shares of Common Stock subject to options or awards granted to non-employee directors during any single fiscal year is the lesser of 13,300 and 33 1/3% of the total number of shares subject to options or awards granted in such fiscal year. The maximum number of shares subject to options or awards granted to any individual employee may not exceed 15,000 in a fiscal year. Generally, options granted have a two-year vesting period based on two years of continuous service and have a ten-year contractual life. Option grants provide for accelerated vesting if there is a change in control. Shares issued upon the exercise of options are from those held in Treasury. Options covering 400,000 shares are authorized for issuance under the 2017 Plan. The plan allows for options which are issued, and are subsequently cancelled, to be re-granted at a later date. As of December 31, 2023, options covering 313,431 shares are outstanding under the 2017 Plan. As of December 31, 2023, options covering 82,569 shares remain available for grant after factoring in the exercised options and the cancelled options, which are eligible to be re-granted. While no further grants of options may be made under the Company’s 2007 Stock Option and Restricted Stock Plan, as of December 31, 2023, 34,600 options were outstanding under such plan of which all are vested and exercisable.

 

ASC 718 requires the use of a valuation model to calculate the fair value of stock-based awards. The Company has elected to use the Black-Scholes option valuation model, which incorporates various assumptions including those for dividend yield, volatility, expected life and interest rates.

 

The table below outlines the weighted average assumptions that the Company used to calculate the fair value of each option award for the six months ended December 31, 2023 and 2022.

   December 31, 2023   December 31, 2022 
         
Dividend yield   3.63%    
 
Company’s expected volatility   31.20%    27.10% 
Risk-free interest rate   4.39%    2.66% 
Expected term   5.3 yrs    5.4 yrs 
Weighted average fair value per share of options granted during the period  $4.03   $4.11 

 

The Company declared and paid regular cash dividends of $0.30 per share for the six months ended December 31, 2023 and paid no cash dividends for the six months ended December 31, 2022. Expected stock price volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options. The expected option term (in years) represents the estimated period of time until exercise and is based on actual historical experience.

 

The following table summarizes stock option activity during the six months ended December 31, 2023:

 

   Employee Stock Option Plans
         Weighted   
   Number of  Weighted  Average   
   Shares  Average  Remaining  Aggregate
   Subject  Exercise  Contractual  Intrinsic
   to Option  Price  Term  Value
Balance at July 1, 2023   296,331   $19.15    6.49      
Granted   78,400   $16.54    9.70      
Exercised   (4,000)  $14.87    
      
Forfeited or expired   (22,700)  $24.24    
      
Outstanding at December 31, 2023   348,031   $18.28    7.04   $756,380 
Vested or expected to vest at December 31, 2023   322,514   $18.53    6.87   $653,520 
Exercisable at December 31, 2023   201,231   $20.54    5.49   $238,620 

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing sale price of the Company’s common stock as reported on the NYSE American on December 31, 2023 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders if all option holders had exercised their options on December 31, 2023. This amount changes based on the fair market value of the Company’s common stock. The intrinsic value of options exercised during the six months ended December 31, 2023 and 2022 was $9,482 and $0, respectively.

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The following table summarizes changes in non-vested stock options during the six months ended December 31, 2023:

 

   Weighted Number  Average
   of Shares  Grant Date
   Subject  Fair Value
   to Option  (per Option)
Non-vested at July 1, 2023   132,600   $3.98 
Granted   78,400   $4.03 
Vested   (58,700)  $3.72 
Forfeited or expired   (5,500)  $4.04 
Non-vested at December 31, 2023   146,800   $4.11 

 

Note 5. Commitments and Contingencies

The Company from time to time, enters into standby letters of credit agreements with financial institutions primarily relating to the guarantee of future performance on certain contracts. Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at December 31, 2023 and June 30, 2023. The Company, as a U.S. Government contractor, is subject to audits, reviews, and investigations by the U.S. Government related to its negotiation and performance of government contracts and its accounting for such contracts. Failure to comply with applicable U.S. Government standards by a contractor may result in suspension from eligibility for award of any new government contract and a guilty plea or conviction may result in debarment from eligibility for awards. The government may, in certain cases, also terminate existing contracts, recover damages, and impose other sanctions and penalties. As a result of contract audits the Company will determine a range of possible outcomes and in accordance with ASC 450 “Contingencies” the Company will accrue amounts within a range that appears to be its best estimate of a possible outcome. Adjustments are made to accruals, if any, periodically based on current information.

 

We are party to various litigation matters and claims arising from time to time in the ordinary course of business. There are no such pending matters which we believe will have a material adverse effect on our business, financial condition, results of operations or cash flows.

 

The Company was awarded $7.4 million in funding during the second quarter of fiscal year 2023 in support of facility and capital equipment upgrades for testing and qualification for the United States Navy. The funding is part of the Navy’s investment to improve and sustain the Surface Combatant Industrial Base. The work will be conducted on the Company’s property in Saratoga Springs, NY, with completion slated for the end of calendar year 2024. The Company expects to be paid within 30 days after the submission of three milestone invoices, but will not be paid for expenses incurred in excess of the specified milestone payment limits. The Company will record the receipt of milestone payments received as a reduction from the cost of the assets. The Company will have an initial cash outlay to satisfy income tax obligations arising from the value of the milestone payments received. The cash outlay arising from federal income tax obligations is expected to be recaptured in future periods. Until recaptured, estimated tax obligations associated with the receipt of milestone payments are recorded on the balance sheet and included in deferred tax assets. Included in property, plant, and equipment at December 31, 2023 was $2,631,592, net of milestone award reimbursements totaling $968,722, for facility and capital upgrades under the funding award compared to $308,001 included in property, plant, and equipment at June 30, 2023. Included in accounts payable at December 31, 2023 was approximately $700,013 for facility and capital upgrades eligible to be reimbursed under the funding award compared to $9,095 included in accounts payable at June 30, 2023. As of January 31, 2024, the second milestone totaling approximately $3.3 million was achieved and submitted for reimbursement. Reimbursement is expected within 30 days from date of submittal.

 

Note 6. Revenue

 

The Company follows ASC 606 “Revenue from Contracts with Customers” to determine the recognition of revenue. This standard requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenues. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services.

 

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Significant judgment is required in determining the satisfaction of performance obligations. Revenues from our performance obligations are satisfied over time using the output method which considers the appraisal of results achieved and milestones reached or units delivered based on contractual shipment terms, typically shipping point. Revenue is recognized when, or as, the customer takes control of the product or services. The output method best depicts the transfer of control to the customer as the output method represents work completed. Control is typically transferred to the customer at the shipping point as the Company has a present right to payment, the customer has legal title to the asset, the customer has the significant risks and rewards of ownership of the asset, and in most instances the customer has accepted the asset.

 

Total revenue recognized for the three and six months ended December 31, 2023 based on units delivered was $8,237,156 and $14,642,694, respectively, compared to $6,757,440 and $13,717,229 for the same period in fiscal year 2023. Total revenue recognized for the three and six months ended December 31, 2023 based on milestones achieved was $2,065,385 and $4,228,061, respectively, compared to $2,046,669 and $3,722,675 for the same period in fiscal year 2023.

 

The Company offers a standard one-year product warranty. Product warranties offered by the Company are classified as assurance-type warranties, which means, the warranty only guarantees that the good or service functions as promised. Based on this, the provided warranty is not considered to be a distinct performance obligation. The impact of variable consideration has been considered but none identified which would be required to be allocated to the transaction price as of December 31, 2023. Our payment terms are generally 30-60 days. 

 

Contract liabilities were $7,624,002 and $8,081,838 as of December 31, 2023 and June 30, 2023, respectively. The decrease in contract liabilities is primarily due to revenue recognized, offset in part by, the advance collection of cash on specific contracts. Revenue recognized, that was in contract liabilities in the beginning of the fiscal year, was $727,305 for the six months ended December 31, 2023. The Company used the practical expedient to expense incremental costs incurred to obtain a contract when the contract term is less than one year.

 

The Company’s backlog at December 31, 2023 totaling approximately $84.8 million is projected, based on expected due dates, to be recognized in the following fiscal years: 24% in 2024; 49% in 2025; 21% in 2026, and 6% thereafter.   

 

Note 7. Recently Issued Accounting Standards

 

Recent Accounting Pronouncements Adopted

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected, with further clarifications made more recently. For trade receivables, loans and other financial instruments, the Company will be required to use a forward-looking expected loss model rather than the incurred loss model for recognizing credit losses which reflects losses that are probable. Credit losses relating to available-for-sale debt securities are required to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. ASU 2016-13 is effective for public entities for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Upon adoption, the amendments in ASU 2016-13 should be applied on a prospective basis to all periods presented relating to available-for-sale debt securities. For all other financial instruments the Company upon adoption will apply the amendments on a modified-retrospective approach. The Company adopted the new guidance under ASU 2016-13 in the first quarter of fiscal year 2024, and determined that the impact of the adoption on its financial statements is immaterial.

 

Note 8. Employee Stock Ownership Plan

 

The Company sponsors a leveraged employee stock ownership plan (the "ESOP") that covers all nonunion employees who work 1,000 or more hours per year and are employed on June 30. The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends on unallocated shares received by the ESOP. All dividends on unallocated shares received by the ESOP are used to pay debt service. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings. As the debt is repaid, shares are released and allocated to active employees, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with FASB ASC 718-40. Accordingly, the shares purchased by the ESOP are reported as Unearned ESOP shares in the balance sheets and the statements of changes in stockholders’ equity. As shares are released or committed-to-be-released, the Company reports compensation expense equal to the current average market price of the shares, and the shares become outstanding for earnings-per-share (EPS) computations. ESOP compensation expense was $94,175 and $76,549 for the three-month periods ended December 31, 2023 and 2022, respectively. ESOP compensation expense was $183,364 and $155,477 for the six-month periods ended December 31, 2023 and 2022, respectively.

 

12 

 

The ESOP shares as of December 31, 2023 and 2022 were as follows:

   December 31, 2023   December 31, 2022 
Allocated shares   440,801    465,248 
Committed-to-be-released shares   11,080    11,244 
Unreleased shares   222,565    245,049 
Total shares held by the ESOP   674,446    721,541 
Fair value of unreleased shares  $4,161,966   $3,479,696 

 

The Company may at times be required to repurchase shares at the ESOP participants’ request at the shares’ fair market value. During the three and six months ended December 31, 2023 and 2022, the Company did not repurchase shares previously held by the ESOP.

 

The ESOP allows for eligible participants to take whole share distributions from the Plan on specific dates in accordance with the provision of the Plan. Share distributions from the ESOP during the six months ended December 31, 2023 and 2022 totaled 44,157 and 30,843 shares, respectively.

13 

 

 

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 highly reliable products for use in military and severe environment applications. Design, manufacturing, and testing is performed in our 150,000+ square foot facility located at 233 Ballston Ave, Saratoga Springs, New York. Espey is classified as a “smaller reporting company” for purposes of the reporting requirements under the Securities Exchange Act of 1934, as amended. Espey’s common stock is publicly-traded on the NYSE American under the symbol “ESP.”

 

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” electronics technologies.

 

Espey is ISO 9001:2015 and AS9100:2016 certified. Our primary products are power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, UPS systems, antennas and high power radar systems. 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 and development to specification, 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 from time to time.

 

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 automatically 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, and in equipment for military applications 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.

 

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

 

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

 

Management expects revenues in fiscal year 2024 to be higher than revenues during fiscal year 2023 and expects net income per share to be higher in fiscal 2024 as compared to the net income per share realized during fiscal year 2023. Sales fluctuations may occur during comparable fiscal periods as the direct result of product mix, directly influenced by the specific contractual terms of those firm orders placed including contract value, scope of work, and contract delivery schedules.

 

The growth and continuing demand in the power electronics industry across multiple manufacturing sectors, coupled with resulting supply chain disruptions from the effects of global events, has created volatility and unpredictability in the availability of certain electronic components and, in some cases, continues to create industry shortages. These supply chain disruptions, including extended lead times and part obsolescence, continue to affect our production, however, we are better able to manage these factors and adequately factor lead times into internal planning schedules and new customer quotations. These shortages will likely continue to impact our ability to support our customer’s schedule demands, as lead times for these components have, in some instances, increased from readily available to waiting times of nearly a year or more. We continue to work with our customers to mitigate any adverse impact upon our ability to service their requirements. These issues, if they persist, 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 2024.

 

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 and the fact fewer workers, in general, are seeking employment. Unemployment rates in the local geographic region are lower than the national average. 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, future unforeseen labor disruptions could delay shipments and result in missing our backlog fulfillment projections and recognizing lower 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 which arise from time to time as a result of, among other reasons, design complexity, the availability of personnel with the requisite expertise, and the requirements to obtain customer approval at various milestones.  Cost overruns which may arise from technical and schedule delays and increased raw material costs could negatively impact the timing of the conversion of backlog into sales, or the profitability of such sales. Engineering programs in both the funded and unfunded portions of the current backlog aggregate $8.9 million.

 

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

 

15 

 

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

 

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

 

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

 

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. 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

 

Management believes our most critical accounting policies include revenue recognition and cost estimation on our contracts.

 

Revenue

 

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

 

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 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. The transaction price for each performance obligation is based on the estimated standalone selling price of the product or service underlying each performance obligation. Transaction prices on our contracts subject to the Federal Acquisition Regulations (FAR) are typically based on estimated costs plus a reasonable profit margin.

 

16 

 

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

 

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

 

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.

 

Contract Liabilities

 

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

 

Results of Operations

 

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

 

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

 

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

 

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

 

17 

 

The increase in gross profit for the three months ended December 31, 2023 when compared to the same period last year resulted primarily from (i) an overall increase in sales, (ii) strong profit on the production and delivery of a unit associated with a one-time build to print contract, which required less labor than originally anticipated to complete the build, and (iii) the recognition of profit realized on a portion of funding we received from a customer during the quarter related to an economic price adjustment as reimbursement for significant unanticipated material costs previously incurred. As to the latter item, the price adjustment approximated $1.6 million, with the majority of the funding to be recognized in gross profit in future reporting periods as program shipments are delivered to the customer.

 

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

 

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.

 

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

 

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

  

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

 

18 

 

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

Liquidity and Capital Resources

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

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

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

   Six Months Ended December 31, 
   2023   2022 
Net cash provided by operating activities  $5,939,155   $4,683,450 
Net cash used in investing activities   (4,402,562)   (6,459,068)
Net cash used in financing activities   (682,415)    

 

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

 

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

 

19 

 

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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

The Company is a smaller reporting company as defined under Securities and Exchange Commission Rule 12b-2. Pursuant to the exemption available to smaller reporting company issuers under Item 305 of Regulation S-K, quantitative and qualitative disclosures about market risk, the Company is not required to provide the information for this item.

 

Item 4. Controls and Procedures

 

(a) The Company's management, with the participation of the Company's chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

(b) There have been no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

20 

 

PART II: Other Information and Signatures

 

Item 1.Legal Proceedings

We are party to various litigation matters and claims arising from time to time in the ordinary course of business.  While the results of such matters cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse effect on our business, financial condition, results of operations or cash flows.  Currently, there are no matters pending.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
(a)Securities Sold
(c)Securities Repurchased

As of December 31, 2023 the Company can repurchase up to $783,460 of its common stock pursuant to an existing authorization by the Board of Directors. During the quarter ended December 31, 2023 no shares were repurchased.

Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

Not applicable

Item 5.Other Information

None

Item 6.Exhibits
  31.1 Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
  31.2 Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
  32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
  32.2 Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

21 

 

 

S I G N A T U R E S

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ESPEY MFG. & ELECTRONICS CORP.
   
   
  /s/ David O’Neil
  David O’Neil
  President and Chief Executive Officer
   
  /s/ Katrina Sparano
  Katrina Sparano
  Principal Financial Officer

 

 

Date: February 12, 2024

 

22 

 

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