Espey Mfg & Electronics Corp (ESP)

Espey Mfg. & Electronics Corp. is a power electronics design and original equipment manufacturing company with a long history of developing and delivering highly reliable products for use in military and severe environment applications. The company is an ISO 9001:2015 and AS9100:2016 certified manufacturer of power conversion, advanced magnetics, and build-to-print products for the rugged industrial and military marketplace. Its primary products include power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, UPS systems, and antennas, with applications spanning AC and DC locomotives, shipboard power, shipboard radar, airborne power, ground-based radar, and ground mobile power. The company is vertically integrated, producing individual components, populating printed circuit boards, fabricating metalwork, painting, wiring, qualifying, and fully testing items in-house. The industry is characterized by ongoing demand across multiple manufacturing sectors, which continues to create shortages and extended lead times for components, with waiting times for certain components approaching a year or more. The market for defense electronics products is largely dependent on the availability of new contracts from the United States and foreign governments to prime contractors, and any decline in expenditures by these governments may have an adverse effect on financial performance.

The company faces competition in all classes of products it manufactures, ranging from divisions of the largest electronic companies to many small companies, and its sales do not represent a significant share of the industry's market for any class of its products. Principal methods of competition include price, product performance, the experience of the particular company, and its history of dealings in such products. Many competitors have invested aggressively in upfront product design costs and accept lower profit margins as a strategic means of maintaining existing business and enhancing market share, which has put pressure on pricing and lowered profit margins on some new business. The company's sales strategy focuses on long-standing relationships with leading defense prime contractors, targeting programs that will generate future longer-term production tails, and it pursues opportunities for prime contracts directly with the Department of Defense, being on the eligible list of contractors with the United States Department of Defense. The company also accepts engineering design studies to position itself competitively on future awards and expand its engineering team's skillset.

The company generates revenue primarily through fixed-price contracts for the design, development, and manufacture of products for military and industrial applications. The majority of 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, with orders also generated from industrial manufacturers for similar services. Revenue is recognized over time using the output method, based on the appraisal of results achieved, milestones reached, or units delivered based on contractual shipment terms. The company disaggregates revenue into two primary streams: manufacturing jobs, which primarily consist of the production and delivery of customer-specific products, and engineering jobs, which primarily consist of design, development, testing, and other engineering services. The company's business is not seasonal, but it is concentrated in equipment for military and industrial applications, exposing it to risks including dependence on appropriations from the United States Government and foreign governments, program allocations, potential governmental termination of orders for convenience, and the general strength of the industry sectors in which its customers transact business.

In fiscal year 2026, total revenue recognized for manufacturing jobs totaled $37,582,698 ¹, compared to $35,343,557 ² in fiscal year 2025. Total revenue recognized for engineering jobs totaled $8,541,627 ³ in fiscal year 2026, compared to $8,607,314 ⁴ in fiscal year 2025. The company's primary products serve applications including AC and DC locomotives, shipboard power, shipboard radar, airborne power, ground-based radar, and ground mobile power. The company also provides services including 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. The company's manufacturing operation includes a complete machine shop with welding and sheet metal fabrication facilities, and it maintains a sophisticated on-site environmental test facility, which are available to other companies on a contract basis.

During fiscal year 2026, the company received approximately $41.4 million ⁵ in new orders. The total sales backlog at June 30, 2026 was $134.9 million ⁶, which included approximately $88.2 million ⁷ from three significant customers, compared to approximately $139.7 million ⁸ at June 30, 2025, which included approximately $95.2 million ⁹ from three significant customers. The funded portion of the backlog at June 30, 2026 was $123.7 million ¹⁰, and the unfunded backlog was $11.2 million ¹¹, compared to unfunded backlog of approximately $33 million ¹² at June 30, 2025. The company expended $3,108,908 ¹³ for plant improvements and new equipment during fiscal year 2026, of which $2,029,608 ¹⁴ was reimbursed under the $3.4 million ¹⁵ award received in the second quarter of fiscal year 2025. The company also paid a regular cash dividend of $1.00 per share ¹⁶ and a special cash dividend of $0.75 per share ¹⁷ during fiscal year 2026, compared to a regular cash dividend of $1.00 per share ¹⁸ in fiscal year 2025.

Net sales for fiscal year 2026 were $46,124,325 ¹⁹, compared to $43,950,872 ²⁰ in fiscal year 2025, a 4.95% ²¹ increase. Gross profit was $16,284,133 ²² in fiscal year 2026, compared to $12,684,631 ²³ in fiscal year 2025, with gross profit as a percentage of sales of 35.3% ²⁴ and 28.9% ²⁵, respectively. Net income for fiscal year 2026 was $11,179,759 ²⁶, or $4.04 ²⁷ and $3.89 ²⁸ per share, basic and diluted, compared to net income of $8,142,954 ²⁹, or $3.14 ³⁰ and $3.02 ³¹ per share, basic and diluted, for fiscal year 2025. Operating income was $11,594,684 ³² in fiscal year 2026, compared to $8,126,686 ³³ in fiscal year 2025. The company's effective tax rate was approximately 16.0% ³⁴ in fiscal year 2026 and approximately 16.3% ³⁵ in fiscal year 2025.

Management expects fiscal year 2027 revenues to outpace fiscal year 2026. While revenue is growing, the current sales mix is expected to shift and include new products with heavier engineering investments, which may temporarily compress near-term gross profits but have the potential to build a foundation for long-term production revenue. Manufacturing scaling and efficiency initiatives are expected to help offset these initial costs and support gross margins. The company expects fiscal year 2027 new orders to meet or exceed fiscal year 2026 levels, and it is presently anticipated that approximately $48 million ³⁶ of orders comprising the June 30, 2026 backlog will be filled during the fiscal year ending June 30, 2027. The company also has outstanding opportunities representing approximately $173 million ³⁷ in the aggregate as of September 5, 2026, for both repeat and new programs, encompassing various new and previously manufactured power supplies, transformers, and subassemblies.

The company's growth strategy includes identifying and obtaining multiple new engineering design and development contracts in any given fiscal year to ensure optimal utilization of engineering personnel, in addition to securing follow-on production awards for product previously designed in-house, as well as build to print opportunities. The company targets programs and opportunities which will generate future longer-term production tails in ensuing years, and from time to time accepts work associated with engineering design studies, which positions it competitively on future awards and expands its engineering team's skillset. 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. The company's sales strategy also includes focusing on long-standing relationships with many of the leading defense prime contractors, which yield growth opportunities from new product development and additional sales opportunities of existing products to these customers.

Inflationary costs are expected to continue but are not expected to have a significant impact on operating income in fiscal year 2027. The labor workforce remains stable, and management continues to closely monitor workforce labor requirements to support the sales backlog and planned delivery schedules. Longer time-to-hire challenges remain for certain positions due to specific skillsets required, and unemployment rates in the local geographic region trend lower than the national average, creating a competitive recruiting environment. The company continues to offer on-the-job training and, when necessary, recruits personnel outside the local region. Combined with supply chain constraints, unforeseen labor disruptions could delay shipments and result in missing 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 engineering design efforts, and it is not uncommon to experience technical or scheduling delays arising from design complexity, availability of personnel with requisite expertise, requirements to obtain customer approval at various milestones, and extended delivery lead times on material required for prototypes.

Capital expenditures, primarily for machinery and equipment and facility upgrades, are not expected to exceed $500,000 ³⁸ for fiscal year 2027, in addition to those funded by grants the company was awarded. A majority of these expenditures will be made to stay competitive in the marketplace and to meet the needs of current contracts. The company has budgeted approximately $500,000 ³⁹ for new equipment and plant improvements in fiscal year 2027, not reimbursable under any funding award. The company expects that working capital will be required to fund orders, general operations of the business, and dividend payments. Management, along with the Legal Affairs, Strategic Planning, and M&A Committee of the Board of Directors, will examine opportunities involving acquisitions or other strategic options, including buying certain products or product lines, provided that such opportunities demonstrate synergies with the company's existing product base and accretion to earnings.

The company's research and development expenditures were approximately $69,902 ⁴⁰ in fiscal year 2026 and $71,074 ⁴¹ in fiscal year 2025. The company does very little research and development with the intent to develop and market new product offerings for sale to customers, as its business primarily is driven by customer product needs and custom product development funded by the applicable customers. The company incurs research costs to support a request for quotation from a customer product-specific need usually associated with stringent size and weight requirements, and engineers and technicians spend varying amounts of time identifying improvements to existing products with the primary objective of reducing production costs. The company's capital allocation strategy includes evaluating the need and use of working capital, with expectations that working capital will be required to fund orders, general operations, and dividend payments. Under existing authorizations from the Board of Directors, as of June 30, 2026, management is authorized to purchase an additional $783,460 ⁴² of company stock.

The company faces headwinds from ongoing demand in the power electronics industry across multiple manufacturing sectors, which continues to create shortages and extended lead times for components, with waiting times for certain components approaching a year or more. Tariffs on steel and aluminum imports from various countries continue to be in effect, and although the company is not currently experiencing any significant financial or raw material sourcing issues resulting from the product tariffs, it cannot provide any assurance that existing tariffs, potential additional tariffs, and associated volatility arising from foreign trade policies will not have a negative impact on future earnings by increasing raw material prices and augmenting lead times. The company also faces risks from changing priorities or decreases in the U.S. government's defense budget, termination of government contracts due to unilateral government action, differences in anticipated and actual program performance, including the ability to perform under long-term fixed-price contracts within estimated costs, and performance issues with key suppliers and subcontractors.

The company's international sales are denominated in United States dollars, and a strengthening of the United States dollar against foreign currencies could increase the price in local currencies of its products in foreign markets and make its products relatively more expensive than competitors' products. The company's U.S. Government contract and subcontract orders are funded by government budgets, which operate on an October-to-September fiscal year, and there are two primary risks associated with this process: the process may be delayed or disrupted because of congressional schedules, negotiations over funding levels for programs or unforeseen world events, which could alter the funding for a program or contract, and funding for multi-year contracts can be changed by future appropriations, which could affect the timing of funds, schedules and program content. The company also faces risks from cost overruns which can be caused from technical and schedule delays and increased raw material costs, which could negatively impact the timing of the conversion of backlog into sales, or the profitability of such sales.

Management's message to shareholders emphasizes expectations for fiscal year 2027 revenues to outpace fiscal year 2026, with a sales mix expected to shift toward new products with heavier engineering investments that may temporarily compress near-term gross profits but build a foundation for long-term production revenue. Management highlights manufacturing scaling and efficiency initiatives expected to offset these initial costs and support gross margins, and expects fiscal year 2027 new orders to meet or exceed fiscal year 2026 levels. Strategic priorities include focusing on long-standing relationships with leading defense prime contractors, targeting programs that generate future longer-term production tails, and pursuing opportunities with current and new customers to lower the concentration of sales and mitigate excessive reliance upon a single major product or significant customer. Management also emphasizes the evaluation of working capital needs, with capital expenditures not expected to exceed $500,000 ⁴⁷ for fiscal year 2027, and the examination of acquisition or other strategic options that demonstrate synergies with the existing product base and accretion to earnings.

Net sales for fiscal year 2026 were $46,124,325 ⁴⁸, compared to $43,950,872 ⁴⁹ in fiscal year 2025, a 4.95% ⁵⁰ increase. Net income was $11,179,759 ⁵¹ in fiscal year 2026, compared to $8,142,954 ⁵² in fiscal year 2025. Diluted earnings per share were $3.89 ⁵³ in fiscal year 2026, compared to $3.02 ⁵⁴ in fiscal year 2025. Gross profit was $16,284,133 ⁵⁵ in fiscal year 2026, compared to $12,684,631 ⁵⁶ in fiscal year 2025, with gross margin of 35.3% ⁵⁷ and 28.9% ⁵⁸, respectively. Operating income was $11,594,684 ⁵⁹ in fiscal year 2026, compared to $8,126,686 ⁶⁰ in fiscal year 2025. The company's cash and cash equivalents were $19,436,966 ⁶¹ at June 30, 2026, compared to $18,862,645 ⁶² at June 30, 2025, and total investment securities were $26,006,718 ⁶³ at June 30, 2026, compared to $24,717,245 ⁶⁴ at June 30, 2025. Net cash provided by operating activities was $5,690,524 ⁶⁵ in fiscal year 2026, compared to $20,991,372 ⁶⁶ in fiscal year 2025. The company's working capital was approximately $54.7 million ⁶⁷ at June 30, 2026, compared to approximately $45.7 million ⁶⁸ at June 30, 2025. The effective tax rate was approximately 16.0% ⁶⁹ in fiscal year 2026 and approximately 16.3% ⁷⁰ in fiscal year 2025. The company recognized a one-time $300,000 ⁷¹ Capital Investment Grant in fiscal 2025 related to the construction completion of the Magnetics Center of Excellence, which increased other income in that period. For segment performance, manufacturing jobs revenue totaled $37,582,698 ⁷² in fiscal year 2026, and engineering jobs revenue totaled $8,541,627 ⁷³ in fiscal year 2026.

The company's business is highly concentrated, with sales to five customers accounting for 67% ⁴³ of total sales in fiscal year 2026, and sales to six customers accounting for 74% ⁴⁴ of total sales in fiscal year 2025. The related accounts receivable balance, as a percentage of total trade accounts receivable, was 60% ⁴⁵ represented by three customers at June 30, 2026, and 51% ⁴⁶ represented by three customers at June 30, 2025. The loss of one of these customers or programs could impact financial performance. The company's contracts are subject to termination for convenience by the U.S. Government, and although contracts meet the enforceability criteria of ASC 606 because the customer is legally obligated to reimburse all costs incurred through the termination date, they do not provide a contractual right to a profit margin upon cancellation. The company faces risks from changing priorities or decreases in the U.S. government's defense budget, termination of government contracts due to unilateral government action, and differences in anticipated and actual program performance, including the ability to perform under long-term fixed-price contracts within estimated costs. Tariffs on steel and aluminum imports continue to be in effect, and the company cannot provide assurance that existing tariffs, potential additional tariffs, and associated volatility arising from foreign trade policies will not have a negative impact on future earnings by increasing raw material prices and augmenting lead times. The company also faces risks from ongoing demand in the power electronics industry creating shortages and extended lead times for components, with waiting times for certain components approaching a year or more, which could cause the company to miss projected delivery dates.