0001174947-23-000786.txt : 20230515
0001174947-23-000786.hdr.sgml : 20230515
20230515160150
ACCESSION NUMBER: 0001174947-23-000786
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 47
CONFORMED PERIOD OF REPORT: 20230331
FILED AS OF DATE: 20230515
DATE AS OF CHANGE: 20230515
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ESPEY MFG & ELECTRONICS CORP
CENTRAL INDEX KEY: 0000033533
STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679]
IRS NUMBER: 141387171
STATE OF INCORPORATION: NY
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-04383
FILM NUMBER: 23921799
BUSINESS ADDRESS:
STREET 1: 233 BALLSTON AVE
STREET 2: COR. CONGRESS & BALLSTON AVES.
CITY: SARATOGA SPRINGS
STATE: NY
ZIP: 12866
BUSINESS PHONE: 5185844100
MAIL ADDRESS:
STREET 1: 233 BALLSTON AVE
CITY: SARATOGA SPRINGS
STATE: NY
ZIP: 12866
FORMER COMPANY:
FORMER CONFORMED NAME: ESPEY MANUFACTURING & ELECTRONICS CORP
DATE OF NAME CHANGE: 19920703
10-Q
1
esp-20230331.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 March 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 York12866
(Address of principal executive
offices)
(518)245-4400
(Registrant's telephone
number, including area code)
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 May 11, 2023, there were 2,702,633 shares outstanding of the registrant's
Common stock, $.33-1/3 par value.
Trade accounts receivable, net of allowance of $3,000
4,330,385
5,733,174
Inventories:
Raw materials
1,964,258
2,037,483
Work-in-process
262,875
315,547
Costs related to contracts in process
16,461,404
16,207,419
Total inventories
18,688,537
18,560,449
Prepaid expenses and other current assets
2,475,723
992,774
Total current assets
43,952,828
37,099,236
Property, plant and equipment, net
2,612,561
2,797,993
Total assets
$
46,565,389
$
39,897,229
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable
$
2,898,852
$
2,079,177
Accrued expenses:
Salaries and wages
542,180
627,187
Vacation
751,888
666,380
ESOP payable
230,403
—
Other
276,362
752,554
Payroll and other taxes withheld
57,248
55,292
Contract liabilities
6,566,188
3,384,474
Income taxes payable
292,742
54,722
Total current liabilities
11,615,863
7,619,786
Deferred tax liabilities
146,644
177,829
Total liabilities
11,762,507
7,797,615
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 March 31, 2023 and June 30, 2022. Outstanding 2,702,633 shares as of March 31, 2023 and June 30, 2022 (includes 239,427 and 256,293 Unearned ESOP shares, respectively)
1,043,291
1,043,291
Capital in excess of par value
23,269,445
23,104,693
Accumulated other comprehensive loss
(377
)
(1,932
)
Retained earnings
21,216,818
18,679,857
45,529,177
42,825,909
Less: Unearned ESOP shares
(4,687,604
)
(4,687,604
)
Cost of 427,241 shares of common stock in treasury as of March 31, 2023 and June 30, 2022
(6,038,691
)
(6,038,691
)
Total stockholders’ equity
34,802,882
32,099,614
Total liabilities and stockholders' equity
$
46,565,389
$
39,897,229
The accompanying notes are an integral part of the financial statements.
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, 2022. 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 March 31, 2023 and June 30, 2022 because of the immediate or short-term maturity of these financial instruments.
Investment securities at March 31, 2023 consists
of certificates of deposit, municipal bonds and U.S. treasury bills and at June 30, 2022 consisted of certificates of deposit and municipal
bonds. 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 March 31, 2023
and June 30, 2022 are as follows:
The portfolio is diversified and highly liquid
and primarily consists of investment grade fixed income instruments. At March 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 March 31, 2023 and June 30, 2022, 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
March 31, 2023
Available-for-sale
$
13,622,615
$
256,722
$
13,879,337
June 30, 2022
Available-for-sale
$
3,639,000
$
69,779
$
3,708,779
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 164,231 shares of our common stock for the three
and nine months ended March 31, 2023 and 264,978 shares for the three and nine months ended March 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 March 31, 2023 and 2022 was $61,575 and $39,699, 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 March 31, 2023 and 2022, was $8,580 and $6,582, respectively. The deferred tax benefit related to the
NQSOs as of March 31, 2023 and 2022 was approximately $1,802 and $1,382, respectively. Total stock-based compensation expense recognized
in the statements of comprehensive income for the nine-month periods ended March 31, 2023 and 2022, was $164,752 and $134,266, respectively,
before income taxes. The amount of this stock-based compensation expense related to NQSOs for the nine-month periods ended March 31, 2023
and 2022, was $22,061 and $22,705, respectively. The deferred tax benefit related to the NQSOs’ as of March 31, 2023 and 2022 was
approximately $4,633 and $4,768, 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 March 31, 2023, there was approximately
$210,042 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the next 2
years, of which $175,074 relates to ISOs and $34,968 relates to NQSOs. The total deferred tax benefit related to these awards is expected
to be $7,343.
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. As of March
31, 2023, options covering 381,104 shares have been granted, of which 245,381 are outstanding, and options covering 135,723 shares have
been cancelled. As of March 31, 2023, options covering 154,619 shares remain available for grant, after factoring in 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 March 31, 2023, 50,750 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 nine months ended March 31, 2023 and 2022.
March 31, 2023
March 31, 2022
Company’s expected volatility
27.16%
25.56%
Risk-free interest rate
2.69%
0.93%
Expected term
5.4 yrs
5.4 yrs
Weighted average fair value per share of options granted during the period
$4.16
$3.72
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 nine months ended March 31, 2023:
Employee Stock Options Plan
Weighted
Number of
Weighted
Average
Shares
Average
Remaining
Aggregate
Subject
Exercise
Contractual
Intrinsic
to Option
Price
Term
Value
Balance at July 1, 2022
246,273
$
20.89
6.73
Granted
73,200
$
13.71
9.36
Exercised
—
—
—
Forfeited or expired
(23,342
)
$
20.46
—
Outstanding at March 31, 2023
296,131
$
19.15
6.73
$
874,322
Vested or expected to vest at March 31, 2023
271,591
$
19.60
6.53
$
726,483
Exercisable at March 31, 2023
164,231
$
23.13
4.99
$
74,965
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 March 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 March 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 nine months ended March
31, 2023 and 2022 was $0, resulting from no option exercise activity during those periods.
The following table summarizes changes in non-vested stock options
during the nine months ended March 31, 2023:
Weighted Number
Average
of Shares
Grant Date
Subject
Fair Value
to Option
(per Option)
Non-vested at July 1, 2022
104,175
$
2.92
Granted
73,200
$
4.16
Vested
(34,075
)
$
1.59
Forfeited or expired
(11,400
)
$
2.73
Non-vested at March 31, 2023
131,900
$
3.97
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 March 31, 2023 and June 30, 2022. 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 Espey’s property in Saratoga Springs, NY, with completion slated for 2024. The Company expects to
be paid within 30 days after the submission of invoices, but will not be paid for expenses incurred in excess of the specified milestone
payment limits.
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.
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 nine months
ended March 31, 2023 based on units delivered was $6,957,142 and $20,674,371, respectively, compared to $7,291,109 and $19,883,573 for
the same period in fiscal year 2022. Total revenue recognized for the three and nine months ended March 31, 2023 based on milestones
achieved was $2,852,474 and $6,575,149, respectively, compared to $1,328,940 and $3,739,958 for the same period in fiscal year 2022.
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 March 31, 2023. Our payment terms are generally 30-60 days.
Contract liabilities were $6,566,188 and $3,384,474 as of March 31, 2023
and June 30, 2022, respectively. The increase in contract liabilities is primarily due to the advance collection of cash on specific contracts,
offset in part, by revenue recognized. Revenue recognized, that was in contract liabilities in the beginning of the fiscal year, was $3,051,528
for the nine months ended March 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 March 31, 2023 totaling
approximately $82.1 million is projected, based on expected due dates, to be recognized in the following fiscal years: 11% in 2023; 47% in 2024; 27% in 2025, and 15% thereafter.
Note 7. Recently Issued Accounting Standards
Recent Accounting Pronouncements Adopted
In December 2019, the FASB issued ASU 2019-12, “Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 amends ASC 740 to simplify the accounting for income
taxes by removing certain exceptions for investments, intraperiod allocations and interim calculations, and adding guidance to reduce
complexity in the accounting standard under the FASB’s simplification initiative. ASU 2019-12 is effective for public entities for
fiscal years beginning after December 15, 2020. Upon adoption, the amendments in ASU 2019-12 should be applied on a prospective basis
to all periods presented. The Company adopted the new guidance under ASU 2019-12 in the first quarter of fiscal year 2022 and removed
the exception for intraperiod allocations from its interim period tax provision calculation, accordingly. The removal of the exception
for intraperiod allocations did not have a material impact on the Company.
Recent Accounting Pronouncements Not Yet 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 is expected to adopt the new guidance
under ASU 2016-13 in the first quarter of fiscal year 2024, beginning July 1, 2023, and is currently evaluating the impact of the adoption
on its financial statements.
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 $100,555 and $77,045
for the three-month periods ended March 31, 2023 and 2022, respectively. ESOP compensation expense was $256,032 and $245,362 for the nine-month
periods ended March 31, 2023 and 2022, respectively.
The ESOP shares as of March
31, 2023 and 2022 were as follows:
March 31, 2023
March 31, 2022
Allocated shares
462,311
472,955
Committed-to-be-released shares
16,866
17,352
Unreleased shares
239,427
262,077
Total shares held by the ESOP
718,604
752,384
Fair value of unreleased shares
$
4,848,397
$
3,642,870
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 nine months ended March 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 provisions of the Plan. Share distributions
from the ESOP during the nine months ended March 31, 2023 and 2022 totaled 33,780 and 14,265 shares, respectively.
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.
We continue to place an emphasis on securing “build
to print” opportunities, which will allow production work to go directly to the manufacturing floor, limiting the impact on our
engineering staff. This allows us to keep our manufacturing team busy while the products are being developed in-house for production.
The total backlog at March 31, 2023 was
approximately $82.1 million, which included approximately $66.3 million from six significant customers, compared to $76.2 million at
March 31, 2022, which included $47.5 million from four significant customers. The Company’s total backlog represents the
estimated remaining sales value of work to be performed under firm contracts. The backlog at March 31, 2023 is fully funded except
for $32 thousand, representing one firm multi-year order from a single customer for which funding has not yet been appropriated by
Congress and/or the customer has not funded the program. 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 March 31, 2022 was
approximately $0.4 million and represented two firm multi-year orders from a single customer for which funding had not yet been
appropriated by Congress and/or funded by our customer. 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.
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. We continue to experience technical and schedule delays with certain
major development programs. The issues causing the delays are being resolved as soon as possible and we continue to work with our customers
on newly arising delays. Engineering programs in both the funded and unfunded portions of the current backlog aggregate $6.9 million.
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 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.
Management expects revenues in fiscal year 2023 to
be higher than revenues during fiscal year 2022 and expects net income per share to be higher in fiscal 2023 as compared to the net income
per share realized during fiscal year 2022. These expectations are driven by orders already in our sales backlog. 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. Financial performance will remain a challenge
as we navigate a current difficult environment of inflation and parts shortages.
Effects from global events and the resulting supply
chain disruptions continue to place pressure on the cost of raw materials, freight, utility, labor and other production and administrative
costs. These inflationary cost challenges are expected to continue to have a negative impact on operating income in fiscal year 2023.
Volatile raw material indexes and shortages have led to wide-spread vendor price increases. For our executed fixed-price contracts, we
will either singularly or in combination, continue to 1) be required to absorb the increased costs 2) mitigate cost increases through
the identification of additional supply chain buying strategies or 3) submit for price remediation assistance from our customers which
is not guaranteed nor recognized by the Company until awarded and definitized. To minimize exposure on future fixed-price contracts, we
continue to incorporate inflationary increases to product quotations provided to our customers, some of which have resulted in significant
price increases. As additional mitigation steps, we have, in many instances, reduced the time in which certain product quotations remain
valid and have also extended lead times for product deliveries. We continue to work with our customers to mitigate any adverse impact
upon our ability to service their requirements.
The Company currently expects new orders in fiscal
2023 to approximate the $43.2 million in new orders received in fiscal year 2022. 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.
New orders received in the first nine months of fiscal
year 2023 were $32.6 million as compared to $34.1 million new orders received in the first nine months of fiscal 2022. It is presently
anticipated that a minimum of $8.7 million of orders comprising the March 31, 2023 backlog will be filled during the fiscal year ending
June 30, 2023 subject, however, to the impact of the factors identified above. The minimum of $8.7 million does not include any shipments,
which may be made against orders subsequently received during the fiscal year ending June 30, 2023.
In addition to the backlog, the Company currently
has outstanding opportunities representing approximately $88 million in the aggregate as of May 8, 2023 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 two significant customers represented 60% of the Company’s total sales for the three-month period ended March 31, 2023.
Net sales to four significant customers represented 61% of the Company’s total sales for the three-month period ended March 31,
2022. Net sales to four significant customers represented 73% of the Company’s total sales for the nine-month period ended March
31, 2023. Net sales to four significant customers represented 55% of the Company’s total sales for the nine-month period ended March
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 net sales is generated from contracts
with industrial manufacturers and defense companies, the Department of Defense, other agencies of the government of the United States
and foreign governments for the design, development and/or manufacture of products. 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.
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 March 31, 2023
and 2022 were $9,809,616 and $8,620,049, respectively, a 13.8% increase. Net sales for the nine months ended March 31, 2023 and 2022 were
$27,249,520 and $23,623,531, respectively, a 15.3% 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. Overall, for the three and nine months ended March 31, 2023, sales increased as
a direct result of an overall higher sales backlog generated from strong new order bookings over the last several years.
For the three months ended March 31, 2023, sales increased
primarily due to an increase in shipments on three build to print contracts which had no or fewer sales in the comparable period last
year. One of these contracts is a new shorter-duration program in which shipments commenced in the current quarter. Another contract is
a large longer-duration build to print contract in which the company designed a magnetics component for the order, all of which is now
in the early phases of production. In addition, sales increased in the current quarter on a large contract for a power supply previously
designed by the Company which had no comparable sales in the prior period. These increases were offset, in part, by decreases in sales,
between the comparable periods, related to contracts which had reached contract completion, timing of contractual delivery schedules or,
to a lesser degree, orders impeded by longer material lead times.
Sales increased in the nine months ended March 31,
2023, primarily due to an increase in shipments on contracts related to a family of power distribution transformers for a single customer
when compared to sales recognized in the prior year. In addition, sales increased in the current year on multiple new and repeat build
to print contracts which had no or significantly fewer comparable sales in the same period last year. In addition, sales increased in
the current year from a large contract for a power supply previously designed by the Company which had no comparable sales in the prior
period. These increases were offset, in part, by decreases in sales, between the comparable periods, related to several contracts due
to contract completion, timing of contractual delivery schedules and certain programs impeded by longer material lead times.
Gross profits for the three months ended March 31,
2023 and 2022 were $1,973,429 and $1,734,880, respectively. Gross profit as a percentage of sales was approximately 20.1% and 20.1%, for
the same periods, respectively. Gross profits for the nine months ended March 31, 2023 and 2022 were $6,046,293 and $4,294,795, respectively.
Gross profit as a percentage of sales was approximately 22.2% and 18.2% for the same periods, respectively.
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.
The increase in gross profit for the three months
ended March 31, 2023 when compared to the same period last year resulted primarily from an increase in sales and the product mix comprising
those sales. Gross profit in the current quarter was favorably impacted by sales on certain build to print shipments. In addition, gross
profit was favorably impacted in the current quarter from improved margins on a specific large fixed priced magnetics engineering and
production contract which was negatively impacted in the comparable prior year by unforeseen significant increases in material costs,
a direct result of inflationary and volatile pricing for certain raw material and components. The current quarter gross profit was negatively
impacted by significant costs incurred on a certain fixed-priced engineering design contract for a power supply due to the ongoing unforeseen
complexity of the design and the identification of additional costs required to screen a large volume of parts due to the unavailability
of mil-spec rated parts in the marketplace, a result of part obsolescence or exceptionally long lead times. The Company has submitted
a request for an equitable price adjustment due to these rising costs for this particular program which is not guaranteed and will not
be recognized by the Company unless the request is agreed to and the terms formalized.
The increase in gross profit for the nine months ended
March 31, 2023 when compared to the same period last year resulted from an increase in sales and a higher overall gross profit percentage
comprising those shipments which was influenced by product mix. In the current period, gross profit was favorably impacted from higher
sales and improved margins on a specific magnetics contract and certain build to print contracts, resulting from manufacturing improvements.
The current period gross profit was negatively impacted by significant costs incurred on a certain fixed-priced engineering design contract
for a power supply due to the ongoing unforeseen complexity of the design and the identification of additional costs required to screen
a large volume of parts due to the unavailability of mil-spec rated parts in the marketplace due to part obsolescence or exceptionally
long lead times. The prior year gross profit was negatively impacted by certain programs which had higher sales in the prior year and
contributed less to gross profit as the result of cost overruns when compared to the same period this year. These cost overruns
included labor from both production and engineering efforts made and the impact of inflationary pricing on materials for certain fixed-price
contracts. In addition, to a lesser extent, specific to the prior year, gross profit was negatively impacted by the expensing of
remaining development costs formerly capitalized in inventory on a specific engineering design program in which our customer had delayed
unit qualification testing and for which production units were not expected to be manufactured in the near term.
Selling, general and administrative expenses were
$1,014,739 for the three months ended March 31, 2023, an increase of $81,014, compared to the three months ended March 31, 2022. Selling,
general and administrative expenses were $2,728,700 for the nine months ended March 31, 2023, a decrease of $386,015 compared to the nine
months ended March 31, 2022. The increase in spending for the three months ended March 31, 2023 as compared to the same period in 2022
relates primarily to selling costs for an outside sales representative related to specific programs in addition to an increase in costs
incurred for conferences and training expenditures and travel expenses. Lower costs were incurred for the nine months ended March 31,
2023, comparably, as the prior year spending included specific non-recurring costs attributed to a change in senior management. In addition,
fewer costs were incurred in the current period when compared to the prior period resulting from a decrease in board of directors fees
resulting from a reduction of two non-employee directors and lower professional recruiting costs incurred. The decreases in the current
period were offset, in part, by increases in conference and training expenditures incurred.
Other income for the three months ended March 31,
2023 and 2022 was $145,810 and $5,661, respectively. Other income for the nine months ended March 31, 2023 and 2022 was $231,926 and $37,049,
respectively. The increase for the three and nine 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 nine months ended March 31, 2023 was approximately 21.5% and 21.6% respectively, compared to 18.0% and 18.8% for the three and nine
months ended March 31, 2022. The effective tax rate in fiscal 2023 is 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 the current year,
there was no benefit received from ESOP dividends paid on allocated shares due to the suspension of the company dividend thru February
2023. The effective tax rate in fiscal 2022 was less than the statutory tax rate mainly from the benefit derived from the ESOP dividends
paid on allocated shares prior to the dividend suspension. The effective tax rate in the three and nine month periods ended March 31,
2023 was higher than the prior year as the direct result of a higher income before taxes in the current fiscal year offset, in part, by
a decreased benefit derived from ESOP dividends paid on allocated shares.
Net income for the three months ended March
31, 2023, was $867,288 or $0.35 per share, basic and diluted, compared to net income of $661,359 or $0.27 per share, basic and diluted,
for the three months ended March 31, 2022. Net income for the nine months ended March 31, 2023 was $2,781,596 or $1.13 per share, basic
and diluted, compared to $988,621 or $0.41 per share, basic and diluted, for the nine months ended March 31, 2022. The increase in net
income in the three months ended March 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. The increase in net income in the nine months ended March 31, 2023 resulted primarily from the increase in gross profit,
an increase in interest income, and a decrease in selling, general and administrative expenses, offset in part, by 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 March 31, 2023 and 2022. The existing line of credit was extended
and expires February 28, 2024.
The Company's working capital as of March 31,
2023 and 2022 was approximately $32.3 million and $28.7 million, respectively. The Company may at times be required to repurchase shares
at the ESOP participants’ request at fair market value. During the three and nine months ended March 31, 2023 and 2022, the Company
did not repurchase any shares held by the ESOP. Under existing authorizations from the Company's Board of Directors, as of March 31, 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:
Nine Months Ended March 31,
2023
2022
Net cash provided by operating activities
$
7,064,437
$
811,078
Net cash used in investing activities
(10,345,016
)
(330,958
)
Net cash used in financing activities
(244,635
)
—
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, an increase in cash collected from trade receivables, an increase
in cash collected from customer advances, and an increase in accounts payable when compared to the comparable period last year offset,
in part, by an increase in prepaid expenses and other current assets between comparable periods. Net cash used in investing activities
increased in the nine months ended March 31, 2023 as compared to the same period in 2022 primarily due to an increase in investment securities
when compared to the same period last year. Cash used in financing activities for the nine months ended March 31, 2023 relates 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 nine months ended March 31,
2023 and 2022, the Company expended $178,513 and $216,500, respectively, for plant improvements and new equipment. The Company has budgeted
approximately $500,000 for new equipment and plant improvements in fiscal year 2023 with the expected actual spending to fall below this
amount due to timing and lead time of certain procurements. The Company expects additional cash outlay in fiscal 2023 associated with
the facility and capital equipment upgrades funded under an award received in the second quarter of the current fiscal year.
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.
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 March 31, 2023 the Company can repurchase
up to $783,460 of its common stock pursuant to an ongoing plan authorized by the Board of Directors. During the quarter ended March
31, 2023 no shares were repurchased.
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.
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
I, David O’Neil, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Espey Mfg. & Electronics Corp;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: May 15, 2023
/s/ David O’Neil
David O’Neil
President and Chief Executive Officer
23
EX-31.2
3
ex31-2.htm
EX-31.2
Exhibit
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
I, Katrina Sparano, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Espey Mfg. & Electronics Corp;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for,
the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented
in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation
of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of
directors (or persons performing the equivalent functions):
(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report
financial information; and
(b)
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: May 15, 2023
/s/ Katrina Sparano
Katrina Sparano
Principal Financial Officer
24
EX-32.1
4
ex32-1.htm
EX-32.1
Exhibit
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
In connection with this quarterly report of Espey
Mfg. & Electronics Corp. (the "Company") on Form 10-Q for the period ended March 31, 2023 as filed with the Securities and
Exchange Commission on the date hereof (the “report”), I, David O’Neil, President and Chief Executive Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
1.
The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in this report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: May 15, 2023
/s/ David O’Neil
David O’Neil
President and Chief Executive Officer
25
EX-32.2
5
ex32-2.htm
EX-32.2
Exhibit 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
In connection with this quarterly report of Espey
Mfg. & Electronics Corp. (the "Company") on Form 10-Q for the period ended March 31, 2023 as filed with the Securities and
Exchange Commission on the date hereof (the “report”), I, Katrina Sparano, Principal Financial Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
The report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.
The information contained in this report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Fiscal period values are FY, Q1, Q2, and Q3. 1st, 2nd and 3rd quarter 10-Q or 10-QT statements have value Q1, Q2, and Q3 respectively, with 10-K, 10-KT or other fiscal year statements having FY.
This is focus fiscal year of the document report in YYYY format. For a 2006 annual report, which may also provide financial information from prior periods, fiscal 2006 should be given as the fiscal year focus. Example: 2006.
Line items represent financial concepts included in a table. These concepts are used to disclose reportable information associated with domain members defined in one or many axes to the table.
For the EDGAR submission types of Form 8-K: the date of the report, the date of the earliest event reported; for the EDGAR submission types of Form N-1A: the filing date; for all other submission types: the end of the reporting or transition period. The format of the date is YYYY-MM-DD.
The type of document being provided (such as 10-K, 10-Q, 485BPOS, etc). The document type is limited to the same value as the supporting SEC submission type, or the word 'Other'.
Indicate number of shares or other units outstanding of each of registrant's classes of capital or common stock or other ownership interests, if and as stated on cover of related periodic report. Where multiple classes or units exist define each class/interest by adding class of stock items such as Common Class A [Member], Common Class B [Member] or Partnership Interest [Member] onto the Instrument [Domain] of the Entity Listings, Instrument.
Indicate 'Yes' or 'No' whether registrants (1) have 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 registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. This information should be based on the registrant's current or most recent filing containing the related disclosure.
Commission file number. The field allows up to 17 characters. The prefix may contain 1-3 digits, the sequence number may contain 1-8 digits, the optional suffix may contain 1-4 characters, and the fields are separated with a hyphen.
Indicate whether the registrant is one of the following: Large Accelerated Filer, Accelerated Filer, Non-accelerated Filer. Definitions of these categories are stated in Rule 12b-2 of the Exchange Act. This information should be based on the registrant's current or most recent filing containing the related disclosure.
Boolean flag that is true when the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Carrying value as of the balance sheet date of liabilities incurred (and for which invoices have typically been received) and payable to vendors for goods and services received that are used in an entity's business. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Amount, after allowance for credit loss, of right to consideration from customer for product sold and service rendered in normal course of business, classified as current.
Carrying value as of the balance sheet date of obligations, excluding pension and other postretirement benefits, incurred through that date and payable for perquisites provided to employees pertaining to services received from them. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Carrying value as of the balance sheet date of obligations incurred and payable for statutory payroll taxes incurred through that date and withheld from employees pertaining to services received from them, including entity's matching share of the employees FICA taxes and contributions to the state and federal unemployment insurance programs. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Carrying value as of the balance sheet date of the obligations incurred through that date and payable for employees' services provided. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Carrying value as of the balance sheet date of obligations incurred and payable for unused vacation time owed to employees based on the entity's vacation benefit given to its employees. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
Value received from shareholders in common stock-related transactions that are in excess of par value or stated value and amounts received from other stock-related transactions. Includes only common stock transactions (excludes preferred stock transactions). May be called contributed capital, capital in excess of par, capital surplus, or paid-in capital.
Sum of the carrying amounts as of the balance sheet date of all assets that are recognized. Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
Sum of the carrying amounts as of the balance sheet date of all assets that are expected to be realized in cash, sold, or consumed within one year (or the normal operating cycle, if longer). Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
Amount of currency on hand as well as demand deposits with banks or financial institutions. Includes other kinds of accounts that have the general characteristics of demand deposits. Also includes short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Excludes cash and cash equivalents within disposal group and discontinued operation.
Represents the caption on the face of the balance sheet to indicate that the entity has entered into (1) purchase or supply arrangements that will require expending a portion of its resources to meet the terms thereof, and (2) is exposed to potential losses or, less frequently, gains, arising from (a) possible claims against a company's resources due to future performance under contract terms, and (b) possible losses or likely gains from uncertainties that will ultimately be resolved when one or more future events that are deemed likely to occur do occur or fail to occur.
Aggregate par or stated value of issued nonredeemable common stock (or common stock redeemable solely at the option of the issuer). This item includes treasury stock repurchased by the entity. Note: elements for number of nonredeemable common shares, par value and other disclosure concepts are in another section within stockholders' equity.
Amount before valuation and LIFO reserves, and progress payments, of inventory associated with long-term contracts, expected to be sold, or consumed within one year or operating cycle, if longer.
Amount before valuation and LIFO reserves of merchandise or goods in the production process expected to be completed within one year or operating cycle, if longer.
Sum of the carrying amounts as of the balance sheet date of all liabilities that are recognized. Liabilities are probable future sacrifices of economic benefits arising from present obligations of an entity to transfer assets or provide services to other entities in the future.
Total obligations incurred as part of normal operations that are expected to be paid during the following twelve months or within one business cycle, if longer.
Amount of asset related to consideration paid in advance for costs that provide economic benefits in future periods, and amount of other assets that are expected to be realized or consumed within one year or the normal operating cycle, if longer.
Amount after accumulated depreciation, depletion and amortization of physical assets used in the normal conduct of business to produce goods and services and not intended for resale. Examples include, but are not limited to, land, buildings, machinery and equipment, office equipment, and furniture and fixtures.
Carrying value as of the balance sheet date of obligations incurred and payable for statutory income, sales, use, payroll, excise, real, property and other taxes. Used to reflect the current portion of the liabilities (due within one year or within the normal operating cycle if longer).
The amount allocated to treasury stock. Treasury stock is common and preferred shares of an entity that were issued, repurchased by the entity, and are held in its treasury.
Number of common stock held in a trust that has been set up specifically to accumulate stock for the sole purpose of distribution to participating employees but not yet earned.
Total number of common shares of an entity that have been sold or granted to shareholders (includes common shares that were issued, repurchased and remain in the treasury). These shares represent capital invested by the firm's shareholders and owners, and may be all or only a portion of the number of shares authorized. Shares issued include shares outstanding and shares held in the treasury.
Amount after tax of increase (decrease) in equity from transactions and other events and circumstances from net income and other comprehensive income, attributable to parent entity. Excludes changes in equity resulting from investments by owners and distributions to owners.
The amount of net income (loss) for the period available to each share of common stock or common unit outstanding during the reporting period and to each share or unit that would have been outstanding assuming the issuance of common shares or units for all dilutive potential common shares or units outstanding during the reporting period.
Amount of income (loss) from continuing operations, including income (loss) from equity method investments, before deduction of income tax expense (benefit), and income (loss) attributable to noncontrolling interest.
The aggregate amount of income or expense from ancillary business-related activities (that is to say, excluding major activities considered part of the normal operations of the business).
Amount, after tax and before adjustment, of unrealized holding gain (loss) on investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale). Excludes unrealized gain (loss) on investment in debt security measured at amortized cost (held-to-maturity) from transfer to available-for-sale.
Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss).
The aggregate total costs related to selling a firm's product and services, as well as all other general and administrative expenses. Direct selling expenses (for example, credit, warranty, and advertising) are expenses that can be directly linked to the sale of specific products. Indirect selling expenses are expenses that cannot be directly linked to the sale of specific products, for example telephone expenses, Internet, and postal charges. General and administrative expenses include salaries of non-sales personnel, rent, utilities, communication, etc.
The average number of shares or units issued and outstanding that are used in calculating diluted EPS or earnings per unit (EPU), determined based on the timing of issuance of shares or units in the period.
Number of [basic] shares or units, after adjustment for contingently issuable shares or units and other shares or units not deemed outstanding, determined by relating the portion of time within a reporting period that common shares or units have been outstanding to the total time in that period.
Amount after tax of increase (decrease) in equity from transactions and other events and circumstances from net income and other comprehensive income, attributable to parent entity. Excludes changes in equity resulting from investments by owners and distributions to owners.
Amount, after tax, of gain (loss) for (increase) decrease in value of benefit obligation for change in actuarial assumptions and increase (decrease) in value of plan assets from experience different from that assumed of defined benefit plan, that has not been recognized in net periodic benefit (cost) credit.
Amount, before adjustment, of tax expense (benefit) for unrealized holding gain (loss) on investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale). Excludes tax expense (benefit) for unrealized gain (loss) on investment in debt security measured at amortized cost (held-to-maturity) from transfer to available-for-sale.
Amount of cash and cash equivalents, and cash and cash equivalents restricted to withdrawal or usage. Excludes amount for disposal group and discontinued operations. Cash includes, but is not limited to, currency on hand, demand deposits with banks or financial institutions, and other accounts with general characteristics of demand deposits. Cash equivalents include, but are not limited to, short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.
Amount of increase (decrease) in cash, cash equivalents, and cash and cash equivalents restricted to withdrawal or usage; including effect from exchange rate change. Cash includes, but is not limited to, currency on hand, demand deposits with banks or financial institutions, and other accounts with general characteristics of demand deposits. Cash equivalents include, but are not limited to, short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates.
The amount of expense recognized in the current period that reflects the allocation of the cost of tangible assets over the assets' useful lives. Includes production and non-production related depreciation.
The increase (decrease) during the reporting period in the aggregate amount of liabilities incurred (and for which invoices have typically been received) and payable to vendors for goods and services received that are used in an entity's business.
The increase (decrease) during the reporting period in amount due within one year (or one business cycle) from customers for the credit sale of goods and services.
The increase (decrease) during the period in the amount due for taxes based on the reporting entity's earnings or attributable to the entity's income earning process (business presence) within a given jurisdiction.
The increase (decrease) during the reporting period in income taxes receivable, which represents the amount due from tax authorities for refunds of overpayments or recoveries of income taxes paid.
The increase (decrease) during the reporting period in the aggregate value of all inventory held by the reporting entity, associated with underlying transactions that are classified as operating activities.
Amount of cash inflow (outflow) from financing activities, including discontinued operations. Financing activity cash flows include obtaining resources from owners and providing them with a return on, and a return of, their investment; borrowing money and repaying amounts borrowed, or settling the obligation; and obtaining and paying for other resources obtained from creditors on long-term credit.
Amount of cash inflow (outflow) from investing activities, including discontinued operations. Investing activity cash flows include making and collecting loans and acquiring and disposing of debt or equity instruments and property, plant, and equipment and other productive assets.
Amount of cash inflow (outflow) from operating activities, including discontinued operations. Operating activity cash flows include transactions, adjustments, and changes in value not defined as investing or financing activities.
Amount of cash outflow to acquire investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale).
The cash outflow associated with the acquisition of long-lived, physical assets that are used in the normal conduct of business to produce goods and services and not intended for resale; includes cash outflows to pay for construction of self-constructed assets.
Amount of cash inflow from sale, maturity, prepayment and call of investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale).
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, 2022. Certain reclassifications may have been made to the prior year financial
statements to conform to the current year presentation.
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 March 31, 2023 and June 30, 2022 because of the immediate or short-term maturity of these financial instruments.
Investment securities at March 31, 2023 consists
of certificates of deposit, municipal bonds and U.S. treasury bills and at June 30, 2022 consisted of certificates of deposit and municipal
bonds. 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 March 31, 2023
and June 30, 2022 are as follows:
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
March 31, 2023
Certificates of deposit
$
13,195,000
$
—
$
—
$
13,195,000
Municipal bonds
$
260,475
$
—
$
(3,752
)
$
256,723
U.S. Treasury Bills
$
424,340
$
3,274
$
—
$
427,614
Total investment securities
$
13,879,815
$
3,274
$
(3,752
)
$
13,879,337
June 30, 2022
Certificates of deposit
$
3,639,000
$
—
$
—
$
3,639,000
Municipal bonds
$
72,225
$
—
$
(2,446
)
$
69,779
Total investment securities
$
3,711,225
$
—
$
(2,446
)
$
3,708,779
The portfolio is diversified and highly liquid
and primarily consists of investment grade fixed income instruments. At March 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 March 31, 2023 and June 30, 2022, the
remaining contractual maturities of available-for-sale debt securities were as follows:
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 164,231 shares of our common stock for the three
and nine months ended March 31, 2023 and 264,978 shares for the three and nine months ended March 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.
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 March 31, 2023 and 2022 was $61,575 and $39,699, 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 March 31, 2023 and 2022, was $8,580 and $6,582, respectively. The deferred tax benefit related to the
NQSOs as of March 31, 2023 and 2022 was approximately $1,802 and $1,382, respectively. Total stock-based compensation expense recognized
in the statements of comprehensive income for the nine-month periods ended March 31, 2023 and 2022, was $164,752 and $134,266, respectively,
before income taxes. The amount of this stock-based compensation expense related to NQSOs for the nine-month periods ended March 31, 2023
and 2022, was $22,061 and $22,705, respectively. The deferred tax benefit related to the NQSOs’ as of March 31, 2023 and 2022 was
approximately $4,633 and $4,768, 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 March 31, 2023, there was approximately
$210,042 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the next 2
years, of which $175,074 relates to ISOs and $34,968 relates to NQSOs. The total deferred tax benefit related to these awards is expected
to be $7,343.
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. As of March
31, 2023, options covering 381,104 shares have been granted, of which 245,381 are outstanding, and options covering 135,723 shares have
been cancelled. As of March 31, 2023, options covering 154,619 shares remain available for grant, after factoring in 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 March 31, 2023, 50,750 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 nine months ended March 31, 2023 and 2022.
March 31, 2023
March 31, 2022
Company’s expected volatility
27.16%
25.56%
Risk-free interest rate
2.69%
0.93%
Expected term
5.4 yrs
5.4 yrs
Weighted average fair value per share of options granted during the period
$4.16
$3.72
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 nine months ended March 31, 2023:
Employee Stock Options Plan
Weighted
Number of
Weighted
Average
Shares
Average
Remaining
Aggregate
Subject
Exercise
Contractual
Intrinsic
to Option
Price
Term
Value
Balance at July 1, 2022
246,273
$
20.89
6.73
Granted
73,200
$
13.71
9.36
Exercised
—
—
—
Forfeited or expired
(23,342
)
$
20.46
—
Outstanding at March 31, 2023
296,131
$
19.15
6.73
$
874,322
Vested or expected to vest at March 31, 2023
271,591
$
19.60
6.53
$
726,483
Exercisable at March 31, 2023
164,231
$
23.13
4.99
$
74,965
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 March 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 March 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 nine months ended March
31, 2023 and 2022 was $0, resulting from no option exercise activity during those periods.
The following table summarizes changes in non-vested stock options
during the nine months ended March 31, 2023:
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 March 31, 2023 and June 30, 2022. 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 Espey’s property in Saratoga Springs, NY, with completion slated for 2024. The Company expects to
be paid within 30 days after the submission of invoices, but will not be paid for expenses incurred in excess of the specified milestone
payment limits.
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.
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 nine months
ended March 31, 2023 based on units delivered was $6,957,142 and $20,674,371, respectively, compared to $7,291,109 and $19,883,573 for
the same period in fiscal year 2022. Total revenue recognized for the three and nine months ended March 31, 2023 based on milestones
achieved was $2,852,474 and $6,575,149, respectively, compared to $1,328,940 and $3,739,958 for the same period in fiscal year 2022.
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 March 31, 2023. Our payment terms are generally 30-60 days.
Contract liabilities were $6,566,188 and $3,384,474 as of March 31, 2023
and June 30, 2022, respectively. The increase in contract liabilities is primarily due to the advance collection of cash on specific contracts,
offset in part, by revenue recognized. Revenue recognized, that was in contract liabilities in the beginning of the fiscal year, was $3,051,528
for the nine months ended March 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 March 31, 2023 totaling
approximately $82.1 million is projected, based on expected due dates, to be recognized in the following fiscal years: 11% in 2023; 47% in 2024; 27% in 2025, and 15% thereafter.
The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts.
In December 2019, the FASB issued ASU 2019-12, “Income
Taxes (Topic 740): Simplifying the Accounting for Income Taxes.” ASU 2019-12 amends ASC 740 to simplify the accounting for income
taxes by removing certain exceptions for investments, intraperiod allocations and interim calculations, and adding guidance to reduce
complexity in the accounting standard under the FASB’s simplification initiative. ASU 2019-12 is effective for public entities for
fiscal years beginning after December 15, 2020. Upon adoption, the amendments in ASU 2019-12 should be applied on a prospective basis
to all periods presented. The Company adopted the new guidance under ASU 2019-12 in the first quarter of fiscal year 2022 and removed
the exception for intraperiod allocations from its interim period tax provision calculation, accordingly. The removal of the exception
for intraperiod allocations did not have a material impact on the Company.
Recent Accounting Pronouncements Not Yet 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 is expected to adopt the new guidance
under ASU 2016-13 in the first quarter of fiscal year 2024, beginning July 1, 2023, and is currently evaluating the impact of the adoption
on its financial statements.
The entire disclosure for change in accounting principle. Includes, but is not limited to, nature, reason, and method of adopting amendment to accounting standards or other change in accounting principle.
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 $100,555 and $77,045
for the three-month periods ended March 31, 2023 and 2022, respectively. ESOP compensation expense was $256,032 and $245,362 for the nine-month
periods ended March 31, 2023 and 2022, respectively.
The ESOP shares as of March
31, 2023 and 2022 were as follows:
March 31, 2023
March 31, 2022
Allocated shares
462,311
472,955
Committed-to-be-released shares
16,866
17,352
Unreleased shares
239,427
262,077
Total shares held by the ESOP
718,604
752,384
Fair value of unreleased shares
$
4,848,397
$
3,642,870
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 nine months ended March 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 provisions of the Plan. Share distributions
from the ESOP during the nine months ended March 31, 2023 and 2022 totaled 33,780 and 14,265 shares, respectively.
Tabular disclosure of investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale).
Tabular disclosure for stock option plans. Includes, but is not limited to, outstanding awards at beginning and end of year, grants, exercises, forfeitures, and weighted-average grant date fair value.
Tabular disclosure of the significant assumptions used during the year to estimate the fair value of stock options, including, but not limited to: (a) expected term of share options and similar instruments, (b) expected volatility of the entity's shares, (c) expected dividends, (d) risk-free rate(s), and (e) discount for post-vesting restrictions.
Amount, before tax, of unrealized gain in accumulated other comprehensive income (AOCI) on investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale).
Amount, before tax, of unrealized loss in accumulated other comprehensive income (AOCI) on investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale).
Amortized cost of investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale).
Line items represent financial concepts included in a table. These concepts are used to disclose reportable information associated with domain members defined in one or many axes to the table.
Fair value of investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale), with single maturity date and allocated without single maturity date, maturing in second through fifth fiscal year following current fiscal year. Excludes interim and annual periods when interim periods are reported from current statement of financial position date (rolling approach).
Fair value of investment in debt security measured at fair value with change in fair value recognized in other comprehensive income (available-for-sale), with single maturity date and allocated without single maturity date, maturing in next fiscal year following current fiscal year. Excludes interim and annual periods when interim periods are reported from current statement of financial position date (rolling approach).
Securities (including those issuable pursuant to contingent stock agreements) that could potentially dilute basic earnings per share (EPS) or earnings per unit (EPU) in the future that were not included in the computation of diluted EPS or EPU because to do so would increase EPS or EPU amounts or decrease loss per share or unit amounts for the period presented.
The percentage of the total number of shares subject to options or awards granted in a single fiscal year; this will take effect only if the percentage is less than a specified amount in the plan contract.
The difference between the maximum number of shares (or other type of equity) authorized for issuance under the plan (including the effects of amendments and adjustments), and the sum of: 1) the number of shares (or other type of equity) already issued upon exercise of options or other equity-based awards under the plan; and 2) shares (or other type of equity) reserved for issuance on granting of outstanding awards, net of cancellations and forfeitures, if applicable.
Amount of accumulated difference between fair value of underlying shares on dates of exercise and exercise price on options exercised (or share units converted) into shares.
For presentations that combine terminations, the number of shares under options that were cancelled during the reporting period as a result of occurrence of a terminating event specified in contractual agreements pertaining to the stock option plan or that expired.
The weighted average fair value at grant date for nonvested equity-based awards issued during the period on other than stock (or unit) option plans (for example, phantom stock or unit plan, stock or unit appreciation rights plan, performance target plan).
The estimated measure of the percentage by which a share price is expected to fluctuate during a period. Volatility also may be defined as a probability-weighted measure of the dispersion of returns about the mean. The volatility of a share price is the standard deviation of the continuously compounded rates of return on the share over a specified period. That is the same as the standard deviation of the differences in the natural logarithms of the stock prices plus dividends, if any, over the period.
Expected term of award under share-based payment arrangement, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents reported fact of one year, five months, and thirteen days.
Weighted average remaining contractual term for option awards granted, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
The number of shares into which fully or partially vested stock options outstanding as of the balance sheet date can be currently converted under the option plan.
The weighted-average price as of the balance sheet date at which grantees can acquire the shares reserved for issuance on vested portions of options outstanding and currently exercisable under the stock option plan.
For presentations that combine terminations, the number of shares under options that were cancelled during the reporting period as a result of occurrence of a terminating event specified in contractual agreements pertaining to the stock option plan or that expired.
Amount by which current fair value of underlying stock exceeds exercise price of fully vested and expected to vest options outstanding. Includes, but is not limited to, unvested options for which requisite service period has not been rendered but that are expected to vest based on achievement of performance condition, if forfeitures are recognized when they occur.
Number of fully vested and expected to vest options outstanding that can be converted into shares under option plan. Includes, but is not limited to, unvested options for which requisite service period has not been rendered but that are expected to vest based on achievement of performance condition, if forfeitures are recognized when they occur.
Weighted-average exercise price, at which grantee can acquire shares reserved for issuance, for fully vested and expected to vest options outstanding. Includes, but is not limited to, unvested options for which requisite service period has not been rendered but that are expected to vest based on achievement of performance condition, if forfeitures are recognized when they occur.
Amount of difference between fair value of the underlying shares reserved for issuance and exercise price of vested portions of options outstanding and currently exercisable.
Weighted average remaining contractual term for vested portions of options outstanding and currently exercisable or convertible, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
Weighted average remaining contractual term for option awards outstanding, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents the reported fact of one year, five months, and thirteen days.
Weighted average remaining contractual term for fully vested and expected to vest options outstanding, in 'PnYnMnDTnHnMnS' format, for example, 'P1Y5M13D' represents reported fact of one year, five months, and thirteen days. Includes, but is not limited to, unvested options for which requisite service period has not been rendered but that are expected to vest based on achievement of performance condition, if forfeitures are recognized when they occur.
The weighted average grant-date fair value of options granted during the reporting period as calculated by applying the disclosed option pricing methodology.
Carrying amount as of the balance sheet date of amounts received from and refundable to customers unless used by them to obtain goods and services from the entity.
Amount of revenue recognized from goods sold, services rendered, insurance premiums, or other activities that constitute an earning process. Includes, but is not limited to, investment and interest income before deduction of interest expense when recognized as a component of revenue, and sales and trading gain (loss).
Line items represent financial concepts included in a table. These concepts are used to disclose reportable information associated with domain members defined in one or many axes to the table.
The shares or units in an ESOP trust that have been assigned to individual participant accounts based on a known formula. IRS rules require allocations to be nondiscriminatory generally based on compensation, length of service, or a combination of both. For any particular participant such shares or units may be vested, unvested, or partially vested.
The shares that, although not legally released, will be released by a future scheduled and committed debt service payment and will be allocated to employees for service rendered in the current accounting period. The ESOP documents typically define the period of service to which the shares relate. ESOP shares are released to compensate employees directly, to settle employer liabilities for other employee benefits, and to replace dividends on allocated shares that are used for debt service.
Shares contributed to the ESOP that have not yet been released, committed to be released, or allocated to participant accounts. Suspense shares generally collateralize ESOP debt.
