Espey Mfg. & Electronics Corp. (NYSE American: ESP) is a leading designer and manufacturer of high-reliability power electronics solutions for the military, industrial, and commercial markets. With a rich history dating back to 1928, the company has established itself as a trusted partner, delivering innovative products and services that meet the demanding requirements of its customers.
Business Overview
Espey operates a 150,000+ square foot facility in Saratoga Springs, New York, where it designs, manufactures, and tests a wide range of power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, UPS systems, antennas, and high-power radar systems. The company's vertically integrated capabilities allow it to control the entire production process, from individual component manufacturing to final product assembly and testing.
Espey's primary markets include the military, industrial, and commercial sectors, with a focus on mission-critical applications. The company's products are used in a variety of platforms, including AC and DC locomotives, shipboard power, shipboard radar, airborne power, ground-based radar, and ground mobile power. Espey's diversified customer base includes large industrial manufacturers, defense companies, the U.S. government, foreign governments, and major foreign electronic equipment companies.
Financials
Espey has demonstrated consistent financial performance, with annual net income of $3,677,131 and annual revenue of $35,592,323 in its most recent fiscal year. The company's annual operating cash flow was $3,899,870, and its annual free cash flow was $3,387,854, highlighting its strong liquidity and ability to generate cash.
For the first nine months of the current fiscal year, Espey reported net sales of $27,125,408, compared to $27,249,520 in the same period last year, a slight decrease of 0.5%. Net income for the first nine months of the current fiscal year was $3,921,844, or $1.58 and $1.56 per share, basic and diluted, compared to $2,781,596, or $1.13 per share, basic and diluted, in the same period last year.
The company's gross profit margin for the first nine months of the current fiscal year was 27.5%, compared to 22.2% in the same period last year. The improvement in gross margin was primarily due to favorable product mix, increased margins on a large transformer contract, and the absence of significant unanticipated costs incurred on a fixed-price engineering design contract in the prior year.
Selling, general, and administrative expenses for the first nine months of the current fiscal year were $3,044,591, an increase of $315,891 compared to the same period last year, mainly due to higher employee compensation costs, including the addition of a new business development employee.
Liquidity
Espey maintains a strong balance sheet, with working capital of $36.6 million as of March 31, 2024. The company has access to a $3 million line of credit, which it has not utilized in the last two fiscal years, demonstrating its financial flexibility and ability to fund operations and growth initiatives organically.
During the first nine months of the current fiscal year, Espey generated $7.4 million in cash from operating activities, an increase compared to $7.1 million in the same period last year. The company used $3.9 million in investing activities, primarily for plant improvements and new equipment, of which $4.3 million was reimbursed or eligible for reimbursement under a $7.4 million grant award from the U.S. Navy.
Backlog and Outlook
Espey's total backlog as of March 31, 2024 was $84.2 million, which included approximately $54.5 million from five significant customers. The company expects revenues in fiscal year 2024 to be higher than revenues during fiscal year 2023 and expects net income per share to be higher in fiscal 2024 as compared to the net income per share realized during fiscal year 2023.
Management continues to focus on diversifying the company's customer base and product mix to mitigate the risks associated with its concentration in the military and rail industries. The company is also actively pursuing new engineering design and development contracts, as well as follow-on production awards, to ensure optimal utilization of its engineering personnel and secure future revenue streams.
Risks and Challenges
Espey operates in a highly competitive industry, with pressure on pricing and profit margins. The company's reliance on a small number of significant customers, as well as its exposure to the military and rail industries, presents risks related to program allocations, government spending, and industry fluctuations.
Additionally, the company faces challenges related to supply chain disruptions, including extended lead times and part obsolescence, which can impact its ability to meet customer delivery schedules. Espey is actively working with its customers and suppliers to mitigate these issues, but they may continue to affect the company's operations in the near term.
Conclusion
Espey Mfg. & Electronics Corp. is a well-established power electronics manufacturer with a diversified product portfolio and customer base. The company's consistent financial performance, strong liquidity, and focus on innovation position it well to navigate the challenges in its industry and capitalize on future growth opportunities. With a robust backlog, a talented engineering team, and a commitment to operational excellence, Espey is poised to continue delivering value to its shareholders.