What changed in this filing

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Item 1. Business

2021-09-24 compared with 2020-09-21 · 197 added, 197 removed, 36 unchanged (92% of the section changed)

1 unchanged sentence

(“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”

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”

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

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’s 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.

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’s 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

In fiscal years ended June 30, 2021 and

2020, the Company's total sales were $27,734,598 and $31,526,231, respectively.

two domestic customers, accounted for 24%, and 14%, respectively, of total sales in 2020.

Sales to three domestic customers accounted

for 34%, 10%, and 10%, respectively, of total sales in 2019.

This high concentration level with these customers presents significant

A loss of one of these customers or programs related to these customers could significantly impact the financial performance

of 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.

Export sales in fiscal years 2020 and

2019 were approximately $2,077,000 and $2,638,000, respectively.

The decrease is primarily due to the decrease in power supply

Sales to four

domestic customers, accounted for 16%, 15%, 14% and 14%, respectively, of total sales in 2021.

Sales to two domestic customers

accounted for 24%, and 14%, respectively, of total sales in 2020.

Although we have made improvement in the number of significant

customers, this concentration level still presents significant risk.

A loss of one of these customers or programs related to these

customers could significantly impact the financial performance of 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.

Export sales in fiscal years 2021 and 2020 were

approximately $2,019,000 and $2,077,000, respectively.

The decrease is primarily due to the decrease in magnetic sales offset, in part,

by an increase in power supply shipments.

Sources of Raw Materials

The Company has at least two potential

sources of supply for a majority of its raw materials.

However, certain components used in its products are available from a single

or a limited number of sources.

Despite the risk associated with single or limited source suppliers, the benefits of higher quality

goods and timely delivery minimize and often limit any potential risk and can eliminate problems with part failures during production.

At times replacements are required to cover obsolete parts.

The Company has at least two potential sources

of supply for a majority of its raw materials.

However, certain components used in its products are available from a single or a limited

number of sources.

Despite the risk associated with single or limited source suppliers, the benefits of higher quality goods and timely

delivery minimize and often limit any potential risk and can eliminate problems with part failures during production.

At times replacements

are required to cover obsolete parts.

Historically, the Company has not typically

experienced any significant delays or shortages with respect to the purchase of raw materials and components used in the manufacture

of its products.

However, over the past several years, the growth and continuing demand in the power electronics industry across

multiple manufacturing sectors has created volatility and unpredictability in the availability of certain electronic components

and, in some cases, continues to create industry shortages.

These shortages have and 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 resulting from the industry-wide phenomenon.

experienced any significant delays or shortages with respect to the purchase of raw materials and components used in the manufacture of

its products.

However, over the past several years, the growth and continuing demand in the power electronics industry across multiple

manufacturing sectors has created volatility and unpredictability in the availability of certain electronic components and, in some cases,

continues to create industry shortages.

These shortages have and 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.

In addition, we continue to incur delays in material deliveries from some company suppliers due to the COVID-19 pandemic.

We continue to work with our customers to mitigate any adverse impact upon our ability to service their requirements.

The President of the United States continued

the imposition of tariffs on steel and aluminum imports from various countries in 2021.

Although we are not currently experiencing

any significant financial or raw material sourcing issues resulting from the product tariffs, the Company cannot provide any assurance

that the existing tariffs, the potential of additional tariffs, and the associated volatility arising from the Administration’s

foreign trade policies, will not have a negative impact on our future earnings by increasing our raw material prices and augmenting

the lead time for the availability of raw materials.

From time to time the Company must identify

parts to replace parts which are no longer produced.

Although we are not currently experiencing any

significant financial or raw material sourcing issues resulting from the product tariffs, the Company cannot provide any assurance that

the existing tariffs, the potential of additional tariffs, and the associated volatility arising from the Administration’s foreign

trade policies, will not have a negative impact on our future earnings by increasing our raw material prices and augmenting the lead time

for the availability of raw materials.

From time to time the Company must identify parts to replace parts

which are no longer produced.

Sales Backlog

1 unchanged sentence

$65.6 million compared to approximately $54.9 million at June 30, 2020.

The Company’s total backlog represents the estimated

remaining sales value of work to be performed under firm contracts.

The funded portion of this backlog at June 30, 2020 is approximately

$53.9 million.

The Company’s total backlog represents the estimated remaining

sales value of work to be performed under firm contracts.

The funded portion of this backlog at June 30, 2021 is approximately $63.5 million.

This includes items that have been authorized and appropriated by Congress and/or funded by the customer.

backlog at June 30, 2020 is approximately $1 million and represents a firm multi-year order for which funding has not yet been

appropriated by Congress or funded by our customer.

The unfunded backlog at June

30, 2021 is approximately $2.1 million and represents two firm multi-year orders from a single customer for which funding has not yet

been appropriated by Congress or funded by our customer.

While there is no guarantee that future budgets and appropriations will provide

funding for individual programs, management has included in unfunded backlog only those programs that it believes are likely to

receive funding based on discussions with customers and program status.

The unfunded backlog at June 30, 2019 was $2.7 million.

For both fiscal years ended 2020 and 2019, the unfunded backlog is comprised of the same multi-year order from a single 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.

to year end, the Company received a request from a customer to temporarily stop work on a contract for a minimum of 120 days.

has determined that there is no immediate impact for the request, however the Company will continue to evaluate any impact on the financial

The Company's backlog and risks associated with government contracts is discussed in greater detail below.

It is presently anticipated that a minimum

of $32 million of orders comprising the June 30, 2020 backlog will be filled during the

fiscal year ending June 30, 2021.

The minimum of $32 million does not include any shipments

which may be made against orders received subsequently to the fiscal year ending June 30, 2020.

The estimate of the June 30, 2020

backlog to be shipped in fiscal year 2021 is subject to future events, which may cause the amount of the backlog actually shipped

to differ from such estimate.

funding for individual programs, management has included in unfunded backlog only those programs that it believes are likely to receive

funding based on discussions with customers and program status.

The unfunded backlog at June 30, 2020 was approximately $1 million, comprised

of one of the same multi-year orders from a single 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.

It is presently anticipated that a minimum of

$38 million of orders comprising the June 30, 2021 backlog will be filled during the fiscal year

ending June 30, 2022.

The minimum of $38 million does not include any shipments which may be made

against orders received subsequently to the fiscal year ending June 30, 2021.

The estimate of the June 30, 2021 backlog to be shipped

in fiscal year 2022 is subject to future events, which may cause the amount of the backlog actually shipped to differ from such estimate.

Marketing and Competition

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

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.

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.

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.

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.

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, 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.

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, 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

Future procurement needs supporting the military

and the rail industry continues to drive competition.

Many of our competitors have, and they continue to invest aggressively in

and the rail industry continue to drive competition.

Many of our competitors have invested, and they 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 allows 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 being developed in-house

transition to production.

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

We continue to place an emphasis on securing “build

to print”

opportunities, which allows production work to go directly to the manufacturing floor, limiting the impact on our engineering

This allows us to keep our manufacturing team busy while the products being developed in-house transition to production.

Research and Development

1 unchanged sentence

spend varying amounts of time on either the development of new products or improvements to existing products.

A majority of the

resulting costs we incur relate to research that is required to support a request for quotation from a customer product-specific

need usually associated with stringent size and weight requirements.

We do very little pure research as our business primarily

is driven by customer product needs and custom product development with some customer funding.

The Company's expenditures for research

and development were approximately $44,738 and $44,819 in fiscal year 2020 and 2019, respectively.

A majority of the resulting

costs we incur relate to research that is required to support a request for quotation from a customer product-specific need usually associated

with stringent size and weight requirements.

We do very little pure research as our business primarily is driven by customer product needs

and custom product development with some customer funding.

The Company's expenditures for research and development were approximately

$40,912 and $44,738 in fiscal year 2021 and 2020, respectively.

The Company had 150 employees as of August

Approximately 39% of the employees are represented by the International Brotherhood of Electrical Workers.

current collective bargaining agreement expires on June 30, 2022.

collective bargaining agreement expires on June 30, 2022.

Relations with the Union are considered good.

Government Regulations

Compliance with federal, state and local

laws regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, did

not in fiscal year 2020, and the Company believes will not in fiscal year 2021, have a material effect upon the capital expenditures,

net income, or competitive position of the Company.

Compliance with federal, state and local laws

regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, did not in fiscal

year 2021, and the Company believes will not in fiscal year 2022, have a material effect upon the capital expenditures, net income, or

competitive position of the Company.

The Company’s U.S.

1 unchanged sentence

and subcontract orders are funded by government budgets, which operate on an October-to-September fiscal year.

Normally, in February

of each year, the President of the United States presents to Congress a proposed budget for the upcoming fiscal year.

includes recommended appropriations for every federal agency and is the result of months of policy and program reviews throughout

the executive branch.

From February through September of each year, the appropriations and authorization committees of Congress

review the President’s budget proposals and establish the funding levels for the upcoming fiscal year in appropriations and

authorization legislation.

Once these levels are enacted into law, the Executive Office of the President administers the funds

to the agencies.

There are two primary risks associated

with this process.

First, the process may be delayed or disrupted because of congressional schedules, negotiations over funding

levels for programs or unforeseen world events, which could, in turn, alter the funding for a program or contract.

Second, funding

for multi-year contracts can be changed by future appropriations, which could affect the timing of funds, schedules and program

Normally, in February of

each year, the President of the United States presents to Congress a proposed budget for the upcoming fiscal year.

This budget includes

recommended appropriations for every federal agency and is the result of months of policy and program reviews throughout the executive

From February through September of each year, the appropriations and authorization committees of Congress review the President’s

budget proposals and establish the funding levels for the upcoming fiscal year in appropriations and authorization legislation.

levels are enacted into law, the Executive Office of the President administers the funds to the agencies.

There are two primary risks associated with

this process.

First, the process may be delayed or disrupted because of congressional schedules, negotiations over funding levels for

programs or unforeseen world events, which could, in turn, alter the funding for a program or contract.

Second, funding for multi-year

contracts can be changed by future appropriations, which could affect the timing of funds, schedules and program content.

Also, our international sales are denominated

in United States dollars.

Consequently, a strengthening of the United States dollar against foreign currencies could increase the

price in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’

Consequently, a strengthening of the United States dollar against foreign currencies could increase the price

in local currencies of our products in foreign markets and make our products relatively more expensive than competitors’

Defense Contracts and Subcontracts

Generally, U.S.

Government contracts are subject

to procurement laws and regulations.

Some of the Company’s contracts are governed by the Federal Acquisition Regulation (FAR),

which lays out uniform policies and procedures for acquiring goods and services by the U.S.

Government, and agency-specific acquisition

regulations that implement or supplement the FAR.

For example, the Department of Defense implements the FAR through the Defense

Federal Acquisition Regulation (DFAR).

The FAR also contains guidelines and regulations

for managing a contract after award, including conditions under which contracts may be terminated, in whole or in part, at the

government’s convenience or for default.

If a contract is terminated for the convenience of the government, a contractor

is entitled to receive payments for its allowable costs and, in general, the proportionate share of fees or earnings for the work

If a contract is terminated for default, the government generally pays for only the work it has accepted.

These regulations

also subject the Company to financial audits and other reviews by the government of its costs, performance, accounting and general

business practices relating to its contracts, which may result in adjustment of the Company’s contract-related costs and

Government contracts are subject to

procurement laws and regulations.

Some of the Company’s contracts are governed by the Federal Acquisition Regulation (FAR), which

lays out uniform policies and procedures for acquiring goods and services by the U.S.

Government, and agency-specific acquisition regulations

that implement or supplement the FAR.

For example, the Department of Defense implements the FAR through the Defense Federal Acquisition

Regulation (DFAR).

The FAR also contains guidelines and regulations for

managing a contract after award, including conditions under which contracts may be terminated, in whole or in part, at the government’s

convenience or for default.

If a contract is terminated for the convenience of the government, a contractor is entitled to receive payments

for its allowable costs and, in general, the proportionate share of fees or earnings for the work done.

If a contract is terminated for

default, the government generally pays for only the work it has accepted.

These regulations also subject the Company to financial audits

and other reviews by the government of its costs, performance, accounting and general business practices relating to its contracts, which

may result in adjustment of the Company’s contract-related costs and fees.

Cyber or Other Security Threats or Other Disruptions

We routinely experience cybersecurity threats

in the form of unauthorized attempts to gain access to our sensitive information.

The threats we face vary from attacks common

to most industries to more advanced attacks with the specific objective of accessing national security information.

our threat detection and mitigation processes and procedures are above adequate.

The processes and procedures in place are designed

to detect, manage and prevent current threats and respond quickly to detect and mitigate new threats.

To ensure our systems remain

protected, we continually assess and acquire, as appropriate, new available technology and provide employee training to utilize

effectively our technological assets.

Prior cyberattacks directed at us have not had a material impact on our financial results

nor restricted us from being awarded contracts from other defense companies or directly from the United States Department of Defense.

However, we can provide no assurance that the occurrence of any future event would not adversely affect our internal operations,

our reputation and competitive advantage, and our future financial results.

The Company's entire operation, including

administrative, manufacturing and engineering facilities, is located in Saratoga Springs, New York.

The Saratoga Springs plant, which the

Company owns, consists of various adjoining buildings on a 22 acre site, approximately eight acres of which is unimproved.

property is not subject to mortgage indebtedness or any other material encumbrance.

The plant has a sprinkler system throughout

and contains approximately 151,000 square feet of floor space, of which 90,000 is used for manufacturing,

24,000 for engineering, 33,000 for shipping and climatically secured storage, and 4,000 for offices.

The offices, engineering and

some manufacturing areas are air-conditioned.

In addition to assembly and wiring operations, the plant includes facilities for

varnishing, potting, impregnation and spray-painting operations.

The manufacturing operation also includes a complete machine

shop, with welding and sheet metal fabrication facilities adequate for substantially all of the Company's current operations.

normal test equipment, the Company maintains a sophisticated on-site environmental test facility.

In addition to meeting all of

the Company's in-house needs, the machine shop and environmental facilities are available to other companies on a contract basis.

We routinely experience cybersecurity threats in the

form of unauthorized attempts to gain access to our sensitive information.

The threats we face vary from attacks common to most industries

to more advanced attacks with the specific objective of accessing national security information.

We believe our threat detection and mitigation

processes and procedures are above adequate.

The processes and procedures in place are designed to detect, manage and prevent current

threats and respond quickly to detect and mitigate new threats.

To ensure our systems remain protected, we continually assess and acquire,

as appropriate, new available technology and provide employee training to utilize effectively our technological assets.

Prior cyberattacks

directed at us have not had a material impact on our financial results nor restricted us from being awarded contracts from other defense

companies or directly from the United States Department of Defense.

However, we can provide no assurance that the occurrence of any future

event would not adversely affect our internal operations, our reputation and competitive advantage, and our future financial results.

The Company's entire operation, including administrative,

manufacturing and engineering facilities, is located in Saratoga Springs, New York.

The Saratoga Springs plant, which the Company

owns, consists of various adjoining buildings on a 22 acre site, approximately eight acres of which is unimproved.

The property is not

subject to mortgage indebtedness or any other material encumbrance.

The plant has a sprinkler system throughout and contains approximately

151,000 square feet of floor space, of which 90,000 is used for manufacturing, 24,000 for engineering,

33,000 for shipping and climatically secured storage, and 4,000 for offices.

The offices, engineering and some manufacturing areas are

air-conditioned.

In addition to assembly and wiring operations, the plant includes facilities for varnishing, potting, impregnation and

spray-painting operations.

The manufacturing operation also includes a complete machine shop, with welding and sheet metal fabrication

facilities adequate for substantially all of the Company's current operations.

Besides normal test equipment, the Company maintains a

sophisticated on-site environmental test facility.

In addition to meeting all of the Company's in-house needs, the machine shop and environmental

facilities are available to other companies on a contract basis.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business