What changed in this filing

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Item 1. Business

2024-09-27 compared with 2023-09-21 · 148 added, 126 removed, 106 unchanged (72% of the section changed)

12 unchanged sentences

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’s services include design and development

Espey is an ISO 9001:2015 and AS9100:2016 certified

manufacturer of power conversion, advanced magnetics and build to specifications provided by the customer “build to print”

products for the rugged industrial and military marketplace.

Our primary products are power supplies, power converters, filters, power

transformers, magnetic components, power distribution equipment, UPS systems, and antennas.

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 specifications provided by the customer “build to print”, design services, design studies, environmental

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16% and 11%, respectively, of total sales in 2024.

Sales to four domestic customers accounted for 17%, 16%, 14% and 11%, respectively,

Sales to five domestic customers accounted for 23%, 18%, 16%, 13% and 11%, respectively,

of total sales in 2023.

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to more than one business unit of a particular customer.

Export sales in fiscal years 2023 and 2022 were

approximately $549,510 and $1,644,000, respectively.

The decrease is primarily due to the decrease in power supply sales resulting from

the timing of contractual delivery schedules.

Export shipments in fiscal years 2024 and 2023

were $2,350,087 and $549,510, respectively.

The increase is primarily due to the increase in power supply shipments resulting

from a repeat order received which had no comparable shipments in the prior year.

Sources of Raw Materials.

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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.

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

The President of the United States continued

the imposition of tariffs on steel and aluminum imports from various countries in 2022.

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.

Ongoing demand in the power electronics industry across

multiple manufacturing sectors continues to create shortages and extended lead times.

In some instances, waiting times for certain components

approach a year or more.

We adequately factor supplier-provided lead times into internal planning schedules and new customer quotations.

From time to time, we encounter part obsolescence which requires us to identify an alternate part suitable for use.

We continue to work

with our customers on strategies to mitigate any adverse impact upon our ability to service their requirements.

Factors which may arise

after the placement of the customer’s order may cause us to miss projected delivery dates.

Inflationary costs are expected to continue

but are not expected to have a significant impact on operating income in fiscal year 2025.

Tariffs on steel and aluminum imports from various

countries continue to be in effect.

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 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.

Sales Backlog

The total backlog at June 30, 2023 was approximately

$83.6 million compared to approximately $76.8 million at June 30, 2022.

The total sales backlog at June 30, 2024 was $97.2

million, which included approximately $61 million from four significant customers, compared to $83.6 million at June 30, 2023, which

included approximately $66 million from six significant customers.

The Company’s total backlog represents the estimated remaining

sales value of work to be performed under firm contracts.

The funded portion of this backlog at June 30, 2023 was approximately $83.5 million.

Orders from significant customers may include more than a single program and

procurement may originate from various divisions of the significant customer.

The funded portion of this backlog at June 30, 2024 was

approximately $94.9 million.

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

The unfunded backlog at June 30, 2023 was approximately $32 thousand and represents a small amount under one firm multi-year

order from a single customer.

While there is no guarantee that future budgets and appropriations

will provide funding for individual programs, management has included in 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, 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.

The unfunded backlog at June 30, 2024 was approximately $2.3 million and represents an amount under one firm repeat multi-year order from

a single customer.

While there is no guarantee that future budgets and appropriations will provide funding for individual programs, management

has included in 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, 2023 approximated $32 thousand.

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.

The majority of our orders are generated

from prime defense contractors, the United States Department of Defense, other agencies of the government of the United States and foreign

governments, and are for the design and development and/or manufacture of products.

Orders are also generated from industrial manufacturers

for similar services.

It is not uncommon to receive orders which include delivery schedules extending beyond a year from the contract

purchase date, therefore a customer’s reorder point may vary.

It is presently anticipated that a minimum of

$39.5 million of orders comprising the June 30, 2023 backlog will be filled during the fiscal year

ending June 30, 2024.

The minimum of $39.5 million does not include any shipments which may be

made against orders received subsequently to the fiscal year ending June 30, 2023.

The estimate of the June 30, 2023 backlog to be shipped

in fiscal year 2024 is subject to future events, which may cause the amount of the backlog actually shipped to differ from such estimate.

$44 million of orders comprising the June 30, 2024 backlog will be filled during the fiscal year ending June 30, 2025.

The estimate of

the June 30, 2024 backlog to be shipped in fiscal year 2025 is subject to future events, which may cause the amount of the backlog actually

shipped to differ from such estimate.

Marketing and Competition

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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 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.

of our business in the rail industry, and in equipment for military applications and industrial applications, as well as 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.

Future procurement needs supporting the military

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

This continues to put pressure on the pricing of our current products and has lowered our profit margins on some of our new business.

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The Company targets those programs and opportunities which will generate future longer-term production tails in ensuing years.

From time to time, we accept work associated with engineering design studies.

While unlikely to result in near-term follow-on orders,

this positions us competitively on future awards and expands our engineering team’s skillset.

to time, we accept work associated with engineering design studies.

While unlikely to result in near-term follow-on orders, this positions

us competitively on future awards and expands our engineering team’s skillset.

Research and Development

Some of the Company's engineers and technicians

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

$65,427 and $32,362 in fiscal year 2023 and 2022, respectively.

We do very little research and development with

the intent to develop and market new product offerings for sale to customers.

Our business primarily is driven by customer product needs

and custom product development funded by the applicable customers.

We incur research costs to support a request for quotation from a customer

product-specific need usually associated with stringent size and weight requirements.

In addition, the Company's engineers and technicians

spend varying amounts of time identifying improvements to existing products with the primary objective of reducing production costs.

times, engineers are tasked with researching replacement parts to remediate identified obsolescence on current or repeat production programs.

The Company's expenditures for research related activities were approximately $86,714 and $65,427 in fiscal year 2024 and 2023, respectively.

The Company had 148 employees as of August 31,

Approximately 36% of the employees are represented by the International Brotherhood of Electrical Workers.

collective bargaining agreement expires on June 30, 2025.

The current collective

bargaining agreement expires on June 30, 2025.

Relations with the Union are considered good.

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The Company’s U.S.

Government contract

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.

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.

Government contract 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.

This budget includes recommended

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

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

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

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Generally, U.S.

Government contracts are subject to

procurement laws and regulations.

Government contracts are subject

to procurement laws and regulations.

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

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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

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.

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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.

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.

Cybersecurity

Robust cybersecurity is an essential component

of our strategic vision.

We face a variety of complex cybersecurity threats as a defense contractor.

Among the risks are computer malware,

ransomware, phishing attacks, Denial of Service attacks and Advanced Persistent Threats.

Our security team, comprised of members from

senior management, IT, human resources and program management, performs routine risk assessments in accordance with NIST 800-30, using

input from observed risks and threats, advisories, federal agencies and local law enforcement.

The Audit Committee of the Board of

Directors is responsible for oversight of our risk management processes.

The Audit Committee is briefed by senior management on cybersecurity

posture, initiatives and incidents.

We allocate significant resources to mitigate these risks.

We are required to adhere to rigorous

regulations, such as those outlined in the Defense Federal Acquisition Regulation Supplement (DFARS), which govern the protection of

controlled unclassified information (CUI) and the mandatory reporting of cybersecurity incidents to the Department of Defense (DoD).

All DFARS requirements are flowed down to our sub-contractors, who are required to self-report their compliance to the U.S.

In addition to the processes and systems that we use to identify and mitigate risks, we utilize third party services to conduct valuations

of our security controls, including penetration testing and independent audits.

Despite our efforts to uphold the highest cybersecurity

standards, we may still experience a cybersecurity incident that has a material effect on business strategy, results of operation or

financial condition.

It is also possible that additional regulations could affect our supply chain and increase costs.

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.

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 in-service 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.

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