ESPEY MFG & ELECTRONICS CORP 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB ID 317 ) Financial Statements REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Espey Mfg. & Electronics Corp. Opinion on the Financial Statements We have audited the accompanying balance sheets of Espey Mfg. & Electronics Corp. (the Company) as of June 30, 2024 and 2023, the related statements of comprehensive income, changes in stockholders’ equity and cash flows for the years then ended, and the related notes to the financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2024 and 2023, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 10 Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Valuation of Inventory Costs Related to Contracts in Process and Work in Process As discussed in Notes 2 and 5 to the financial statements, inventory relating to contracts in process and work in process is valued at cost, including factory overhead incurred to date. Contract costs include material, subcontract costs, labor, and an allocation of overhead costs. 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 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, changes are reflected in current period earnings. Due to the magnitude of the inventory, and the subjectivity involved in estimating the total cost at completion we identified the evaluation of the estimate to complete as a critical audit matter, which required a high degree of auditor judgment. Addressing the matter involved performing subjective procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. The primary procedures performed included the following: ● We obtained an understanding of the process and assumptions used by management to develop estimates to complete including labor, overhead and materials. ● We tested total cost at completion of a contract by using process employed by management, including: o Testing the completeness and accuracy of the source information used; o Testing the mathematical accuracy of management’s calculations; o Reviewing expected gross margin on contracts; o Evaluating the reasonableness and consistency of methodology and assumptions applied by management; and o Performing a retrospective review of the prior-year estimates used to identify potential bias of management judgements. /s/ Freed Maxick CPAs, P.C. We have served as the Company's auditor since 2014. Buffalo, New York September 27, 2024 11 Espey Mfg. & Electronics Corp. Balance Sheets June 30, 2024 and 2023 2024 2023 ASSETS Cash and cash equivalents $ 4,351,970 $ 2,748,755 Investment securities 18,878,631 11,964,673 Trade accounts receivable, less allowance for credit losses of $ 3,000 6,635,490 5,755,282 Income tax receivable — 35,666 Inventories: Raw materials 1,693,448 1,889,702 Work-in-process 1,645,973 681,300 Costs related to contracts in process 15,904,588 17,318,579 Total inventories 19,244,009 19,889,581 Deferred tax asset 895,154 — Prepaid expenses and other current assets 3,231,402 4,282,477 Total current assets 53,236,656 44,676,434 Property, plant and equipment, net 3,306,275 2,825,089 Total assets $ 56,542,931 $ 47,501,523 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 3,751,209 $ 1,212,375 Accrued expenses: Salaries and wages 928,163 890,748 Vacation 511,144 685,188 Other 757,552 547,747 Payroll and other taxes withheld 56,862 66,042 Contract liabilities 9,043,422 8,081,838 Income taxes payable 220,607 — Total current liabilities 15,268,959 11,483,938 Deferred tax liabilities — 137,827 Total liabilities 15,268,959 11,621,765 Commitments and Contingencies (See Note 14) Common stock, par value $.33-1/3 per share Authorized 10,000,000 shares; Issued 3,129,874 shares as of June 30, 2024 and 2023. Outstanding 2,733,958 and 2,702,633 shares as of June 30, 2024 and 2023, respectively (includes 211,487 and 233,645 Unearned ESOP Shares, respectively) 1,043,291 1,043,291 Capital in excess of par value 23,930,428 23,283,245 Accumulated other comprehensive gain (loss) 6,544 ( 2,429 ) Retained earnings 26,004,790 21,867,720 50,985,053 46,191,827 Less: Unearned ESOP shares ( 3,868,093 ) ( 4,273,378 ) Cost of 395,916 and 427,241 shares of common stock in treasury as of June 30, 2024 and 2023, respectively ( 5,842,988 ) ( 6,038,691 ) Total stockholders' equity 41,273,972 35,879,758 Total liabilities and stockholders' equity $ 56,542,931 $ 47,501,523 The accompanying notes are an integral part of the financial statements. 12 Espey Mfg. & Electronics Corp. Statements of Comprehensive Income Years Ended June 30, 2024 and 2023 2024 2023 Net sales $ 38,736,319 $ 35,592,323 Cost of sales 28,083,259 27,541,785 Gross profit 10,653,060 8,050,538 Selling, general and administrative expenses 4,113,608 3,750,524 Operating income 6,539,452 4,300,014 Other income Interest income 728,299 359,617 Other 27,263 46,836 Total other income 755,562 406,453 Income before provision for income taxes 7,295,014 4,706,467 Provision for income taxes 1,479,874 1,029,336 Net income $ 5,815,140 $ 3,677,131 Other comprehensive income, net of tax: Unrealized gain (loss) on investment securities 8,973 ( 497 ) Total comprehensive income $ 5,824,113 $ 3,676,634 Net income per share: Basic $ 2.34 $ 1.50 Diluted $ 2.29 $ 1.49 Weighted average number of shares outstanding: Basic 2,489,165 2,454,856 Diluted 2,536,967 2,471,016 The accompanying notes are an integral part of the financial statements. 13 Espey Mfg. & Electronics Corp. Statements of Changes in Stockholders' Equity Years Ended June 30, 2024 and 2023 Accumulated Capital in Other Unearned Total Outstanding Common Excess of Comprehensive Retained Treasury Treasury ESOP Stockholders’ Shares Amount Par Value Loss Earnings Shares Amount Shares Equity Balance as of June 30, 2022 2,702,633 $ 1,043,291 $ 23,104,693 $ ( 1,932 ) $ 18,679,857 427,241 $ ( 6,038,691 ) $ ( 4,687,604 ) $ 32,099,614 Comprehensive income: Net income 3,677,131 3,677,131 Other comprehensive loss, net of tax of $ 104 ( 497 ) ( 497 ) Total comprehensive income 3,676,634 Stock-based compensation 227,132 227,132 Dividends paid on common stock $ 0.20 per share ( 489,268 ) ( 489,268 ) Reduction of unearned ESOP shares ( 48,580 ) 414,226 365,646 Balance as of June 30, 2023 2,702,633 $ 1,043,291 $ 23,283,245 $ ( 2,429 ) $ 21,867,720 427,241 $ ( 6,038,691 ) $ ( 4,273,378 ) $ 35,879,758 The accompanying notes are an integral part of the financial statements. 14 Espey Mfg. & Electronics Corp. Statements of Changes in Stockholders' Equity Years Ended June 30, 2024 and 2023 Accumulated Capital in Other Unearned Total Outstanding Common Excess of Comprehensive Retained Treasury Treasury ESOP Stockholders’ Shares Amount Par Value (Loss) Gain Earnings Shares Amount Shares Equity Balance as of June 30, 2023 2,702,633 $ 1,043,291 $ 23,283,245 $ ( 2,429 ) $ 21,867,720 427,241 $ ( 6,038,691 ) $ ( 4,273,378 ) $ 35,879,758 Comprehensive income: Net income 5,815,140 5,815,140 Other comprehensive income, net of tax of $ 1,884 8,973 8,973 Total comprehensive income 5,824,113 Stock options exercised 31,325 330,659 ( 31,325 ) 195,703 526,362 Stock-based compensation 283,673 283,673 Dividends paid on common stock $ 0.675 per share ( 1,678,070 ) ( 1,678,070 ) Reduction of unearned ESOP shares 32,851 405,285 438,136 Balance as of June 30, 2024 2,733,958 $ 1,043,291 $ 23,930,428 $ 6,544 $ 26,004,790 395,916 $ ( 5,842,988 ) $ ( 3,868,093 ) $ 41,273,972 The accompanying notes are an integral part of the financial statements. 15 Espey Mfg. & Electronics Corp. Statements of Cash Flows Years Ended June 30, 2024 and 2023 2024 2023 Cash Flows from Operating Activities: Net income $ 5,815,140 $ 3,677,131 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 283,673 227,132 Depreciation 453,517 484,920 ESOP compensation expense 438,136 365,646 Deferred income tax benefit ( 1,032,981 ) ( 40,002 ) Loss (gain) on disposal of property, plant and equipment 590 ( 2,500 ) Changes in assets and liabilities: Increase in trade accounts receivable ( 880,208 ) ( 22,108 ) Decrease (increase) in income tax receivable 35,666 ( 35,666 ) Decrease (increase) in inventories 645,572 ( 1,329,132 ) Decrease (increase) in prepaid expenses and other current assets 1,051,075 ( 3,289,703 ) Increase (decrease) in accounts payable 2,538,833 ( 866,802 ) Increase in accrued salaries and wages 37,415 263,561 (Decrease) increase in vacation accrual ( 174,044 ) 18,808 Increase (decrease) in other accrued expenses 209,805 ( 204,807 ) (Decrease) increase in payroll and other taxes withheld ( 9,180 ) 10,750 Increase in contract liabilities 961,584 4,697,364 Increase (decrease) in income taxes payable 220,607 ( 54,722 ) Net cash provided by operating activities $ 10,595,200 $ 3,899,870 Cash Flows from Investing Activities: Additions to property, plant and equipment ( 5,164,165 ) ( 512,016 ) Proceeds from grant award 4,228,722 — Proceeds from sale of property, plant and equipment 150 2,500 Purchase of investment securities ( 26,423,984 ) ( 15,902,014 ) Proceeds from sale/maturity of investment securities 19,519,000 7,645,623 Net cash used in investing activities ( 7,840,277 ) ( 8,765,907 ) Cash Flows from Financing Activities: Dividends paid on common stock ( 1,678,070 ) ( 489,268 ) Proceeds from exercise of stock options 526,362 — Net cash used in financing activities ( 1,151,708 ) ( 489,268 ) Increase (decrease) in cash and cash equivalents 1,603,215 ( 5,355,305 ) Cash and cash equivalents, beginning of the year 2,748,755 8,104,060 Cash and cash equivalents, end of the year $ 4,351,970 $ 2,748,755 Supplemental Schedule of Cash Flow Information: Income taxes paid $ 2,258,965 $ 1,159,595 The accompanying notes are an integral part of the financial statements. 16 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 1. Nature of Operations Espey Mfg. & Electronics Corp. (the Company) is a manufacturer of electronic equipment used primarily in military and industrial applications. The principal markets for the Company's products are companies that provide electronic support to both military and industrial applications across the United States and at some international locations. Note 2. Summary of Significant Accounting Policies Revenue The majority of our sales are generated from military contracts from defense companies, the Department of Defense, other agencies of the government of the United States and foreign governments, for the design and development and/or manufacture of products. Sales are also generated from industrial manufacturers for similar services. 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. Inventory relating to contracts in process and work in process is valued at 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. 17 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies, Continued Contract Liabilities Contract liabilities include advance payments and billings in excess of revenue recognized. Depreciation Depreciation of plant and equipment is computed on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives of depreciable assets are as follows: Buildings and improvements 10 – 50 years Machinery and equipment 3 – 20 years Furniture and fixtures 7 – 10 years Income Taxes The Company follows the provisions of Accounting Standards Codification (“ASC”) Topic 740-10, "Accounting for Income Taxes." Under the provisions of ASC 740-10, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. Cash and Cash Equivalents Cash and cash equivalents consist of cash and money market funds. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Investment Securities The Company accounts for its investments in debt securities in accordance with ASC 320-10-25, “Accounting for Certain Investments in Debt and Equity Securities.” Investments in debt securities at June 30, 2024 and 2023 consisted of municipal bonds and treasury bills. The Company classifies investments in debt securities as available-for-sale. Unrealized holding gains and losses, net of related tax effect, on available-for-sale debt securities are excluded from earnings and are reported as a separate component of stockholders’ equity until realized. Realized gains and losses for debt securities classified as available-for-sale are included in earnings and are determined using the specific identification method. Interest income is recognized when earned. Fair values are based on quoted market prices available as of the balance sheet date, and are therefore considered a Level 1 valuation. Certificates of deposit held for investment with an original maturity greater than three months are carried at amortized cost and reported as short-term investments on the balance sheets. The type of certificates of deposit that the Company invests in are not considered debt securities under Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) 320, Investments - Debt Securities. Fair Value of Financial Instruments 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: 18 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies, Continued ◾ 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 investment securities, accounts receivable, accounts payable and accrued expenses, approximated fair value as of June 30, 2024 and 2023 because of the immediate or short-term maturity of these financial instruments. Accounts Receivable and Allowance for Credit Losses The Company extends credit to its customers in the normal course of business and collateral is generally not required for trade receivables. Exposure to credit risk is controlled through the use of credit approvals, credit limits, and monitoring procedures. Accounts receivable are reported net of an allowance for credit losses. The Company estimates the allowance based on its analysis of historical experience, current economic market conditions, performance of specific account reviews, and other factored considerations to include, but not limited to, contracts covered by government funding and the overall health of the industry. Interest is not charged on past due balances. Based on these factors, there was an allowance for credit losses of $ 3,000 at June 30, 2024 and 2023. Changes to the allowance for credit losses are charged to expense and reduced by charge-offs, net of recoveries. The opening accounts receivable balance, net of allowance for credit losses of $ 3,000 , at July 1, 2022 and July 1, 2023 were $ 5,733,174 and $ 5,755,282 , respectively. Per Share Amounts ASC 260-10 “Earnings Per Share (EPS)” requires the Company to calculate net income per share based on basic and diluted net income per share, as defined. Basic EPS excludes dilution and is computed by dividing net income by the weighted average number of shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The dilutive effect of outstanding options issued by the Company are reflected in diluted EPS using the treasury stock method. Under the treasury stock method, options will only have a dilutive effect when the average market price of common stock during the period exceeds the exercise price of the options. Comprehensive Income Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income for fiscal years ended June 30, 2024 and 2023 consists of unrealized holding gains (losses) on available-for-sale debt securities. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Recently Adopted Accounting Standards 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. 19 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies, Continued 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 adopted the new guidance under ASU 2016-13 in the first quarter of fiscal year 2024, and determined that the impact of the adoption on its financial statements is immaterial. Recent Accounting Pronouncements Not Yet Adopted In December 2023, the FASB issued ASU No. 2023-09, “Income Taxes (“Topic 740”): Improvements to Income Tax Disclosures”, which includes amendments that further enhance income tax disclosures through the standardization and disaggregation of rate reconciliation categories and income taxes paid. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and is to be applied prospectively, with early adoption and retrospective application permitted. We are currently evaluating the impact of this standard to our financial statements. Impairment of Long-Lived Assets Long-lived assets, including property, plant, and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairments of long-lived assets in fiscal years 2024 and 2023. Assets to be disposed of are separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated. The assets and liabilities of a disposed group classified as held for sale are presented separately in the appropriate asset and liability sections of the balance sheet, if applicable. Concentrations of Risk The market for our defense electronics products is largely dependent on the availability of new contracts from the United States and foreign governments to prime contractors to which we provide components. Any decline in expenditures by the United States or foreign governments may have an adverse effect on our financial performance. 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 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. 20 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 3. 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 year ended June 30, 2024 based on units delivered totaled $ 33,403,833 compared to $ 27,770,365 for the same period in fiscal year 2023. Total revenue recognized for the year ended June 30, 2024 based on milestones achieved totaled $ 5,332,486 compared to $ 7,821,958 for the same period in fiscal year 2023. 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 result in the adjustment of the transaction price as of June 30, 2024. Our payment terms are generally 30-60 days. Contract liabilities were $ 9,043,422 and $ 8,081,838 as of June 30, 2024 and 2023, 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, approximated $ 1,191,954 for the year ended June 30, 2024. 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 June 30, 2024 totaling approximately $ 97.2 million is expected, based on expected due dates, to be recognized in the following fiscal years: 45 % in 2025, 33 % in 2026, 10 % in 2027, and 12 % thereafter. Note 4. Investment Securities Investment securities at June 30, 2024 consist of certificates of deposit, municipal bonds and U.S. treasury bills and at June 30, 2023, consisted of certificates of deposit, municipal bonds and U.S. treasury bills. 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 debt securities by major security type at June 30, 2024 and June 30, 2023 are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value June 30, 2024 Certificates of deposit $ 17,651,000 $ — $ — $ 17,651,000 Municipal bonds 709,059 5,824 ( 3,313 ) 711,570 U.S. Treasury bills 510,288 5,773 — 516,061 Total investment securities $ 18,870,347 $ 11,597 $ ( 3,313 ) $ 18,878,631 21 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 4. Investment Securities, Continued Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value June 30, 2023 Certificates of deposit $ 11,280,000 $ — $ — $ 11,280,000 Municipal bonds 260,475 165 ( 7,843 ) 252,797 U.S. Treasury Bills 430,952 1,225 ( 301 ) 431,876 Total investment securities $ 11,971,427 $ 1,390 $ ( 8,144 ) $ 11,964,673 The portfolio is diversified and highly liquid and primarily consists of investment grade fixed income instruments. At June 30, 2024, 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 June 30, 2024 and June 30, 2023, 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 June 30, 2024 Available-for-sale $ 17,889,582 $ 989,049 $ 18,878,631 June 30, 2023 Available-for-sale $ 11,711,876 $ 252,797 $ 11,964,673 Note 5. Contracts in Process Contracts in process at June 30, 2024 and 2023 are as follows: 2024 2023 Unrecognized gross contract value $ 97,216,542 $ 83,577,153 Costs related to contracts in process $ 15,904,588 $ 17,318,579 Included in costs relating to contracts in process at June 30, 2024 and 2023 are costs relative to contracts that may not be completed within the ensuing year as contracts vary in size, scope and duration. Under the units-of-delivery method, the related sale and cost of sales will not be reflected in the statements of comprehensive income until the units under contract are shipped. Note 6. Property, Plant and Equipment Property, plant and equipment at June 30, 2024 and 2023 is as follows: 2024 2023 Land $ 45,000 $ 45,000 Building and improvements 5,472,156 4,811,179 Machinery and equipment 11,509,018 11,402,679 Furniture and fixtures 165,651 164,200 17,191,825 16,423,058 Accumulated depreciation ( 13,885,550 ) ( 13,597,969 ) Property, plant and equipment, net $ 3,306,275 $ 2,825,089 22 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 6. Property, Plant and Equipment, Continued Depreciation expense was $ 453,517 and $ 484,920 for the years ended June 30, 2024 and 2023, respectively. 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 is being conducted on the Company’s property in Saratoga Springs, NY, with completion slated for the end of calendar year 2024. The Company expects to be paid within 30 days after the submission of three milestone invoices, but will not be paid for expenses incurred in excess of the specified milestone payment limits. The Company will record the receipt of milestone payments received as a reduction from the cost of the assets. The Company will have an initial cash outlay to satisfy income tax obligations arising from the value of the milestone payments received. The cash outlay arising from federal income tax obligations is expected to be recaptured in future periods. Until recaptured, estimated tax obligations associated with the receipt of milestone payments are recorded on the balance sheet and included in deferred tax assets. As of June 30, 2024, net deferred tax asset includes a deferred tax asset of $ 888,032 associated with milestone reimbursements received totaling $ 4,228,722 . Included in property, plant, and equipment at June 30, 2024 was $ 965,392 not yet reimbursed, for facility and capital upgrades under the funding award, compared to $ 308,001 in spending not yet reimbursed included in property, plant, and equipment at June 30, 2023. Included in accounts payable at June 30, 2024 was approximately $ 272,560 for facility and capital upgrades eligible to be reimbursed under the funding award compared to $ 9,095 included in accounts payable at June 30, 2023. Note 7. Pension Expense Under terms of a negotiated union contract which expires on June 30, 2025, the Company is obligated to make contributions to a union-sponsored International Brotherhood of Electrical Workers Local 1799 defined benefit pension plan (Plan identifying number is 14-6065199) covering eligible employees. Such contributions and expenses are based upon hours worked at a specified rate and amounted to $ 102,745 in fiscal year 2024 and $ 102,612 in fiscal year 2023. These contributions represent more than five percent of the total contributions made into the Plan. For the years beginning January 1, 2024 and 2023, the Plan was in the “green zone” which means it is neither endangered nor critical status. In the last quarter of the current fiscal year, the Company notified the third-party administrator of the IBEW Local 1799 Pension Fund of its intention to withdraw permanently from the plan effective June 16, 2024. As required by the Employee Retirement Income Security Act “ERISA”, the Company is subject to a termination withdrawal liability. At June 30, 2024, the Company recorded a termination withdrawal obligation totaling $ 772,157 , based on calculated amounts provided by a third party actuary retained by the Pension Fund. The outstanding amount is shown within the accounts payable balance on the Company’s balance sheet at June 30, 2024. An initial withdrawal liability contribution payment to the Plan totaling $ 210,305 was made during July 2024. The remaining liability of $ 561,852 is expected to be paid in the second half of fiscal 2025. As the Company was the only remaining contributing employer to the multiemployer pension plan, its withdrawal constitutes a mass withdrawal termination. Final withdrawal calculations are contingent upon the availability of January 1, 2025 assets and the finalization of December 31, 2024 liabilities as the withdrawal liability will need to be re-determined based on a December 31, 2024 measurement date. The Company does not expect future adjustments to the established liability to have a material impact on the Company’s financial statements. The cost of the withdrawal liability obligation is recorded in indirect overhead product costs, capitalized in inventory and expensed through cost of sales based on shipments. The Company is obligated to make contributions to the National Electrical Benefit Fund (NEBF) (Plan identifying number is 53-0181657). The Plan is a defined pension benefit plan covering eligible union employees. Such contributions and expenses amounted to $ 79,429 in fiscal year 2024 and $ 72,350 in fiscal year 2023. The contribution did not and will not in the future have a material impact on the Company’s financial statements. The Company sponsors a 401(k) plan for non-union workers with employee and employer matching contributions. The employer match is 10 % of the employee contribution and was $ 60,301 and $ 53,768 , for fiscal years 2024 and 2023, respectively. 23 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 8. Provision for Income Taxes A summary of the components of the provision for income taxes for the years ended June 30, 2024 and 2023 is as follows: 2024 2023 Current tax expense - federal $ 2,515,865 $ 1,059,743 Current tax (benefit) expense - state ( 3,010 ) 9,595 Deferred tax benefit ( 1,032,981 ) ( 40,002 ) Provision for income taxes $ 1,479,874 $ 1,029,336 Deferred income taxes reflect the impact of "temporary differences" between the amount of assets and liabilities for financial reporting purposes and such amounts measured by tax laws and regulations. These "temporary differences" are determined in accordance with ASC 740-10. The combined U.S. federal and state effective income tax rates of 20.3 % and 21.9 %, for 2024 and 2023 respectively, differed from the statutory U.S. federal income tax rate for the following reasons: 2024 2023 U.S. federal statutory income tax rate 21.0 % 21.0 % Increase (reduction) in rate resulting from: State franchise tax, net of federal income tax benefit — 0.2 ESOP cost versus Fair Market Value 0.1 ( 0.2 ) Dividend on allocated ESOP shares ( 0.3 ) — Stock-based compensation 0.2 1.0 Other ( 0.7 ) ( 0.1 ) Effective tax rate 20.3 % 21.9 % For the years ended June 30, 2024 and 2023 deferred income tax benefit of $ 1,032,981 and $ 40,002 , respectively, results from the changes in temporary differences for each year. The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities as of June 30, 2024 and 2023 are presented as follows: 2024 2023 Deferred tax assets: Accrued expenses $ 138,158 $ 273,059 ESOP 32,698 24,407 Property, plant and equipment - principally due to differences in depreciation methods 601,358 — Pension Withdrawal 162,153 — Stock-based compensation 39,724 36,552 Total deferred tax assets $ 974,091 $ 334,018 Deferred tax liability: Property, plant and equipment - principally due to differences in depreciation methods $ — $ 337,501 Inventory - effect of uniform capitalization 33,817 99,215 Prepaid expenses 45,120 35,129 Total deferred tax liability $ 78,937 $ 471,845 Net deferred tax asset (liability) $ 895,154 $ ( 137,827 ) 24 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 8. Provision for Income Taxes, Continued In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projection for future taxable income over the period in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these temporary differences without consideration of a valuation allowance. As the result of the implementation of the FASB interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109, the Company recognized no material adjustments to unrecognized tax benefits. As of June 30, 2024 and 2023, the Company has no unrecognized tax benefits. The Company recognizes interest and penalties in general and administrative expense. As of June 30, 2024 and 2023, the Company has not recorded any provision for accrued interest and penalties. The Company is subject to taxation in the United States and various state jurisdictions. The federal tax returns are subject to audit for three years from date of filing unless the return was audited within that period. In general the majority of state statutes follow similar guidelines. As such, the Company’s tax returns for tax years ending June 30, 2024, 2023, and 2022 remain open to examination by the respective taxing authorities. Note 9. Significant Customers 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. Sales to five domestic customers accounted for 81 % of total sales in 2024. Sales to five domestic customers accounted for 81 % of total sales in 2023. Orders from significant customers may include more than one program and procurement may originate from various divisions of the significant customer. The related accounts receivable balance, as a percentage of the Company's total trade accounts receivable balance, was 79 % represented by five customers at June 30, 2024 and 81 % represented by five customers at June 30, 2023. Export shipments in fiscal years 2024 and 2023 were $ 2,350,087 and $ 549,510 , respectively. Note 10. 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 statement of financial position. 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. The ESOP borrowed from the Corporation an amount equal to the purchase price. The loan will be repaid in fifteen (15) equal annual installments of principal commencing June 2021. The Board of Directors has fixed the interest rate and the unpaid balance will bear interest at a fixed rate of 3.00 % per annum. ESOP compensation expense was $ 438,136 and $ 365,646 for the years ended June 30, 2024 and 2023, respectively. 25 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 10. Employee Stock Ownership Plan, Continued The ESOP shares as of June 30, 2024 and 2023 were as follows: 2024 2023 Allocated shares 451,132 484,958 Unearned shares 211,487 233,645 Total shares held by the ESOP 662,619 718,603 Fair value of unearned shares $ 4,494,099 $ 3,913,554 The Company may at times be required to repurchase shares at the ESOP participants’ request at the fair market value. During the years ended June 30, 2024 and 2023, 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 provision of the plan. Share distributions from the ESOP during the years ended June 30, 2024 and 2023 totaled 55,984 shares and 33,780 shares, respectively. Note 11. 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. Included as a reduction to the cost recognized for share-based payments is an estimate for option forfeitures. It is the Company’s policy to estimate expected option forfeitures based on historical experience. Actual forfeitures are adjusted prior to the vesting date if the impact is material. Total stock-based compensation expense recognized in the statements of comprehensive income for the fiscal years ended June 30, 2024 and 2023, was $ 283,673 and $ 227,132 , respectively, before income taxes. The amount of this stock-based compensation expense related to non-qualified stock options (“NQSOs”) for the fiscal years ended June 30, 2024 and 2023, was $ 34,903 and $ 21,432 , respectively. The deferred tax benefit related to the NQSOs as of June 30, 2024 and 2023 was approximately $ 7,330 and $ 4,501 , 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 June 30, 2024, there was approximately $ 204,765 of unrecognized compensation cost related to stock option awards that is expected to be recognized as expense over the next 1.75 years, of which $ 181,955 relates to ISOs and $ 22,809 relates to NQSOs. The total deferred tax benefit related to the NQSOs in future years will be $ 4,790 . 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"), approved by the Company's shareholders at the Company's Annual Meeting on December 1, 2017. 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. 26 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 11. Stock-based Compensation, Continued Options covering 400,000 shares are authorized for issuance under the 2017 Plan. As of June 30, 2024, options covering 31,325 shares have been exercised, options covering 287,706 shares are outstanding and options covering 143,973 shares have been cancelled. As of June 30, 2024, options covering 80,969 shares remain available for grant, after factoring the cancelled shares, 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 June 30, 2024, 34,350 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 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 years ended June 30, 2024 and 2023. 2024 2023 Dividend yield 3.61 % 0.03 % Expected stock price volatility 31.21 % 27.20 % Risk-free interest rate 4.39 % 2.71 % Expected option life (in years) 5.3 yrs 5.4 yrs Weighted average fair value per share of options granted during the period $ 4.11 $ 4.18 Effective March 13, 2023, the Company reinstated payment of a quarterly dividend. The Company paid regular cash dividends on common stock of $ 0.675 per share for the fiscal year ended June 30, 2024 and paid regular cash dividends on common stock of $ 0.20 per share for the fiscal year ended June 30, 2023. 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 year ended June 30, 2024: Employee Stock Option Plans Weighted Number of Weighted Average Shares Average Remaining Aggregate Subject Exercise Contractual Intrinsic to Option Price Term Value Balance at July 1, 2023 296,331 $ 19.15 6.49 Granted 80,900 $ 16.78 9.22 Exercised ( 31,325 ) $ 16.80 — Forfeited or expired ( 23,850 ) $ 24.30 — Outstanding at June 30, 2024 322,056 $ 18.41 6.59 $ 1,259,317 Vested or expected to vest at June 30, 2024 313,205 $ 18.45 6.52 $ 1,212,613 Exercisable at June 30, 2024 174,756 $ 20.98 4.83 $ 382,667 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 June 30, 2024 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 June 30, 2024. This amount changes based on the fair market value of the Company’s common stock. 27 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 11. Stock-based Compensation, Continued The total intrinsic values of the options exercised during the twelve months ended June 30, 2024 and 2023 was $ 195,236 and $ 0 , respectively. The following table summarizes changes in non-vested stock options during the year ended June 30, 2024: Weighted Number Average of Shares Grant Date Subject Fair Value to Option (per Option) Non-vested at July 1, 2023 132,600 $ 3.98 Granted 80,900 $ 4.11 Vested ( 60,700 ) $ 3.74 Forfeited or expired ( 5,500 ) $ 4.04 Non-vested at June 30, 2024 147,300 $ 4.15 Note 12. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains cash and cash equivalents with various financial institutions. At times such investments may be in excess of FDIC insurance limits. As disclosed in Note 9, 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. The related accounts receivable balance, as a percentage of the Company's total trade accounts receivable balance, was 79 % represented by five customers at June 30, 2024 and 81 % represented by five customers at June 30, 2023. Although the Company's exposure to credit risk associated with nonpayment of these concentrated balances is affected by the conditions or occurrences within the U.S. and foreign governments, the Company believes that its trade accounts receivable credit risk exposure is limited. The Company performs ongoing credit evaluations of its customer's financial conditions and requires collateral, such as progress payments, in certain circumstances. The Company establishes an allowance for credit losses based upon factors surrounding the credit risk of specific customers, historical trends and other information. Note 13. Related Parties The administration of the shares of common stock held by the ESOP Trust is subject to the Espey Mfg. & Electronics Corp. Employee Retirement Plan and Trust (ESOP) and a Trust Agreement, each effective as of July 1, 2016. The Trustees’ rights with respect to the disposition of shares are governed by the terms of the Plan and the Trust Agreement. As to shares that have been allocated to the accounts of participants in the ESOP Trust, the Plan provides that the Trustees are required to vote such shares in accordance with instructions received from the participants. As to unallocated shares and allocated shares for which voting instructions have not been received from participants, the Plan provides that the Trustees are required to vote such shares in accordance with the direction of the Board of Directors of the Company under the terms of the Plan and Trust Agreement, which is currently in the same proportion as the instructions received on the allocated shares. See Note 10 for additional information regarding the ESOP. Note 14. Commitments and Contingencies The Company at certain times 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 June 30, 2024 and 2023. 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. 28 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 14. Commitments and Contingencies, Continued 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. 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. Note 15. Stockholders' Equity Reservation of Shares The Company has reserved common shares for future issuance as follows as of June 30, 2024: Stock options outstanding 322,056 Stock options available for issuance 80,969 Number of common shares reserved 403,025 The following table sets forth the reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for continuing operations for the years ended June 30: 2024 2023 Numerator: Net income $ 5,815,140 $ 3,677,131 Denominator: Basic EPS: Common shares outstanding, beginning of period 2,702,633 2,702,633 Unearned ESOP shares ( 233,645 ) ( 256,293 ) Weighted average common shares issued during the period 11,837 — Weighted average ESOP shares earned during the period 8,340 8,516 Denominator for basic earnings per common shares – Weighted average common shares 2,489,165 2,454,856 Diluted EPS: Common shares outstanding, beginning of period 2,702,633 2,702,633 Unearned ESOP shares ( 233,645 ) ( 256,293 ) Weighted average common shares issued during the period 11,837 — Weighted average ESOP shares earned during the period 8,340 8,516 Weighted average dilutive effect of stock options 47,802 16,160 Denominator for diluted earnings per common shares – Weighted average common shares 2,536,967 2,471,016 29 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 15. Stockholders’ Equity, Continued Not included in this computation of earnings per share for the year ended June 30, 2024 and 2023 were options to purchase 62,691 and 130,656 shares, respectively, of the Company’s common stock. These options were excluded because their inclusion would have been anti-dilutive due to the average strike price exceeding the average market price of those shares. Effective March 13, 2023, the Company reinstated payment of a quarterly dividend. The Company paid regular cash dividends on common stock of $ 0.675 per share for the fiscal year ended June 30, 2024 and paid regular cash dividends on common stock of $ 0.20 per share for the fiscal year ended June 30, 2023. Our Board of Directors assesses the Company’s dividend policy periodically. There is no assurance that the Board of Directors will maintain the amount of the regular cash dividend during any future years. Note 16. Line of Credit At June 30, 2024, the Company has an uncommitted and unused Line of Credit with a financial institution. The agreement provides that the Company may borrow up to $ 3,000,000 . The line provides for interest payments equal to the SOFR Daily Floating Rate plus 2 percentage points. Any borrowing under the line of credit will be collateralized by accounts receivable. All outstanding balances are payable no later than the expiration date of the agreement, unless other terms are agreed to by the lender. The existing line of credit expires February 28, 2025. The Company did not borrow any funds during the last two fiscal years. Note 17. Quarterly Financial Information (Unaudited) First Second Third Fourth 2024 Quarter Quarter Quarter Quarter Net sales $ 8,568,214 $ 10,302,541 $ 8,254,653 $ 11,610,911 Gross profit 2,245,377 3,142,575 2,064,191 3,200,917 Net income 1,094,544 1,795,370 1,031,930 1,893,296 Net income per share - Basic 0.44 0.73 0.41 0.76 Diluted 0.44 0.72 0.40 0.73 2023 Net sales $ 8,635,795 $ 8,804,109 $ 9,809,616 $ 8,342,803 Gross profit 1,812,142 2,260,722 1,973,429 2,004,245 Net income 768,266 1,146,042 867,288 895,535 Net income per share - Basic 0.31 0.47 0.35 0.37 Diluted 0.31 0.47 0.35 0.36 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None