ESPEY MFG & ELECTRONICS CORP 10-Q

ESP 20250331 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q ☒ QUARTERLY Report Pursuant to Section 13 or 15( d ) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2025 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 1-4383 ESPEY MFG. & ELECTRONICS CORP. (Exact name of registrant as specified in its charter) New York Trading Symbol 14-1387171 (State of incorporation) ESP (I.R.S. Employer's Identification No.) 233 Ballston Avenue , Saratoga Springs , New York 12866 (Address of principal executive offices) 518 - 245-4400 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act Title of each class Trading Symbol Name of each exchange on which registered Common Stock $.33-1/3 par value ESP NYSE American Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No Indicate by check mark whether the registrant has submitted electronically every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company: ☐ Large accelerated filer ☐ Non-accelerated filer ☐ Accelerated filer ☒ Smaller reporting company ☐ Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Securities Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No At May 8, 2025, there were 2,831,399 shares outstanding of the registrant's Common stock, $.33-1/3 par value. ESPEY MFG. & ELECTRONICS CORP. Quarterly Report on Form 10-Q I N D E X PART I FINANCIAL INFORMATION PAGE Item 1 Financial Statements: Balance Sheets - March 31, 2025 (Unaudited) and June 30, 2024 1 Statements of Comprehensive Income (Unaudited) - Three and Nine Months Ended March 31, 2025 and 2024 2 Statements of Changes in Stockholders’ Equity (Unaudited) – Three and Nine Months Ended March 31, 2025 and 2024 3 Statements of Cash Flows (Unaudited) - Nine Months Ended March 31, 2025 and 2024 7 Notes to Financial Statements (Unaudited) 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 3 Quantitative and Qualitative Disclosures about Market Risk 21 Item 4 Controls and Procedures 21 PART II OTHER INFORMATION 22 Item 1 Legal Proceedings 22 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 22 Item 3 Defaults Upon Senior Securities 22 Item 4 Mine Safety Disclosures 22 Item 5 Other Information 22 Item 6 Exhibits 22 SIGNATURES 23 PART I: FINANCIAL INFORMATION ESPEY MFG. & ELECTRONICS CORP. Balance Sheets March 31, 2025 (Unaudited) and June 30, 2024 March 31, 2025 June 30, 2024 ASSETS Cash and cash equivalents $ 13,859,462 $ 4,351,970 Investment securities 24,635,038 18,878,631 Trade accounts receivable, less allowance for credit losses of $ 3,000 6,407,177 6,635,490 Inventories: Raw materials 1,859,193 1,693,448 Work-in-process 554,820 1,645,973 Costs related to contracts in process 14,174,050 15,904,588 Total inventories 16,588,063 19,244,009 Net deferred tax assets 923,934 895,154 Prepaid expenses and other current assets 4,945,190 3,231,402 Total current assets 67,358,864 53,236,656 Property, plant and equipment, net 5,480,631 3,306,275 Total assets $ 72,839,495 $ 56,542,931 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 2,075,635 $ 3,751,209 Accrued expenses: Salaries and wages 850,695 928,163 Vacation 593,723 511,144 ESOP payable 276,683 — Other 1,359,315 757,552 Payroll and other taxes withheld 63,357 56,862 Contract liabilities 21,018,310 9,043,422 Income taxes payable 277,030 220,607 Total current liabilities 26,514,748 15,268,959 Total liabilities 26,514,748 15,268,959 Commitments and contingencies (See Note 5) Common stock, par value $.33-1/3 per share Authorized 10,000,000 shares; Issued 3,129,874 shares as of March 31, 2025 and June 30, 2024. Outstanding 2,816,558 and 2,733,958 shares as of March 31, 2025 and June 30, 2024, respectively (includes 195,234 and 211,487 Unearned ESOP shares, respectively) 1,043,291 1,043,291 Capital in excess of par value 25,172,305 23,930,428 Accumulated other comprehensive gain 6,731 6,544 Retained earnings 29,287,337 26,004,790 55,509,664 50,985,053 Less: Unearned ESOP shares ( 3,868,093 ) ( 3,868,093 ) Cost of 313,316 and 395,916 shares of common stock in treasury as of March 31, 2025 and June 30, 2024, respectively ( 5,316,824 ) ( 5,842,988 ) Total stockholders’ equity 46,324,747 41,273,972 Total liabilities and stockholders' equity $ 72,839,495 $ 56,542,931 The accompanying notes are an integral part of the financial statements. 1 ESPEY MFG. & ELECTRONICS CORP. Statements of Comprehensive Income (Unaudited) Three and Nine Months Ended March 31, 2025 and 2024 Three Months Ended Nine Months Ended March 31, March 31, 2025 2024 2025 2024 Net sales $ 10,302,719 $ 8,254,653 $ 34,354,677 $ 27,125,408 Cost of sales 7,354,335 6,190,462 25,441,699 19,673,265 Gross profit 2,948,384 2,064,191 8,912,978 7,452,143 Selling, general and administrative expenses 1,197,262 971,220 3,418,206 3,044,591 Operating income 1,751,122 1,092,971 5,494,772 4,407,552 Other income Interest income 324,705 181,940 852,544 490,883 Other 11,601 2,881 30,595 22,275 Total other income 336,306 184,821 883,139 513,158 Income before provision for income taxes 2,087,428 1,277,792 6,377,911 4,920,710 Provision for income taxes 382,941 245,862 1,166,608 998,866 Net income $ 1,704,487 $ 1,031,930 $ 5,211,303 $ 3,921,844 Other comprehensive income, net of tax: Unrealized gain on investment securities 1,727 2,151 187 7,568 Total comprehensive income $ 1,706,214 $ 1,034,081 $ 5,211,490 $ 3,929,412 Net income per share: Basic $ 0.66 $ 0.41 $ 2.03 $ 1.58 Diluted $ 0.63 $ 0.40 $ 1.95 $ 1.56 Weighted average number of shares outstanding: Basic 2,599,960 2,491,906 2,569,514 2,480,153 Diluted 2,699,674 2,571,921 2,668,928 2,519,708 Dividends per share: $ 0.250 $ 0.175 $ 0.750 $ 0.475 The accompanying notes are an integral part of the financial statements. 2 Espey Mfg. & Electronics Corp. Statements of Changes in Stockholders' Equity (Unaudited) Three Months Ended March 31, 2025 Accumulated Capital in Other Unearned Total Outstanding Common Excess of Comprehensive Retained Treasury Treasury ESOP Stockholders’ Shares Amount Par Value Gain Earnings Shares Amount Shares Equity Balance as of December 31, 2024 2,796,758 $ 1,043,291 $ 24,851,718 $ 5,004 $ 28,232,545 333,116 $ ( 5,447,820 ) $ ( 3,868,093 ) $ 44,816,645 Comprehensive income: Net income $ 1,704,487 1,704,487 Other comprehensive income, net of tax of $ 363 1,727 1,727 Total comprehensive income 1,706,214 Stock options exercised 19,800 227,364 ( 19,800 ) 130,996 358,360 Stock-based compensation 93,223 93,223 Dividends paid on common stock $ 0.25 per share ( 649,695 ) ( 649,695 ) Balance as of March 31, 2025 2,816,558 $ 1,043,291 $ 25,172,305 $ 6,731 $ 29,287,337 313,316 $ ( 5,316,824 ) $ ( 3,868,093 ) $ 46,324,747 The accompanying notes are an integral part of the financial statements. 3 Espey Mfg. & Electronics Corp. Statements of Changes in Stockholders' Equity (Unaudited) Nine Months Ended March 31, 2025 Accumulated Capital in Other Unearned Total Outstanding Common Excess of Comprehensive Retained Treasury Treasury ESOP Stockholders’ Shares Amount Par Value Gain Earnings Shares Amount Shares Equity 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 Comprehensive income: Net income 5,211,303 5,211,303 Other comprehensive gain, net of tax of $ 39 187 187 Total comprehensive income 5,211,490 Stock options exercised 82,600 955,621 ( 82,600 ) 526,164 1,481,785 Stock-based compensation 286,256 286,256 Dividends paid on common stock $ 0.75 per share ( 1,928,756 ) ( 1,928,756 ) Balance as of March 31, 2025 2,816,558 $ 1,043,291 $ 25,172,305 $ 6,731 $ 29,287,337 313,316 $ ( 5,316,824 ) $ ( 3,868,093 ) $ 46,324,747 The accompanying notes are an integral part of the financial statements. 4 Espey Mfg. & Electronics Corp. Statements of Changes in Stockholders' Equity (Unaudited) Three Months Ended March 31, 2024 Accumulated Capital in Other Unearned Total Outstanding Common Excess of Comprehensive Retained Treasury Treasury ESOP Stockholders’ Shares Amount Par Value Gain Earnings Shares Amount Shares Equity Balance as of December 31, 2023 2,706,633 $ 1,043,291 $ 23,448,890 $ 2,988 $ 24,015,739 423,241 $ ( 6,013,701 ) $ ( 4,273,378 ) $ 38,223,829 Comprehensive income: Net income 1,031,930 1,031,930 Other comprehensive income, net of tax of $ 452 2,151 2,151 Total comprehensive income 1,034,081 Stock options exercised 26,125 281,517 ( 26,125 ) 163,216 444,733 Stock-based compensation 75,420 75,420 Dividends paid on common stock $ 0.175 per share ( 436,113 ) ( 436,113 ) Balance as of March 31, 2024 2,732,758 $ 1,043,291 $ 23,805,827 $ 5,139 $ 24,611,556 397,116 $ ( 5,850,485 ) $ ( 4,273,378 ) $ 39,341,950 The accompanying notes are an integral part of the financial statements. 5 Espey Mfg. & Electronics Corp. Statements of Changes in Stockholders' Equity (Unaudited) Nine Months Ended March 31, 2024 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 3,921,844 3,921,844 Other comprehensive income, net of tax of $ 1,589 7,568 7,568 Total comprehensive income 3,929,412 Stock options exercised 30,125 316,007 ( 30,125 ) 188,206 504,213 Stock-based compensation 206,575 206,575 Dividends paid on common stock $ 0.475 per share ( 1,178,008 ) ( 1,178,008 ) Balance as of March 31, 2024 2,732,758 $ 1,043,291 $ 23,805,827 $ 5,139 $ 24,611,556 397,116 $ ( 5,850,485 ) $ ( 4,273,378 ) $ 39,341,950 The accompanying notes are an integral part of the financial statements. 6 ESPEY MFG. & ELECTRONICS CORP. Statements of Cash Flows (Unaudited) Nine Months Ended March 31, 2025 and 2024 March 31, 2025 March 31, 2024 Cash Flows from Operating Activities: Net income $ 5,211,303 $ 3,921,844 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 286,256 206,575 Depreciation 334,732 343,825 ESOP compensation expense 435,298 311,664 Deferred income tax benefit ( 28,780 ) ( 916,006 ) (Gain) Loss on disposal of property, plant and equipment — 590 Changes in assets and liabilities: Decrease in trade accounts receivable 228,313 439,862 Decrease in income taxes receivable — 35,666 Decrease in inventories 2,655,946 278,237 Increase in prepaid expenses and other current assets ( 1,713,788 ) 728,069 Decrease in accounts payable ( 1,675,574 ) 1,623,255 Decrease in accrued salaries and wages ( 77,468 ) ( 178,004 ) Increase in vacation accrual 82,579 ( 119,481 ) Increase in ESOP payable ( 158,615 ) ( 110,982 ) Increase in other accrued expenses 601,763 437,611 Increase in payroll and other taxes withheld 6,495 4,549 Increase in contract liabilities 11,974,888 ( 375,829 ) Increase in income taxes payable 56,423 719,217 Net cash provided by operating activities 18,219,771 7,350,662 Cash Flows from Investing Activities: Additions to property, plant and equipment ( 2,509,088 ) ( 4,501,997 ) Proceeds from grant award — 4,228,722 Proceeds from sale of property, plant and equipment — 150 Purchase of investment securities ( 26,616,220 ) ( 18,442,671 ) Proceeds from sale/maturity of investment securities 20,860,000 14,846,438 Net cash used in investing activities ( 8,265,308 ) ( 3,869,358 ) Cash Flows from Financing Activities: Dividends on common stock ( 1,928,756 ) ( 1,178,008 ) Proceeds from exercise of stock options 1,481,785 504,213 Net cash used in financing activities ( 446,971 ) ( 673,795 ) Increase in cash and cash equivalents 9,507,492 2,807,509 Cash and cash equivalents, beginning of period 4,351,970 2,748,755 Cash and cash equivalents, end of period $ 13,859,462 $ 5,556,264 Supplemental Schedule of Cash Flow Information: Income taxes paid $ 1,139,015 $ 1,162,000 The accompanying notes are an integral part of the financial statements. 7 ESPEY MFG. & ELECTRONICS CORP. Notes to Financial Statements (Unaudited) Note 1. Basis of Presentation In the opinion of management the accompanying unaudited financial statements contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for such periods. The results for any interim period are not necessarily indicative of the results to be expected for the full fiscal year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States generally accepted accounting principles have been condensed or omitted. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of assets and liabilities. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventories, income taxes, and stock-based compensation. Specific to inventories, including work-in-process and contracts in process, management evaluates, quarterly, those estimates used in determining the cost to complete for each contract on Espey Mfg. & Electronics Corp.’s (the “Company”) sales backlog. The change in estimates may affect the reported amount of inventories and gross profit in the current or a future period and could result in the Company recording a loss contingency when a loss is determined to be probable and reasonably estimated. Management bases its estimates on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. These financial statements should be read in conjunction with the Company's most recent audited financial statements included in its report on Form 10-K for the year ended June 30, 2024. Certain reclassifications may have been made to the prior year financial statements to conform to the current year presentation. Note 2. Investment Securities FASB Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures” establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: ◾ Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. ◾ Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. ◾ Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The carrying amounts of financial instruments, including cash and cash equivalents, short term investments, accounts receivable, accounts payable and accrued expenses, approximated fair value as of March 31, 2025 and June 30, 2024 because of the immediate or short-term maturity of these financial instruments. Investment securities at March 31, 2025 and June 30, 2024 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 of available-for-sale debt securities by major security type at March 31, 2025 and June 30, 2024 are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value March 31, 2025 Certificates of deposit $ 23,492,000 $ — $ — $ 23,492,000 Municipal bonds 1,134,518 8,988 ( 468 ) 1,143,038 U.S. Treasury bills — — — — Total investment securities $ 24,626,518 $ 8,988 $ ( 468 ) $ 24,635,038 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 8 The portfolio is diversified and highly liquid and primarily consists of investment grade fixed income instruments. At March 31, 2025, the Company did not have any investments in individual securities that have been in a continuous loss position considered to be other than temporary. As of March 31, 2025 and June 30, 2024, the remaining contractual maturities of available-for-sale debt securities were as follows: Years to Maturity Less than One to One Year Five Years Total March 31, 2025 Available-for-sale $ 23,139,022 $ 1,496,016 $ 24,635,038 June 30, 2024 Available-for-sale $ 17,889,582 $ 989,049 $ 18,878,631 Note 3. Net Income per Share Basic net income per share excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. The computation of diluted net income per share excluded options to purchase 2,500 shares of our common stock for the three and nine months ended March 31, 2025 and 60,766 shares for the three and nine months ended March 31, 2024, as the effect of including them would be anti-dilutive. As unearned shares owned by the Company’s sponsored leveraged employee stock ownership plan (the “ESOP”) are released or committed-to-be-released, the shares become outstanding for earnings-per-share computations. The 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 three month periods ended March 31: 2025 2024 Numerator: Net income $ 1,704,487 $ 1,031,930 Denominator: Basic EPS: Common shares outstanding, beginning of period 2,796,758 2,706,633 Unearned ESOP shares ( 200,652 ) ( 222,566 ) Weighted average common shares issued during the period 3,794 7,778 Weighted average ESOP shares earned during the period 60 61 Denominator for basic earnings per common shares – Weighted average common shares 2,599,960 2,491,906 Diluted EPS: Common shares outstanding, beginning of period 2,796,758 2,706,633 Unearned ESOP shares ( 200,652 ) ( 222,566 ) Weighted average common shares issued during the period 3,794 7,778 Weighted average ESOP shares earned during the period 60 61 Weighted average dilutive effect of stock options 99,714 80,015 Denominator for diluted earnings per common shares – Weighted average common shares 2,699,674 2,571,921 9 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 nine month periods ended March 31: 2025 2024 Numerator: Net income $ 5,211,303 $ 3,921,844 Denominator: Basic EPS: Common shares outstanding, beginning of period 2,733,958 2,702,633 Unearned ESOP shares ( 211,487 ) ( 233,646 ) Weighted average common shares issued during the period 41,606 5,606 Weighted average ESOP shares earned during the period 5,437 5,560 Denominator for basic earnings per common shares – Weighted average common shares 2,569,514 2,480,153 Diluted EPS: Common shares outstanding, beginning of period 2,733,958 2,702,633 Unearned ESOP shares ( 211,487 ) ( 233,646 ) Weighted average common shares issued during the period 41,606 5,606 Weighted average ESOP shares earned during the period 5,437 5,560 Weighted average dilutive effect of stock options 99,414 39,555 Denominator for diluted earnings per common shares – Weighted average common shares 2,668,928 2,519,708 Note 4. Stock Based Compensation The Company follows ASC 718 “Compensation - Stock Compensation” in establishing standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services, as well as transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. ASC 718 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements based on the fair value of the share-based payment. ASC 718 establishes fair value as the measurement objective in accounting for share-based payment transactions with employees, except for equity instruments held by employee share ownership plans. Total stock-based compensation expense recognized in the statements of comprehensive income for the three-month periods ended March 31, 2025 and 2024 was $ 93,223 and $ 75,420 , respectively, before income taxes. The amount of this stock-based compensation expense related to non-qualified stock options (“NQSOs”) for the three-month periods ended March 31, 2025 and 2024 was $ 8,362 and $ 8,179 , respectively. The deferred tax benefit related to the NQSOs as of March 31, 2025 and 2024 was approximately $ 1,756 and $ 1,718 , respectively. Total stock-based compensation expense recognized in the statements of comprehensive income for the nine-month periods ended March 31, 2025 and 2024 was $ 286,256 and $ 206,575 , respectively, before income taxes. The amount of this stock-based compensation expense related to NQSOs for the nine-month periods ended March 31, 2025 and 2024 was $ 23,783 and $ 26,724 , respectively. The deferred tax benefit related to the NQSOs as of March 31, 2025 and 2024 was approximately $ 4,994 and $ 5,612 , respectively. The remaining stock option expense in each year related to incentive stock options (“ISOs”) which are not deductible by the Company when exercised, assuming a qualifying disposition and as such no deferred tax benefit was established related to these amounts. As of March 31, 2025, there was $ 340,519 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 $ 311,672 relates to ISOs and $ 28,847 relates to NQSOs. The total deferred tax benefit related to these awards is expected to be $ 6,058 . 10 The Company has one employee stock option plan under which options or stock awards may be granted, the 2017 Stock Option and Restricted Stock Plan (the "2017 Plan"). The Board of Directors may grant options to acquire shares of common stock to employees and non-employee directors of the Company at the fair market value of the common stock on the date of grant. The maximum aggregate number of shares of Common Stock subject to options or awards to non-employee directors is 133,000 and the maximum aggregate number of shares of Common Stock subject to options or awards granted to non-employee directors during any single fiscal year is the lesser of 13,300 and 33 1/3% of the total number of shares subject to options or awards granted in such fiscal year. The maximum number of shares subject to options or awards granted to any individual employee may not exceed 15,000 in a fiscal year. Generally, options granted have a two -year vesting period based on two years of continuous service and have a ten-year contractual life. Option grants provide for accelerated vesting if there is a change in control. Shares issued upon the exercise of options are from those held in Treasury. Options covering 400,000 shares are authorized for issuance under the 2017 Plan. As of March 31, 2025, options covering 103,925 shares have been exercised and options covering 293,606 shares are outstanding. Options covering 2,469 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 March 31, 2025, 24,350 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 dividend yield, volatility, expected life and interest rates. The table below outlines the weighted average assumptions that the Company used to calculate the fair value of each option award for the nine months ended March 31, 2025 and 2024. March 31, 2025 March 31, 2024 Dividend yield 3.79 % 3.63 % Company’s expected volatility 32.85 % 31.20 % Risk-free interest rate 4.35 % 4.39 % Expected term 5.1 yrs 5.3 yrs Weighted average fair value per share of options granted during the period $ 5.37 $ 4.03 The Company declared and paid regular cash dividends of $ 0.75 per share for the nine months ended March 31, 2025 and paid $ 0.475 cash dividends for the nine months ended March 31, 2024. Expected stock price volatility is based on the historical volatility of the Company’s stock. The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options. The expected option term (in years) represents the estimated period of time until exercise and is based on actual historical experience. The following table summarizes stock option activity during the nine months ended March 31, 2025: 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, 2024 322,056 $ 18.41 6.59 Granted 79,000 $ 21.79 9.29 Exercised ( 82,600 ) $ 17.94 — Forfeited or expired ( 500 ) $ 16.54 — Outstanding at March 31, 2025 317,956 $ 19.37 6.83 $ 2,471,791 Vested or expected to vest at March 31, 2025 302,783 $ 19.10 6.64 $ 2,363,682 Exercisable at March 31, 2025 162,556 $ 19.38 4.86 $ 1,262,070 The aggregate intrinsic value in the table above represents the total pretax intrinsic value (the difference between the closing sale price of the Company’s common stock as reported on the NYSE American on March 31, 2025 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders if all option holders had exercised their options on March 31, 2025. This amount changes based on the fair market value of the Company’s common stock. The intrinsic value of options exercised during the nine months ended March 31, 2025 and 2024 was $ 841,603 and $ 186,186 , respectively. 11 The following table summarizes changes in non-vested stock options during the nine months ended March 31, 2025: Weighted Number Average of Shares Grant Date Subject Fair Value to Option (per Option) Non-vested at July 1, 2024 147,300 $ 4.15 Granted 79,000 $ 5.37 Vested ( 70,400 ) $ 4.16 Forfeited or expired ( 500 ) $ 4.03 Non-vested at March 31, 2025 155,400 $ 4.76 Note 5. Commitments and Contingencies The Company from time to time, enters into standby letters of credit agreements with financial institutions primarily relating to the guarantee of future performance on certain contracts. Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at March 31, 2025 and June 30, 2024. The Company, as a U.S. Government contractor, is subject to audits, reviews, and investigations by the U.S. Government related to its negotiation and performance of government contracts and its accounting for such contracts. Failure to comply with applicable U.S. Government standards by a contractor may result in suspension from eligibility for award of any new government contract and a guilty plea or conviction may result in debarment from eligibility for awards. The government may, in certain cases, terminate existing contracts, recover damages, and impose other sanctions and penalties. As a result of contract audits, the Company will determine a range of possible outcomes and, in accordance with ASC 450 “Contingencies,” the Company will accrue amounts within a range that appears to be its best estimate of a possible outcome. Adjustments are made to accruals, if any, periodically based on current information. We are party to various litigation matters and claims arising from time to time in the ordinary course of business. There are no pending litigation matters or claims which we believe will have a material adverse effect on our business, financial condition, results of operations or cash flows. The Company was awarded $ 7.4 million in funding during the second quarter of fiscal year 2023 in support of facility and capital equipment upgrades for testing and qualification for the United States Navy. The funding is part of the Navy’s investment to improve and sustain the Surface Combatant Industrial Base. The work is being conducted on the Company’s property in Saratoga Springs, NY, and is in the final stages, nearing completion. 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 has recorded any receipts of milestone payments received as a reduction from the cost of the assets. The Company incurred 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 March 31, 2025, net deferred tax assets include a deferred tax asset of $ 888,032 associated with milestone reimbursements received totaling $ 4,228,722 . Included in property, plant, and equipment at March 31, 2025 was $ 2,535,297 not yet reimbursed for facility and capital upgrades under the funding award, compared to $ 965,392 in spending not yet reimbursed included in property, plant, and equipment at June 30, 2024. Included in accounts payable at March 31, 2025 was approximately $ 25,000 for facility and capital upgrades eligible to be reimbursed under the funding award compared to $ 272,560 included in accounts payable at June 30, 2024. In June 2024, the Company notified the third-party administrator of the IBEW Local 1799 Pension Fund of its intention to withdraw permanently from the plan. As required by the Employee Retirement Income Security Act “ERISA”, the Company is subject to a termination withdrawal liability. The recorded termination withdrawal obligation at March 31, 2025 and June 30, 2024 totaled $ 561,852 and $ 772,157 , respectively, shown within the accounts payable balance on the Company’s balance sheets. As the Company was the only remaining contributing employer to the multiemployer pension plan, its withdrawal constitutes a mass withdrawal termination. Final withdrawal calculations have been completed and are in line with the established liability as of March 31, 2025. In December 2024, the Company was awarded $ 3.4 million in funding in support of facility and capital equipment upgrades. The funding is part of the Navy’s investment to improve and sustain the Surface Combatant Industrial Base. The grant is expected to be in force through calendar year 2026. Included in property, plant, and equipment at March 31, 2025 was $ 776,329 not yet reimbursed for facility and capital equipment upgrades under the funding award. Included in accounts payable at March 31, 2025 was approximately $ 152,701 for facility and capital upgrades eligible to be reimbursed under the funding award. 12 Note 6. Revenue The Company follows ASC 606 “Revenue from Contracts with Customers” to determine the recognition of revenue. This standard requires entities to assess the products or services promised in contracts with customers at contract inception to determine the appropriate unit at which to record revenues. Revenue is recognized when control of the promised products or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those products or services. Significant judgment is required in determining the satisfaction of performance obligations. Revenues from our performance obligations are satisfied over time using the output method which considers the appraisal of results achieved and milestones reached or units delivered based on contractual shipment terms, typically shipping point. Revenue is recognized when, or as, the customer takes control of the product or services. The output method best depicts the transfer of control to the customer as the output method represents work completed. Control is typically transferred to the customer at the shipping point, as the Company has a present right to payment, the customer has legal title to the asset, the customer has the significant risks and rewards of ownership of the asset, and in most instances the customer has accepted the asset. Total revenue recognized for the three and nine months ended March 31, 2025 based on units delivered was $ 9,557,710 and $ 27,057,894 , respectively, compared to $ 7,546,422 and $ 22,189,116 for the same period in fiscal year 2024. Total revenue recognized for the three and nine months ended March 31, 2025 based on milestones achieved was $ 745,009 and $ 7,296,783 , respectively, compared to $ 708,231 and $ 4,936,292 for the same period in fiscal year 2024. The Company offers a standard one-year product warranty. Product warranties offered by the Company are classified as assurance-type warranties, which means the warranty only guarantees that the good or service functions as promised. Based on this, the provided warranty is not considered to be a distinct performance obligation. The impact of variable consideration has been considered but none identified which would be required to be allocated to the transaction price as of March 31, 2025. Our payment terms are generally 30-60 days. Contract liabilities were $ 21,018,310 and $ 9,043,422 as of March 31, 2025 and June 30, 2024, respectively. The increase in contract liabilities is primarily due to the advance collection of cash on specific contracts, offset in part, by revenue recognized. Of the $ 9,043,422 that was in contract liabilities as of June 30, 2024, $ 3,490,436 has been recognized in revenue as of the nine months ended March 31, 2025. The Company used the practical expedient to expense incremental costs incurred to obtain a contract when the contract term is less than one year . The Company’s backlog at March 31, 2025 totaling approximately $ 138 million is currently estimated to be recognized in the following fiscal years: 7.0 % in 2025; 35.9 % in 2026; 12.3 % in 2027; 44.8 % thereafter. The timing of supplier deliveries of material, production schedules, the completion of engineering deliverables, among other factors, could cause these estimates to change. Note 7. Recently Issued Accounting Standards Recent Accounting Pronouncements Not Yet Adopted In December 2023, FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures,” to enhance the transparency and decision usefulness of income tax disclosures. The amendments in ASU 2023-09 provide improvements primarily related to the rate reconciliation and income taxes paid information included in income tax disclosures. The Company would be required to disclose additional information regarding reconciling items equal to or greater than five percent of the amount computed by multiplying pretax income (loss) by the applicable statutory tax rate. Additionally, the Company would be required to disclose income taxes paid (net of refunds received) disaggregated by individual jurisdictions, when the taxes paid in an individual jurisdiction is equal to or greater than five percent of the Company’s total income taxes paid (net of refunds received). The amendments in ASU 2023-09 are effective for the annual period beginning July 1, 2025. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company will evaluate the impact of ASU 2023-09 on its financial statements. 13 In November 2023, the FASB issued ASU 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which provides updates to qualitative and quantitative reportable segment disclosure requirements, including enhanced disclosures about significant segment expenses and increased interim disclosure requirements, among others. The amendments in ASU 2023-07 are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted, and the amendments should be applied retrospectively. The adoption of ASU 2023-07 is not expected to have a significant impact on the financial statements. The Company is currently evaluating the impact of this new guidance on its financial statements. In November 2024, the FASB issued ASU 2024-03, “Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40)” with the goal of improving disclosures about a public business entity’s expenses and address requests from investors for more detailed information about the types of expenses in captions that are commonly presented on the face of the financial statements such as cost of sales, SG&A, and research and development. These amendments are effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods beginning after December 15, 2027. Early adoption is permitted and should be applied either prospectively to financial statements issued for reporting periods after the effect date of the updates or retrospectively to any or all prior periods presented in the financial statements. The Company will evaluate the impact of this guidance on its financial statements. Recent Accounting Pronouncements Adopted None Note 8. Employee Stock Ownership Plan The Company sponsors a leveraged employee stock ownership plan (the "ESOP") that covers all nonunion employees who work 1,000 or more hours per year and are employed on June 30. The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends on unallocated shares received by the ESOP. All dividends on unallocated shares received by the ESOP are used to pay debt service. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings. As the debt is repaid, shares are released and allocated to active employees, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with FASB ASC 718-40 “Share-based Payments.” Accordingly, the shares purchased by the ESOP are reported as Unearned ESOP shares in the balance sheet and the statement of changes in stockholders’ equity. As shares are released or committed-to-be-released, the Company reports compensation expense equal to the current average market price of the shares, and the shares become outstanding for earnings-per-share (EPS) computations. ESOP compensation expense was $ 149,036 and $ 128,300 for the three-month periods ended March 31, 2025 and 2024, respectively. ESOP compensation expense was $ 435,298 and $ 311,664 for the nine-month periods ended March 31, 2025 and 2024, respectively. The ESOP shares as of March 31, 2025 and 2024 were as follows: March 31, 2025 March 31, 2024 Allocated shares 383,812 428,974 Committed-to-be-released shares 16,253 16,619 Unreleased shares 195,234 217,026 Total shares held by the ESOP 595,299 662,619 Fair value of unreleased shares $ 5,296,698 $ 5,479,907 The Company may at times be required to repurchase shares at the ESOP participants’ request at the shares’ fair market value. During the three and nine months ended March 31, 2025 and 2024, 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 nine months ended March 31, 2025 and 2024 totaled 67,320 and 55,985 shares, respectively. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Espey Mfg. & Electronics Corp. (“Espey”) is a power electronics design and original equipment manufacturing (OEM) company with a long history of developing and delivering reliable products for use in military and severe environment applications. Design, manufacturing, and testing is performed in our in-service 150,000+ square foot facility located at 233 Ballston Ave, Saratoga Springs, New York. Espey is classified as a “smaller reporting company” for purposes of the reporting requirements under the Securities Exchange Act of 1934, as amended. Espey’s common stock is publicly-traded on the NYSE American under the symbol “ESP.” Espey began operations after incorporation in New York in 1928. We strive to remain competitive as a leader in high power energy conversion and transformer solutions through the design and manufacture of new and improved products by using advanced and “cutting edge” electronics technologies. Espey is an ISO 9001:2015 and AS9100:2016 certified manufacturer of power conversion, advanced magnetics and build to print 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 testing services, metal fabrication, painting services, and development of automatic testing equipment. Espey is vertically integrated, meaning that the Company produces individual components (including inductors), populates printed circuit boards, fabricates metalwork, paints, wires, qualifies, and fully tests items, mechanically, electrically and environmentally, in house. Portions of the manufacturing and testing process are subcontracted to vendors from time to time. The Company markets its products primarily through its own direct sales organization and through outside sales representatives. Business is solicited from large industrial manufacturers and defense companies, the government of the United States, foreign governments and major foreign electronic equipment companies. Espey is also on the eligible list of contractors with the United States Department of Defense. We pursue opportunities for prime contracts directly with the Department of Defense and are generally automatically solicited by Department of Defense procurement agencies for their needs falling within the major classes of products produced by the Company. Espey contracts with the Federal Government under cage code 20950 as Espey Mfg. & Electronics Corp. There is competition in all classes of products manufactured by the Company, ranging from divisions of the largest electronic companies, to many small companies. The Company's sales do not represent a significant share of the industry's market for any class of its products. The principal methods of competition for electronic products of both a military and industrial nature include, among other factors, price, product performance, the experience of the particular company and history of its dealings in such products. Our business is not seasonal. However, the concentration of our business in the rail industry, and in equipment for military applications and industrial applications, and our customer concentrations expose us to on-going associated risks. These risks include, without limitation, fluctuating requirements for power supplies in the rail industry, dependence on appropriations from the United States Government and the governments of foreign nations, program allocations, the potential of governmental termination of orders for convenience, and the general strength of the industry sectors in which our customers transact business. Future procurement needs supporting the military and the rail industry continue to drive competition. Many of our competitors have invested, and continue to invest, aggressively in upfront product design costs and accept lower profit margins as a strategic means of maintaining existing business and enhancing market share. This continues to put pressure on the pricing of our current products and has lowered our profit margins on some of our new business. In order to compete effectively for new business, in some cases we have invested in upfront design costs, thereby reducing initial profitability as a means of procuring new long-term programs. As part of our strategy, we adjust our pricing in order to achieve a balance which enables us both to retain repeat programs while being more competitive in bidding on new programs. 15 Our sales strategy includes identifying and obtaining multiple new engineering design and development contracts in any given fiscal year to ensure optimal utilization of our engineering personnel in addition to securing follow-on production awards for product previously designed in-house, as well as, new or follow-on build to print opportunities. 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 for future awards and expands our engineering team’s skillset. The total backlog at March 31, 2025 was $138 million, which included approximately $97.7 million from three significant customers, compared to $84.2 million at March 31, 2024, which included approximately $54.5 million from five significant customers. The Company’s total backlog represents the estimated remaining sales value of work to be performed under firm contracts. It is not uncommon to receive orders which include delivery schedules extending beyond a year from the contract purchase date. Due to this, a customer’s future reorder point may vary. The backlog at March 31, 2025 is fully funded, except for approximately $33.3 million, representing six firm follow-on multi-year orders from a single customer. While there is no guarantee that future budgets and appropriations will provide funding for individual programs, management has included in the unfunded backlog only those programs that it believes are likely to receive funding based on program status and discussions with customers. 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 to the extent information is known or estimable. Management expects revenues and earnings per share to be higher in fiscal year 2025 than fiscal year 2024. This expectation is driven primarily by orders already in our backlog that will be shipped in the final quarter of fiscal year 2025 and the change in product mix shipped during fiscal year 2025 as compared to fiscal year 2024. 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 a concern. Although we are not currently experiencing any significant financial or raw material sourcing issues resulting from the product tariffs, the Company is continuing to monitor the changes in foreign trade policies and the potential impact they could have on our business moving forward. The labor workforce remains stable. Management continues to closely monitor workforce labor requirements to support our sales backlog and planned delivery schedules. Longer time-to-hire challenges remain for certain positions due to specific skillsets required for those positions. Unemployment rates in the local geographic region trend lower than the national average which has created a competitive recruiting environment. Where possible, the Company continues to offer on-the-job training and when necessary, continues to recruit personnel outside the local region. Combined with supply chain constraints, unforeseen labor disruptions could delay shipments and result in missing our backlog fulfillment projections and recognizing lower than anticipated operating income. Successful conversion of engineering program backlog into sales is largely dependent on the execution and completion of our engineering design efforts. It is not uncommon to experience technical or scheduling delays which arise from time to time as a result of, among other reasons, design complexity, the availability of personnel with the requisite expertise, and the requirements to obtain customer approval at various milestones. Cost overruns which may arise from technical and scheduling delays and increased raw material costs could negatively impact the timing of the conversion of backlog into sales, or the profitability of such sales. Engineering programs in both the funded and unfunded portions of the current backlog aggregate $12.3 million. It is presently anticipated that a minimum of $9.6 million of orders comprising the March 31, 2025 backlog will be filled during the fiscal year ending June 30, 2025 subject, however, to the impact of the factors identified above. The minimum of $9.6 million does not include any shipments which may be made against orders subsequently received during the fiscal year ending June 30, 2025. 16 As of March 31, 2025, new orders received year to date have exceeded total new orders received in fiscal 2024. New orders received in the first nine months of fiscal year 2025 were $75.1 million as compared to approximately $27.8 million new orders received in the first nine months of fiscal year 2024. Included in new orders received during the current fiscal year are two awards, one for $29.5 million and the other $19.8 million, when fully funded, to provide electric power distribution panels for the U.S. Navy’s Columbia class submarines through calendar year 2032. In addition to the backlog and the new orders already booked in fiscal year 2025, the Company currently has outstanding opportunities representing approximately $151 million in the aggregate as of May 1, 2025 for both repeat and new programs. Outstanding opportunities encompass various new and previously manufactured power supplies, transformers, and subassemblies. We consider the value of those opportunities we believe are likely to be awarded based on factors which include: quotation status, communicated award dates, historical ordering, public information on defense programs and program funding, discussion with customers, and our cost competitiveness. However, there can be no assurance that the Company will acquire any of the outstanding opportunities described above, many of which are subject to allocations of the United States defense spending and factors affecting the defense industry. Also, many solicitations we receive for the procurement of goods and services are associated with competitive bidding processes. A significant portion of the Company’s business is the production of military and industrial electronic equipment for use by the U.S. and foreign governments and certain industrial customers. Net sales to five significant customers represented 82% of the Company’s total sales for the three-month period ended March 31, 2025. Net sales to four significant customers represented 79% of the Company’s total sales for the three-month period ended March 31, 2024. Net sales to six significant customers represented approximately 75% of the Company’s total sales for the nine-month period ended March 31, 2025. Net sales to four significant customers represented 74% of the Company’s total sales for the nine-month period ended March 31, 2024. A loss of one of these customers or programs related to these customers, or customer requested deferrals of product delivery could significantly impact the Company. Historically, a small number of customers have accounted for a large percentage of the Company’s total sales in any given fiscal year. Management continues to pursue opportunities with current and new customers with an overall objective of lowering the concentration of sales, mitigating excessive reliance upon a single major product of a particular program and minimizing the impact of the loss of a single significant customer. Given the nature of our business, we believe our existing sales order backlog is fairly diversified in terms of customers and the category of products on order. Critical Accounting Policies and Estimates Management believes our most critical accounting policies include revenue recognition and cost estimation on our contracts. Revenue The majority of our sales are generated from military contracts from defense companies, the United States 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. 17 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. Inventory balances are reduced based on this analysis. Inventoried work relating to contracts in process and work-in-process is valued at actual production cost, including factory overhead incurred to date. Contract costs include material, subcontract costs, labor, and an allocation of overhead costs. Work-in-process represents spare units and parts and other inventory items acquired or produced to service units previously sold or to meet anticipated future orders. Provision for losses on contracts is made when the existence of such losses becomes probable and estimable. The provision for losses on contracts is included in other accrued expenses on the Company’s balance sheet. The costs attributed to units delivered under contracts are based on the estimated average cost of all units expected to be produced. Certain contracts are expected to extend beyond twelve months. The estimation of total cost at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Given the significance of the estimation processes and judgments described above, it is possible that materially different amounts of expected sales and contract costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process. When a change in expected sales value or estimated cost is determined, the change is reflected in current period earnings. Contract Liabilities Contract liabilities include advance payments and billings in excess of revenue recognized. 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 March 31, 2025 and June 30, 2024. 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, 2023 and July 1, 2024 were $5,755,282 and $6,635,490, respectively. Results of Operations Net sales for the three months ended March 31, 2025 and 2024 were $10,302,719 and $8,254,653, respectively, a 24.8% increase. Net sales for the nine months ended March 31, 2025 and 2024 were $34,354,677 and $27,125,408, respectively, a 26.7% increase. In general, sales fluctuations may occur during comparable fiscal periods as the direct result of sales backlog levels, product mix, and specific contractual terms of those firm orders placed including contract value, scope of work, and contract delivery schedules. For the three months ended March 31, 2025, the increase in sales when compared to the same period last year is primarily due to more deliveries against an overall higher sales backlog and the product mix comprising those shipments. The increase in sales in the current year was mainly related to our power supply and build to print programs. During the current quarter, sales increased on deliveries for some key build to print and power supply contracts. These increases were partially offset by the completion of a power supply program which had sales in the prior comparable period and a decrease in sales relating to two main magnetics programs. These decreases are attributable to the timing of shipments on certain programs. For the nine months ended March 31, 2025, the increase in sales when compared to the same period last year is primarily related to our power supply and build to print programs. These increases were partially offset by a decrease in sales for two main magnetics programs also attributable to the timing of shipments on certain programs. 18 Gross profits for the three months ended March 31, 2025 and 2024 were $2,948,384 and $2,064,191, respectively. Gross profit as a percentage of sales was approximately 28.6% and 25.0%, for the same periods, respectively. Gross profits for the nine months ended March 31, 2025 and 2024 were $8,912,978 and $7,452,143, respectively. Gross profit as a percentage of sales was approximately 25.9% and 27.5% for the same periods, respectively. Gross profits as a percentage increased for the three months ended March 31, 2025 when compared to the same period last year and decreased for the nine months ended March 31, 2025 when compared to the same period last year. The increase in the gross margin percentage for the three months ended March 31, 2025 is mainly attributable to product mix, increased shipments on various power supply programs with higher than average gross margins, and increased margins on a key build to print program when compared to the same period last year. The gross margin percentage decreased for the nine months ended March 31, 2025 when compared to the same period last year due to the completion of two build to print contracts in the prior comparable period in which there were less sales in the nine months ended March 31, 2025. Further, there was increased spending and decreased margins for two main magnetics programs which management is confident will improve as the contracts progress. The primary factors in determining the change in gross profit and net income are overall sales levels and product mix. The gross profits on mature products and build to print contracts are typically higher as compared to products which are still in the engineering development stage or in early stages of production. In the case of the latter, the Company can incur what it refers to as “loss contracts,” primarily on engineering design contracts in which the Company invests with the objective of developing future product sales. In any given accounting period the mix of product shipments between higher margin programs, less mature programs, and expenditures associated with loss contracts, has a significant impact on gross profit and net income. Selling, general and administrative expenses were $1,197,262 for the three months ended March 31, 2025, an increase of $226,042, compared to the three months ended March 31, 2024. Selling, general and administrative expenses were $3,418,206 for the nine months ended March 31, 2025, an increase of $373,615 compared to the nine months ended March 31, 2024. The increase in spending for the three months ended March 31, 2025 as compared to the same period in 2024 relates mainly to the increase in employee compensation costs, outside selling costs related to non-employee sales representatives, an increase in employee recruitment fees, and increases in dues, subscriptions and training costs. The increase in spending for the nine months ended March 31, 2025 as compared to the same period in 2024 relates mainly to the increase in employee compensation costs, outside selling costs related to non-employee sales representatives, an increase in outbound freight costs related to higher sales, and an increase in employee recruitment fees. Other income for the three months ended March 31, 2025 and 2024 was $336,306 and $184,821, respectively. Other income for the nine months ended March 31, 2025 and 2024 was $883,139 and $513,158, respectively. The increase for the three and nine months ended March 31, 2025 is primarily due to the increase in interest income resulting from an increase in cash held in money markets and investment securities. Interest income is a function of the level of investments and investment strategies that generally tend to be conservative. The Company’s effective tax rate for the three and nine months ended March 31, 2025 was approximately 18.3%, compared to 19.2% and 20.3% for the three and nine months ended March 31, 2024. The effective tax rate in fiscal 2025 and fiscal 2024 is less than the statutory tax rate mainly due to the benefit received from ESOP dividends paid on allocated shares as well as the benefit from foreign derived intangible income, offset in part, by the permanent difference for incentive stock option expense recorded for book purposes which is not deductible for tax purposes. The effective tax rate for the three and nine months ended March 31, 2025 was lower than the prior year primarily from a greater benefit derived from the ESOP dividends paid on allocated shares and the benefit derived from the exercise of incentive stock options in the current period when compared to the same prior year period. Net income for the three months ended March 31, 2025 was $1,704,487 or $0.66 and $0.63 per share, basic and diluted, compared to net income of $1,031,930 or $0.41 and $0.40 per share, basic and diluted, for the three months ended March 31, 2024. Net income for the nine months ended March 31, 2025 was $5,211,303 or $2.03 and $1.95 per share, basic and diluted, compared to $3,921,844 or $1.58 and $1.56 per share, basic and diluted, for the nine months ended March 31, 2024. The increase in net income in the three months ended March 31, 2025 when compared to the same period last year resulted primarily from the increase in gross profits and interest income which is slightly offset by an increase in selling, general, and administrative expenses and an increase in the provision for income taxes. The increase in net income in the nine months ended March 31, 2025 when compared to the same period last year resulted primarily from the increase in gross profit and the increase in interest income, offset in part, by an increase in selling, general, and administrative expenses and an increase in the provision for income taxes, all discussed above. 19 Liquidity and Capital Resources The Company's working capital is an appropriate indicator of the liquidity of its business. During the past two fiscal years, the Company has funded all of its operations with cash flows resulting from operating activities and when necessary, from its existing cash and investments. The Company did not borrow any funds during the last two fiscal years. Management has a $3,000,000 line of credit available to help fund further growth or working capital needs but does not anticipate the need for any borrowed funds in the foreseeable future. Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at March 31, 2025 and 2024. The existing line of credit was renewed in March 2025. The Company's working capital as of March 31, 2025 and 2024 was approximately $40.8 million and approximately $36.6 million, respectively. The Company may at times be required to repurchase shares at the ESOP participants’ request at fair market value. During the three and nine months ended March 31, 2025 and 2024, the Company did not repurchase any shares held by the ESOP. Under an existing authorization from the Company's Board of Directors, as of March 31, 2025, management is authorized to purchase an additional $783,460 of Company stock. The table below presents the summary of cash flow information for the fiscal years indicated: Nine Months Ended March 31, 2025 2024 Net cash provided by operating activities $ 18,219,771 $ 7,350,662 Net cash used in investing activities (8,265,308 ) (3,869,358 ) Net cash used in financing activities (446,971 ) (673,795 ) Net cash provided by operating activities fluctuates between periods primarily as a result of differences in sales and net income, provision for income taxes, the timing of the collection of accounts receivable, purchase of inventory, and payment of accounts payable. The increase in cash provided by operating activities compared to the prior year primarily relates to an increase in contract liabilities for cash advances received from customers and an increase in prepaid expenses and other current assets offset in part by a decrease in inventories and decrease in accounts payable. Net cash used in investing activities increased in the nine months ended March 31, 2025 as compared to the same period in 2024 due to higher investment securities offset in part by the increased proceeds from the maturity of investment securities when compared to the same period last year. Cash used in financing activities for the nine months ended March 31, 2025 slightly increased primarily to dividend payments on common stock, offset in part, by proceeds from the exercise of stock options. The Company currently believes that the cash flow generated from operations and when necessary, from cash and cash equivalents will be sufficient to meet its long-term funding requirements for the foreseeable future. During the nine months ended March 31, 2025 and 2024, the Company expended $2,509,088 and $4,501,997, respectively, for plant improvements and new equipment, of which $2,346,233 and $4,294,632, respectively, was either reimbursed or eligible to be reimbursed under the not to exceed $7.4 million and $3.4 million awards received by the Company. The awards received by the Company are in support of facility and capital equipment upgrades for testing and qualification for the United States Navy. These funding awards are part of the Navy’s investment to improve and sustain the Surface Combatant Industrial Base. The Company has budgeted approximately $500,000 for new equipment and plant improvements in fiscal year 2025, not reimbursable under the funding awards received. A majority of these expenditures will be made to stay competitive in the marketplace and to meet the needs of current contracts. 20 CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The terms "believe," "anticipate," "intend," "goal," "expect," and similar expressions may identify forward-looking statements. These forward-looking statements represent the Company's current expectations or beliefs concerning future events. The matters covered by these statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including the Company's dependence on timely development, introduction and customer acceptance of new products, the impact of competition and price erosion, supply and manufacturing constraints, potential new orders from customers, the impact of cyber or other security threats or other disruptions to our business, the impact of inflationary pressures on the United States economy and our operations and other risks and uncertainties. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is a smaller reporting company as defined under Securities and Exchange Commission Rule 12b-2. Pursuant to the exemption available to smaller reporting company issuers under Item 305 of Regulation S-K, quantitative and qualitative disclosures about market risk, the Company is not required to provide the information for this item. Item 4. Controls and Procedures (a) The Company's management, with the participation of the Company's Chief Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. (b) There have been no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. 21 PART II: Other Information and Signatures Item 1. Legal Proceedings Currently, there are no matters pending against the Company which could reasonably be expected to have a material adverse effect on our business, financial condition, results of operations or cash flows. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) Securities Sold (c) Securities Repurchased As of March 31, 2025 the Company can repurchase up to $783,460 of its common stock pursuant to an existing authorization by the Board of Directors. During the quarter ended March 31, 2025 no shares were repurchased. Item 3. Defaults Upon Senior Securities None Item 4. Mine Safety Disclosures Not applicable Item 5. Other Information None Item 6. Exhibits 31.1 Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of the Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 22 S I G N A T U R E S Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESPEY MFG. & ELECTRONICS CORP. /s/ David O’Neil David O’Neil President and Chief Executive Officer /s/ Kaitlyn O’Neil Kaitlyn O’Neil Principal Financial Officer Date: May 12, 2025 23