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, 2025 and 2024, 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, 2025 and 2024, 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. 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 and Accruals 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. 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. 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 balance sheet. 11 The estimation of total cost at completion of a contract is subject to variables involving contract costs incurred and expected to be incurred 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 contract costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process. When a change in expected 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 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: ● Obtain understanding of the process and assumptions used by management to develop estimates to complete including labor, overhead and materials. ● Perform retrospective review of prior period’s cost of sales percentage and estimates to complete. ● Perform brainstorming meeting among the engagement team to determine where the estimate may be susceptible to fraud or error. ● Test management’s estimate to complete and expected gross margin. ● Review appropriateness of job loss accrual. /s/ Freed Maxick, P.C. We have served as the Company's auditor since 2014. Rochester, New York September 16, 2025 12 Espey Mfg. & Electronics Corp. Balance Sheets June 30, 2025 and 2024 2025 2024 ASSETS Cash and cash equivalents $ 18,862,645 $ 4,351,970 Investment securities 24,717,245 18,878,631 Trade accounts receivable, less allowance for credit losses of $ 3,000 7,598,888 6,635,490 Inventories: Raw materials 2,120,462 1,693,448 Work-in-process 681,334 1,645,973 Costs related to contracts in process 15,040,253 15,904,588 Total inventories 17,842,049 19,244,009 Deferred tax asset 1,202,019 895,154 Prepaid expenses and other current assets 4,933,562 3,231,402 Total current assets 75,156,408 53,236,656 Property, plant and equipment, net 3,960,156 3,306,275 Total assets $ 79,116,564 $ 56,542,931 LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable $ 2,641,576 $ 3,751,209 Accrued expenses: Salaries and wages 1,185,387 928,163 Vacation 568,078 511,144 Other 594,153 757,552 Payroll and other taxes withheld 93,456 56,862 Contract liabilities 22,886,404 9,043,422 Income taxes payable 298,510 220,607 Total current liabilities 28,267,564 15,268,959 Total liabilities 28,267,564 15,268,959 Commitments and Contingencies (See Note 13) Common stock, par value $.33-1/3 per share Authorized 10,000,000 shares; Issued 3,129,874 shares as of June 30, 2025 and 2024. Outstanding 2,896,368 and 2,733,958 shares as of June 30, 2025 and 2024, respectively (Includes 189,817 and 211,487 Unearned ESOP Shares, respectively) 1,043,291 1,043,291 Capital in excess of par value 26,331,842 23,930,428 Accumulated other comprehensive gain (loss) 11,596 6,544 Retained earnings 31,550,390 26,004,790 58,937,119 50,985,053 Less: Unearned ESOP shares ( 3,471,747 ) ( 3,868,093 ) Cost of 233,506 and 395,916 shares of common stock in treasury as of June 30, 2025 and 2024, respectively ( 4,616,372 ) ( 5,842,988 ) Total stockholders' equity 50,849,000 41,273,972 Total liabilities and stockholders' equity $ 79,116,564 $ 56,542,931 The accompanying notes are an integral part of the financial statements. 13 Espey Mfg. & Electronics Corp. Statements of Comprehensive Income Years Ended June 30, 2025 and 2024 2025 2024 Net sales $ 43,950,872 $ 38,736,319 Cost of sales 31,266,241 28,083,259 Gross profit 12,684,631 10,653,060 Selling, general and administrative expenses 4,557,945 4,113,608 Operating income 8,126,686 6,539,452 Other income Interest income 1,259,852 728,299 Other 342,126 27,263 Total other income 1,601,978 755,562 Income before provision for income taxes 9,728,664 7,295,014 Provision for income taxes 1,585,710 1,479,874 Net income $ 8,142,954 $ 5,815,140 Other comprehensive income, net of tax: Unrealized gain on investment securities 5,052 8,973 Total comprehensive income $ 8,148,006 $ 5,824,113 Net income per share: Basic $ 3.14 $ 2.34 Diluted $ 3.02 $ 2.29 Weighted average number of shares outstanding: Basic 2,591,036 2,489,165 Diluted 2,696,192 2,536,967 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, 2025 and 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 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 Changes in Stockholders' Equity (continued) Years Ended June 30, 2025 and 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, 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 8,142,954 8,142,954 Other comprehensive income, net of tax of $ 1,061 5,052 5,052 Total comprehensive income 8,148,006 Stock options exercised 162,410 1,829,006 ( 162,410 ) 1,226,616 3,055,622 Stock-based compensation 346,281 346,281 Dividends paid on common stock $ 1.00 per share ( 2,597,354 ) ( 2,597,354 ) Reduction of unearned ESOP shares 226,127 396,346 622,473 Balance as of June 30, 2025 2,896,368 $ 1,043,291 $ 26,331,842 $ 11,596 $ 31,550,390 233,506 $ ( 4,616,372 ) $ ( 3,471,747 ) $ 50,849,000 The accompanying notes are an integral part of the financial statements. 16 Espey Mfg. & Electronics Corp. Statements of Cash Flows Years Ended June 30, 2025 and 2024 2025 2024 Cash Flows from Operating Activities: Net income $ 8,142,954 $ 5,815,140 Adjustments to reconcile net income to net cash provided by operating activities: Stock-based compensation 346,281 283,673 Depreciation 451,523 453,517 ESOP compensation expense 622,472 438,136 Deferred income tax benefit ( 306,865 ) ( 1,032,981 ) Loss (gain) on disposal of property, plant and equipment — 590 Changes in assets and liabilities: Increase in trade accounts receivable ( 963,398 ) ( 880,208 ) Decrease in income tax receivable — 35,666 Increase in inventories 1,401,960 645,572 Increase in prepaid expenses and other current assets ( 1,702,160 ) 1,051,075 Decrease in accounts payable ( 1,109,633 ) 2,538,833 Increase in accrued salaries and wages 257,224 37,415 Increase in vacation accrual 56,934 ( 174,044 ) Decrease other accrued expenses ( 163,399 ) 209,805 Increase in payroll and other taxes withheld 36,594 ( 9,180 ) Increase in contract liabilities 13,842,982 961,584 Increase in income taxes payable 77,903 220,607 Net cash provided by operating activities $ 20,991,372 $ 10,595,200 Cash Flows from Investing Activities: Additions to property, plant and equipment ( 4,365,403 ) ( 5,164,165 ) Proceeds from grant award 3,260,000 4,228,722 Proceeds from sale of property, plant and equipment — 150 Purchase of investment securities ( 33,873,762 ) ( 26,423,984 ) Proceeds from sale/maturity of investment securities 28,040,200 19,519,000 Net cash used in investing activities ( 6,938,965 ) ( 7,840,277 ) Cash Flows from Financing Activities: Dividends paid on common stock ( 2,597,354 ) ( 1,678,070 ) Proceeds from exercise of stock options 3,055,622 526,362 Net cash provided by (used in) financing activities 458,268 ( 1,151,708 ) Increase in cash and cash equivalents 14,510,675 1,603,215 Cash and cash equivalents, beginning of the year 4,351,970 2,748,755 Cash and cash equivalents, end of the year $ 18,862,645 $ 4,351,970 Supplemental Schedule of Cash Flow Information: Income taxes paid $ 1,815,732 $ 2,258,965 The accompanying notes are an integral part of the financial statements. 17 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. As the Company does not have standalone observable prices, a contract’s transaction price of each performance obligation is based on the standalone selling price, which is determined using an expected cost plus a margin approach. 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. 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 variables including contract costs incurred and expected to be incurred as well as estimates regarding contract completion dates. Given the significance of the estimation processes and judgments described above, it is possible that materially different amounts of expected contract costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process. When a change in expected estimated cost is determined, changes are reflected in current period earnings. Contract Liabilities Contract liabilities include advance payments and billings in excess of revenue recognized. 18 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies, Continued 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 the Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (ASC) Topic 740-10, “Accounting for Income Taxes." Under the provisions of FASB 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, 2025 and 2024 consisted of a combination of municipal bonds, U.S. Treasury bills, and certificates of deposit. The Company classifies investments in debt securities as available-for-sale, which are reported at fair market value. 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. Fair Value of Financial Instruments FASB ASC Topic 820 “Fair Value Measurement” 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. 19 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies, Continued ◾ 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, 2025 and 2024 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, 2025 and 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, 2024 and July 1, 2023 were $ 6,635,490 and $ 5,755,282 , respectively. Per Share Amounts FASB ASC Topic 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 unallocated ESOP shares 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, 2025 and 2024 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 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. The amendments in ASU 2023-07 require all public entities, including those with a single reportable segment, to include additional disclosures around significant segment expenses, as well as identify measures used by the Chief Operating Decision Maker in evaluating segment performance, allocating resources, and assessing Company results. Espey adopted ASU 2023-07 effective June 30, 2025. The adoption of 2023-07 did not change the way that the Company identifies its reportable segments and, did not have a material impact on the Company’s segment-related disclosures. Refer to the notes to the financial statements for further information on Espey’s reportable segment. 20 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 2. Summary of Significant Accounting Policies, Continued 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. In November, 2024, the FASB issued ASU No. 2024-03, “Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures” (Subtopic 220-40) which is intended to improve disclosures around public business entities expenses and address requests from investors for more detailed information about the types of expenses that are within commonly presented expense captions such as cost of sales and selling, general, and administrative costs. This ASU is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027, with early adoption 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 2025 and 2024. 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. 21 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 3. Revenue The Company follows FASB 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 performance obligations. Revenues from our performance obligations are satisfied over time using the output method, using direct measurements of the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised under the contract. The output method considers the appraisal of results achieved, 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 progress toward satisfaction of each performance obligation. For units delivered, 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. For milestones achieved, the customer has confirmed the performance defined in the contract has been met and the Company is entitled to payment. Total revenue recognized for the year ended June 30, 2025 based on units delivered totaled $ 35,343,557 compared to $ 33,403,833 for the same period in fiscal year 2024. Total revenue recognized for the year ended June 30, 2025 based on milestones achieved totaled $ 8,607,314 compared to $ 5,332,486 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 result in the adjustment of the transaction price as of June 30, 2025. Our payment terms are generally 30-60 days. Contract liabilities were $ 22,886,404 and $ 9,043,422 as of June 30, 2025 and 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. Revenue recognized, that was in contract liabilities in the beginning of the fiscal year, approximated $ 3,666,815 for the year ended June 30, 2025. The opening contract liabilities balance at July 1, 2024 and July 1, 2023 were $ 9,043,422 and $ 8,081,838 , respectively. 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, representing performance obligations not yet satisfied, at June 30, 2025 totaling approximately $ 139.7 million is expected, based on expected due dates, to be recognized in the following fiscal years: 35 % in 2026, 19 % in 2027, 15 % in 2028, and 31 % thereafter. The nature of the contracts that make up the Company’s backlog are enforceable and include cancellation clauses. 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. Significant Customers & Accounts Receivable Concentrations: 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 six domestic customers accounted for 74 % of total sales in 2025. Each of the six customers accounted for 16 %, 13 % 12 %, 12 %, 11 % and 10 % of sales in fiscal year 2025. Sales to five domestic customers accounted for 81 % of total sales in 2024. Each of those five customers accounted for 20 %, 18 %, 16 %, 16 % and 11 %, respectively, of total sales in 2024. 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 51% represented by three customers at June 30, 2025. Each of the three customers accounted for 26 %, 14 %, and 11 % of accounts receivable in fiscal year 2025. 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. Each of the five customers accounted for 38 %, 20 %, 10 %, 7 %, and 4 % of accounts receivable in fiscal year 2024. 22 Espey Mfg. & Electronics Corp. Notes to Financial Statements Export shipments in fiscal years 2025 and 2024 were $ 3,124,820 and $ 2,350,087 , respectively. Note 4. Investment Securities Investment securities at June 30, 2025 consist of certificates of deposit and municipal bonds and at 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 debt securities by major security type at June 30, 2025 and June 30, 2024 are as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value June 30, 2025 Certificates of deposit $ 23,539,000 $ — $ — $ 23,539,000 Municipal bonds 1,163,567 14,678 — 1,178,245 U.S. Treasury bills — — — — Total investment securities $ 24,702,567 $ 14,678 $ — $ 24,717,245 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 The portfolio is diversified and highly liquid and primarily consists of investment grade fixed income instruments. At June 30, 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 June 30, 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 June 30, 2025 Available-for-sale $ 22,933,933 $ 1,783,312 $ 24,717,245 June 30, 2024 Available-for-sale $ 17,889,582 $ 989,049 $ 18,878,631 23 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 5. Contracts in Process Contracts in process at June 30, 2025 and 2024 are as follows: 2025 2024 Unrecognized gross contract value $ 139,673,288 $ 97,216,542 Costs related to contracts in process $ 15,040,253 $ 15,904,588 Included in costs relating to contracts in process at June 30, 2025 and 2024 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, 2025 and 2024 is as follows: 2025 2024 Land $ 45,000 $ 45,000 Building and improvements 6,137,629 5,472,156 Machinery and equipment 11,887,737 11,509,018 Furniture and fixtures 165,651 165,651 18,236,017 17,191,825 Accumulated depreciation ( 14,275,861 ) ( 13,885,550 ) Property, plant and equipment, net $ 3,960,156 $ 3,306,275 Depreciation expense was $ 451,523 and $ 453,517 for the years ended June 30, 2025 and 2024, 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, which was completed in April 2025. The Company received payment related to the third and final submission of milestone invoices. The Company recorded the receipt 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 June 30, 2025, net deferred tax asset includes a deferred tax asset of $ 1,298,291 associated with milestone reimbursements received totaling $ 7,488,722 . As of June 30, 2025 no portion of the property, plant, and equipment balance was related to facility and capital upgrades pending reimbursement under the funding award, compared to $ 965,392 in spending that was not yet reimbursed and included in property, plant, and equipment at June 30, 2024. As of June 30, 2025 no portion of the accounts payable balance was related to capital upgrades eligible for reimbursement under this funding award compared to approximately $ 272,560 included in accounts payable at June 30, 2024. All assets related to this award were placed in service at June 30, 2025. The Company received an additional award for $ 3.4 million in funding during the second quarter of fiscal year 2025 in support of continued 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. Work is being conducted on the Company’s property in Saratoga Springs, NY, which is anticipated to be completed by the end of fiscal year 2026. The Company will receive payment related to submission of milestones. The first two milestones are achieved upon placement of all purchase orders and subsequently submitted for reimbursement. The final milestone and final reimbursement is dependent on completion of all work to be performed and assets purchased to be placed in service. To receive full reimbursement for the $ 3.4 million award, the Company must invest approximately 15 % or $ 508,000 in relation to these facility improvements and capital equipment upgrades. The Company will record the receipt of milestone payments 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, 2025, net deferred tax asset includes a deferred tax asset of $ 386,808 associated with items that will be reimbursed under this grant. As of June 30, 2025 the Company has received $ 0 in milestone reimbursements. Included in property, plant, and equipment at June 30, 2025 was approximately $ 1,731,042 not yet reimbursed for facility and capital upgrades under this funding award, which includes $ 63,029 related to assets that have been placed in service. Included in accounts payable at June 30, 2025 was approximately $ 108,306 for facility and capital upgrades eligible to be reimbursed under this funding award. 24 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 7. Pension Expense In the last quarter of the 2024 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. This outstanding amount was 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. Final withdrawal calculations were provided to the Company on April 11, 2025 resulting in a final payment of $ 534,583 which was paid on May 8, 2025. 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 $ 79,739 in fiscal year 2025 and $ 79,429 in fiscal year 2024. 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 $ 66,617 and $ 60,301 , for fiscal years 2025 and 2024, respectively. Note 8. Provision for Income Taxes A summary of the components of the provision for income taxes for the years ended June 30, 2025 and 2024 is as follows: 2025 2024 Current tax expense - federal $ 1,882,969 $ 2,515,865 Current tax (benefit) expense - state 9,606 ( 3,010 ) Deferred tax benefit ( 306,865 ) ( 1,032,981 ) Provision for income taxes $ 1,585,710 $ 1,479,874 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 FASB ASC 740-10. The combined U.S. federal and state effective income tax rates of 16.3 % and 20.3 %, for 2025 and 2024 respectively, differed from the statutory U.S. federal income tax rate for the following reasons: 2025 2024 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 0.1 — ESOP cost versus Fair Market Value 0.5 0.1 Dividend on allocated ESOP shares ( 0.6 ) ( 0.3 ) Stock-based compensation ( 3.8 ) 0.2 Foreign derived intangible income ( 0.9 ) ( 0.8 ) Other ( 0.0 ) 0.1 Effective tax rate 16.3 % 20.3 % 25 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 8. Provision for Income Taxes, Continued For the years ended June 30, 2025 and 2024 deferred income tax benefit of $ 306,865 and $ 1,032,981 , 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, 2025 and 2024 are presented as follows: 2025 2024 Deferred tax assets: Accrued expenses $ 171,491 $ 138,158 ESOP 39,113 32,698 Property, plant and equipment - principally due to differences in depreciation methods 1,023,074 601,358 Pension Withdrawal — 162,153 Stock-based compensation 38,568 39,724 Total deferred tax assets $ 1,272,246 $ 974,091 Deferred tax liability: Inventory - effect of uniform capitalization 25,477 33,817 Prepaid expenses 44,750 45,120 Total deferred tax liability $ 70,227 $ 78,937 Net deferred tax asset (liability) $ 1,202,019 $ 895,154 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, 2025 and 2024, the Company has no unrecognized tax benefits. The Company recognizes interest and penalties in general and administrative expense. As of June 30, 2025 and 2024, 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, 2025, 2024, and 2023 remain open to examination by the respective taxing authorities. Note 9. 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 “Compensation-Stock Compensation”. 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 $ 622,472 and $ 438,136 for the years ended June 30, 2025 and 2024, respectively. 26 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 9. Employee Stock Ownership Plan, Continued The ESOP shares as of June 30, 2025 and 2024 were as follows: 2025 2024 Allocated shares 405,482 451,132 Unearned shares 189,817 211,487 Total shares held by the ESOP 595,299 662,619 Fair value of unearned shares $ 8,676,535 $ 4,494,099 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, 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 years ended June 30, 2025 and 2024 totaled 67,320 shares and 55,984 shares, respectively. Note 10. Stock-based Compensation The Company follows FASB ASC 718-40 “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. 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, 2025 and 2024, was $ 346,281 and $ 283,673 , 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, 2025 and 2024, was $ 32,145 and $ 34,903 , respectively. The deferred tax benefit related to the NQSOs as of June 30, 2025 and 2024 was $ 6,750 and $ 7,330 , 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, 2025, there was $ 233,094 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 $ 212,609 relates to ISOs and $ 20,485 relates to NQSOs. The total deferred tax benefit related to the NQSOs in future years will be $ 4,302 . 27 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 10. Stock-based Compensation, Continued 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 stockholders 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. Options covering 400,000 shares are authorized for issuance under the 2017 Plan. As of June 30, 2025, options covering 163,435 shares have been exercised, options covering 224,096 shares are outstanding and options covering 154,473 shares have been cancelled. As of June 30, 2025, options covering 12,469 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 June 30, 2025, 4,050 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, 2025 and 2024. 2025 2024 Dividend yield 3.79 % 3.61 % Expected stock price volatility 32.85 % 31.21 % Risk-free interest rate 4.35 % 4.39 % Expected option life (in years) 5.1 yrs 5.3 yrs Weighted average fair value per share of options granted during the period $ 5.37 $ 4.11 The Company paid regular cash dividends on common stock of $ 1.00 per share for the fiscal year ended June 30, 2025 and paid regular cash dividends on common stock of $ 0.675 per share for the fiscal year ended June 30, 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 years ended June 30, 2025 and 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 Granted 79,000 $ 21.79 9.04 Exercised ( 162,410 ) $ 18.81 — Forfeited or expired ( 10,500 ) $ 18.90 — Outstanding at June 30, 2025 228,146 $ 19.26 7.30 $ 6,033,634 Vested or expected to vest at June 30, 2025 214,100 $ 19.21 7.20 $ 5,671,899 Exercisable at June 30, 2025 83,746 $ 19.07 4.99 $ 2,231,351 28 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 10. Stock-based Compensation, Continued 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, 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 June 30, 2025. This amount changes based on the fair market value of the Company’s common stock. The total intrinsic values of the options exercised during the twelve months ended June 30, 2025 and 2024 was $ 2,023,198 and $ 195,236 , respectively. The following table summarizes changes in non-vested stock options during the years ended June 30, 2025 and 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 Granted 79,000 $ 5.37 Vested ( 71,400 ) $ 4.18 Forfeited or expired ( 10,500 ) $ 4.71 Non-vested at June 30, 2025 144,400 $ 4.76 Note 11. 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 3, 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 70 % represented by six customers at June 30, 2025. Each of the six customers accounted for 26 %, 14 %, 11 %, 7 %, 7 % and 6 % of accounts receivable in fiscal year 2025. 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. Each of the five customers accounted for 38 %, 20 %, 10 %, 7 %, and 4 % of accounts receivable in fiscal year 2024. 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 12. 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 9 for additional information regarding the ESOP. 29 Espey Mfg. & Electronics Corp. Notes to Financial Statements Note 13. 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, 2025 and 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, 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 FASB 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 14. Stockholders' Equity Reservation of Shares The Company has reserved common shares for future issuance as follows as of June 30, 2025: Stock options outstanding 228,146 Stock options available for issuance 12,469 Number of common shares reserved 240,615 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: 2025 2024 Numerator: Net income $ 8,142,954 $ 5,815,140 Denominator: Basic EPS: Common shares outstanding, beginning of period 2,733,958 2,702,633 Unearned ESOP shares ( 211,487 ) ( 233,645 ) Weighted average common shares issued during the period 60,416 11,837 Weighted average ESOP shares earned during the period 8,149 8,340 Denominator for basic earnings per common shares – Weighted average common shares 2,591,036 2,489,165 Diluted EPS: Common shares outstanding, beginning of period 2,733,958 2,702,633 Unearned ESOP shares ( 211,487 ) ( 233,645 ) Weighted average common shares issued during the period 60,416 11,837 Weighted average ESOP shares earned during the period 8,149 8,340 Weighted average dilutive effect of stock options 105,156 47,802 Denominator for diluted earnings per common shares – Weighted average common shares 2,696,192 2,536,967 Not included in this computation of earnings per share for the years ended June 30, 2025 and 2024 were options to purchase 0 and 62,691 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. 30 Espey Mfg. & Electronics Corp. Notes to Financial Statements The Company paid regular cash dividends on common stock of $ 1.00 per share for the fiscal year ended June 30, 2025 and paid regular cash dividends on common stock of $ 0.675 per share for the fiscal year ended June 30, 2024. 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 15. Line of Credit At June 30, 2025, 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, 2026. The Company did not borrow any funds during the last two fiscal years. Note 16. Quarterly Financial Information (Unaudited) First Second Third Fourth 2025 Quarter Quarter Quarter Quarter Net sales $ 10,443,218 $ 13,608,740 $ 10,302,719 $ 9,596,194 Gross profit 2,800,882 3,163,712 2,948,384 3,771,652 Net income 1,598,317 1,908,499 1,704,487 2,931,651 Net income per share - Basic 0.63 0.74 0.66 1.10 Diluted 0.61 0.71 0.63 1.05 2024 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 Note 17. Segment Reporting As of June 30, 2025, the Company adopted FASB’s ASU 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which provides enhancements to qualitative and quantitative reportable segment disclosure requirements for all public companies. Operating segments are clearly defined components of an entity in which separate financial information is readily available and reviewed by the chief operating decision maker (“CODM”) when allocating resources and assessing company performance. Espey’s CODM is the Chief Executive Officer . There is one management team that oversees a single operating segment and reports directly to the CEO. Our CODM evaluates performance and makes operating decisions about allocating resources based on financial data presented on a consolidated basis, focusing on significant expenses, net income, and certain key performance indicators (“KPI”) presented on our internal monthly and weekly management reports. Significant expenses regularly provided to and reviewed by the CODM are Cost of Sales and Selling, General and Administrative costs which are each separately presented on the Company’s Consolidated Statement of Income. During the years ended June 30, 2025 and 2024, domestic revenue accounted for more than 90% of total revenue. The Company manages sales on a consolidated basis under one reportable segment. 31 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None