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1、 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington,D.C.20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30,2019 Commission File Number I-4383 ESPEY MFG.&ELECTRONICS CORP.(Exact name of registrant as specified
2、 in its charter)NEW YORK(State of incorporation)14-1387171(I.R.S.Employers Identification No.)233 Ballston Avenue,Saratoga Springs,New York 12866(Address of principal executive offices)518-584-4100(Registrants telephone number,including area code)Securities registered pursuant to Section 12(b)of the
3、 Act Title of each class Trading Symbol Common Stock$.33-1/3 par value ESP Common Stock Purchase Rights Name of each exchange on which registered NYSE American NYSE AmericanSecurities registered pursuant to Section 12(g)of the Act None Indicate by check mark if the registrant is a well-known seasone
4、d issuer,as defined in Rule 405 of the Securities Act.Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d)of the Act.Yes No Indicate by check mark whether the registrant(1)has filed all reports required to be filed by Section 13 or 1
5、5(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 elect
6、ronically 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 a
7、ccelerated filer,an accelerated filer,a non-accelerated filer,or a smaller reporting company:Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company.Yes No The aggregate market value of the voting stoc
8、k held by non-affiliates of the registrant was$43,320,411 based upon the closing sale price of$24.92 on the NYSE American on December 31,2018.At September 10,2019 there were 2,401,213 shares outstanding of the registrants Common stock,$.33-1/3 par value.1 DOCUMENTS INCORPORATED BY REFERENCE Portions
9、 of the registrants definitive proxy statement relating to the 2019 Annual Meeting of Shareholders,to be filed with the Securities and Exchange Commission,are incorporated by reference in Part III,Items 10 through 14 on Form 10-K as indicated herein.Forward-Looking Statements This Annual Report on F
10、orm 10-K contains forward-looking statements that are based on managements expectations,estimates,projections and assumptions.Words such as“expects,”“anticipates,”“plans,”“believes,”“scheduled,”“estimates”and variations of these words and similar expressions are intended to identify forward-looking
11、statements.Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995,as amended.These statements are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict.Therefore,actua
12、l future results and trends may differ materially from what is forecast in forward-looking statements due to a variety of factors,including,without limitation:Changing priorities or decreases in the U.S.governments defense budget(including changes in priorities in response to terrorist threats,impro
13、vement of homeland security and general U.S.Government budgetary issues);Termination of government contracts due to unilateral government action;Differences in anticipated and actual program performance,including the ability to perform under long-term fixed-price contracts within estimated costs,and
14、 performance issues with key suppliers and subcontractors;Potential of changing prices for energy and raw materials;General strength of the industry sectors in which our customers transact business All forward-looking statements speak only as of the date of this report or,in the case of any document
15、 incorporated by reference,the date of that document.All subsequent written and oral forward-looking statements attributable to the Company or any person acting on the Companys behalf are qualified by the cautionary statements in this section.The Company does not undertake any obligation to update o
16、r publicly release any revisions to forward-looking statements to reflect events,circumstances or changes in expectations after the date of this report.2 PART I Item 1.Business General Espey Mfg.&Electronics Corp.(“Espey”)is a power electronics design and original equipment manufacturing(OEM)company
17、 with a long history of developing and delivering highly reliable products for use in military and severe environment applications.Design,manufacturing,and testing is performed in our 150,000+square foot facility located at 233 Ballston Ave,Saratoga Springs,New York.Espey is classified as a“smaller
18、reporting company”for purposes of the reporting requirements under the Securities Exchange Act of 1934,as amended.Espeys 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 lead
19、er in high power energy conversion and transformer solutions through the design and manufacture of new and improved products by using advanced and“cutting edge”electronics technologies.Espey is ISO 9001:2015 and AS9100:2016 certified.Our primary products are power supplies,power converters,filters,p
20、ower transformers,magnetic components,power distribution equipment,UPS systems,antennas and high power radar systems.The applications of these products include AC and DC locomotives,shipboard power,shipboard radar,airborne power,ground-based radar,and ground mobile power.Espeys services include desi
21、gn and development to specification,build to print,design services,design studies,environmental testing services,metal fabrication,painting services,and development of automatic testing equipment.Espey is vertically integrated,meaning that the Company produces individual components(including inducto
22、rs),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.In fiscal years ended June 30,2019 and 2018,t
23、he Companys total sales were$36,477,851 and$32,517,883,respectively.Sales to three domestic customers accounted for 34%,10%,and 10%,respectively,of total sales in 2019.Sales to two domestic customers accounted for 33%and 27%of total sales in 2018.This high concentration level with these customers pr
24、esents significant risk.A loss of one of these customers or programs related to these customers could significantly impact the financial performance of the Company.Historically,a small number of customers have accounted for a large percentage of the Companys total sales in any given fiscal year.Expo
25、rt sales in fiscal years 2019 and 2018 were approximately$2,638,000 and$3,112,000,respectively.The decrease is primarily due to the decrease in antenna shipments.Sources of Raw Materials The Company has not typically experienced any significant delays or shortages with respect to the purchase of raw
26、 materials and components used in the manufacture of its products and has at least two potential sources of supply for a majority of its raw materials.However,certain components used in its products are available from a single or a limited number of sources.Despite the risk associated with single or
27、 limited source suppliers,the benefits of higher quality goods and timely delivery minimize and often limit any potential risk and can eliminate problems with part failures during production.At times replacements are required to cover obsolete parts.The power electronics industry is experiencing sus
28、tained growth and continuing demand from multiple manufacturing sectors.This growth has created volatility and unpredictability in the availability of certain electronic components and,in some cases,has created industry shortages.These shortages have a strong potential to impact our ability to suppo
29、rt our customers schedule demands,as lead times for these components have,in some instances,increased from readily available to waiting times of nearly a year or more.We are working with our customers to mitigate adverse impact upon our ability to service their requirements resulting from the curren
30、t industry-wide phenomenon.The President of the United States continued the imposition of tariffs on steel and aluminum imports from various countries in 2019.While currently we are not experiencing any significant financial or raw material sourcing issues resulting from the product tariffs,the Comp
31、any cannot provide any assurance that the existing tariffs,the potential of additional tariffs,and the associated volatility arising from the Administrations foreign trade policies,will not have a negative impact on our future earnings by increasing our raw material prices and augmenting the lead ti
32、me for the availability of raw materials.From time to time the Company must identify parts to replace parts which are no longer produced.3 Sales Backlog The total backlog at June 30,2019 was approximately$45.6 million compared to approximately$48.1 million at June 30,2018.The Companys total backlog
33、represents the estimated remaining sales value of work to be performed under firm contracts.The funded portion of this backlog at June 30,2019 is approximately$42.9 million.This includes items that have been authorized and appropriated by Congress and/or funded by the customer.The unfunded backlog a
34、t June 30,2019 is approximately$2.7 million and represents a firm multi-year order for which funding has not yet been appropriated by Congress or funded by our customer.While there is no guarantee that future budgets and appropriations will provide funding for individual programs,management has incl
35、uded in unfunded backlog only those programs that it believes are likely to receive funding based on discussions with customers and program status.The unfunded backlog at June 30,2018 was$3.1 million.For both fiscal years ended 2019 and 2018,the unfunded backlog is comprised primarily of the same mu
36、lti-year order from a single customer.The Companys backlog and risks associated with government contracts is discussed in greater detail below.It is presently anticipated that a minimum of$32.7 million of orders comprising the June 30,2019 backlog will be filled during the fiscal year ending June 30
37、,2020.The minimum of$32.7 million does not include any shipments which may be made against orders received subsequently to the fiscal year ending June 30,2019.The estimate of the June 30,2019 backlog to be shipped in fiscal year 2020 is subject to future events,which may cause the amount of the back
38、log actually shipped to differ from such estimate.Marketing and Competition The Company markets its products primarily through its own direct sales organization and through outside sales representatives.Business is solicited from large industrial manufacturers and defense companies,the government of
39、 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 s
40、olicited 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
41、 the Company ranging from divisions of the largest electronic companies,to many small companies.The Companys sales do not represent a significant share of the industrys market for any class of its products.The principal methods of competition for electronic products of both a military and industrial
42、 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 ap
43、plications and our customer concentrations expose us to on-going associated risks.These risks include,without limitation,requirements for power supplies in the rail industry,dependence on appropriations from the United States Government and the governments of foreign nations,program allocations,the
44、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 continues to drive competition.Many of our competitors have,and they contin
45、ue 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 busin
46、ess.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 retai
47、n repeat programs while being more competitive in bidding on new programs.We continue to place an emphasis on securing“build to print”opportunities,which allows production work to go directly to the manufacturing floor,limiting the impact on our engineering staff.This allows us to keep our manufactu
48、ring team busy while the products being developed in-house transition to production.Research and Development Some of the Companys engineers and technicians spend varying amounts of time on either the development of new products or improvements to existing products.A majority of the resulting costs w
49、e incur relate to research that is required to support a request for quotation from a customer product-specific need usually associated with stringent size and weight requirements.We do very little pure research as our business primarily is driven by customer 4 product needs and custom product devel
50、opment with some customer funding.The Companys expenditures for research and development were approximately$44,819 and$18,206 in fiscal year 2019 and 2018,respectively.Employees The Company had 160 employees as of August 31,2019.During the year ended June 30,2019,we increased the number of employees
51、 to support our business growth.Approximately 40%of the employees are represented by the International Brotherhood of Electrical Workers.A new collective bargaining agreement was approved in July 2018.The four-year agreement expires on June 30,2022.Relations with the Union are considered good.Govern
52、ment Regulations Compliance with federal,state and local laws regulating the discharge of materials into the environment,or otherwise relating to the protection of the environment,did not in fiscal year 2019,and the Company believes will not in fiscal year 2020,have a material effect upon the capita
53、l expenditures,net income,or competitive position of the Company.The Companys U.S.Government contract and subcontract orders are funded by government budgets,which operate on an October-to-September fiscal year.Normally,in February of each year,the President of the United States presents to Congress
54、 a proposed budget for the upcoming fiscal year.This budget includes recommended appropriations for every federal agency and is the result of months of policy and program reviews throughout the executive branch.From February through September of each year,the appropriations and authorization committ
55、ees of Congress review the Presidents budget proposals and establish the funding levels for the upcoming fiscal year in appropriations and authorization legislation.Once these levels are enacted into law,the Executive Office of the President administers the funds to the agencies.There are two primar
56、y risks associated with this process.First,the process may be delayed or disrupted because of congressional schedules,negotiations over funding levels for programs or unforeseen world events,which could,in turn,alter the funding for a program or contract.Second,funding for multi-year contracts can b
57、e changed by future appropriations,which could affect the timing of funds,schedules and program content.Also,our international sales are denominated in United States dollars.Consequently,a strengthening of the United States dollar against foreign currencies could increase the price in local currenci
58、es of our products in foreign markets and make our products relatively more expensive than competitors products.U.S.Government Defense Contracts and Subcontracts Generally,U.S.Government contracts are subject to procurement laws and regulations.Some of the Companys contracts are governed by the Fede
59、ral 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
60、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 governments convenience or for default.If a contract is terminated for the convenience of the gove
61、rnment,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
62、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 Companys contract-related costs and fees.Cyber or Other Security Threats or Other Disruptions We routinely experi
63、ence cybersecurity threats in the form of unauthorized attempts to gain access to our sensitive information.The threats we face vary from attacks common to most industries to more advanced attacks with the specific objective of accessing national security information.We believe our threat detection
64、and mitigation processes and procedures are above adequate.The processes and procedures in place are designed to detect,manage and prevent current threats and respond quickly to detect and mitigate new threats.To ensure our systems remain protected,we continually assess and acquire,as appropriate,ne
65、w available technology and provide employee training to utilize effectively our technological assets.Prior cyberattacks directed at us have not had a material impact on our financial results nor restricted us from being awarded contracts from other defense companies or directly from the United State
66、s Department of Defense.However,we can provide no assurance that the occurrence of any future event would not adversely affect our internal operations,our reputation and competitive advantage,and our future financial results.5 Item 2.Property The Companys entire operation,including administrative,ma
67、nufacturing and engineering facilities,is located in Saratoga Springs,New York.The Saratoga Springs plant,which the Company owns,consists of various adjoining buildings on a 22 acre site,approximately eight acres of which is unimproved.The property is not subject to mortgage indebtedness or any othe
68、r material encumbrance.The plant has a sprinkler system throughout and contains approximately 151,000 square feet of floor space,of which 90,000 is used for manufacturing,24,000 for engineering,33,000 for shipping and climatically secured storage,and 4,000 for offices.The offices,engineering and som
69、e manufacturing areas are air-conditioned.In addition to assembly and wiring operations,the plant includes facilities for varnishing,potting,impregnation and spray-painting operations.The manufacturing operation also includes a complete machine shop,with welding and sheet metal fabrication facilitie
70、s adequate for substantially all of the Companys current operations.Besides normal test equipment,the Company maintains a sophisticated on-site environmental test facility.In addition to meeting all of the Companys in-house needs,the machine shop and environmental facilities are available to other c
71、ompanies on a contract basis.Item 3.Legal Proceedings 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 hav
72、e a material adverse effect on our business,financial condition,results of operations or cash flows.Item 4.Mine Safety Disclosures Not applicable 6 PART II Item 5.Market for the Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities Price Range of Common
73、Stock The table below shows the range of high and low prices for the Companys common stock on the NYSE American(symbol ESP),the principal market for trading in the common stock,for each quarterly period for the last two fiscal years ended June 30:2019 High Low First Quarter$32.55$25.25 Second Quarte
74、r 30.12 23.80 Third Quarter 26.50 23.61 Fourth Quarter 25.67 23.50 2018 High Low First Quarter$24.40$21.39 Second Quarter 24.07 21.07 Third Quarter 27.10 21.70 Fourth Quarter 29.97 25.50 Holders The approximate number of holders of record of the common stock was 72 on September 10,2019 according to
75、records of the Companys transfer agent.Included in this number are shares held in nominee or street name and,therefore,the number of beneficial owners of the common stock is believed to be substantially in excess of the foregoing number.Dividends The Company paid regular cash dividends on common sto
76、ck of$1.00 per share and a special cash dividend of$1.00 per share for the fiscal year ended June 30,2019 and$1.00 per share for the fiscal year ended June 30,2018.The Board of Directors has authorized the payment of a fiscal year 2020 first quarter regular dividend of$0.25 payable September 27,2019
77、 to shareholders of record on September 20,2019.Our Board of Directors assesses the Companys dividend policy periodically.While there is no assurance that the Board of Directors will maintain the amount of the regular cash dividend or declare a special dividend during any future years,we believe tha
78、t the Company is in the position to continue to pay the regular cash dividends for the foreseeable future.During fiscal year 2019,the Company sold common stock to certain employees and directors as they exercised existing stock options granted under a shareholder approved plan.During the year,15,899
79、 shares were sold at prices that ranged from$17.09 a share to$27.22 a share.The securities were sold for cash.Proceeds are used for general working capital purposes.The Company did not make any open market purchases of equity securities in the fiscal year 2019 fourth quarter.The following table sets
80、 forth information as of June 30,2019 with respect to compensation plans under which equity securities of the Company may be issued.Equity Compensation Plan Information Number of securities to Weighted-average Number of Securities remaining be issued upon exercise exercise price of available for fut
81、ure issuance under of outstanding options,outstanding options,equity compensation plan(excluding Plan Category warrants and rights warrants and rights securities reflected in column(a)(a)(b)(c)Equity compensation plans approved by security holders 259,164$25.16 291,976 Equity compensation plans not
82、approved by security holders -Total 259,164 291,976 7 Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations Business Outlook Management expects revenues in fiscal year 2020 to approximate revenues during fiscal year 2019 and expects the gross profit margin to be
83、 higher in fiscal year 2020 than the gross profit margin during fiscal year 2019.This expectation is driven primarily by orders already in our backlog that will be shipped in fiscal year 2020 with lower anticipated aggregate production costs than with the product mix shipped during fiscal 2019.As ma
84、rket factors including competition and product costs impact gross profit margins,management will continue to evaluate our sales strategy,employment levels,and facility costs.During fiscal year 2019 the Company received approximately$33.9 million in new orders.Our total backlog at June 30,2019 was ap
85、proximately$45.6 million,as compared to$48.1 million at June 30,2018.Currently,we expect a minimum of$32.7 million of orders comprising the June 30,2019 backlog will be filled during the fiscal year ending June 30,2020.This$32.7 million will be supplemented by shipments which may be made against ord
86、ers received during the 2020 fiscal year.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
87、,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 schedule delays could negatively impact the timing of the conversion of backlog in
88、to sales,or the profitability of such sales.While during the past two fiscal years we experienced some technical and schedule delays with our major development programs,these delays were resolved as they arose and we do not currently expect any negative impact on our customer order fulfillment proje
89、ctions for fiscal year 2020.Engineering programs in both the funded and unfunded portions of the current backlog aggregate$5.4 million.In addition to the backlog,the Company currently has outstanding opportunities representing in excess of$52 million in the aggregate as of August 31,2019,for both re
90、peat and new programs.The outstanding quotations encompass various new and previously manufactured power supplies,transformers,and subassemblies.However,there can be no assurance that the Company will acquire any of the anticipated orders described above,many of which are subject to allocations of t
91、he United States defense spending and factors affecting the defense industry.Three significant customers represented 54%of the Companys total sales in fiscal year 2019 and two significant customers represented 60%of the Companys total sales in fiscal year 2018.These sales are in connection with mult
92、iyear programs in which the Company is a significant contractor.The June 30,2019 backlog of$45.6 million included orders from five customers that represent 16%,13%,11%,11%and 10%,respectively,of the total backlog.The June 30,2018 backlog of$48.1 million includes orders from three customers that repr
93、esent 23%,16%and 10%,respectively,of the total backlog.Although improvement has been made in customer concentrations,this high customer concentration level continues to present significant risk.A loss of one of these customers or programs related to these customers,or customer requested deferrals of
94、 product delivery could significantly impact the Company.Historically,a small number of customers have accounted for a large percentage of the Companys total sales in any given fiscal year.Management continues to pursue opportunities with current and new customers with an overall objective of loweri
95、ng 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.We continue to evaluate the Companys business development functions and the implementation of potential alternative c
96、ourses of action in order to diversify the Companys customer base.The quotations for non-repeat programs referred to above include several new customers.Management,along with the Board of Directors,continues to evaluate the need and use of the Companys working capital.Capital expenditures,primarily
97、for machinery and equipment,are expected to be approximately$300,000 for fiscal year 2020.A majority of these expenditures will be made to stay competitive in the marketplace and to meet the needs of current contracts.Expectations are that the working capital will be required to fund orders,dividend
98、 payments,and general operations of the business.Management along with the Mergers and Acquisitions Committee of the Board of Directors will examine opportunities involving acquisitions or other strategic options,including buying certain products or product lines,provided that such opportunities dem
99、onstrate synergies with the Companys existing product base and accretion to earnings.8 Results of Operations Net sales for the years ended June 30,2019 and 2018 were$36,477,851 and$32,517,883,respectively,a 12%increase.The increase in net sales in fiscal year 2019 is primarily due to an increase in
100、build to print sales for product which had no shipments in the prior fiscal year,an increase in magnetic sales consisting of certain engineering deliverables,and product shipments on one long-term program,offset,in part,by a decrease in power supply shipments.Although shipments supporting the rail i
101、ndustry increased and remain strong,the overall decline in power supply shipments in fiscal year 2019 relates primarily to the timing of shipments related to one military contract which had significant shipments in the prior fiscal year.Our ability to ship product was constrained during fiscal years
102、 2019 and 2018 by engineering design changes required to meet customer requirements,certain supplier product non-conformances and an increase in lead times for many parts including certain electronic components due to industry shortages and volatility within the power electronics industry.We expect
103、these factors will continue to affect certain product shipments during fiscal year 2020.Gross profits for the fiscal years ended June 30,2019 and 2018 were$7,063,173 and$7,662,252,respectively.Gross profit as a percentage of sales was 19.4%and 23.6%,for the same periods,respectively.The primary fact
104、ors 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.I
105、n 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
106、and less mature programs,and expenditures associated with loss contracts,has a significant impact on gross profit and net income.The gross profit percentage decreased in the fiscal year ended June 30,2019 as compared to the same period in 2018 primarily due to the increase in cost resulting from the
107、 change in estimates on two separate contracts for the design and production of power transformers,offset in part,by an increase in sales when compared to the same period in 2018.The gross profit percentage was further reduced by a slight overall decline in the gross profit percentage on product shi
108、pments.The decrease in gross profit related to the change in estimates on two specific contracts resulted from an increase in direct costs,material and labor,of approximately$1.1 million.The net increase in direct costs is attributable to in process design changes required to meet contract specifica
109、tions,changes to the bill of materials and operations,and scrap and other costs incurred typically associated with first time builds.Selling,general and administrative expenses were$4,410,234 for the fiscal year ended June 30,2019;an increase of$601,839 compared to the fiscal year ended June 30,2018
110、.The increase for the fiscal year ended June 30,2019 as compared to the same period in 2018 relates primarily to an increase in headcount and related employee compensation costs in support of our business growth,the incurrence of a bad debt expense related to a single customer,cost associated with t
111、he appointment of a new Class B Director effective June 1,2018,professional services consisting primarily of commissions earned by outside sales representatives,and an increase in freight costs resulting from higher sales.Other income for the fiscal year ended June 30,2019 and 2018 was$228,694 and$2
112、15,219,respectively.The increase in the twelve months ended is primarily due an increase in interest income on investments and income received from the sale of scrap metal.The increase in interest income resulted from the gradual increase in current yield percentages earned on investment securities
113、offset,in part,by a reduction in investment securities.Interest income is a function of the level of investments and investment strategies which generally tend to be conservative.The increase in income from scrap metal sales is primarily due to an increase in saleable metal remnants resulting from t
114、he overall increase in material purchases during the current year when compared to the prior year.The Companys effective tax rate was 18.7%in the fiscal year 2019 and 24.4%in fiscal year 2018.The statutory tax rate was reduced from 34%to 21%under the Tax Cuts and Jobs Act(the“Tax Act)effective on Ja
115、nuary 1,2018.The effective tax rate in fiscal 2019 is less than the statutory tax rate mainly due to the benefit derived from the dividends paid on allocated shares in the Companys Employee Retirement Plan and Trust(“ESOP”).The effective tax rate in fiscal 2018 is less than the statutory tax rate ma
116、inly due to the benefit the Company received on its“qualified production activities”under The American Jobs Creation Act of 2004 which expired after the end of fiscal 2018 and the benefit derived from the ESOP dividends paid on allocated shares.Net income for fiscal year 2019 was$2,342,694 or$0.99 a
117、nd$0.98 per share,basic and diluted,respectively compared to$3,075,797 or$1.32 and$1.31 per share,basic and diluted,respectively for fiscal year 2018.The 9 decrease in net income per share for the twelve months ended June 30,2019 was due to a lower gross profit percentage resulting primarily from an
118、 increase in expenditures related to engineering design investments made by the company when compared to the prior year and an increase in selling,general,and administrative expenses when compared to the same periods in 2018 as discussed above.These increases were offset,in part,by an increase in sa
119、les and a reduction in the Companys effective tax rate discussed above.Liquidity and Capital Resources The Companys working capital is an appropriate indicator of the liquidity of its business,and during the past two fiscal years,the Company,when possible,has funded all of its operations with cash f
120、lows 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 available a$3,000,000 line of credit to help fund further growth or working capital needs,if necessary,but does not
121、anticipate the need for any borrowed funds in the foreseeable future.Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at June 30,2019 and 2018.The line of credit is reviewed annually in November for renewal by December 1st.The Companys working capital as
122、of June 30,2019 and 2018 was$28,377,168 and$29,740,468,respectively.During the twelve months ended June 30,2019,the Company repurchased 1,810 shares of its common stock from the ESOP for a purchase price of$44,888.During the twelve months ended June 30,2018 the Company repurchased 4,798 shares of it
123、s common stock from the ESOP for a purchase price of$109,694.Under existing authorizations from the Companys Board of Directors,as of June 30,2019,management is authorized to purchase an additional$831,408 of Company stock.The table below presents the summary of cash flow information for the fiscal
124、years indicated:2019 2018 Net cash(used in)provided by operating activities$(3,604,406)$260,907 Net cash provided by(used in)investing activities 5,234,540(4,020,102)Net cash used in financing activities(4,466,169)(2,000,172)Net cash used in operating activities fluctuates between periods primarily
125、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 used in operating activities compared to the prior year primarily relates to a decrease in net
126、income,a decrease in accrued salaries and wages and an increase in inventories and accounts receivable offset,in part,by an increase in accounts payable,a decrease in prepaid expenses and other current assets and a decrease in contract liabilities.The increase in cash provided by investing activitie
127、s in the current fiscal year is primarily related to a decrease in spending for the purchase of property,plant and equipment and the reduction of investment security purchases.This reduction is primarily due to the late fiscal year shipment of product representing accounts receivable not yet convert
128、ed into cash and the payment of a special dividend.The increase in cash used in financing activities in the current fiscal year is primarily related to the cash expended for the special dividend totaling$1.00 per share declared and paid in fiscal 2019 offset,in part,by proceeds received from the exe
129、rcise of stock options during the current fiscal year.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 fiscal years ended J
130、une 30,2019 and 2018,the Company expended$608,318 and$1,923,220,respectively,for plant improvements and new equipment.The Company has budgeted approximately$300,000 for new equipment and plant improvements in fiscal year 2020.Management anticipates that the funds required will be available from curr
131、ent operations.Management believes that the Companys reserve for bad debts of$3,000 is adequate given the customers with whom the Company does business.Historically,bad debt expense has been minimal.10 Item 8.Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNT
132、ING FIRM To the Board of Directors and Stockholders 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 30,2019 and 2018,the related statements of comprehensive income,changes in stoc
133、kholders 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 30,2019 and 2018,and the r
134、esults 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 Companys management.Our responsibility is to express an opinion
135、on the Companys 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
136、 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 m
137、isstatement,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
138、 of expressing an opinion on the effectiveness of the Companys 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 perform
139、ing 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 evaluati
140、ng the overall presentation of the financial statements.We believe that our audits provide a reasonable basis for our opinion./s/Freed Maxick CPAs,P.C.We have served as the Companys auditor since 2014.Rochester,New York September 16,2019 11 Espey Mfg.&Electronics Corp.Balance Sheets June 30,2019 and
141、 2018 2019 2018 ASSETS Cash and cash equivalents.$1,462,761$4,298,796 Investment securities.5,684,240 11,520,706 Trade accounts receivable,net of allowance of$3,000.10,995,783 4,377,726 Income tax receivable.-161,975 Inventories:Raw materials.1,747,449 1,562,581 Work-in-process.408,130 966,342 Costs
142、 related to contracts in process.11,069,558 8,880,003 Total inventories.13,225,137 11,408,926 Prepaid expenses and other current assets.494,181 1,292,575 Total current assets.31,862,102 33,060,704 Property,plant and equipment,net.3,825,411 3,758,637 Total assets.$35,687,513$36,819,341 LIABILITIES AN
143、D STOCKHOLDERS EQUITY Accounts payable.$2,160,433$1,822,597 Accrued expenses:Salaries and wages.329,890 529,005 Vacation.786,870 707,612 Other.109,755 104,663 Payroll and other taxes withheld 61,451 53,435 Contract liabilities 6,054 102,924 Income taxes payable 30,481 -Total current liabilities.3,48
144、4,934 3,320,236 Deferred tax liabilities.277,075 17,693 Total liabilities.3,762,009 3,337,929 Commitments and Contingencies(See Note 15)Common stock,par value$.33-1/3 per share Authorized 10,000,000 shares;Issued 3,029,874 shares as of June 30,2019 and 2018.Outstanding 2,401,213 and 2,387,124 as of
145、June 30,2019 and 2018,respectively (includes 14,166 and 29,166 Unearned ESOP Shares,respectively).1,009,958 1,009,958 Capital in excess of par value.18,731,975 18,201,691 Accumulated other comprehensive loss.(1,299)(6,349)Retained earnings.20,022,132 22,416,400 39,762,766 41,621,700 Less:Unearned ES
146、OP shares.(204,706)(421,453)Cost of 628,661 and 642,750 shares of common stock in treasury as of June 30,2019 and 2018,respectively.(7,632,556)(7,718,835)Total stockholders equity.31,925,504 33,481,412 Total liabilities and stockholders equity.$35,687,513$36,819,341 The accompanying notes are an int
147、egral part of the financial statements.12 Espey Mfg.&Electronics Corp.Statements of Comprehensive Income Years Ended June 30,2019 and 2018 2019 2018 Net sales.$36,477,851$32,517,883 Cost of sales.29,414,678 24,855,631 Gross profit.7,063,173 7,662,252 Selling,general and administrative expenses.4,410
148、,234 3,808,395 Operating income.2,652,939 3,853,857 Other income Interest income.167,682 160,650 Other.61,012 54,569 Total other income.228,694 215,219 Income before provision for income taxes.2,881,633 4,069,076 Provision for income taxes.538,939 993,279 Net income.$2,342,694$3,075,797 Other compre
149、hensive income,net of tax:Unrealized gain(loss)on investment securities.5,050 (2,750)Total comprehensive income.$2,347,744$3,073,047 Net income per share:Basic.$0.99$1.32 Diluted.$0.98$1.31 Weighted average number of shares outstanding:Basic.2,372,945 2,333,885 Diluted.2,389,228 2,348,307 The accomp
150、anying notes are an integral part of the financial statements.13 Espey Mfg.&Electronics Corp.Statements of Changes in Stockholders Equity Years Ended June 30,2019 and 2018 Accumulated Capital in Other Unearned Total Outstanding Common Excess of Comprehensive Retained Treasury Stock ESOP Stockholders
151、 Shares Amount Par Value Income(Loss)Earnings Shares Amount Shares Equity Balance as of June 30,2017 2,371,321$1,009,958$17,650,335$(3,599)$21,670,196 658,553$(7,779,099)$(650,248)$31,897,543 Comprehensive income:Net income 3,075,797 3,075,797 Other comprehensive loss,net of tax of$(394)(2,750)(2,75
152、0)Total comprehensive income 3,073,047 Stock options exercised 20,601 269,157 (20,601)169,958 439,115 Stock-based compensation 123,112 123,112 Dividends paid on common stock$1.00 per share (2,329,593)(2,329,593)Purchase of treasury stock (4,798)4,798 (109,694)(109,694)Reduction of unearned ESOP shar
153、es 159,087 228,795 387,882 Balance as of June 30,2018 2,387,124$1,009,958$18,201,691$(6,349)$22,416,400 642,750$(7,718,835)$(421,453)$33,481,412 The accompanying notes are an integral part of the financial statements.14 Espey Mfg.&Electronics Corp.Statements of Changes in Stockholders Equity Years E
154、nded June 30,2019 and 2018 Accumulated Capital in Other Unearned Total Outstanding Common Excess of Comprehensive Retained Treasury Stock ESOP Stockholders Shares Amount Par Value Income(Loss)Earnings Shares Amount Shares Equity Balance as of June 30,2018 2,387,124$1,009,958$18,201,691$(6,349)$22,41
155、6,400 642,750$(7,718,835)$(421,453)$33,481,412 Comprehensive income:Net income 2,342,694 2,342,694 Other comprehensive income,net of tax of$1,342 5,050 5,050 Total comprehensive income 2,347,744 Stock options exercised 15,899 184,514 (15,899)131,167 315,681 Stock-based compensation 172,148 172,148 D
156、ividends paid on common stock$2.00 per share (4,736,962)(4,736,962)Purchase of treasury stock (1,810)1,810 (44,888)(44,888)Reduction of unearned ESOP shares 173,622 216,747 390,369 Balance as of June 30,2019 2,401,213$1,009,958$18,731,975$(1,299)$20,022,132 628,661$(7,632,556)$(204,706)$31,925,504 T
157、he accompanying notes are an integral part of the financial statements.15 Espey Mfg.&Electronics Corp.Statements of Cash Flows Years Ended June 30,2019 and 2018 2019 2018 Cash Flows from Operating Activities:Net income.$2,342,694$3,075,797 Adjustments to reconcile net income to net cash (used in)pro
158、vided by operating activities:Bad debt expense.69,010 -Stock-based compensation.172,148 123,112 Depreciation.540,978 429,679 ESOP compensation expense.390,369 387,882 Loss on disposal of assets.566 -Deferred income tax expense.258,040 115,075 Changes in assets and liabilities:Increase in trade recei
159、vables,net.(6,687,067)(978,113)Decrease(increase)in income tax receivable.161,975 (41,796)Increase in inventories,net .(1,816,211)(363,611)Decrease(increase)in prepaid expenses and other current assets.798,394 (1,065,269)Increase(decrease)in accounts payable.337,836 (427,518)(Decrease)increase in ac
160、crued salaries and wages.(199,115)356,960 Increase in vacation accrual.79,258 51,413 Increase(decrease)in other accrued expenses.5,092 (145,620)Increase in payroll and other taxes withheld.8,016 6,496 Decrease in contract liabilities.(96,870)(1,263,580)Increase in income taxes payable.30,481 -Net ca
161、sh(used in)provided by operating activities.$(3,604,406)$260,907 Cash Flows from Investing Activities:Additions to property,plant and equipment.(608,318)(1,923,220)Purchase of investment securities.(6,039,808)(11,199,339)Proceeds from sale/maturity of investment securities.11,882,666 9,102,457 Net c
162、ash provided by(used in)investing activities.5,234,540 (4,020,102)Cash Flows from Financing Activities:Dividends paid on common stock.(4,736,962)(2,329,593)Purchase of treasury stock.(44,888)(109,694)Proceeds from exercise of stock options.315,681 439,115 Net cash used in financing activities.(4,466
163、,169)(2,000,172)Decrease in cash and cash equivalents.(2,836,035)(5,759,367)Cash and cash equivalents,beginning of the year.4,298,796 10,058,163 Cash and cash equivalents,end of the year.$1,462,761$4,298,796 Supplemental Schedule of Cash Flow Information:Income taxes paid.$87,200$920,000 The accompa
164、nying notes are an integral part of the financial statements.16 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 1.Nature of Operations Espey Mfg.&Electronics Corp.(the Company)is a manufacturer of electronic equipment used primarily in military and industrial applications.The principa
165、l markets for the Companys 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 net sales is generated from contra
166、cts with industrial manufacturers and defense companies,the Department of Defense,other agencies of the government of the United States and foreign governments for the design,development and/or manufacture of products.Contracts may be long-term in nature.We provide our products and design and develo
167、pment 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 fo
168、r a contract 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 collectability of consideration is probable.We assess each contract at its inception to determine whether it shoul
169、d 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 ince
170、ption 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
171、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(F
172、AR)are typically based on estimated costs plus a reasonable profit margin.We recognize revenue using the output method based on the appraisal of results achieved and milestones reached or units delivered based on contractual shipment terms,typically shipping point.Inventory Raw materials are valued
173、at the lower of cost(average cost)or net realizable value.Balances for slow-moving and obsolete inventory are reviewed on a regular basis by analyzing estimated demand,inventory on hand,sales levels,market conditions,and other information and reduce inventory balances based on this analysis.Inventor
174、ied 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 invento
175、ry 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 Companys b
176、alance 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 in
177、volving 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 wer
178、e used,based on changes in circumstances,in the estimation process.When a change in expected sales value or estimated cost is determined,changes are reflected in current period earnings.Contract Liabilities Contract liabilities include advance payments and billings in excess of revenue recognized.17
179、 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
180、as follows:Buildings and improvements 10 40 years Machinery and equipment 3 20 years Furniture and fixtures 7 10 years Income Taxes The Company follows the provisions of Accounting Standards Codification(“ASC”)Topic 740-10,Accounting for Income Taxes.Under the provisions of ASC 740-10,deferred tax a
181、ssets 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 app
182、ly 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 equiva
183、lents 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 investment securities in accordance with ASC 320-10-25,“Accounting for Certain I
184、nvestments in Debt and Equity Securities.”Investment securities at June 30,2019 and 2018 consist of certificates of deposit and municipal bonds.The Company classifies investment securities as available-for-sale.Unrealized holding gains and losses,net of related tax effect,on available-for-sale secur
185、ities are excluded from earnings and are reported as a separate component of stockholders equity until realized.Realized gains and losses for securities classified as available-for-sale are included in earnings and are determined using the specific identification method.Interest income is recognized
186、 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 ASC 820 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and mini
187、mize 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 da
188、te.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 t
189、hat reflect a reporting entitys 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
190、,approximated fair value as of June 30,2019 and 2018 because of the immediate or short-term maturity of these financial instruments.18 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 2.Summary of Significant Accounting Policies,Continued Accounts Receivable and Allowance for Doubtful
191、Accounts 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
192、of an allowance for doubtful accounts.The Company estimates the allowance based on its analysis of specific balances.Interest is not charged on past due balances.Based on these factors,there was an allowance for doubtful accounts of$3,000 at June 30,2019 and 2018.Changes to the allowance for doubtfu
193、l accounts are charged to expense and reduced by charge-offs,net of recoveries.Per Share Amounts ASC 260-10“Earnings Per Share(EPS)”requires the Company to calculate net income(loss)per share based on basic and diluted net income(loss)per share,as defined.Basic EPS excludes dilution and is computed
194、by dividing net income(loss)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
195、 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 in
196、come consists of net income and other comprehensive income.Other comprehensive income for fiscal years ended June 30,2019 and 2018 consists of unrealized holding gains and losses on available-for-sale securities.Use of Estimates The preparation of financial statements in conformity with accounting p
197、rinciples 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 revenue
198、s and expenses during the reporting period.Actual results could differ from those estimates.Reclassifications Certain reclassifications may have been made to the prior year financial statements to conform to the current year presentation.Recently Issued Accounting Standards In February 2018,the FASB
199、 issued ASU No.2018-02,“Income StatementReporting Comprehensive Income(Topic 220):Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”.Under current accounting guidance,the income tax effects for changes in income tax rates and certain other transactions are recognize
200、d in income from continuing operations resulting in income tax effects recognized in Accumulated Other Comprehensive Income that do not reflect the current tax rate of the entity(“stranded tax effects”).The new guidance allows the Company the option to reclassify these stranded tax effects to retain
201、ed earnings that relate to the change in the federal tax rate resulting from the passage of the Tax Cuts and Jobs Act(the“Tax Act”).This update is effective for fiscal years beginning after December 15,2018,including interim periods therein,and early adoption is permitted.The Company is evaluating t
202、he impact that ASU No.2018-02 will have on the Companys financial statements.19 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 2.Summary of Significant Accounting Policies,Continued In August 2018,the FASB issued ASU No.2018-13,“Fair Value Measurement(Topic 820):Disclosure Framework
203、Changes to the Disclosure Requirements for Fair Value Measurement.”This ASU is part of the FASBs larger disclosure framework project intended to improve the effectiveness of financial statement footnote disclosure.ASU 2018-13 modifies required fair value disclosures related primarily to level 3 inve
204、stments.This ASU is effective for annual periods beginning after December 15,2019 and interim periods within those annual periods.The adoption of ASU 2018-13 is not expected to have a material effect on the Companys financial position,results of operations,and cash flows.Impairment of Long-Lived Ass
205、ets 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
206、 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
207、were no impairments of long-lived assets in fiscal years 2019 and 2018.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 cla
208、ssified 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 gov
209、ernments 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 Companys contrac
210、ts 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 t
211、hrough 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 governments convenience or for default.If a contract is terminated for
212、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 regulation
213、s 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 Companys contract-related costs and fees.Note 3.Revenue Effective July 1,2018,we adopt
214、ed Financial Accounting Standards Board(“FASB”)Accounting Standards Codification(“ASC)606“Revenue from Contracts with Customers”,which 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
215、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.We adopted ASC 606 using the modified retrospective metho
216、d,which means,using the allowed practical expedient,we applied the new standard to open contracts at June 30,2018.We reviewed remaining obligations as of the effective date and determined no adjustment was required to the opening balance of retained earnings.Under the modified retrospective method,p
217、rior period revenue is not restated for comparative 20 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 3.Revenue,Continued periods.As a result of the adoption,we reclassified customer advance payments from inventory to contract liabilities.Contract liabilities were$6,054 and$102,924 a
218、s of June 30,2019 and June 30,2018,respectively.The decrease in contract liabilities is due to the recognition of revenue related to certain amounts previously collected and included in contract liabilities.The company used the practical expedient to expense incremental costs incurred to obtain a co
219、ntract when the contract term is less than one year.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 r
220、eached or units delivered based on contractual shipment terms,typically shipping point.Revenue is recognized when 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 typ
221、ically transferred to the customer at 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
222、 for the twelve months ended June 30,2019 based on units delivered totaled$30,677,077 compared to$29,762,111 for the same periods in 2018.Total revenue recognized for the twelve months ended June 30,2019 based on milestones achieved totaled$5,800,774 compared to$2,755,772 for the same periods in 201
223、8.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 distin
224、ct 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 June 30,2019.Our payment terms are generally 30-60 days.The companys backlog at June 30,2019 totaling$45.6 million is expected
225、,based on contractual due dates,to be recognized in the following fiscal years:72%in 2020;16%in 2021;11%in 2022,and 1%in 2023.Note 4.Investment Securities Investment securities at June 30,2019 and 2018 consist of certificates of deposit and municipal bonds which are classified as available-for-sale
226、securities and have been determined to be level 1 assets.The cost,gross unrealized gains,gross unrealized losses and fair value of available-for-sale securities by major security type at June 30,2019 and 2018 are as follows:Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value 201
227、9 Certificates of deposit$5,046,627$-$-$5,046,627 Municipal bonds 636,269 1,576 (232)637,613 2019 Total investment securities$5,682,896$1,576$(232)$5,684,240 2018 Certificates of deposit$10,440,000$-$-$10,440,000 Municipal bonds 1,085,754 635 (5,683)1,080,706 2018 Total investment securities$11,525,
228、754$635$(5,683)$11,520,706 21 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 4.Investment Securities,Continued The portfolio is diversified and highly liquid and primarily consists of investment grade fixed income instruments.At June 30,2019,the Company did not have any investments i
229、n individual securities that have been in a continuous loss position considered to be other than temporary.As of June 30,2019 and 2018,the remaining contractual maturities of available-for-sale securities were as follows:Years to Maturity Less than One to One Year Five Years Total 2019 Available-for
230、-sale$5,549,460$134,780$5,684,240 2018 Available-for-sale$10,967,300$553,406$11,520,706 Note 5.Contracts in Process Contracts in process at June 30,2019 and 2018 are as follows:2019 2018 Unrecognized gross contract value$45,552,562$48,100,984 Costs related to contracts in process$11,069,558$8,880,00
231、3 Included in costs relating to contracts in process at June 30,2019 and 2018 are costs of$2,740,804 and$1,602,827,respectively,relative to contracts that may not be completed within the ensuing year.Under the units-of-delivery method,the related sale and cost of sales will not be reflected in the s
232、tatements of comprehensive income until the units under contract are shipped.Gross profit for the year ended June 30,2019 was negatively impacted by the change in estimate on two separate contracts for the design and production of power transformers.The increase in direct costs,material and labor,ap
233、proximated$1.1 million.The net increase in direct costs is attributable to in process design changes required to meet contract specifications,changes to the bill of materials and operations,and scrap and other costs incurred typically associated with first time builds.Note 6.Property,Plant and Equip
234、ment Property,plant and equipment at June 30,2019 and 2018 is as follows:2019 2018 Land$45,000$45,000 Building and improvements 4,591,429 4,378,866 Machinery and equipment 11,156,006 10,877,555 Furniture and fixtures 170,120 170,120 15,962,555 15,471,541 Accumulated depreciation (12,137,144)(11,712,
235、904)Property,plant and equipment,net$3,825,411$3,758,637 Machinery and equipment includes$90,344 that was not placed in service as of June 30,2019.Depreciation expense was$540,978 and$429,679 for the years ended June 30,2019 and 2018,respectively.Note 7.Pension Expense Under terms of a negotiated un
236、ion contract which expires on June 30,2022,the Company is obligated to make contributions to a union-sponsored International Brotherhood of Electrical Workers Local 1799 defined benefit pension plan(Plan identifying number is 14-6065199)covering eligible employees.Such contributions and expenses are
237、 based upon hours worked at a specified rate and amounted to$129,095 in fiscal year 2019 and$99,031 22 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 7.Pension Expense,Continued in fiscal year 2018.These contributions represent more than five percent of the total contributions made i
238、nto the Plan.For the years beginning January 1,2019 and 2018,the Plan was in the“green zone”which means it is neither endangered nor critical status.A Funding Improvement Plan,entered into by Plan Trustees in fiscal year 2013,when the Plan was in“critical status,”calls for an increase in contributio
239、ns starting January 1,2016 of$0.04 per hour for each year for five years thereafter.The increase did not and will not have a material impact on the Companys financial statements.The Company sponsors a 401(k)plan for non-union workers with employee and employer matching contributions.The employer mat
240、ch is 10%of the employee contribution and was$57,581 and$52,225,for fiscal years 2019 and 2018,respectively.Note 8.Provision for Income Taxes The Tax Cuts and Jobs Act(“Tax Act”)was enacted on December 22,2017.The legislation significantly changes U.S.tax law by,among other things,lowering the U.S.f
241、ederal corporate tax rate,bonus depreciation that allows for full expensing of qualified property,and limiting the deductibility of interest expense and executive compensation.The Tax Act permanently reduces the U.S.corporate income tax rate to a flat 21%rate,effective January 1,2018.Pursuant to Sec
242、tion 15 of the Internal Revenue Code,the Company applied a blended corporate tax rate of 28.1 percent for fiscal year 2018,which was based on the applicable tax rates before and after the Tax Reform Act and the number of days in the year.In fiscal year 2018,the Company re-measured certain U.S.deferr
243、ed tax assets and liabilities based on the rates at which they are expected to reverse in the future,which is generally 21%,and provisionally recorded an increase to the provision for income taxes of$35,200 related to the re-measurement.However,as of June 30,2018 the impact from the Tax Act related
244、to the re-measurement of the companys deferred tax assets and liabilities was a$4,553 increase to the provision for income taxes.The year-end amount differed from the provisional amount booked in the second quarter due to variances in timing adjustments from those forecasted,mainly the accelerated e
245、xpensing of property,plant and equipment placed in service in the third and fourth quarter.A summary of the components of the provision for income taxes for the years ended June 30,2019 and 2018 is as follows:2019 2018 Current tax expense-federal$274,889$880,213 Current tax expense(benefit)-state 6,
246、010 (2,009)Deferred tax expense 258,040 115,075 Provision for income taxes$538,939$993,279 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 tempo
247、rary differences are determined in accordance with ASC 740-10.The combined U.S.federal and state effective income tax rates of 18.7%and 24.4%,for 2019 and 2018 respectively,differed from the statutory U.S.federal income tax rate for the following reasons:2019 2018 U.S.federal statutory income tax ra
248、te 21.0%28.1%Increase(reduction)in rate resulting from:State franchise tax,net of federal income tax benefit 0.2 (0.1)ESOP cost versus Fair Market Value 1.3 1.1 Dividend on allocated ESOP shares (3.0)(2.9)Qualified production activities -(2.1)Stock-based compensation 0.2 0.1 Foreign Derived Intangib
249、le Income Deduction (0.3)-Other (0.7)0.2 Effective tax rate 18.7%24.4%23 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 8.Provision for Income Taxes,Continued For the years ended June 30,2019 and 2018 deferred income tax expense of$258,040 and$115,075,respectively,results from the ch
250、anges 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 30,2019 and 2018 are presented as follows:2019 2018 Deferred tax assets:Accrued expenses$164,388$203,150 ESOP 17,702 32,875 Stock-based
251、compensation 56,382 51,140 Inventory-effect of uniform capitalization 64,148 53,863 Unrealized loss on investment securities -1,060 Other 1,437 1,437 Total deferred tax assets$304,057$343,525 Deferred tax liability:Property,plant and equipment-principally due to differences in depreciation methods$5
252、41,150$361,218 Prepaid expenses 39,982 -Total deferred tax liability$581,132$361,218 Net deferred tax liability$(277,075)$(17,693)In assessing the realizability 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
253、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
254、 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
255、 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 ta
256、x benefits.As of June 30,2019 and 2018,the Company has no unrecognized tax benefits.The Company recognizes interest and penalties in general and administrative expense.As of June 30,2019 and 2018,the Company has not recorded any provision for accrued interest and penalties.The Company is subject to
257、taxation in the United States and various state jurisdictions.By Federal statue 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 statues follow similar guidelines.As such the companys tax returns fo
258、r tax years ending June 30,2019,2018,2017 and 2016 remain open to examination by the respective taxing authorities.Note 9.Significant Customers A significant portion of the Companys business is the production of military and industrial electronic equipment for use by the U.S.and foreign governments
259、and certain industrial customers.Sales to three domestic customers accounted for approximately 54%of total sales in fiscal year 2019.Sales to two domestic customers accounted for approximately 60%of total sales in fiscal year 2018.The related accounts receivable balance,as a percentage of the Compan
260、ys total trade accounts receivable balance,was 53.6%represented by two customers at June 30,2019 and 64%represented by one customer at June 30,2018.Export sales in fiscal years 2019 and 2018 were approximately$2,638,000 and$3,112,000,respectively.24 Espey Mfg.&Electronics Corp.Notes to Financial Sta
261、tements Note 10.Stock Rights Plan The Company has a Shareholder Rights Plan that expires on December 31,2019.Under this plan,common stock purchase rights were distributed as a dividend at the rate of one right for each share of common stock outstanding as of or issued subsequent to April 14,1989.Eac
262、h right entitles the holder thereof to buy one-half share of common stock of the Company at an exercise price of$25 per share subject to adjustment.The rights are exercisable only if a person or group acquires beneficial ownership of 15%or more of the Companys common stock or commences a tender or e
263、xchange offer which,if consummated,would result in the offeror individually or,together with all affiliates and associates thereof,being the beneficial owner of 15%or more of the Companys common stock.If a 15%or larger shareholder should engage in certain self-dealing transactions or a merger with t
264、he Company in which the Company is the surviving corporation and its shares of common stock are not changed or converted into equity securities of any other person,or if any person were to become the beneficial owner of 15%or more of the Companys common stock,then each right not owned by such shareh
265、older or related parties of such shareholder(all of which will be void)will entitle its holder to purchase,at the rights then current exercise price,shares of the Companys common stock having a value of twice the rights exercise price.In addition,if the Company is involved in any other merger or con
266、solidation with,or sells 50%or more of its assets or earning power to another person,each right will entitle its holder to purchase,at the rights then current exercise price,shares of common stock of such other person having a value of twice the rights exercise price.The Company generally is entitle
267、d to redeem the rights at one cent per right at any time until the 15th day(or 25th day if extended by the Companys Board of Directors)following public announcement that a 15%position has been acquired or the commencement of a tender or exchange offer which,if consummated,would result in the offeror
268、,together with all affiliates and associates thereof,being the beneficial owner of 15%or more of the Companys common stock.Note 11.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
269、 year and are employed on June 30.The Company makes annual contributions to the ESOP equal to the ESOPs 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
270、recorded as a reduction of retained earnings.As the debt is repaid,shares are released and allocated to active employees,based on the proportion of debt service paid in the year.The Company accounts for its ESOP in accordance with FASB ASC 718-40.Accordingly,the shares purchased by the ESOP are repo
271、rted 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.ESOP compe
272、nsation expense was$390,369 and$387,882 for the years ended June 30,2019 and 2018,respectively.The ESOP shares as of June 30,2019 and 2018 were as follows:2019 2018 Allocated shares 454,943 459,032 Unreleased shares 14,166 29,166 Total shares held by the ESOP 469,109 488,198 Fair value of unreleased
273、 shares$350,609$782,524 The Company may at times be required to repurchase shares at the ESOP participants request at the fair market value.During the twelve months ended June 30,2019,the Company repurchased 1,810 shares previously held in the ESOP for$44,888.During the twelve months ended June 30,2
274、018 the Company repurchased 4,798 shares previously held by the ESOP for$109,694.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 twelve months ended J
275、une 30,2019 and 2018 totaled 17,279 shares and 8,103 shares,respectively.25 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 12.Stock-based Compensation The Company follows ASC 718 in establishing standards for the accounting for transactions in which an entity exchanges its equity ins
276、truments 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 entitys equity instruments or that may be settled by the issuance of those equity instruments.ASC 718 requires that the cost resultin
277、g 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
278、 employee share ownership plans.Total stock-based compensation expense recognized in the statements of comprehensive income for the fiscal years ended June 30,2019 and 2018,was$172,148 and$123,112,respectively,before income taxes.The amount of this stock-based compensation expense related to non-qua
279、lified stock options(“NQSO”)for the fiscal years ended June 30,2019 and 2018,was$44,780 and$32,564,respectively.The deferred tax benefit related to the NQSOs as of June 30,2019 and 2018 was approximately$9,404 and$6,839,respectively.The remaining stock option expense in each year related to incentiv
280、e stock options(“ISO”)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 30,2019,there was approximately$199,969 of unrecognized compensation cost related to stock option
281、 awards that is expected to be recognized as expense over the next 1.75 years,of which$52,399 relates to NQSOs and$147,570 relates to ISOs.The total deferred tax benefit related the NQSOs in future years will be approximately$11,004.The Company has one employee stock option plan under which options
282、or stock awards may be granted,the 2017 Stock Option and Restricted Stock Plan(the 2017 Plan),approved by the Companys shareholders at the Companys 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
283、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 no
284、n-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
285、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
286、 covering 400,000 shares are authorized for issuance under the 2017 plan,of which 110,304 have been granted as of June 30,2019.While no further grants of options may be made under the Companys 2007 Stock Option and Restricted Stock Plan,as of June 30,2019,154,950 options were outstanding under such
287、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
288、 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 year ended June 30,2019 and 2018.2019 2018 Dividend yield 3.68%4.54%Expected stock price volatility 27.63%24.07%Risk-free interest rate 2.70%2.04%E
289、xpected option life(in years)5.2 yrs 4.8 yrs Weighted average fair value per share of options granted during the period$5.13$2.95 The Company pays dividends quarterly and paid regular cash dividends totaling$1.00 per share and a special cash dividend of$1.00 for the twelve months ended June 30,2019
290、and regular cash dividends totaling$1.00 for the same period in fiscal year 2018.Expected stock price volatility is based on the historical volatility of the Companys 26 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 12.Stock-based Compensation,Continued stock.The risk-free interest
291、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 life(in years)represents the estimated period of time until exercise and is based on actual historical experience.The following table summari
292、zes stock option activity during the twelve months ended June 30,2019:Employee Stock Options Plan Weighted Number of Weighted Average Shares Average Remaining Aggregate Subject Exercise Contractual Intrinsic to Option Price Term Value Balance at July 1,2018 222,854$24.29 6.26 Granted 55,589$27.17 9.
293、44 Exercised (15,899)$19.86-Forfeited or expired (3,380)$25.86-Outstanding at June 30,2019 259,164$25.16 6.37$219,627 Vested or expected to vest at June 30,2019 243,481$25.18 6.20$198,723 Exercisable at June 30,2019 154,950$25.42 4.66$78,525 The aggregate intrinsic value in the table above represent
294、s the total pretax intrinsic value(the difference between the closing sale price of the Companys common stock as reported on the NYSE American on June 30,2019 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 hol
295、ders had exercised their options on June 30,2019.This amount changes based on the fair market value of the Companys common stock.The total intrinsic values of the options exercised during the twelve months ended June 30,2019 and 2018 was$67,328 and$26,691,respectively.The following table summarizes
296、changes in non-vested stock options during the twelve months ended June 30,2019:Weighted Number of Average Shares Grant Date Subject Fair Value to Option (per Option)Non-Vested at July 1,2018 87,605$3.65 Granted 55,589 5.13 Vested(36,350)4.64 Forfeited or expired (2,630)4.35 Non-Vested at June 30,20
297、19 104,214$4.08 Note 13.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 variou
298、s financial institutions.At times such investments may be in excess of FDIC insurance limits.As disclosed in Note 9,a significant portion of the Companys business is the production of military and industrial electronic equipment for use by the U.S.and foreign governments and certain industrial custo
299、mers.The related accounts receivable balance,as a percentage of the Companys total trade accounts receivable balance,was 46.2%represented by one customers at June 30,2019 and 61%represented by one customer at June 30,2018.Although the Companys exposure to credit risk associated with nonpayment of th
300、ese 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 customers financial conditions and requires col
301、lateral,such as progress payments,in certain circumstances.The Company establishes an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers,historical trends and other information.27 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 14.Rela
302、ted Parties The administration of the shares of common stock held by the ESOP Trust is subject to the Amended and Restated Plan 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 Agr
303、eement.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 instructio
304、ns 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.See Note 11 for additional information regarding the ESOP.Note 15
305、.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 aggregate
306、d to zero at June 30,2019 and 2018.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.Governmen
307、t 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 sa
308、nctions 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,
309、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
310、 adverse effect on our business,financial condition,results of operations or cash flows.Note 16.Stockholders Equity Reservation of Shares The Company has reserved common shares for future issuance as follows as of June 30,2019:Stock options outstanding 259,164 Stock options available for issuance 29
311、1,976 Number of common shares reserved 551,140 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 30:2019 2018 Numerator:Net income$2,342,694$3,075,797 Denomi
312、nator:Basic EPS:Common shares outstanding,beginning of period 2,387,124 2,371,321 Unearned ESOP shares (29,166)(45,000)Weighted average common shares issued during the period 9,708 4,685 Weighted average common shares purchased during the period (362)(3,075)Weighted average ESOP shares earned during
313、 the period 5,641 5,954 Denominator for basic earnings per common shares Weighted average common shares 2,372,945 2,333,885 Diluted EPS:Common shares outstanding,beginning of period 2,387,124 2,371,321 28 Espey Mfg.&Electronics Corp.Notes to Financial Statements Note 16.Stockholders Equity,Continued
314、 Unearned ESOP shares (29,166)(45,000)Weighted average common shares issued during the period 9,708 4,685 Weighted average common shares purchased during the period (362)(3,075)Weighted average ESOP shares earned during the period 5,641 5,954 Weighted average dilutive effect of stock options 16,283
315、14,422 Denominator for diluted earnings per common shares Weighted average common shares 2,389,228 2,348,307 Not included in this computation of earnings per share for the year ended June 30,2019 and 2018 were options to purchase 196,039 and 2,500 shares,respectively,of the Companys common stock.The
316、se 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.The Company paid regular cash dividends on common stock of$1.00 per share and a special cash dividend of$1.00 for the fiscal year ended Ju
317、ne 30,2019 and regular cash dividends on common stock of$1.00 per share in 2018.Subsequent to June 30,2019,the Board of Directors has authorized the payment of a fiscal year 2020 first quarter regular dividend of$0.25 payable September 29,2019 to shareholders of record on September 20,2019.Our Board
318、 of Directors assesses the Companys dividend policy periodically.There is no assurance that the Board of Directors will either maintain the amount of the regular cash dividend or declare a special dividend during any future years.Note 17.Line of Credit At June 30,2019,the Company has an uncommitted
319、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 LIBOR Daily Floating Rate plus 2.00%.Any borrowing under the line of credit will be collateralized by accounts receivable.The
320、 line will be reviewed annually in November for renewal on December 1st.All outstanding balances are payable no later than the expiration date of the agreement,unless other terms are agreed to by the lender.Note 18.Quarterly Financial Information(Unaudited)First Second Third Fourth 2019 Quarter Quar
321、ter Quarter Quarter Net sales$8,337,399$7,303,109$9,218,141$11,619,202 Gross profit.992,934 1,516,235 2,150,439 2,403,565 Net income.61,671 217,758 922,456 1,140,809 Net income per share-Basic .0.03 0.09 0.39 0.48 Diluted.0.03 0.09 0.39 0.47 2018 Net sales$7,496,423$11,531,105$5,663,161$7,827,194 Gr
322、oss profit.1,461,154 3,075,598 1,255,204 1,870,296 Net income.442,764 1,614,871 317,764 700,398 Net income per share-Basic .0.19 0.69 0.14 0.30 Diluted.0.19 0.69 0.14 0.29 29 Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A.Controls and Procedu
323、res Evaluation of Controls and Procedures(a)The Companys management,with the participation of the Companys chief executive officer and chief 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 S
324、ecurities Exchange Act of 1934)as of the end of the period covered by this Annual Report on Form 10-K.Based on such evaluation,our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this
325、 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.Managements Report on Internal Control over Fina
326、ncial Reporting Management of our Company is responsible for establishing and maintaining adequate internal control over financial reporting,as that term is defined in Exchange Act Rules 13a-15(f)and 15d-15(f).Our internal control over financial reporting is a process designed to provide reasonable
327、assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.Because of its inherent limitations,internal control over financial reporting may not prevent or detect misstatemen
328、ts.Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.Under the supervision and with the participation of o
329、ur management,including the principal executive officer and principal financial officer,we conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organiz
330、ations of the Treadway Commission in 2013.Based on our evaluation using the criteria set forth in Internal Control-Integrated Framework,management has concluded that our internal control over financial reporting was effective as of June 30,2019.This annual report does not include an attestation repo
331、rt of our registered public accounting firm regarding internal control over financial reporting.Our report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only managements report in this annual report.Item 9B.Other inform
332、ation None PART III The information called for by Item 10.Directors,Executive Officers,and Corporate Governance,Item 11.Executive Compensation,Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters,Item 13.Certain Relationships and Related Transactions
333、,and Director Independence and Item 14.Principal Accountant Fees and Services,is hereby incorporated by reference to the Companys Proxy Statement for its Annual Meeting of Shareholders,(scheduled to be held on December 6,2019)to be filed with the SEC pursuant to Regulation 14A under the Securities Exchange Act of 1934,as amended.30 PART IV Item 15.Exhibits,Financial Statement Schedules,Signatures
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