UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

QUARTERLY Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934

For the quarterly period ended MarchDecember 31, 2016

Commission File Number I-4383

ESPEY MFG. & ELECTRONICS CORP.

(Exact name of registrant as specified in its charter)

233 Ballston Avenue, Saratoga Springs, New York 12866

(Address of principal executive offices)

518-245-4400

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

SxYes          £oNo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

SxYes          £oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

Indicate by check mark whether the registrant is a shell company.

£oYes          SxNo

At May 11, 2016,February 9, 2017, there were 2,364,6842,371,321 shares outstanding of the registrant's Common stock, $.33-1/3 par value.

Note 6.   Recently Issued Accounting Standards

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,” which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. The standard is effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is permitted for annual periods beginning after December 15, 2016, and interim periods therein. We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our financial statements and have not yet determined the method by which we will adopt the standard in fiscal 2019.

In July 2015, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”.Inventory.” ASU No. 2015-11 requires inventory measured using any method other than last-in, first out or the retail inventory method to be subsequently measured at the lower of cost and net realizable value, rather than at the lower of cost or market. Net realizable value is defined as the estimated selling price, less the estimated costs to complete, dispose, and transport such inventory. ASU No. 2015-11 will be effective for fiscal years and interim periods beginning after December 15, 2016. ASU No. 2015-11 is required to be applied prospectively and early adoption is permitted. The Company’s adoption of ASU No. 2015-11 is not expected to have a material impact on the Company’s financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers,”which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU No. 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.

In subsequent periods, the FASB issued additional ASUs intended to clarify specific aspects related to the interpretation and implementation of ASU No. 2014-09. In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers – Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” to provide guidance on principal versus agent considerations by an entity as discussed in ASU No. 2014-09. ASU No. 2016-08 provides criteria to be assessed by an entity when determining whether it is the principal or agent in relation to the goods or services which the company is contractually obligated to provide to the customer. Among these considerations are; identifying the unit of account at which the entity should assess whether it is a principal or an agent, identifying the nature of the good or service provided to the customer; applying the control principle to certain types of transactions; and, interaction of the control principle with the indicators provided to assist in the principle versus agent evaluation. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers – (Topic 606): Identifying Performance Obligations and Licensing” to provide implementation guidance related to the necessary judgements required in identifying performance obligations of a contract and guidance related to recognition of licensing revenues. In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers – (Topic 606): Narrow-Scope Improvements and Practical Expedients” to provide guidance related to the implementation of ASU No. 2014-09 in the following areas; assessing collectability for contracts that do not meet Step 1 of revenue recognition, presentation of sales taxes, noncash consideration, contract modifications at transition, and completed contracts at transition.

These standards are effective for annual periods beginning after December 15, 2017, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU No. 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). Early adoption is permitted for annual periods beginning after December 15, 2016 and interim periods therein. We are currently evaluating the impact of our pending adoption of ASU No. 2014-09 on our financial statements and have not yet determined the method by which we will adopt the standard in fiscal 2019 beginning July 1, 2018.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. The guidance requires the classification of deferred tax assets and liabilities as non-currentnoncurrent in a classified balance sheet. The current requirement that deferred tax assets and liabilities of a tax-payingtaxpaying component of an entity be offset and presented as a single amount is not affected by this update. ASU No. 2015-17 will be effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. ASU No. 2015-17 may be applied prospectively or retrospectively, and early adoption is permitted. Adoption of ASU No. 2015-17 would have the following impact on the Company’s financial statements at MarchDecember 31, 2016;2016; a decrease in current assets of $214,534,$217,764, a decrease in non-currentnoncurrent liabilities of $157,444$202,248 and an increase in non-currentnoncurrent assets of $57,090.

$15,516.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in this Update address certain aspects of recognition, measurement, presentation and disclosure of financial instruments (primarily equity securities) in order to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU No. 2016-01 will be effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Company is evaluating the impact that ASU No. 2016-01 will have on the Company's financial statements.

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers – Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”. ASU 2016-08 provides guidance on principal versus agent considerations by an entity as discussed in ASU 2014-09, issued May 2014. ASU 2016-08 provides criteria to be assessed by an entity when determining whether it is the principal or agent in relation to the goods or services which the company is contractually obligated to provide to the customer. Among these considerations are; Identifying the unit of account at which the entity should assess whether it is a principal or an agent, Identifying the nature of the good or service provided to the customer; Applying the control principle to certain types of transactions; and, Interaction of the control principle with the indicators provided to assist in the principle versus agent evaluation. The effective date and transition requirements for the amendments in this Update are consistent with the effective date and transition requirements of Update 2014-09. The Company’s adoption of ASU 2016-08 is not expected to have a material impact on the Company’s financial position or results of operations.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The areas for simplification in this Updateupdate involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Additionally, this ASU allows an entity to make an accounting policy election to either estimate the number of awards that are expected to vest (current GAAP) or account for forfeitures as they occur. ASU No. 2016-09 will be effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. ASU No. 2016-09 may be applied prospectively or retrospectively, and early adoption is permitted. The Company is evaluating the impact that ASU No. 2016-09 will have on the Company's financial statements.

Note 7.  Employee Stock Ownership Plan

The Company sponsors a leveraged employee stock ownership plan (the "ESOP") that covers all nonunionnon-union employees who work 1,000 or more hours per year and are employed on June 30. The Company makes annual contributions to the ESOP equal to the ESOP's debt service less dividends on unallocated shares received by the ESOP. All dividends on unallocated shares received by the ESOP are used to pay debt service. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings. As the debt is repaid, shares are released and allocated to active employees, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with FASB ASC 718-40. Accordingly, the shares purchased by the ESOP are reported as Unearned ESOP Sharesshares 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 compensation expense was $109,856$108,167 and $124,712$111,081 for the three-month periods ended MarchDecember 31, 2016 and 2015, respectively. ESOP compensation expense was $334,031$216,876 and $333,389$224,175 for the nine-monthsix-month periods ended MarchDecember 31, 2016 and 2015, respectively.

The ESOP shares as of MarchDecember 31, 2016 and 2015 were as follows:

During the three and ninesix months ended MarchDecember 31, 2016 the Company repurchased 01,663 shares previously held in the ESOP for $44,335. During the three and six months ended December 31, 2015 the company repurchased 14,303 shares previously held in the ESOP for $0 and $355,418, respectively. During the three and nine months ended March 31, 2015, the Company repurchased 0 and 13,553 shares previously held in the ESOP for $0 and $320,504, respectively.$355,418.

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Espey Mfg. & Electronics Corp. (“Espey”) is a power electronics design and original equipment manufacturing (OEM) company with a long history of developing and delivering 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 reporting company” for purposes of the reporting requirements under the Securities Exchange Act of 1934, as amended. Espey’s common stock is publicly-traded on the NYSE MKT under the symbol “ESP.”

Espey began operations after incorporation in New York in 1928. We strive to remain competitive as a leader in high power energy conversion and transformer solutions through the design and manufacture of new and improved products by using advanced and “cutting edge” electronics technologies.

Espey is ISO 9001:2008 and AS9100:2009 certified. Our primary products are power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, UPS systems, antennas and high power radar systems. The applications of these products include AC and DC locomotives, shipboard power, shipboard radar, airborne power, ground-based radar, and ground mobile power.

Espey services include design 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 inductors), populates printed circuit boards, fabricates metalwork, paints, wires, qualifies, and fully tests items, mechanically, electrically and environmentally, in house. Portions of the manufacturing and testing process are subcontracted to vendors from time to time.

The Company markets its products primarily through its own direct sales organization and through outside sales representatives. Business is solicited from large industrial manufacturers and defense companies, the government of the United States, foreign governments and major foreign electronic equipment companies. In certain countries the Company has external sales representatives to help solicit and coordinate foreign contracts. Espey is also on the eligible list of contractors with the United States Department of Defense and generally is automatically solicited by Defense Department procurement agencies for their needs falling within the major classes of products produced by the Company. In addition, the Company directly pursues opportunities from the United States Department of Defense for prime contracts. Espey contracts with the Federal Government under cage code 20950 as Espey Mfg. & Electronics Corp.

There is competition in all classes of products manufactured by the Company from divisions of the largest electronic companies, as well as many small companies. The Company's sales do not represent a significant share of the industry's market for any class of its products. The principal methods of competition for electronic products of both a military and industrial nature include, among other factors, price, product performance, the experience of the particular company and history of its dealings in such products.

Our business is not seasonal. However, the concentration of our business in the rail industry, and in equipment for industrial and military applications andincluding our customer concentrations, expose us to on-going associated risks including, without limitation, dependence on appropriations from the United States Government and the governments of foreign nations, program allocations, of a single customer, and the potential of governmental termination of orders for convenience.convenience, and the general health of our largest customers.

Uncertainty in federal defense spending and competitionthe current decline in our industrial customer basethe rail industry continues to be a concern. Based upon discussions during contract negotiations with our major customers over the past several years, we believe that manydrive competition. Many of our competitors have been aggressively investing in upfront product design costs and lowering profit margins as a strategic means of maintaining existing business and enhancing market share at the expense of short term profit. This change in the market place has put pressure on the pricing of our current products and will result in lower margins on new business and some of our legacy business. In order to compete effectively for new business, in some cases we invest in upfront design costs, thereby reducing initial profitability as a means of procuring new long-term programs. Accordingly, we have adjustedadjust our pricing strategy in order to achieve a balance which enables us both to retain repeat programs while being more competitive in bidding on new programs. This trend will continue in the current fiscal year as we continue to invest in new programs and aggressively quote long-term programs in an effort to grow the business.

In order to maintain a balanced business, we are continuing to place an emphasis on securing “build to print” opportunities, which will allow production work to go directly to the manufacturing floor, limiting the impact on our engineering staff. This effort will keep our manufacturing team busy while the products being developed transition to production. We have had some success with build to print opportunities. The selection of vendors by the potential customers to whom we have submitted quotations is taking longer than we originally anticipated. We will be unable to assess whether our initiative has been successful until the end of this fiscal year.

The Company's backlog was approximately $41.6$38.2 million at MarchDecember 31, 2016 which includes $26.2$21.8 million from two significant customers compared to $38.4$43.0 million at MarchDecember 31, 2015 which included $24.4$27.4 million from two significant customers. The backlog at March 31, 2016, also includes a $10.1 million delivery order attributable to an award of a significant contract from the Federal Government. Revenues under this contract are not expected to be realized until fiscal year 2017. The backlog for the Company represents the estimated remaining sales value of work to be performed under firm contracts. This includes items that have been authorized and appropriated by Congress and/or funded by the customer. The unfunded portions of the backlog at March 31, 2016 and 2015, were $0 and $2.3 million, respectively, representing firm multi-year orders for which funding had 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 a given program, management has includedincludes in unfunded backlog only those programs that it believes are likely to receive funding based on discussions with customers and program status.

The unfunded portions of the backlog at December 31, 2016 and 2015 were $0.

Management expects revenues in fiscal year 2017 to be less than revenues during fiscal 2016. This is primarily due to a decline we are experiencing in our industrial sector. As reported in our report on Form 10-K for the fiscal year ended June 30, 2016, a significant customer in the rail market advised us of its expectations for a scaled-back purchase plan due to increasefalling demand for locomotives. For the six months ended December 31, 2016, shipments to this significant customer declined by 49% as compared with the same period in 2015 and new orders received from this significant customer declined by 87% as compared with the same period in 2015. We are working closely with our rail industry partners to secure long-term agreements that will allow us to support them through this downturn and provide a resumption of business for the Company upon a rail industry recovery. The anticipated sales decline in the rail industry may be offset, in part, by a new product for a customer in the military market which is currently in the final stages of design development and qualification testing. If the testing is successful, shipments of the product are expected to begin in the fourth quarter of the current fiscal year 2015 revenues. Current expectationsyear.

In order to address the downturn in the rail market and its impact on future sales and income, we also launched two additional military power supply designs in fiscal 2016, each for a different customer. All designs have progressed through critical design and have proceeded into qualification testing. We are for gross marginsexperiencing some delays in qualification testing on one of these programs and expect future production orders to be lower compareddelayed as well. We expect these new products to prior year due to product mix, competitive pricing pressures, new program investments, and a one-time reduction to cost of sales in the prior year discussed within the Results of Operations, below. have significant multi-year production runs post qualification.

New orders received in the first ninesix months of fiscal 20162017 were approximately $26.0$10.9 million as compared to $20.5$20.2 million of new orders received in the first ninesix months of fiscal 2015. 2016, which included a $10.1 million initial production delivery order attributable to an award of a significant contract from the Federal Government for a power supply we have designed and is currently in the final stages of qualification. While we expect future procurements under this contract, due to the contract’s nature future procurements are not guaranteed and require the approval and allocation of funds by the Federal Government. The next procurement installment of the multi-year contract award is not expected until the product enters full-rate production, currently scheduled to commence in the fourth quarter of fiscal 2017. Each new order could be in the $10 million range. The orders received in the second quarter of fiscal 2017 include a power supply design and build contract from a new customer totaling approximately $3 million. If successful in design, this power supply could have a large volume of sales in future years, although currently we are unable to quantify the amount.

It is presently anticipated that a minimum of $6million$11 million of orders comprising the MarchDecember 31, 2016 backlog will be filled during the fiscal year ending June 30, 2016.2017. The minimum of $6$11 million does not include any shipments, which may be made against orders subsequently received during the fiscal year ending June 30, 2016.2017. The estimate of the December 31, 2016 backlog to be shipped in fiscal 2017 is subject to future events, which may cause the amount of the backlog actually shipped to differ from such estimate.

In addition to the backlog, the Company currently has outstanding opportunities representing in excess of $51$54 million in the aggregate as of May 11, 2016,January 31, 2017 for both repeat 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 the United States defense spending and factors affecting the defense industry and industrial locomotive power supply procurement of a single customer.

Management continues to evaluate our sales strategy including the professional and technical resources necessary to keep pace with the changing market conditions and needs of our customers. The Company has added to and re-aligned current sales and engineering resources, in order to focus on penetrating opportunities with new and existing customers. The Company continues quoting current and new customers for programs of varying sizes.generally.

Net sales to fourtwo significant customers represented 68.6%38.4% and 49.8% of the Company's total sales for the three-month period ended MarchDecember 31, 2016 and net2015, respectively. Net sales to two significant customers represented 63.8%42.6% and 54.7% of the Company’s total sales for the three-month periodsix-month periods ended March 31, 2015. Net sales to two significant customers represented 49.5% of the Company's total sales for the nine-month period ended MarchDecember 31, 2016 and net sales to three significant customers represented 59.5% of the Company’s total sales for the nine-month period ended March 31, 2015.2015, respectively. This high concentration level with these customers presents significant risk. A loss of one of these customers or programs related to these customers could significantly impact the Company. Historically, a small number of customers have accounted for a large percentage of the Company’s total sales in any given fiscal year. Management continues to pursue opportunities with current and new customers with an overall objective of lowering the concentration of sales and mitigating excessive reliance upon a single major product of a particular program or minimizing the impact of the loss of a single significant customer.

Critical Accounting Policies and Estimates

Management believes our most critical accounting policies include revenue recognition and cost estimates to completion.estimation on our contracts.

A significant portion of our business is comprised of development and production contracts. Generally revenues on long-term fixed-price contracts are recorded on a percentage of completion basis using units of delivery as the measurement basis for progress toward completion.

Percentage of completion accounting requires judgment relative to expected sales, estimating costs and making assumptions related to technical issues and delivery schedule.schedules. Contract costs include material, subcontract costs, labor and an allocation of overhead costs. The estimation of cost at completion of a contract is subject to numerous variables involving contract costs and estimates as to the length of time to complete the contract. Given the significance of the estimation processes and judgments described above, it is possible that materially different amounts of expected sales and contract costs could be recorded if different assumptions were used, based on changes in circumstances, in the estimation process. When a change in expected sales value or estimated cost is determined, changes are reflected in current period earnings.

Results of Operations

Net sales increaseddecreased for the three months ended MarchDecember 31, 2016, to $7,217,922$5,667,624 as compared to $6,470,286$7,242,020 for the same period in 2015. Net sales for the ninesix months ended MarchDecember 31, 2016, increaseddecreased to $20,739,378$11,736,308 as compared to $17,860,841$13,521,456 for the same period in 2015. For the three and six months ended MarchDecember 31, 2016, the increasedecrease in net sales is primarily due to increased magneticsthe decrease in shipments offset by a decrease in power supplies shipped. Forresulting from the nine months ended March 31, 2016, thescaled-back procurement by a significant customer due to falling demand offset by an increase in net sales is primarily due to increased shipments of magnetics and power supplies, offset by a decline in spare part sales.

magnetic shipments.

For the three months ended MarchDecember 31, 2016 and 2015, gross profits were $2,148,223$1,080,145 and $1,437,534,$1,588,043, respectively. Gross profit as a percentage of sales was 29.8%19.1% and 22.2%21.9%, for the three months ended MarchDecember 31, 2016 and 2015, respectively. For the ninesix months ended MarchDecember 31, 2016 and 2015, gross profits were $5,704,586$2,423,892 and $5,506,348,$3,556,363, respectively. Gross profit as a percentage of sales was 27.5%20.7% and 30.8%26.3%, for the ninesix months ended MarchDecember 31, 2016 and 2015, respectively. The primary factors in determining gross profit and net income are overall sales levels and product mix. The gross profits on mature products and build to print contracts are typically higher as compared to products which are still in the engineering development stage or in early stages of production. In the case of the latter, the Company incurscan incur what it refers to as “loss contracts,” meaning 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 and less mature programs, and expenditures associated with loss contracts, has a significant impact on gross profit and net income. The gross profit percentage increaseddecreased in the three and six months ended MarchDecember 31, 2016 as compared to the same period ended March 31,in 2015 due to product mix and an increase in expenditures related to engineering design investments, specifically, one of the impact of higher margins resulting from product mix.military power supplies discussed above. The design investment resulted in a 4.1% and 3.6% decline in the gross profit percentage decreased for the ninethree and six months ended MarchDecember 31, 2016, as compared to the nine months ended March 31, 2015 due to a favorable one-time reduction to cost of sales that occurred during the nine months ended March 31, 2015. The prior year reduction totaled $560,000 for a contract settlement related to a previously cancelled program.respectively.

Selling, general and administrative expenses were $781,248$750,381 for the three months ended MarchDecember 31, 2016; an increaseof $15,348,a decrease of $4,577, compared to the three months ended MarchDecember 31, 2015. Selling, general and administrative expenses were $2,285,856$1,523,047 for the ninesix months ended MarchDecember 31, 2016; an increase of $288,577$18,439 compared to the ninesix months ended MarchDecember 31, 2015. The decrease for the three months ended December 31, 2016 relates primarily to a decrease in professional services. The increase for the three and ninesix months ended MarchDecember 31, 20152016 relates primarily to an increase inincreased compensation costs due to pay increases and an increaseoffset by a decrease in the number of employees.professional services. 

Other income for the three months ended MarchDecember 31, 2016 and 2015, was $16,952$18,655 and $14,386,$37,173, respectively. Other income for the ninesix months ended MarchDecember 31, 2016 and 2015, was $79,566$37,678 and $52,034,$62,614, respectively. The increasedecrease is primarily due to a reduction in scrap sales partially offset by an increase in scrap metal sales.interest income.  

The Company’s effective tax rates for the three and ninesix months ended MarchDecember 31, 2016, were 29.7%29.9% and 29.5%29.2%, respectively, compared to 26.2% and 26.0%29.4% for the three and ninesix months ended MarchDecember 31, 2015, respectively.2015. The effective tax rate is less than the statutory tax rate mainly due to the benefit the Company receives on its “qualified production activities” under The American Jobs Creation Act of 2004 and the benefit derived from the ESOP dividends paid on allocated shares. The increase in the effective tax rate for March 31, 2016, is primarily due to a reduced benefit caused by the reduction in dividends deductible for income tax purposes.

Net income for the three months ended MarchDecember 31, 2016, was $972,468$244,079 or $0.43$0.11 per share both basic and diluted, respectively compared to $506,369$614,427 or $0.22$0.27 per share both basic and diluted, for the three months ended MarchDecember 31, 2015. Net income for the ninesix months ended MarchDecember 31, 2016, was $2,465,425$664,904 or $1.08$0.29 per share both basic and diluted compared to $2,636,672$1,492,957 or $1.16 and $1.15$0.65 per share both basic and diluted respectively, for the ninesix months ended MarchDecember 31, 2015. The increase in net income per share for the three months ended March 31, 2016, was primarily due to higher sales and higher margins resulting from product mix. The decrease in net income per share for the ninethree and six months ended MarchDecember 31, 2016 compared to the same period in 2015 was mainly due to higher selling, generallower gross profit resulting from lower sales and administrative expenseslower gross profit percentage resulting from product mix and a higher effective income tax rate offset by anthe increase in sales. Also, impactingexpenditures related to engineering design investments made by the comparison is a prior year favorable one-time $560,000 reduction to cost of sales referred to above.company.

Liquidity and Capital Resources

The Company's 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 flows resulting from operating activities and when necessary from its existing cash and investments. The Company did not borrow any funds during the last two fiscal years. Management has available a $3,000,000 line of credit to help fund further growth or working capital and letter of credit needs, if necessary, but does not anticipate the need for any borrowed funds in the foreseeable future. Contingent liabilities on outstanding standby letters of credit agreements aggregated to zero at MarchDecember 31, 2016 and 2015.

The Company's working capital as of MarchDecember 31, 2016 and 2015 was approximately $29.5$29.9 million and $28.1$28.9 million, respectively. During the three and nine monthssix-months ended MarchDecember 31, 2016 the Company repurchased 0 and 14,3031,663 shares of its common stock from the Company’s Employee Retirement Plan and Trust (”(“ESOP”) for a purchasedpurchase price of $0 and $355,418, respectively.$44,335. During the three and ninesix months ended MarchDecember 31, 2015 the Company repurchased 0 and 13,55314,303 shares of its common stock respectively, from the ESOP for a purchase price of $0 and $320,504, respectively.$355,418. Under existing authorizations from the Company’sCompany's Board of Directors, as of MarchDecember 31, 2016, management is authorized to purchase an additional $1,030,326$985,991 of Company Stock.

stock.

The table below presents the summary of cash flow information for the periodsfiscal years indicated:

Net cash provided by operating activities fluctuates between periods primarily as a result of differences in sales and net income, provisions for income taxes, the timing of the collection of accounts receivable, purchase of inventory, and payment of accounts payable.payable. The increasedecrease in net cash provided by operating activities primarily relates to a decrease in net income and the decrease in cash collections on accounts receivable offset by the reduction in payments for inventory purchases for the period. Net cash used by investing activities increased in the first six months of fiscal 2017 due to an increase in trade receivable collections and a decline in inventory purchases due to the timingpurchase of production jobs, offset by an increase in cash paid for both federal income tax deposits and payments to vendors. Net cash provided by investing activities decreased in the nine months of fiscal 2016 due to the timing and reinvestment of matured investment securities. The increasedecrease in cash used in financing activities is due primarily to the fact that fewer shares were purchased from the Company’s ESOP during the six months ended December 31, 2016 compared with the same period in 2015. In addition, cash expended for the six months ended December 31, 2015 included the dividend payable at June 30, 2015, paid in the nine months ended March 31, 2016.2015.

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 ninesix months ended MarchDecember 31, 2016 and 2015, the Company expended $140,340$223,211 and $162,822,$82,341, respectively, for plant improvements and new equipment. The Company has budgeted approximately $250,000$750,000 for new equipment and plant improvements in fiscal 2016.2017. Management anticipates that the funds required will be available from current operations.

Management also believes that the Company's 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.

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE

SECURITIES LITIGATION REFORM ACT OF 1995

This report contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The terms "believe," "anticipate," "intend," "goal," "expect," and similar expressions may identify forward-looking statements. These forward-looking statements represent the Company's current expectations or beliefs concerning future events. The matters covered by these statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including the Company's dependence on timely development, introduction and customer acceptance of new products, the impact of competition and price erosion, supply and manufacturing constraints, potential new orders from customers and other risks and uncertainties. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is a smaller reporting company as defined under Securities and Exchange Commission Rule 12b-2. Pursuant to the exemption available to smaller reporting company issuers under Item 305 of Regulation S-K, quantitative and qualitative disclosures about market risk, the Company is not required to provide the information for this item.

Item 4. Controls and Procedures

(a) The Company's management, with the participation of the Company's chief executive officer and 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 Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b) There have been no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II: Other Information and Signatures

None

Purchases of Equity Securities

None

Not applicable

None

S I G N A T U R E S

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 12, 2016February 9, 2017