EASTERN CO 10-Q

ITEM 1 – FINANCIAL STATEMENTS THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended April 2, 2022 April 3, 2021 Net sales $ 69,014,648 $ 61,773,433 Cost of products sold ( 54,438,968 ) ( 46,264,163 ) Gross margin 14,575,680 15,509,270 Product development expense ( 1,197,008 ) ( 1,017,563 ) Selling and administrative expenses ( 9,865,614 ) ( 8,944,393 ) Operating profit 3,513,058 5,547,314 Interest expense ( 434,335 ) ( 527,144 ) Other income 488,520 2,426,740 Income from continuing operations before income taxes 3,567,243 7,446,910 Income tax expense ( 881,125 ) ( 1,767,552 ) Net income from continuing operations 2,686,118 5,679,358 Discontinued Operations (see note B ) Income from operations of discontinued operations 471,187 211,181 Income tax expense ( 126,867 ) ( 49,712 ) Income from discontinued operations 344,320 161,469 Net income $ 3,030,438 $ 5,840,827 Earnings per share from continuing operations: Basic $ 0.43 $ 0.90 Diluted $ 0.43 $ 0.90 Earnings per share from discontinued operations: Basic $ 0.06 $ 0.03 Diluted $ 0.05 $ 0.03 Total earnings per share: Basic $ 0.49 $ 0.93 Diluted $ 0.48 $ 0.93 Cash dividends per share: $ 0.11 $ 0.11 See accompanying notes. 3 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended April 2, 2022 April 3, 2021 Net income $ 3,030,438 $ 5,840,827 Other comprehensive income (loss): Change in foreign currency translation 202,281 ( 79,054 ) Change in fair value of interest rate swap, net of tax cost of: 2022 - $ 333,635 ; 2021 - $ 130,501 1,056,511 413,245 Change in pension and postretirement benefit costs, net of taxes of: 2022 - $ 92,235 ; 2021 - $ 92,194 313,408 295,744 Total other comprehensive income 1,572,200 629,935 Comprehensive income $ 4,602,638 $ 6,470,762 See accompanying notes. 4 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS April 2, 2022 January 1, 2022 (unaudited) ASSETS Current Assets Cash and cash equivalents $ 5,073,524 $ 6,168,304 Accounts receivable, less allowances: 2022 - $ 532,000 ; 2021 - $ 515,000 46,965,504 43,151,500 Inventories 67,777,718 62,862,342 Current portion of notes receivable 1,027,125 1,027,125 Prepaid expenses and other assets 7,831,437 6,943,691 Current assets held for sale 4,671,915 3,521,899 Total Current Assets 133,347,223 123,674,861 Property, Plant and Equipment 55,234,222 56,935,080 Accumulated depreciation ( 28,641,459 ) ( 28,631,329 ) Property, Plant and Equipment, Net 26,592,763 28,303,751 Goodwill 72,225,885 72,211,873 Trademarks 5,484,923 5,409,720 Patents and other intangibles net of accumulated amortization 21,865,328 22,863,497 Long term notes receivable, less current portion 2,551,478 2,726,698 Right of Use Assets 11,430,632 11,138,535 Total Other Assets 113,558,246 114,350,323 TOTAL ASSETS $ 273,498,232 $ 266,328,935 See accompanying notes. 5 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS April 2, 2022 January 1, 2022 (unaudited) LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 33,654,638 $ 29,633,974 Accrued compensation 2,584,565 4,375,867 Other accrued expenses 2,481,396 4,808,000 Current portion of lease liability 2,715,550 2,664,895 Current portion of long-term debt 7,500,000 7,500,000 Current liabilities held for sale 1,226,417 580,990 Total Current Liabilities 50,162,566 49,563,726 Deferred income taxes 1,151,759 1,151,759 Other long-term liabilities 668,354 668,354 Lease liability 8,815,587 8,639,339 Long-term debt, less current portion 66,960,231 63,813,522 Accrued other postretirement benefits 1,299,767 1,284,589 Accrued pension cost 26,580,732 26,605,382 Total Liabilities 155,638,996 151,726,671 Shareholders’ Equity Voting Preferred Stock, no par value: Authorized and unissued: 1,000,000 shares Nonvoting Preferred Stock, no par value: Authorized and unissued: 1,000,000 shares Common Stock, no par value, Authorized: 50,000,000 shares 32,841,476 32,620,008 Issued: 9,034,387 shares in 2022 and 9,029,852 shares in 2021 Outstanding: 6,239,824 shares in 2022 and 6,265,527 shares in 2021 Treasury Stock: 2,794,563 shares in 2022 and 2,764,325 shares in 2021 ( 21,674,502 ) ( 20,907,613 ) Retained earnings 131,652,818 129,422,625 Accumulated other comprehensive income (loss): Foreign currency translation 1,020,727 818,446 Unrealized gain (loss) on interest rate swap, net of tax 700,523 ( 355,988 ) Unrecognized net pension and postretirement benefit costs, net of tax ( 26,681,806 ) ( 26,995,214 ) Accumulated other comprehensive loss ( 24,960,556 ) ( 26,532,756 ) Total Shareholders’ Equity 117,859,236 114,602,264 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 273,498,232 $ 266,328,935 See accompanying notes. 6 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended April 2, 2022 April 3, 2021 Operating Activities Net income $ 3,030,438 $ 5,840,827 Less: income from discontinued operations 344,320 161,469 Income from continuing operations $ 2,686,118 $ 5,679,358 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,830,427 1,809,609 Unrecognized pension and postretirement benefits 247,133 ( 674,262 ) Loss (gain) on sale of equipment and other assets 268,770 ( 1,601,812 ) Provision for doubtful accounts 19,740 73,097 Stock compensation expense 221,468 278,258 Changes in operating assets and liabilities: Accounts receivable ( 3,951,314 ) ( 3,942,502 ) Inventories ( 4,902,631 ) ( 513,863 ) Prepaid expenses and other ( 1,075,545 ) ( 798,273 ) Other assets ( 89,366 ) ( 156,726 ) Accounts payable 3,526,499 1,075,130 Accrued compensation ( 1,858,898 ) ( 1,116,703 ) Other accrued expenses ( 478,878 ) 1,140,223 Net cash (used in) provided by operating activities ( 3,556,477 ) 1,251,534 Investing Activities Payments received from notes receivable 175,220 68,325 Proceeds from sale of equipment 1,371,073 1,993,744 Purchases of property, plant and equipment ( 572,047 ) ( 671,964 ) Net cash provided by investing activities 974,246 1,390,105 Financing Activities Proceeds from short term borrowings (revolver) 5,000,000 — Principal payments on long-term debt ( 1,852,107 ) ( 1,162,045 ) Financing leases, net ( 92,111 ) ( 9,875 ) Purchase common stock for treasury ( 766,889 ) — Dividends paid ( 687,180 ) ( 684,702 ) Net cash provided by (used in) financing activities 1,601,713 ( 1,856,622 ) Discontinued Operations Cash (used in) provided by operating activities ( 396,936 ) 848,523 Cash used in investing activities - ( 247,625 ) Cash (used in) provided by discontinued operations ( 396,936 ) 600,898 Effect of exchange rate changes on cash ( 22,903 ) ( 22,881 ) Net change in cash and cash equivalents ( 1,400,357 ) 1,363,034 Cash and cash equivalents at beginning of period 6,602,429 16,101,635 Cash and cash equivalents at end of period ¹ $ 5,202,072 $ 17,464,669 Supplemental disclosure of cash flow information: Interest $ 463,080 $ 685,520 Income taxes 110,917 21,100 Non-cash investing and financing activities Right of use asset 292,097 114,471 Lease liability ( 226,903 ) ( 104,595 ) ¹ includes cash from assets held for sale of $0.1 million as of April 2, 2022 and $1.5 million as of April 3, 2021 7 Table of Contents THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) April 2, 2022 Note A – Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2022, filed with the Securities and Exchange Commission on March 17, 2022 (the “2021 Form 10-K”), for additional information. The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. All intercompany accounts and transactions are eliminated. The condensed consolidated balance sheet as of January 1, 2022 has been derived from the audited consolidated balance sheet at that date. The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2021 or the 2021 fiscal year mean the 52-week period ended on January 1, 2022, and references to 2022 or the 2022 fiscal year mean the 52-week period ending on December 31, 2022. In a 52-week fiscal year, each quarter has 13 weeks. References to the first quarter of 2021, the first fiscal quarter of 2021 or the three months ended April 3, 2021 mean the period from January 3, 2021 to April 3, 2021. References to the first quarter of 2022, the first fiscal quarter of 2022 or the three months ended April 2, 2022, mean the 13-week period from January 2, 2022 to April 2, 2022. Certain amounts in the 2021 financial statements have been reclassified to conform with the 2022 presentation with no impact or change to previously reported net income or shareholder’s equity. Note B – Discontinued Operations In the second quarter of 2021, the Company determined that the companies included in our former Diversified Products segment no longer fit with our long-term strategy and the Company initiated the process of selling the companies within the Diversified Products segment. Selling the companies within this segment will allow management to focus on our core capabilities and offerings. The former Diversified Products segment met the criteria to be held for sale and furthermore, we determined that the assets held for sale qualify for discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented. On November 3, 2021, the Company sold its Greenwald Industries, Inc. division (“Greenwald”). Greenwald, located in Chester, CT, is an OEM manufacturer offering a range of payment solutions from coin-vending products to smart card systems and payment applications. On November 22, 2021, the Company sold its Frazer & Jones Company division (“Frazer & Jones”). Frazer & Jones is a ductile and malleable iron foundry located in Syracuse, NY. Eastern has exited the mining business to focus on our three core businesses. 8 Table of Contents Summarized Financial Information of Discontinued Operations The following table represents income from discontinued operations, net of tax: Three Months Ended April 2, 2022 April 3, 2021 (unaudited) (unaudited) Net sales $ 2,367,226 $ 11,324,442 Cost of products sold ( 1,603,762 ) ( 9,904,720 ) Gross margin 763,464 1,419,722 Selling and administrative expenses ( 257,060 ) ( 1,032,827 ) Operating income 506,404 386,895 Interest expense ( 35,217 ) ( 175,714 ) Income from discontinued operations before income taxes 471,187 211,181 Income tax expense ( 126,867 ) ( 49,712 ) Income from discontinued operations, net of tax $ 344,320 $ 161,469 The following table represents the assets and liabilities from discontinued operations: April 2, 2022 January 1, 2022 (unaudited) Cash $ 128,548 $ 434,126 Accounts receivable 1,112,294 1,153,274 Inventory 2,539,551 1,258,032 Prepaid expenses 43,293 59,850 Property, plant and equipment, net 571,260 591,920 Right of use assets 276,969 24,697 Total assets of discontinued operations¹ $ 4,671,915 $ 3,521,899 Accounts payable $ 566,653 $ 167,794 Accrued compensation and other accrued expenses 382,795 388,499 Current portion of lease liability 92,323 24,697 Other long-term liabilities 184,646 - Total liabilities of discontinued operations¹ $ 1,226,417 $ 580,990 ¹ The total assets and liabilities of discontinued operations are classified as current in the April 2, 2022 and January 1, 2022 balance sheets, as we expect to sell the discontinued operations and collect proceeds within one year. 9 Table of Contents Note C – Earnings Per Share The denominators used to calculate earnings per share are as follows: Three Months Ended April 2, 2022 April 3, 2021 Basic: Weighted average shares outstanding 6,247,649 6,248,339 Diluted: Weighted average shares outstanding 6,247,649 6,248,339 Dilutive stock appreciation rights 12,055 30,998 Denominator for diluted earnings per share 6,259,704 6,279,337 Note D – Inventories Inventories from continuing operations consist of the following components: April 2, 2022 January 1, 2022 Raw material and component parts $ 27,077,178 $ 25,113,487 Work in process 10,389,475 9,636,009 Finished goods 30,311,065 28,112,846 Total inventories $ 67,777,718 $ 62,862,342 Note E - Goodwill The aggregate carrying amount of goodwill from continuing operations is approximately $ 72.2 million as of April 2, 2022. No impairment was recognized in the first quarter of 2022. The Company tests its reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events and circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. The Company tests reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources. Note F – Leases The Company presents right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company accounts for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate. The Company has operating leases for buildings, warehouses, and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability. 10 Table of Contents Currently, the Company has 25 operating leases and three finance leases with a lease liability of $ 11.8 million as of April 2, 2022. The finance lease arrangements are immaterial. The terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. There are no related party lease transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company. Total lease expense for each of the next five fiscal years is estimated to be as follows: remainder of 2022 - $ 2.2 million; 2023 - $ 2.6 million; 2024 - $ 2.1 million; 2025 - $ 1.2 million; 2026 - $ 0.8 million; and $ 2.9 million thereafter. The weighted average remaining lease term is 6.0 years. The implicit interest rate used was 5.0 %. Note G - Debt On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association and TD Bank, N.A. as lenders (the “Credit Agreement”), that included a $ 100 million term portion and a $ 20 million revolving commitment portion. Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with People’s United Bank, N.A. (approximately $ 19 million) and to acquire certain subsidiaries of Big 3 Holdings, LLC (collectively “Big 3 Precision”). The term portion of the loan required quarterly principal payments of $ 1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increased to $ 1,875,000 per quarter beginning September 30, 2021 and continuing through June 30, 2023. The repayment amount then increases to $ 2,500,000 per quarter beginning September 30, 2023 and continuing through June 30, 2024. The term loan is a 5 -year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25 % based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. As of April 2, 2022, the Company has borrowed $ 5,000,000 on the revolving commitment portion of the facility at an interest rate of 1.71 %. The term loan bears interest at a variable rate based on the LIBOR rate plus an applicable margin of 1.25 % to 2.25 %, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.25 % to 1.25 % or the LIBOR rate plus an applicable margin of 1.25% to 2.25%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019, with Santander Bank, N.A., as administrative agent. The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. The Company was in compliance with all of its covenants under the Credit Agreement on April 2, 2022, and through the date of filing this Form 10-Q. On August 30, 2019, the Company entered an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $ 50,000,000 , which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44 % on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44 %. On April 2, 2022, the interest rate for approximately half ($ 26.8 million) of the term portion was 1.71%, using a one-month LIBOR rate, and 2.94 % on the remaining balance ($ 42.8 million) of the term loan based on a one-month LIBOR rate. The interest rates under the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the phasing out of LIBOR. Information regarding the phasing out of LIBOR is provided below. On July 27, 2017, the Financial Conduct Authority (the “FCA”) (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. In December 2020, the ICE Benchmark Administration (the “IBA”) announced a market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023, which the FCA supports. On March 5, 2021, the IBA released its feedback statement reporting the results of the market consultation. Pursuant to its feedback statement, the IBA ceased publication of all settings of non-US dollar LIBOR and only the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings scheduled to be discontinued after June 30, 2023. The Alternative Reference Rates Committee (ARRC), a financial industry group convened by the Federal Reserve Board, has recommended the use of SOFR to replace LIBOR. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate which has implications for how interest and other payments are based. Changes in the method of calculating the replacement of LIBOR with an alternative rate or benchmark are still in flux, and once an alternate rate is adopted, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect the Company’s results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks at this time. We are working with our senior lender and may need to renegotiate our credit facilities as LIBOR phases out in June 2023. 11 Table of Contents Note H - Stock Options and Awards The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers, other key employees, and non-employee directors expired in February 2020. On February 19, 2020, the Board of Directors of the Company (the “Board”) adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”). On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The 2020 Plan replaced the 2010 Plan. The Company has no other existing plan pursuant to which equity awards may be granted. Incentive stock options granted under the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Board. Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Board. During the first three months of fiscal 2022, the Company granted 36,200 stock awards that were subject to the meeting of performance measurements. The Company granted 27,300 stock awards in the first three months of fiscal 2021. For the first three months of fiscal 2022, the Company used an assumption which included an expected term of 4.0 years, volatility deviation of 47.15 % and a risk-free rate 2.04 % for the purposes of measuring compensation under the Black Scholes Method. For the first three months of fiscal 2021, the Company used several assumptions which included an expected term of 4.0 years, volatility deviation between 47.25 % to 47.54 % and a risk-free rate between 0.18 % to 0.20 % for the purposes of measuring compensation under the Black Scholes Method. The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During the first three months of fiscal 2022 and 2021 the Company did not issue any SARs. Stock-based compensation expense in connection with SARs previously granted to employees was approximately $ 113,000 and $ 113,000 in the first quarter of 2022 and the first quarter of 2021. As of April 2, 2022, there were 763,968 shares of Company common stock reserved and available for future grant under the 2020 Plan. The following tables set forth the outstanding SARs for the period specified: Three Months Ended Year Ended April 2, 2022 January 1, 2022 Units Weighted Average Exercise Price Units Weighted Average Exercise Price Outstanding at beginning of period 180,833 $ 22.88 244,001 $ 21.87 Issued - - - - Exercised - - ( 55,668 ) 19.31 Forfeited - - ( 7,500 ) 21.20 Outstanding at end of period 180,833 22.88 180,833 22.88 12 Table of Contents SARs Outstanding and Exercisable Range of Exercise Prices Outstanding as of April 2, 2022 Weighted Average Remaining Contractual Life Weighted Average Exercise Price Exercisable as of April 2, 2022 Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 20.20 - $ 26.30 180,333 1.9 $ 22.88 118,335 1.4 $ 23.30 The following tables set forth the outstanding stock awards for the period specified: Three Months Ended Year Ended April 2, 2022 January 1, 2022 Shares Shares Outstanding at beginning of period 27,300 25,000 Issued 36,200 27,300 Exercised - - Forfeited - ( 25,000 ) Outstanding at end of period 63,500 27,300 As of April 2, 2022, outstanding SARs and stock awards had an intrinsic value of $ 1,722,000 . Note I – Share Repurchase Program On May 2, 2018, the Company announced that the Board of Directors of the Company had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Below is a summary of the Company’s share repurchases during the first quarter of 2022. Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that may yet be Purchased Under the Plans or Programs Balance as of January 1, 2022 69,596 $ 25.89 69,596 130,404 January 2, 2022 - April 2, 2022 30,238 25.36 30,238 ( 30,238 ) Balance as of April 2, 2022 99,834 $ 25.73 99,834 100,166 Note J – Revenue Recognition The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled. The Company records revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which are delivering goods or services, determines the transaction price, allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped. 13 Table of Contents Customer volume rebates, product returns, discount and allowance are variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material. The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts. Note K - Income Taxes The Company files income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2017 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2015. The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for several reasons, including the closure of federal, state, and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the value of unrecognized tax benefits during the three months ended April 2, 2022. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months. Note L - Retirement Benefit Plans The Company has four non-contributory defined benefit pension plans covering most U.S. employees. Three of these pension plans are frozen and participants in these three plans have not accrued benefits since the date on which these plans were frozen. A fourth pension plan does not permit new participants but existing participants in this fourth pension plan continue to accrue benefits. Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law. The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements. Significant disclosures relating to these benefit plans for the first quarter of fiscal years 2022 and 2021 are as follows: Pension Benefits Three Months Ended April 2, 2022 April 3, 2021 Service cost $ 269,744 $ 271,833 Interest cost 608,189 504,255 Expected return on plan assets ( 1,460,661 ) ( 1,448,674 ) Amortization of prior service cost 16,563 24,845 Amortization of the net loss 390,075 432,539 Net periodic benefit $ ( 176,090 ) $ ( 215,202 ) Other Postretirement Benefits Three Months Ended April 2, 2022 April 3, 2021 Service cost 13,323 13,626 Interest cost 10,988 9,842 Expected return on plan assets ( 4,400 ) ( 6,420 ) Gain on significant event - - Amortization of prior service cost 1,060 - Amortization of the net loss ( 2,054 ) ( 3,094 ) Net periodic benefit cost $ 18,917 $ 13,954 The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In fiscal year 2022, the Company expects to contribute $ 300,000 into its pension plans and $ 50,000 into its postretirement plan. As of April 2, 2022, the Company has not made any contributions into its pension plans, has contributed $ 3,000 to its postretirement plan, and expects to make the remaining contributions as required during the remainder of the fiscal year. The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion. The Company made contributions to the plan as follows: Three Months Ended April 2, 2022 April 3, 2021 Regular matching contribution $ 210,939 $ 191,808 Transitional credit contribution 51,564 66,929 Non-discretionary contribution 343,377 534,675 Total contributions for the period $ 605,880 $ 793,412 The non-discretionary contribution of $ 323,082 made in the three months ended April 2, 2022, was accrued for and expensed in the prior fiscal year. 14 Table of Contents Note M - Recent Accounting Pronouncements Adopted In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Tax. The changes implemented in ASU 2019-12 include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to employee stock ownership plans. The Company adopted ASU 2019-12 as of January 3, 2021. The adoption of this guidance did not have a material impact on the consolidated financial statements of the Company. The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company. Note N - Concentration of Risk Credit Risk Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As of April 2, 2022, there was one significant concentration of credit risk with a customer, who has receivables representing 10 % of our total accounts receivable. One single customer represented more than 11 % of the Company’s net accounts receivable as of January 1, 2022. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable. The Company has deposits that exceed amounts up to $ 250,000 that are insured by the Federal Deposit Insurance Corporation (FDIC), but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution. Interest Rate Risk The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based on the LIBOR rate plus a margin spread of 1.25 % to 2.25 %. The Company has an interest rate swap with a notional amount of $ 42.8 million on April 2, 2022, to convert a portion of the borrowing under the Credit Agreement from variable to fixed rates. The valuation of this swap is determined using the one-month LIBOR rate index and mitigates the Company's exposure to interest rate risk. Additionally, interest rates on the Company's debt are susceptible to changes to the method that LIBOR rates are determined and to the potential phasing out of LIBOR after 2021. The potential phasing out of LIBOR is discussed in greater detail in Note G — Debt hereof and under the heading “The phaseout of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest rates” in Part II, Item 8 of the 2021 Form 10-K. Currency Exchange Rate Risk The Company’s currency exposure is concentrated in the British pound, Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB and the Hong Kong dollar. Because of the Company’s limited exposure to any single foreign market, any currency gains or losses have not been material and are not expected to be material in the future. As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments. 15 Table of Contents