EASTERN CO 10-Q

ITEM 1 – FINANCIAL STATEMENTS THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended Six Months Ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Net sales $ 68,337,790 $ 69,540,054 $ 140,833,158 $ 138,554,702 Cost of products sold ( 53,189,948 ) ( 53,552,232 ) ( 110,187,615 ) ( 107,991,200 ) Gross margin 15,147,842 15,987,822 30,645,543 30,563,502 Product development expense ( 1,431,110 ) ( 959,364 ) ( 2,832,309 ) ( 2,156,372 ) Selling general and administrative expenses ( 11,289,037 ) ( 10,141,815 ) ( 23,226,674 ) ( 20,007,429 ) Operating profit 2,427,695 4,886,643 4,586,560 8,399,701 Interest expense ( 781,104 ) ( 503,787 ) ( 1,507,110 ) ( 938,121 ) Other income (expense) 252,180 511,810 ( 378,520 ) 1,000,330 Income from continuing operations before income taxes 1,898,771 4,894,666 2,700,930 8,461,910 Income tax expense ( 499,564 ) ( 1,193,877 ) ( 694,409 ) ( 2,075,002 ) Net income from continuing operations 1,399,207 3,700,789 2,006,521 6,386,908 Discontinued Operations (see note B) Gain from operations of discontinued operations - 459,563 - 930,749 Income tax expense - ( 123,737 ) - ( 250,604 ) Gain from discontinued operations - 335,826 - 680,145 Net income $ 1,399,207 $ 4,036,615 $ 2,006,521 $ 7,067,053 Earnings per share from continuing operations: Basic $ 0.22 $ 0.59 $ 0.32 $ 1.02 Diluted $ 0.22 $ 0.59 $ 0.32 $ 1.02 Earnings per share from discontinued operations: Basic $ - $ 0.06 $ - $ 0.11 Diluted $ - $ 0.06 $ - $ 0.11 Total earnings per share: Basic $ 0.22 $ 0.65 $ 0.32 $ 1.13 Diluted $ 0.22 $ 0.65 $ 0.32 $ 1.13 Cash dividends per share: $ 0.11 $ 0.11 $ 0.22 $ 0.22 See accompanying notes. -3- Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended Six Months Ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Net income $ 1,399,207 $ 4,036,615 $ 2,006,521 $ 7,067,053 Other comprehensive (loss) income: Change in foreign currency translation ( 431,042 ) ( 1,173,177 ) ( 94,457 ) ( 970,896 ) Change in fair value of interest rate swap, net of tax (benefit) cost of: 2023 - $(274,957) and $(362,648) respectively; 2022 - $93,659 and $427,294 respectively ( 1,172,067 ) 296,588 ( 1,449,754 ) 1,353,099 Change in pension and postretirement benefit costs, net of taxes of: 2023 - $74,359 and $148,719 respectively; 2022 - $92,235 and $184,470 respectively 252,670 313,409 505,338 626,817 Total other comprehensive (loss) income ( 1,350,439 ) ( 563,180 ) ( 1,038,873 ) 1,009,020 Comprehensive income $ 48,768 $ 3,473,435 $ 967,648 $ 8,076,073 See accompanying notes. -4- Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS July 1, 2023 December 31, 2022 (unaudited) ASSETS Current Assets Cash and cash equivalents $ 13,204,674 $ 10,187,522 Accounts receivable, less allowances: 2023 - $ 601,516 ; 2022 - $ 677,000 41,983,715 42,886,250 Inventories 57,536,157 64,636,591 Current portion of notes receivable 168,160 1,006,421 Prepaid expenses and other assets 6,172,162 6,598,774 Total Current Assets 119,064,868 125,315,558 Property, Plant and Equipment 57,338,192 56,112,889 Accumulated depreciation ( 31,228,575 ) ( 30,000,797 ) Property, Plant and Equipment, Net 26,109,617 26,112,092 Goodwill 70,810,947 70,777,459 Trademarks 5,514,956 5,514,886 Patents and other intangibles net of accumulated amortization 17,058,089 18,819,897 Long term notes receivable, less current portion 876,427 2,276,631 Deferred Income Taxes 488,989 488,989 Right of Use Assets 16,621,564 12,217,521 Total Other Assets 111,370,972 110,095,383 TOTAL ASSETS $ 256,545,457 $ 261,523,033 See accompanying notes. -5- Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS July 1, 2023 December 31, 2022 (unaudited) LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 27,010,990 $ 27,638,317 Accrued compensation 3,758,455 3,327,832 Other accrued expenses 3,683,882 3,944,964 Current portion of operating lease liability 3,583,505 3,059,547 Current portion of finance lease liability 152,253 - Current portion of long-term debt 3,011,829 9,010,793 Total Current Liabilities 41,200,914 46,981,453 Other long-term liabilities 754,763 754,762 Operating lease liability, less current portion 13,038,059 9,195,205 Finance lease liability, less current portion 836,445 - Long-term debt, less current portion 51,379,405 55,136,231 Accrued postretirement benefits 664,710 666,222 Accrued pension cost 22,448,575 22,174,465 Total Liabilities 130,322,871 134,908,338 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 33,596,350 33,586,165 Issued: 9,072,761 shares at 2023 and 9,056,421 shares at 2022 Outstanding: 6,238,316 shares at 2023 and 6,221,976 shares at 2022 Treasury Stock: 2,834,445 shares at 2023 and 2,834,445 shares at 2022 ( 22,544,685 ) ( 22,544,684 ) Retained earnings 139,622,432 138,985,852 Accumulated other comprehensive loss: Foreign currency translation ( 1,235,435 ) ( 1,140,978 ) Unrealized gain on interest rate swap, net of tax - 1,449,754 Unrecognized net pension and postretirement benefit costs, net of tax ( 23,216,076 ) ( 23,721,414 ) Accumulated other comprehensive loss ( 24,451,511 ) ( 23,412,638 ) Total Shareholders’ Equity 126,222,586 126,614,695 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 256,545,457 $ 261,523,033 See accompanying notes. -6- Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended July 1, 2023 July 2, 2022 Operating Activities Net income $ 2,006,521 $ 7,067,053 Less: gain from discontinued operations - 680,145 Income from continuing operations $ 2,006,521 $ 6,386,908 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization 3,621,126 3,632,317 Unrecognized pension and postretirement benefits 656,655 81,210 Loss on sale of equipment and other assets 318,775 276,250 Provision for doubtful accounts ( 16,731 ) 39,437 Stock compensation expense 10,185 414,619 Changes in operating assets and liabilities: Accounts receivable 918,871 ( 3,302,349 ) Inventories 7,711,536 ( 5,237,113 ) Prepaid expenses and other 562,548 ( 1,228,182 ) Other assets 163,077 58,576 Accounts payable ( 953,660 ) ( 100,497 ) Accrued compensation ( 165,590 ) ( 1,711,069 ) Other accrued expenses ( 1,274,858 ) ( 1,812,968 ) Net cash provided by (used in) operating activities 13,558,455 ( 2,502,862 ) Investing Activities Business Acquisition ( 547,638 ) - Payments received from notes receivable 2,309,236 428,832 Proceeds from sale of equipment - 1,371,073 Purchases of property, plant and equipment ( 1,978,784 ) ( 1,140,728 ) Net cash (used in) provided by investing activities ( 217,186 ) 659,177 Financing Activities Principal payments on long-term debt ( 69,248,743 ) ( 3,767,866 ) Principal payments on short-term borrowing (revolver) ( 252,025 ) - Proceeds from short term borrowings (revolver) - 10,000,000 Proceeds from new long-term debt financing 60,000,000 - Financing leases, net 674,558 ( 126,547 ) Purchase common stock for treasury - ( 1,423,378 ) Dividends paid ( 1,369,941 ) ( 1,372,101 ) Net cash (used in) provided by financing activities ( 10,196,151 ) 3,310,108 Discontinued Operations Cash used in operating activities - ( 717,668 ) Cash used in discontinued operations - ( 717,668 ) Effect of exchange rate changes on cash ( 127,966 ) ( 160,653 ) Net change in cash and cash equivalents 3,017,152 588,103 Cash and cash equivalents at beginning of period 10,187,522 6,602,429 Cash and cash equivalents at end of period ¹ $ 13,204,674 $ 7,190,532 Supplemental disclosure of cash flow information: Interest $ 1,364,527 $ 1,012,157 Income taxes 315,120 1,647,375 Non-cash investing and financing activities Right of use asset 4,404,043 1,694,711 Lease liability ( 5,355,510 ) ( 1,595,081 ) ¹ includes cash from assets held for sale of $0.1 million as of July 2, 2022 See accompanying notes -7- Table of Contents THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) July 1, 2023 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 December 31, 2022, filed with the Securities and Exchange Commission on March 14, 2023 (the “2022 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 December 31, 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 2022 or the 2022 fiscal year mean the 52-week period ended on December 31, 2022, and references to 2023 or the 2023 fiscal year mean the 52-week period ending on December 30, 2023. In a 52-week fiscal year, each quarter has 13 weeks. References to the second quarter of 2022, the second fiscal quarter of 2022 or the three months ended July 2, 2022, mean the period from April 3, 2022 to July 2, 2022. References to the second quarter of 2023, the second fiscal quarter of 2023 or the three months ended July 1, 2023, mean the 13-week period from April 2, 2023 to July 1, 2023. References to the first six months of 2022 or the six months ended July 2, 2022 mean the period from January 2, 2022 to July 2, 2022. References to the first six months of 2023 or the six months ended July 1, 2023 mean the period from January 1, 2023 to July 1, 2023. Certain amounts in the 2022 financial statements have been reclassified to conform with the 2023 presentation with no impact or change to previously reported net income or shareholders’ 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, which process was completed with the sale of the Company’s Argo EMS business (“Argo”) on October 19, 2022. Argo supplied printed circuit boards and other electronic assemblies to original equipment manufacturers in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial control, medical, and military products. We believe that the sale of the Diversified Products segment has allowed 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 statement of operations as discontinued operations for the prior period presented. The results of the former Diversified Products segment are not reflected in the unaudited condensed consolidated statements of income for the three and six months ended July 1, 2023 because dispositions of the businesses that comprised that segment were completed prior to the start of the period. -8- Table of Contents Summarized Financial Information of Discontinued Operations The following table represents income from discontinued operations, net of tax: Three Months Ended Six Months Ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 (unaudited) (unaudited) (unaudited) (unaudited) Net sales $ - $ 2,473,201 $ - $ 4,840,427 Cost of products sold - ( 1,683,295 ) - ( 3,287,057 ) Gross margin - 789,906 - 1,553,370 Selling, general and administrative expenses - ( 289,497 ) - ( 546,557 ) Operating income (loss) - 500,409 - 1,006,813 Interest expense - ( 40,846 ) - ( 76,064 ) Gain (Loss) from discontinued operations before income taxes - 459,563 - 930,749 Income tax (expense) benefit - ( 123,737 ) - ( 250,604 ) Income (loss) from discontinued operations, net of tax $ - $ 335,826 $ - $ 680,145 Note C – Earnings Per Share The denominators used to calculate earnings per share are as follows: Three Months Ended Six Months Ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Basic: Weighted average shares outstanding 6,232,717 6,222,818 6,227,873 6,235,231 Diluted: Weighted average shares outstanding 6,232,717 6,222,818 6,227,873 6,235,231 Dilutive stock appreciation rights 32,462 14,102 32,462 14,102 Denominator for diluted earnings per share 6,265,179 6,236,920 6,260,335 6,249,333 Note D – Inventories Inventories from continuing operations consist of the following components: July 1, 2023 December 31, 2022 Raw material and component parts $ 23,076,826 $ 25,924,696 Work in process 8,298,926 9,323,082 Finished goods 26,160,405 29,388,813 Total inventories $ 57,536,157 $ 64,636,591 -9- Table of Contents Note E - Goodwill The aggregate carrying amount of goodwill from continuing operations is approximately $ 70.8 million as of July 1, 2023 and includes the write-off of approximately $ 0.5 million of goodwill associated with the closure of Associated Toolmakers Ltd. In the second quarter of 2023. Additionally, the Company recorded approximately $ 0.5 million of goodwill associated with the acquisition of Sureflex, Inc. in the second quarter of 2023. See Note O – Business Acquisitions for further details. No impairment was recognized in the second quarter of 2023. 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. Currently, the Company has twenty-one operating leases with a lease liability of $ 16.6 million and four finance leases with a lease liability of $ 1.0 million as of July 1, 2023. 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. Approximate total minimum lease payments for each of the next five fiscal years is estimated to be as follows: remainder of 2023 - $ 2.0 million; 2024 - $ 3.6 million; 2025 - $ 2.3 million; 2026 - $ 1.8 million; 2027 - $ 1.5 million; and $ 6.4 million thereafter. The weighted average remaining lease term is 7.4 years. The implicit interest rate used was 5.0 % to 8.25 %. Note G - Debt On June 16, 2023, the Company entered into a credit agreement with TD Bank, N.A., Wells Fargo Bank, Bank of America, and M&T Bank as lenders (the “Credit Agreement”), that included a $ 60 million term portion and a $ 30 million revolving commitment portion. The proceeds of the term loan were used to repay the Company’s remaining outstanding term loan and to terminate its existing credit facility with Santander Bank, N.A. (approximately $59 million). The term loan portion of the credit facility requires quarterly principal payments of (i) $ 750,000 beginning on September 30, 2023 through June 30, 2025, (ii) $ 1,125,000 beginning on September 30, 2025 through June 30, 2027, and (iii) $ 1,500,000 beginning on September 30, 2027 through March 31, 2028, with the balance of the term loan payable on the maturity date of June 16, 2028. Amounts outstanding under the revolving portion of the credit facility are generally due and payable on the expiration date of the Credit Agreement (June 16, 2028). The Company can elect to prepay some or all the outstanding balance from time to time without penalty. A commitment fee is payable on the unused portion of the revolving credit facility based on the Company’s consolidated ratio of net debt to adjusted EBITDA from time to time. Currently, the commitment fee is 0.30 %. As of July 1, 2023, the Company has not borrowed any funds on the revolving commitment portion of the credit facility. -10- Table of Contents The term loan bears interest at a variable rate based on the SOFR rate plus an applicable margin of 1.875 % to 2.625 %, 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 0.875 % to 1.625 % or the SOFR rate plus an applicable margin of 1.875% to 2.625%, 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 as of June 16, 2023, with TD 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 3.5 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 its covenants under the Credit Agreement on July 1, 2023, and through the date of filing this Form 10-Q. Note H - Stock Options and Awards On February 19, 2020, the Board of Directors of the Company (the “Board”) adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”), which replaced The Eastern Company 2010 Executive Stock Incentive Plan after its expiration in February 2020. 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 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 six months of fiscal 2023 and 2022, the Company granted 64,500 and 43,300 stock awards, respectively, that were subject to the meeting of performance measurements or time based. For the first six months of fiscal years 2023 and 2022, the Company used fair market value to determine the associated expense with stock awards. 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 six months of fiscal 2023 and 2022 the Company did not issue any SARs. Stock-based compensation (income) expense, including forfeitures, in connection with SARs and stock awards previously granted to employees was approximately $ 21,000 and $ 136,000 in the second quarter of 2023 and the second quarter of 2022, respectively, and was approximately $( 163,000 ) and $ 250,000 in the first six months of fiscal years 2023 and 2022, respectively. As of July 1, 2023, there were 898,105 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: Six Months Ended Year Ended July 1, 2023 December 31, 2022 Units Weighted Average Exercise Price Units Weighted Average Exercise Price Outstanding at beginning of period 146,166 $ 23.22 180,833 $ 22.88 Expired ( 50,833 ) 24.24 - - Exercised ( 33,333 ) 21.10 ( 16,667 ) 21.20 Forfeited ( 49,000 ) 22.80 ( 18,000 ) 21.74 Outstanding at end of period 13,000 24.19 146,166 23.22 -11- Table of Contents SARs Outstanding and Exercisable Range of Exercise Prices Outstanding as of July 1, 2023 Weighted Average Remaining Contractual Life Weighted Average Exercise Price Exercisable as of July 1, 2023 Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 19.44 - $ 26.30 13,000 1.0 $ 24.19 13,000 1.0 $ 24.19 The following tables set forth the outstanding stock awards for the period specified: Six Months Ended Year Ended July 1, 2023 December 31, 2022 Shares Shares Outstanding at beginning of period 64,500 27,300 Issued 64,500 43,300 Exercised ( 10,600 ) - Forfeited ( 33,100 ) ( 6,100 ) Outstanding at end of period 85,300 64,500 As of July 1, 2023, outstanding SARs and stock awards had an intrinsic value of $ 1,543,077 . 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 shares repurchased during the second quarter of 2023. 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 April 1, 2023 139,716 $ 24.61 139,716 60,284 April 2, 2023 – July 1, 2023 - - - - Balance as of July 1, 2023 139,716 $ 24.61 139,716 60,284 -12- Table of Contents 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. Customer volume rebates, product returns, discount and allowance are variable considerations 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 2018 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2016. 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 six months ended July 1, 2023. 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 three months and first six months 2023 and 2022 are as follows: Pension Benefits Three Months Ended Six Months Ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Service cost $ 216,153 $ 269,743 $ 432,306 $ 539,487 Interest cost 990,053 608,191 1,980,107 1,216,380 Expected return on plan assets ( 1,049,014 ) ( 1,460,661 ) ( 2,098,030 ) ( 2,921,322 ) Amortization of prior service cost - 16,563 - 33,126 Amortization of the net loss 342,865 390,075 685,730 780,150 Net periodic benefit cost (benefit) $ 500,057 $ ( 176,089 ) $ 1,000,113 $ ( 352,179 ) -13- Table of Contents Other Postretirement Benefits Three Months Ended Six Months Ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Service cost $ 6,486 $ 13,323 $ 12,972 $ 26,646 Interest cost 14,533 10,988 29,066 21,976 Expected return on plan assets ( 4,849 ) ( 4,400 ) ( 9,698 ) ( 8,800 ) Amortization of prior service cost 1,060 1,060 2,120 2,120 Amortization of the net loss ( 16,895 ) ( 2,054 ) ( 33,790 ) ( 4,108 ) Net periodic benefit cost $ 335 $ 18,917 $ 670 $ 37,834 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 2023, the Company expects to contribute approximately $ 800,000 into its pension plans and approximately $ 50,000 into its postretirement plan. As of July 1, 2023, the Company has contributed $ 164,000 to its pension plans, has contributed $ 28,000 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 Six Months Ended July 1, 2023 July 2, 2022 July 1, 2023 July 2, 2022 Regular matching contribution $ 253,665 $ 161,714 $ 506,426 $ 372,654 Transitional credit contribution 26,344 28,179 60,663 79,742 Non-discretionary contribution 89,163 16,769 521,112 360,146 Total contributions for the period $ 369,172 $ 206,662 $ 1,088,201 $ 812,542 The non-discretionary contribution of $ 328,953 made in the six months ended July 1, 2023, was accrued for, and expensed in the prior fiscal year. Effective January 1, 2023, the non-discretionary contributions are being contributed on a weekly basis. Note M - Recent Accounting Pronouncements 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 July 1, 2023, there were two significant concentrations of credit risk with two customers, who had receivables representing 12 % and 13 % of our net accounts receivable. One single customer represented 14 % of the Company’s net accounts receivable as of December 31, 2022. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable. -14- Table of Contents 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 SOFR rate plus an applicable margin of 1.875 % to 2.625 %, depending on the Company’s senior net leverage ratio. Currency Exchange Rate Risk The Company’s currency exposure is concentrated in the Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB, Hong Kong dollar and United Kingdom pound sterling. Because of the Company’s limited exposure to any single foreign market, any exchange 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. Note O – Business Acquisition On June 29, 2023 the Company acquired certain assets, including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights, rights existing under all sales and purchase agreements, and assumed certain liabilities of Sureflex, Inc. (“Sureflex”). These assets are held in our Velvac, Inc. (“Velvac”) subsidiary. We expect that Sureflex, which manufactures tractor-trailer electrical connection cable assemblies, will enable the Company to manufacture electrical products and become more competitive with respect to cost and quality. The acquisition of Sureflex was accounted for under Business Combinations (Topic 805). The acquired business is included in the consolidated operating results of the Company from the effective date of the acquisition. The excess of the cost of Sureflex over the fair market value of the net assets acquired of $ 0.5 million has been recorded as goodwill. Neither the actual results nor the pro forma effects of the Sureflex acquisition are material to the Company’s financial statements. -15- Table of Contents