EASTERN CO 10-Q

ITEM 1 – FINANCIAL STATEMENTS THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended March 30, 2024 April 1, 2023 Net sales $ 67,929,087 $ 72,495,367 Cost of products sold ( 51,732,988 ) ( 56,997,668 ) Gross margin 16,196,099 15,497,699 Product development expense ( 1,359,797 ) ( 1,401,199 ) Selling and administrative expenses ( 11,498,958 ) ( 11,937,637 ) Operating profit 3,337,344 2,158,863 Interest expense ( 845,035 ) ( 726,006 ) Other income (expense) 10,354 ( 630,699 ) Income before income taxes 2,502,663 802,158 Income tax expense ( 555,091 ) ( 194,845 ) Net income $ 1,947,572 $ 607,313 Earnings per share: Basic $ 0.31 $ 0.10 Diluted $ 0.31 $ 0.10 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 March 30, 2024 April 1, 2023 Net income $ 1,947,572 $ 607,313 Other comprehensive income: Change in foreign currency translation ( 157,000 ) 336,585 Change in fair value of foreign currency swap, net of tax cost (benefit) of: 2024 - $96,724 ; 2023 - $(87,691) 403,016 ( 277,687 ) Change in pension and postretirement benefit costs, net of taxes of: 2024 - $71,355 ; 2023 - $74,360 243,336 252,668 Total other comprehensive income 489,352 311,566 Comprehensive income $ 2,436,924 $ 918,879 See accompanying notes. 4 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 30, 2024 December 30, 2023 (unaudited) ASSETS Current Assets Cash and cash equivalents $ 7,356,444 $ 8,299,453 Marketable Securities 2,127,735 986,477 Accounts receivable, less allowances: 2024 - $ 541,103 ; 2023 - $ 564,816 42,881,758 37,057,488 Inventories 55,847,071 59,272,207 Current portion of notes receivable 618,231 573,269 Prepaid expenses and other assets 6,199,897 6,047,814 Total Current Assets 115,031,136 112,236,708 Property, Plant and Equipment 61,842,148 60,270,096 Accumulated depreciation ( 32,710,475 ) ( 31,980,335 ) Property, Plant and Equipment, Net 29,131,673 28,289,761 Goodwill 70,722,962 70,776,893 Trademarks 5,514,884 5,514,960 Patents and other intangibles net of accumulated amortization 14,360,192 15,325,927 Long term notes receivable, less current portion 329,970 374,932 Deferred Income Taxes 2,283,571 2,283,571 Right of Use Assets 16,521,127 17,236,449 Total Other Assets 109,732,706 111,512,732 TOTAL ASSETS $ 253,895,515 $ 252,039,201 See accompanying notes. 5 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS March 30, 2024 December 30, 2023 (unaudited) LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 26,971,547 $ 25,319,473 Accrued compensation 4,636,088 5,379,381 Other accrued expenses 4,874,024 4,556,623 Current portion of operating lease liability 4,195,865 4,424,369 Current portion of finance lease liability 182,290 182,010 Current portion of long-term debt 2,871,870 2,871,870 Total Current Liabilities 43,731,684 42,733,726 Other long-term liabilities 640,724 640,724 Operating lease liability, less current portion 12,325,261 12,812,079 Finance lease liability, less current portion 696,584 728,100 Long-term debt, less current portion 40,271,398 41,063,865 Accrued postretirement benefits 565,727 554,758 Accrued pension cost 21,150,758 21,025,365 Total Liabilities 119,382,136 119,558,617 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 34,464,595 33,950,859 Issued: 9,118,031 shares as of 2024 and 9,091,815 shares as of 2023 Outstanding: 6,233,510 shares as of 2024 and 6,217,370 shares as of 2023 Treasury Stock: 2,884,521 shares as of 2024 and 2,874,445 shares as of 2023 ( 23,515,267 ) ( 23,280,467 ) Retained earnings 146,069,675 144,805,168 Accumulated other comprehensive loss: Foreign currency translation ( 1,023,599 ) ( 866,599 ) Unrealized gain on foreign currency swap, net of tax 403,016 - Unrecognized net pension and postretirement benefit costs, net of tax ( 21,885,041 ) ( 22,128,377 ) Accumulated other comprehensive loss ( 22,505,624 ) ( 22,994,976 ) Total Shareholders’ Equity 134,513,379 132,480,584 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 253,895,515 $ 252,039,201 See accompanying notes. 6 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended March 30, 2024 April 1, 2023 Operating Activities Net income $ 1,947,572 $ 607,313 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,876,124 1,814,749 Reduction in carrying amount of ROU assets 715,322 631,368 Unrecognized pension and postretirement benefits 445,218 880,421 Loss on sale of equipment and other assets 37,330 - Provision for doubtful accounts ( 23,000 ) 3,269 Stock compensation expense (benefit) 513,737 ( 49,246 ) Changes in operating assets and liabilities: Accounts receivable ( 5,898,945 ) ( 1,585,976 ) Inventories 3,415,931 7,212,179 Prepaid expenses and other ( 109,507 ) ( 37,330 ) Other assets 21,710 ( 155,055 ) Accounts payable 3,601,059 ( 1,031,704 ) Accrued compensation ( 1,000,332 ) ( 1,104,186 ) Change in operating lease liability ( 715,322 ) ( 639,987 ) Other accrued expenses ( 1,248,705 ) 314,443 Net cash provided by operating activities 3,578,192 6,860,258 Investing Activities Marketable securities ( 999,960 ) - Payments received from notes receivable - 2,233,192 Proceeds from sale of equipment 18,000 - Purchases of property, plant, and equipment ( 1,776,954 ) ( 1,151,205 ) Net cash (used in) provided by investing activities ( 2,758,914 ) 1,081,987 Financing Activities Payments on short term borrowings (revolver) - ( 268,249 ) Principal payments on long-term debt ( 792,467 ) ( 4,858,000 ) Financing leases, net ( 31,236 ) 723,254 Purchase common stock for treasury ( 234,800 ) - Dividends paid ( 683,065 ) ( 684,293 ) Net cash used in financing activities ( 1,741,568 ) ( 5,087,288 ) Effect of exchange rate changes on cash ( 20,719 ) 28,538 Net change in cash and cash equivalents ( 943,009 ) 2,883,495 Cash and cash equivalents at beginning of period 8,299,453 10,187,522 Cash and cash equivalents at end of period $ 7,356,444 $ 13,071,017 Supplemental disclosure of cash flow information: Interest $ 831,462 $ 716,763 Income taxes 230,523 ( 59,681 ) Non-cash investing and financing activities Right of use asset 140,939 ( 652,914 ) Lease liability ( 140,939 ) ( 328,721 ) See accompanying notes 7 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) March 30, 2024 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 30, 2023, filed with the Securities and Exchange Commission on March 12, 2024 (the “2023 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 30, 2023 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 2023, the 2023 fiscal year or fiscal 2023 mean the 52-week period ended on December 30, 2023, and references to 2024, the 2024 fiscal year or fiscal 2024 mean the 52-week period ending on December 28, 2024. In a 52-week fiscal year, each quarter has 13 weeks. References to the first quarter of 2023, the first fiscal quarter of 2023, the first quarter of fiscal 2023 or the three months ended April 1, 2023, mean the period from January 1, 2023 to April 1, 2023. References to the first quarter of 2024, the first fiscal quarter of 2024, the first fiscal quarter of 2024 or the three months ended March 30, 2024, mean the 13-week period from December 31, 2023 to March 30, 2024. Certain amounts in the 2023 financial statements have been reclassified to conform with the 2024 presentation with no impact or change to previously reported net income or shareholders’ equity. Note B – Earnings Per Share The denominators used to calculate earnings per share are as follows: Three Months Ended March 30, 2024 April 1, 2023 Basic: Weighted average shares outstanding 6,215,673 6,223,027 Diluted: Weighted average shares outstanding 6,215,673 6,223,027 Dilutive stock appreciation rights 39,727 10,962 Denominator for diluted earnings per share 6,255,400 6,233,989 8 Table of Contents Note C – Fair Value of Instruments Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value: Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. The Company’s financial instruments are primarily investments in marketable securities (Level 1) and pension assets, see Note L, Retirement Benefit Plans . The carrying amounts of other financial instruments (cash and cash equivalents, marketable securities, accounts receivable, accounts payable and debt) as of March 30, 2024 and December 30, 2023, approximate fair value because of their short-term nature and market-based interest rates. Note D – Inventories Inventories consist of the following components: March 30, 2024 December 30, 2023 Raw material and component parts $ 23,084,312 $ 24,500,087 Work in process 9,381,683 9,957,068 Finished goods 23,381,076 24,815,052 Total inventories $ 55,847,071 $ 59,272,207 Note E - Goodwill The aggregate carrying amount of goodwill is approximately $ 70.7 million as of March 30, 2024. No impairment was recognized in the first quarter of 2024. The Company evaluates 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. 9 Table of Contents Currently, the Company has twenty-two operating leases with a lease liability of $ 16.5 million and two finance leases with a lease liability of $ 0.9 million as of March 30, 2024. 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. The future payments (in millions) due under non-cancelable operating and finance leases as of March 30, 2024 are as follows: Operating Finance 2024 $ 3.2 $ 0.1 2025 3.2 0.2 2026 2.5 0.2 2027 and thereafter 10.2 0.6 19.1 1.1 Less effects of discounting ( 2.6 ) ( 0.2 ) Lease liabilities recognized $ 16.5 $ 0.9 As of March 30, 2024, the weighted average lease term for all operating and finance leases is 7.0 and 5.8 years, respectively. The weighted average discount rate associated with operating and finance leases was 6.3 % and 6.4 %, respectively. 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 %. The Company has no borrowings outstanding under the revolving commitment portion of the credit facility as of March 30, 2024. The term loan bears interest at a variable rate based on the term secured overnight financing rate (“SOFR”), plus an adjustment of ten basis points, 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 0.87 5% to 1.62 5% or term SOFR, plus an adjustment of ten basis points, 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 March 30, 2024, and through the date of filing this Form 10-Q. 10 Table of Contents 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. The Company did not grant any stock awards during the first three months of fiscal 2024 and fiscal 2023. For the first three months of fiscal years 2024 and 2023, 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. The Company did not issue any SARs during the first three months of fiscal 2024 and 2023. Stock-based compensation expense (income), including forfeitures, in connection with SARs and stock awards previously granted to employees was approximately $ 434,000 and $( 184,000 ) in the first quarter of 2024 and the first quarter of 2023, respectively. As of March 30, 2024, there were 879,924 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 March 30, 2024 December 30, 2023 Units Weighted Average Exercise Price Units Weighted Average Exercise Price Outstanding at beginning of period 13,000 $ 24.19 146,166 $ 23.22 Expired ( 9,000 ) 26.30 ( 50,833 ) 24.24 Exercised - - ( 33,333 ) 21.10 Forfeited - - ( 49,000 ) 22.80 Outstanding at end of period 4,000 $ 20.20 13,000 $ 24.19 SARs Outstanding and Exercisable Range of Exercise Prices Outstanding as of March 30, 2024 Weighted Average Remaining Contractual Life Weighted Average Exercise Price Exercisable as of March 30, 2024 Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 20.20 4,000 1.1 $ 20.20 4,000 1.1 $ 20.20 11 Table of Contents The following tables set forth the outstanding stock awards for the period specified: Three Months Ended Year Ended March 30, 2024 December 30, 2023 Shares Shares Outstanding at beginning of period 89,400 64,500 Issued - 82,800 Exercised ( 23,734 ) ( 10,600 ) Forfeited ( 1,433 ) ( 47,300 ) Outstanding at end of period 64,233 89,400 As of March 30, 2024, outstanding SARs and stock awards had an intrinsic value of $ 2,245,274 . Note I – Share Repurchase Program On August 21, 2023, the Company announced that the Board of Directors of the Company had approved a new share repurchase program authorizing the Company to repurchase up to 200,000 shares of the Company’s common stock through August 20, 2028. 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. Below is a summary of the Company’s shares repurchased during the first quarter of 2024 under the new share repurchase program. 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 December 30, 2023 40,000 $ 18.39 40,000 160,000 December 31, 2024 – March 30, 2024 10,076 23.30 10,076 149,924 Balance as of March 30, 2024 50,076 $ 19.38 50,076 149,924 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. 12 Table of Contents 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 2019 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2017. 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 March 30, 2024. 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. All of these pension plans are frozen and participants in these plans have not accrued benefits since the date on which these plans were frozen. 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 2024 and 2023 are as follows: Pension Benefits Three Months Ended March 30, 2024 April 1, 2023 Service cost $ 178,003 $ 216,153 Interest cost 966,702 990,054 Expected return on plan assets ( 1,099,035 ) ( 1,049,016 ) Amortization of the net loss 327,365 342,865 Net periodic benefit cost $ 373,035 $ 500,056 Other Postretirement Benefits Three Months Ended March 30, 2024 April 1, 2023 Service cost $ 3,574 $ 6,486 Interest cost 12,951 14,533 Expected return on plan assets ( 4,684 ) ( 4,849 ) Amortization of prior service cost 1,060 1,060 Amortization of the net loss ( 19,567 ) ( 16,895 ) Net periodic benefit (gain) cost $ ( 6,666 ) $ 335 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 2024, the Company expects to make cash contributions to its qualified pension plans of approximately $ 2,100,000 and approximately $ 50,000 into its other postretirement plan. As of March 30, 2024, the Company has contributed $ 450,000 to its pension plans and $ 7,000 to its postretirement plan and expects to make the remaining contributions as required during the remainder of the fiscal year. 13 Table of Contents 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 401(k) Plan as follows: Three Months Ended March 30, 2024 April 1, 2023 Regular matching contribution $ 285,563 $ 252,761 Transitional credit contribution 28,906 34,320 Non-discretionary contribution 110,890 431,950 Total contributions for the period $ 425,359 $ 719,031 The non-discretionary contribution of $ 328,953 made in the three months ended April 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 In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which amends the reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We do not expect this new standard to have a significant impact on our disclosures. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit disaggregated between domestic and foreign and (3) income tax expense or benefit from continuing operations disaggregated by federal, state, and foreign. The update also requires entities to disclose their income tax payments to various jurisdictions. This standard is effective for fiscal years beginning after December 15, 2024. We do not expect this new standard to have a significant impact on our disclosures. 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 March 30, 2024, there was one significant concentration of credit risk with a customer, who had receivables representing 12% of our net accounts receivable. One single customer represented 12 % of the Company’s net accounts receivable as of December 30, 2023. 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. 14 Table of Contents 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 term SOFR, plus an adjustment of ten basis points, plus an applicable margin of 1.87 5% to 2.62 5%, 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, and Hong Kong dollar. 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, and 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 (ASC 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