EASTERN CO 10-Q

ITEM 1 – FINANCIAL STATEMENTS THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED ) Three Months Ended Six Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Net sales $ 73,151,889 $ 68,337,790 $ 141,080,976 $ 140,833,158 Cost of products sold ( 54,941,336 ) ( 53,189,948 ) ( 106,674,324 ) ( 110,187,615 ) Gross margin 18,210,553 15,147,842 34,406,652 30,645,543 Product development expense ( 1,301,487 ) ( 1,431,110 ) ( 2,661,284 ) ( 2,832,309 ) Selling and administrative expenses ( 11,536,949 ) ( 11,289,037 ) ( 23,035,906 ) ( 23,226,674 ) Operating profit 5,372,117 2,427,695 8,709,462 4,586,560 Interest expense ( 829,934 ) ( 781,104 ) ( 1,674,969 ) ( 1,507,110 ) Other (expense) income ( 20,066 ) 252,180 ( 9,712 ) ( 378,520 ) Income before income taxes 4,522,117 1,898,771 7,024,781 2,700,930 Income tax expense ( 1,014,245 ) ( 499,564 ) ( 1,569,336 ) ( 694,409 ) Net income $ 3,507,872 $ 1,399,207 $ 5,455,445 $ 2,006,521 Earnings per share: Basic $ 0.56 $ 0.22 $ 0.88 $ 0.32 Diluted $ 0.56 $ 0.22 $ 0.87 $ 0.32 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 June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Net income $ 3,507,872 $ 1,399,207 $ 5,455,445 $ 2,006,521 Other comprehensive income: Change in foreign currency translation ( 472,078 ) ( 431,042 ) ( 629,078 ) ( 94,457 ) Change in fair value of foreign currency swap, net of tax benefit of: 2024 - $(109,797) and $(17,103) respectively ( 477,378 ) - ( 74,362 ) - Change in fair value of interest rate swap, net of tax benefit of: 2023 - $(274,957) and $(362,648) respectively - ( 1,172,067 ) - ( 1,449,754 ) Change in pension and postretirement benefit costs, net of taxes of: 2024 - $71,355 and $142,710 respectively; 2023 - $74,359 and $148,719 respectively 237,501 252,670 480,837 505,338 Total other comprehensive loss ( 711,955 ) ( 1,350,439 ) ( 222,603 ) ( 1,038,873 ) Comprehensive income $ 2,795,917 $ 48,768 $ 5,232,842 $ 967,648 See accompanying notes. - 4 - Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 29, 2024 December 30, 2023 (unaudited) ASSETS Current Assets Cash and cash equivalents $ 11,706,497 $ 8,299,453 Marketable securities 2,034,602 986,477 Accounts receivable, less allowances: 2024 - $ 562,498 ; 2023 - $ 564,816 42,327,344 37,057,488 Inventories 56,879,677 59,272,207 Current portion of notes receivable 192,933 573,269 Prepaid expenses and other assets 5,127,614 6,047,814 Total Current Assets 118,268,667 112,236,708 Property, Plant and Equipment 62,804,268 60,270,096 Accumulated depreciation ( 33,485,314 ) ( 31,980,335 ) Property, Plant and Equipment, Net 29,318,954 28,289,761 Goodwill 70,700,912 70,776,893 Trademarks 5,514,853 5,514,960 Patents and other intangibles net of accumulated amortization 13,372,930 15,325,927 Long term notes receivable, less current portion 284,330 374,932 Deferred Income Taxes 2,536,357 2,283,571 Right of Use Assets 15,682,994 17,236,449 Other Long-Term Assets 222,504 - Total Other Assets 108,314,880 111,512,732 TOTAL ASSETS $ 255,902,501 $ 252,039,201 See accompanying notes. - 5 - Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 29, 2024 December 30, 2023 (unaudited) LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 27,683,500 $ 25,319,473 Accrued compensation 5,493,325 5,379,381 Other accrued expenses 5,098,540 4,556,623 Current portion of operating lease liability 3,846,537 4,424,369 Current portion of finance lease liability 182,219 182,010 Current portion of long-term debt 2,853,935 2,871,870 Other current liabilities 296,866 - Total Current Liabilities 45,454,922 42,733,726 Other long-term liabilities 640,724 640,724 Operating lease liability, less current portion 11,836,457 12,812,079 Finance lease liability, less current portion 665,217 728,100 Long-term debt, less current portion 39,575,849 41,063,865 Accrued postretirement benefits 579,832 554,758 Accrued pension cost 20,662,798 21,025,365 Total Liabilities 119,415,799 119,558,617 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 34,575,179 33,950,859 Issued: 9,122,953 shares as of 2024 and 9,091,815 shares as of 2023 Outstanding: 6,228,432 shares as of 2024 and 6,217,370 shares as of 2023 Treasury Stock: 2,894,521 shares as of 2024 and 2,874,445 shares as of 2023 ( 23,762,587 ) ( 23,280,467 ) Retained earnings 148,891,689 144,805,168 Accumulated other comprehensive loss: Foreign currency translation ( 1,495,677 ) ( 866,599 ) Unrealized loss on foreign currency swap, net of tax ( 74,362 ) - Unrecognized net pension and postretirement benefit costs, net of tax ( 21,647,540 ) ( 22,128,377 ) Accumulated other comprehensive loss ( 23,217,579 ) ( 22,994,976 ) Total Shareholders’ Equity 136,486,702 132,480,584 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 255,902,501 $ 252,039,201 See accompanying notes. - 6 - Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Six Months Ended June 29, 2024 July 1, 2023 Operating Activities Net income $ 5,455,445 $ 2,006,521 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,741,969 3,621,126 Reduction in carrying amount of ROU assets 1,553,455 4,404,043 Unrecognized pension and postretirement benefits 10,219 656,655 Loss on sale of equipment and other assets 40,801 318,775 Provision for doubtful accounts 4,000 ( 16,731 ) Stock compensation expense 624,320 10,185 Changes in operating assets and liabilities: Accounts receivable ( 5,266,258 ) 918,871 Inventories 2,365,449 7,711,536 Prepaid expenses and other 1,006,407 562,548 Other assets 28,721 163,077 Accounts payable 2,939,089 ( 953,660 ) Accrued compensation 96,109 ( 165,590 ) Operating lease liability ( 1,553,455 ) ( 4,395,424 ) Other accrued expenses ( 784,960 ) ( 1,283,477 ) Net cash provided by operating activities 10,261,311 13,558,455 Investing Activities Marketable securities ( 999,960 ) - Business acquisition - ( 547,638 ) Payments received from notes receivable 470,937 2,309,236 Proceeds from sale of equipment 18,000 - Purchases of property, plant, and equipment ( 2,834,977 ) ( 1,978,784 ) Net cash used in investing activities ( 3,346,000 ) ( 217,186 ) Financing Activities Proceeds from new long-term debt financing - 60,000,000 Principal payments on long-term debt ( 1,505,952 ) ( 69,248,743 ) Payments on short term borrowings (revolver) - ( 252,025 ) Financing leases, net ( 62,674 ) 674,558 Purchase common stock for treasury ( 482,120 ) - Dividends paid ( 1,368,924 ) ( 1,369,941 ) Net cash used in financing activities ( 3,419,670 ) ( 10,196,151 ) Effect of exchange rate changes on cash ( 88,597 ) ( 127,966 ) Net change in cash and cash equivalents 3,407,044 3,017,152 Cash and cash equivalents at beginning of period 8,299,453 10,187,522 Cash and cash equivalents at end of period $ 11,706,497 $ 13,204,674 Supplemental disclosure of cash flow information: Interest $ 1,639,713 $ 1,364,527 Income taxes 1,599,765 315,120 Non-cash investing and financing activities Right of use asset 144,445 4,404,043 Lease liability ( 144,445 ) ( 5,355,510 ) See accompanying notes - 7 - Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) June 29, 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 in this Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2024 (this “Form 10-Q”) 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 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 second quarter of 2024, the second fiscal quarter of 2024 or the three months ended June 29, 2024, mean the 13-week period from March 31, 2023 to June 29, 2024. 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. References to the first six months of 2024 or the six months ended June 29, 2024 mean the period from December 31, 2023 to June 29, 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 Six Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Basic: Weighted average shares outstanding 6,233,153 6,232,717 6,224,596 6,227,873 Diluted: Weighted average shares outstanding 6,233,153 6,232,717 6,224,596 6,227,873 Dilutive stock appreciation rights 25,626 32,462 25,626 32,462 Denominator for diluted earnings per share 6,258,779 6,265,179 6,250,222 6,260,335 - 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), designated foreign currency hedge contracts – see Note O, Financial Instruments and Fair Value Measurements , 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 June 29, 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: June 29, 2024 December 30, 2023 Raw material and component parts $ 23,511,138 $ 24,500,087 Work in process 9,555,150 9,957,068 Finished goods 23,813,389 24,815,052 Total inventories $ 56,879,677 $ 59,272,207 Note E - Goodwill The aggregate carrying amount of goodwill is approximately $ 70.7 million as of June 29, 2024. No impairment was recognized in the second 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. - 9 - Table of Contents 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 nineteen operating leases with a lease liability of $ 15.7 million and two finance leases with a lease liability of $ 0.8 million as of June 29, 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 June 29, 2024 are as follows: Operating Finance 2024 $ 2.1 $ 0.1 2025 3.2 0.2 2026 2.5 0.2 2027 2.1 0.2 2028 1.9 0.2 thereafter 6.4 0.2 18.3 1.0 Less effects of discounting ( 2.6 ) ( 0.2 ) Lease liabilities recognized $ 15.7 $ 0.8 As of June 29, 2024, the weighted average lease term for all operating and finance leases is 7 .0 and 5.6 years, respectively. The weighted average discount rate associated with operating and finance leases was 6.4 % and 6.3 %, 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 of 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 June 29, 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 0.875 % to 1.625 % or 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 June 29, 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. During the first six months of fiscal 2024 and 2023, the Company granted stock awards with respect to 92,016 and 64,500 shares of Company common stock, respectively, that were subject to the meeting of performance measurements or time based. For the first six 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 six months of fiscal 2024 and 2023. Stock-based compensation (income) expense, including forfeitures, in connection with SARs and stock awards previously granted to employees was approximately $( 20,000 ) and $ 21,000 in the second quarter of 2024 and the second quarter of 2023, respectively, and was approximately $ 414,000 and $( 163,000 ) in the first six months of fiscal years 2024 and 2023, respectively. As of June 29, 2024, there were 792,819 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 June 29, 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 June 29, 2024 Weighted Average Remaining Contractual Life Weighted Average Exercise Price Exercisable as of June 29, 2024 Weighted Average Remaining Contractual Life Weighted Average Exercise Price $ 20.20 4,000 0.8 $ 20.20 4,000 0.8 $ 20.20 - 11 - Table of Contents The following tables set forth the outstanding stock awards for the period specified: Six Months Ended Year Ended June 29, 2024 December 30, 2023 Shares Shares Outstanding at beginning of period 89,400 64,500 Issued 92,016 82,800 Exercised ( 23,734 ) ( 10,600 ) Forfeited ( 11,266 ) ( 47,300 ) Outstanding at end of period 146,416 89,400 As of June 29, 2024, outstanding SARs and stock awards had an intrinsic value of $ 3,750,304 . Note I – Share Repurchase Program On August 21, 2023, the Company announced that the Board 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 second quarter of 2024 under the 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 March 30, 2024 50,076 $ 19.38 50,076 149,924 March 31, 2024 – June 29, 2024 10,000 24.73 10,000 139,924 Balance as of June 29, 2024 60,076 $ 20.27 60,076 139,924 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. at the federal and state levels, and in 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 six months ended June 29, 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 three months and first six months 2024 and 2023 are as follows: Pension Benefits Three Months Ended Six Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Service cost $ 178,004 $ 216,153 $ 356,007 $ 432,306 Interest cost 966,704 990,053 1,933,406 1,980,107 Expected return on plan assets ( 1,099,034 ) ( 1,049,014 ) ( 2,198,069 ) ( 2,098,030 ) Amortization of prior service cost - - - - Amortization of the net loss 327,363 342,865 654,728 685,730 Net periodic benefit cost (benefit) $ 373,037 $ 500,057 $ 746,072 $ 1,000,113 Other Postretirement Benefits Three Months Ended Six Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Service cost $ 3,574 $ 6,486 $ 7,148 $ 12,972 Interest cost 12,951 14,533 25,902 29,066 Expected return on plan assets ( 4,684 ) ( 4,849 ) ( 9,368 ) ( 9,698 ) Amortization of prior service cost 1,060 1,060 2,120 2,120 Amortization of the net loss ( 19,567 ) ( 16,895 ) ( 39,134 ) ( 33,790 ) Net periodic benefit cost $ ( 6,666 ) $ 335 $ ( 13,332 ) $ 670 - 13 - Table of Contents 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 June 29, 2024, the Company has contributed $ 979,000 to its pension plans and $ 14,000 to its postretirement plan in fiscal year 2024 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 401(k) Plan as follows: Three Months Ended Six Months Ended June 29, 2024 July 1, 2023 June 29, 2024 July 1, 2023 Regular matching contribution $ 261,993 $ 253,665 $ 547,556 $ 506,426 Transitional credit contribution 21,964 26,344 50,870 60,663 Non-discretionary contribution 102,873 89,163 213,763 521,112 Total contributions for the period $ 386,830 $ 369,172 $ 812,189 $ 1,088,201 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 In November 2023, the FASB issued 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 June 29, 2024, there was one significant concentration of credit risk with a customer, who had receivables representing 13 % of our net accounts receivable. This same 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 under the credit agreement, which bears interest at variable rates based on term 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. Note O – Financial Instruments and Fair Value Measurements The Company incurs certain manufacturing, marketing, and selling costs in international markets in local currency. Accordingly, earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates relative to the U.S. dollar, the Company’s reporting currency. The Company has a program in place that is designed to mitigate the exposure to changes in foreign currency exchange rates. The program includes the use of derivative financial instruments to minimize, for a period of time, the impact on its financial results from changes in foreign exchange rates. The Company utilizes foreign currency forward contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, namely Mexican pesos. This does not eliminate the impact of the volatility of foreign exchange rates. However, because the Company generally enters into forward contracts twelve to eighteen months out, rates are fixed for a twelve-to-eighteen-month period, thereby facilitating financial planning and resource allocation. Designated Foreign Currency Hedge Contracts All of the Company’s designated foreign currency hedge contracts as of June 29, 2024 were cash flow hedges under ASC 815, “Derivatives and Hedging” (“ASC 815”). The Company records the effective portion of any change in the fair value of designated foreign currency hedge contracts in other comprehensive income until the related third-party transaction occurs. Once the related third-party transaction occurs, the Company reclassifies the effective portion of any related gain or loss on the designated foreign currency hedge contracts to earnings. In the event the hedged forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. The Company had designated foreign currency hedge contracts outstanding in the contract amount of $ 14.4 million as of June 29, 2024 and $ 0.0 million as of December 30, 2023. As of June 29, 2024 a loss of $ 0.1 million, net of tax, will be reclassified to earnings within the next eighteen months. All currency cash flow hedges outstanding as of June 29, 2024 mature within eighteen months. Fair Value of Derivative Instruments The following table presents the effect of the Company’s derivative instruments designated as cash flow hedges under ASC 815 in its unaudited Condensed Consolidated Statements of Operations for the six months ended June 29, 2024: Derivative Instruments Amount of Loss Recognized in Accumulated Other Comprehensive Income Amount of Gain Reclassified from Accumulated Other Comprehensive Income into Earnings Location in Condensed Consolidated Statement of Operations Designated foreign currency hedge contracts, net of tax $ ( 57,259 ) $ 18,891 Cost of products sold ASC 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. The Company determines the fair value of its derivative instruments using the framework prescribed by ASC 820, “Fair Value Measurements and Disclosures”, by considering the estimated amount it would receive or pay to sell or transfer these instruments at the reporting date. Generally, the Company uses inputs that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; other observable inputs for the asset or liability; and inputs derived principally from, or corroborated by, observable market data by correlation or other means. As of June 29, 2024, the Company has classified its derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by ASC 815, as discussed below, because these observable inputs are available for substantially the full term of its derivative instruments. - 15 - Table of Contents The following tables present the fair value of the Company’s derivative instruments as they appear in its Condensed Consolidated Balance Sheets as of June 29, 2024 and December 30, 2023: Location in Condensed Consolidated Balance Sheets As of June 29, 2024 As of December 30, 2023 Derivative Assets: Designated foreign currency hedge contracts Other long-term assets $ 222,504 $ - Derivative Liabilities: Designated foreign currency hedge contracts Other current liabilities $ 296,866 $ - Note P – 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 ASC Topic 805, “Business Combinations”. 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. - 16 - Table of Contents