Omega Flex, Inc. 10-K

Item 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company is a leading manufacturer of flexible metal hose and is currently engaged in a number of different markets, including construction, manufacturing, transportation, petrochemical, pharmaceutical and other industries. The Company’s business is managed as a single operating segment that consists of the manufacture and sale of flexible metal hose, fittings, and accessories. The Company’s products are concentrated in residential and commercial construction, and general industrial markets, with a comprehensive portfolio of intellectual property and patents issued in various countries around the world. The Company’s primary product, flexible gas piping, is used for gas piping within residential and commercial buildings. Through its flexibility and ease of use, the Company’s TracPipe ® and TracPipe ® CounterStrike ® flexible gas piping, along with its fittings distributed under the trademarks AutoSnap ® and AutoFlare ® , allows users to substantially cut the time required to install gas piping, as compared to traditional methods. The Company’s newest product line MediTrac ® corrugated medical tubing is used for piping medical gases (oxygen, nitrogen, nitrous oxide, carbon dioxide, and medical vacuum) in health care facilities. Building on the recognized strengths and strategies employed in the flexible gas piping market, MediTrac ® can be used in place of rigid copper pipe, and due to its long continuous lengths and flexibility, it can be installed approximately five times faster than rigid copper pipe, saving on installation labor and construction schedules. The Company’s products are manufactured at its Exton, Pennsylvania and Houston, Texas facilities in the U.S., and in Banbury, Oxfordshire in the U.K. A majority of the Company’s sales across all industries are generated through independent outside sales organizations such as sales representatives, wholesalers and distributors, or a combination of both. The Company has a broad distribution network in North America and to a lesser extent in other global markets. Changes in Financial Condition The Company’s cash balance of $37,703,000 on December 31, 2022 increased $4,790,000 (14.6%) from a $32,913,000 balance at December 31, 2021. The primary reason for the increase in cash is due to income generated from operations during 2022. This was partially offset by dividend payments during 2022 totaling $9,489,000, as detailed in Note 7, Shareholders’ Equity, to the Consolidated Financial Statements included in this report. See the Company’s Consolidated Cash Flow Statement for further details regarding the change in cash. Accounts Receivable were $17,503,000 and $20,726,000 as of December 31, 2022 and December 31, 2021, respectively, decreasing $3,223,000 or 15.6%. This is mostly timing related, associated with greater cash collections resulting from higher sales during the fourth quarter of the previous year versus the current quarter. Inventory was $17,764,000 and $15,565,000 as of December 31, 2022 and December 31, 2021, respectively, increasing $2,199,000 or 14.1%. The increase is mainly the result of the purchase of inventory to ensure enough materials on hand because of the challenging supply chain environment and significantly increased costs. Other Long Term Assets were $5,871,000 and $1,702,000 as of December 31, 2022 and December 31, 2021, respectively, increasing $4,169,000 or 244.9%. The increase is due to higher inventories, which are estimated to be used beyond the next twelve months, mainly for the new corrugated medical tubing (“CMT”) products. Higher amounts of materials for the new CMT products were initially purchased for cost considerations and because of longer required lead times. As the market for these new products continues to develop the composition of the related inventories is expected to become more current. Accrued Compensation was $3,782,000 on December 31, 2022, compared to $7,008,000 on December 31, 2021, decreasing $3,226,000 or 46.0%. A significant portion of the liability that existed at the previous year end related to incentive compensation earned in 2021. As is customary, the liability was then paid during the first quarter of the following year, or 2022, thus diminishing the balance. In 2022, there was a decrease in the incentive compensation liability to align with the changes in the executive management team. The liability now represents amounts earned during the current year. - 21 - Accrued Commissions and Sales Incentives were $4,996,000 and $7,183,000 as of December 31, 2022 and December 31, 2021, respectively, decreasing $2,187,000 or 30.4%. The decrease is the result of lower sales which did not allow most of our customers to achieve growth tiers as defined within their sales incentive agreements. Other Liabilities were $7,530,000 and $4,864,000 as of December 31, 2022 and December 31, 2021, respectively. The increase of $2,666,000 or 54.8% mainly relates to accruals for legal and product liability matters associated mainly with two cases, one which was resolved through settlement and the other is pending which the Company continues to vigorously defend. Retained earnings were $60,954,000 and $50,053,000 as of December 31, 2022 and December 31, 2021, respectively, increasing $10,901,000 or 21.8%. The increase was primarily due to an increase from net income during the year, as provided on the Company’s Consolidated Statement of Operations, partially offset by dividends declared during 2022, as discussed in detail in Note 7, Shareholders’ Equity, to the Consolidated Financial Statements included in this report. Results of Operations Twelve months ended December 31, 2022 vs. twelve months ended December 31, 2021 The Company reported comparative results from operations for the twelve month periods ended December 31, 2022 and 2021 as follows: Twelve-months ended December 31, (dollars in thousands) 2022 2022 2021 2021 Net Sales $ 125,487 100.0 % $ 130,011 100.0 % Gross Profit $ 78,305 62.4 % $ 81,531 62.7 % Operating Profit $ 31,016 24.7 % $ 35,062 27.0 % Net Sales . The Company’s sales for the full year of 2022 were $125,487,000, reflecting a decrease of $4,524,000, or 3.5%, compared to $130,011,000 in 2021. The decrease in sales resulted mostly from a decrease in unit volume. The effect of the lower sales volumes was mostly offset by pricing actions to offset material cost pressure and to protect margins. Gross Profit . The Company’s gross profit margins were 62.4% and 62.7% for the years ended December 31, 2022, and 2021, respectively. Similar to the previous year, the Company was able to maintain margins similar to prior year levels despite rising material commodity costs which were mainly offset by increases in selling prices. Selling Expenses . Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight. Selling expenses were $21,931,000 and $20,429,000 for 2022 and 2021, respectively, representing an increase of $1,502,000, or 7.4%. The increases primarily related to costs for resumption of travel and other marketing efforts, which were lower in the 2021 period mainly due to the COVID-19 pandemic. Staffing related expenses and commissions were also higher. Commissions increased because of a shift of shipments from third party warehouses, whose shipments are subject to commission, compared to those directly from the manufacturing facilities, whose shipments are not subject to commission. Freight was lower mainly because of the lower sales. As a percentage of net sales, selling expenses were 17.5% and 15.7% for the twelve months ended December 31, 2022 and 2021, respectively. - 22 - General and Administrative Expenses . General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services. General and administrative expenses were $20,625,000 and $21,430,000 for the years ended December 31, 2022 and 2021, respectively, decreasing $805,000, or 3.8% between periods. There was a decrease in the incentive compensation component, which is aligned with profitability of $3,189,000, mainly because of the changes in the executive management team, and there was a reduction in expense pertaining to stock based compensation which moves in relation to the Company’s stock price, as detailed in Note 12, Stock Based Compensation Plans. Items which increased from the previous year include legal and product liability expenses, associated mainly with two cases, one which was resolved through settlement and the other is pending, and salary related expenses. As a percentage of net sales, general and administrative expenses were 16.4% and 16.5% for the twelve months ended December 31, 2022 and 2021, respectively. Engineering Expenses . Engineering expenses consist of development expenses associated with the development of new products, and costs related to enhancements of existing products and manufacturing processes. Engineering expenses increased $123,000 or 2.7% between periods, being $4,733,000 and $4,610,000 for the years ended December 31, 2022 and 2021, respectively. As a percentage of net sales for the year, engineering expenses were 3.8% in 2022 and 3.6% in 2021. Operating Profit . Reflecting all the factors mentioned above, operating profits decreased $4,046,000, or 11.5%, between periods, reflecting a profit of $31,016,000 in 2022, as compared to $35,062,000 in 2021. Interest Income. Interest income is recorded on cash investments, and interest expense is recorded at times when the Company has debt amounts outstanding on its line of credit. The Company recorded interest income of $174,000 for 2022, compared to $35,000 for 2021. The increase in interest income was because of the increase in interest rates during the last six months of 2022. There were no borrowings on its line of credit during 2022 and 2021. Other Income (Expense) . Other income (expense) primarily consists of foreign currency exchange gains (losses) on transactions within our foreign subsidiaries, and therefore tends to fluctuate with the strengthening and or weakening of the British Pound. The Company recognized other expense of $211,000 during 2022 and other income of $21,000 during 2021. Income Tax Expense . Income tax expense was $7,327,000 for 2022, compared to $8,862,000 for 2021. The $1,535,000 or 17.3% decrease in tax expense was largely the result of the decrease in income before taxes and from the reduction of non-deductible incentive compensation to align with the changes in the executive management team. The effective tax rate for 2022 and 2021 was at approximately 24% and 25% of income before taxes, respectively. Twelve months ended December 31, 2021 vs. twelve months ended December 31, 2020 The Company reported comparative results from operations for the twelve month periods ended December 31, 2021 and 2020 as follows: Twelve-months ended December 31, (dollars in thousands) 2021 2021 2020 2020 Net Sales $ 130,011 100.0 % $ 105,796 100.0 % Gross Profit $ 81,531 62.7 % $ 66,550 62.9 % Operating Profit $ 35,062 27.0 % $ 26,653 25.2 % Net Sales . The Company’s sales for the full year of 2021 were $130,011,000, reflecting an increase of $24,215,000, or 22.9%, compared to $105,796,000 in 2020. The increase in sales resulted mostly from an increase in unit volume, which was in some measure impacted by the COVID-19 pandemic in the previous year, as well as increases to selling prices that were necessary to help offset rising material commodity costs. - 23 - Gross Profit . The Company’s gross profit margins were 62.7% and 62.9% for the years ended December 31, 2021, and 2020, respectively. The Company was able to maintain margins similar to prior year levels despite rising material commodity costs, which were mainly offset by increases in selling prices. Selling Expenses . Selling expenses consist primarily of employee salaries and associated overhead costs, commissions, and the cost of marketing programs such as advertising, trade shows and related communication costs, and freight. Selling expenses were $20,429,000 and $16,580,000 for 2021 and 2020, respectively, representing an increase of $3,849,000, or 23.2%. The most significant increases included commissions and freight, driven by the increase in sales. In addition, sales personnel were added in France and advertising, trade shows and travel returned to more expected levels as these were restricted in the previous year due to the COVID-19 pandemic. For the same annual periods, selling expense as a percentage of net sales was consistent at 15.7%. General and Administrative Expenses . General and administrative expenses consist primarily of employee salaries, benefits for administrative, executive and finance personnel, legal and accounting, insurance, and corporate general and administrative services. General and administrative expenses were $21,430,000 and $19,117,000 for the years ended December 31, 2021 and 2020, respectively, increasing $2,313,000, or 12.1% between periods. Incentive compensation was derived from two notable yet partly offsetting components. There was an increase in the incentive compensation component which is aligned with profitability; however, this was partially offset by a reduction in expense pertaining to stock based compensation which moves in relation to the Company’s stock price, as detailed in Note 12, Stock Based Compensation Plans. Other items increasing from the previous year include legal and product liability expenses and director fees. As a percentage of net sales, general and administrative expenses were 16.5% and 18.1% for the twelve months ended December 31, 2021 and 2020, respectively. Engineering Expenses . Engineering expenses consist of development expenses associated with the development of new products, and costs related to enhancements of existing products and manufacturing processes. Engineering expenses increased $410,000 or 9.8% between periods, being $4,610,000 and $4,200,000 for the years ended December 31, 2021 and 2020, respectively. The increase was primarily attributable to an increase in staffing, mainly in the U.K., and certification and qualification expenses. As a percentage of net sales for the year, engineering expenses were 3.6% in 2021 and 4.0% in 2020. Operating Profit . Reflecting all the factors mentioned above, operating profits increased $8,409,000, or 31.6%, between periods, reflecting a profit of $35,062,000 in 2021, as compared to $26,653,000 in 2020. Interest Income. Interest income is recorded on cash investments, and interest expense is recorded at times when the Company has debt amounts outstanding on its line of credit. The Company recorded interest income of $35,000 for 2021, compared to interest expense of $39,000 for 2020. The decrease in interest expense and increase in interest income was largely due to the interest expense incurred on the borrowings of $15,000,000 on its line of credit for a portion of the second quarter of 2020 to ensure liquidity during the COVID-19 pandemic. There were no borrowings on its line of credit during 2021. Other Income (Expense) . Other income (expense) primarily consists of foreign currency exchange gains (losses) on transactions within our foreign subsidiaries, and therefore tends to fluctuate with the strengthening and or weakening of the British Pound. The Company recognized other income of $21,000 during 2021 and other expense of $53,000 during 2020. Income Tax Expense . Income tax expense was $8,862,000 for 2021, compared to $6,594,000 for 2020. The $2,268,000 or 34.4% increase in tax expense was largely the result of the increase in income before taxes. The effective tax rate for both periods was similar at approximately 25% of income before taxes. - 24 - Commitments and Contingencies See Note 11, to the Consolidated Financial Statements included in this report for a detailed description of commitments and contingencies. Liquidity and Capital Resources Historically, the Company’s primary cash needs have been related to working capital items, which the Company has largely funded through cash generated from operations. As of December 31, 2022, the Company had a cash balance of $37,703,000. Additionally, the Company has a $15,000,000 line of credit available, as discussed in detail in Note 6, Line of Credit and Other Borrowings, which had no borrowings outstanding against it as of December 31, 2022. On December 31, 2021 and December 31, 2020, the Company had cash balances of $32,913,000 and $23,633,000, respectively, with no borrowings against the line of credit. Operating Activities Cash provided by operating activities is net income adjusted for certain non-cash items and changes in certain assets and liabilities, such as those included in working capital. For 2022, the Company’s cash provided from operating activities was $15,246,000, compared to $25,149,000 of cash provided during 2021, and $19,310,000 of cash provided during 2020. This illustrates a decrease of $9,903,000 during 2022, versus an increase during 2021 of $5,839,000. For details of the operating cash flows refer to the consolidated statements of cash flows in Item 8. Financial Statements and Supplementary Data on page 40. As a general trend, the Company tends to deplete or generate lower amounts of cash early in the year, as significant payments are typically made for accrued promotional incentives, incentive compensation, and taxes. Cash has then historically shown a tendency to be restored and accumulated during the latter portion of the year. Investing Activities Cash used in investing activities during 2022, 2021, and 2020 was $942,000, $971,000, and $564,000 respectively, all related to various capital expenditure projects. Financing Activities All financing activities relate to dividend payments, which are detailed in Note 7, Shareholders’ Equity, in the Consolidated Financial Statements included in this report. Dividend payments for 2022, 2021, and 2020 amounted to $9,489,000, $14,867,000, and $11,306,000, respectively. Also, see Note 6, Line of Credit and Other Borrowings, for a description of borrowings and repayments during the second quarter of 2020. The Company had no borrowings or payments on its line of credit during 2022 or 2021. Liquidity We believe our existing cash and cash equivalents, along with our borrowing capacity, will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future capital requirements will depend upon many factors including our rate of revenue growth, the timing and extent of any expansion efforts, the potential for investments in, or the acquisition of any complementary products, businesses, or supplementary facilities for additional capacity. - 25 - The Company’s primary contractual obligations as of December 31, 2022, which are due over the next twelve months, are summarized in the following table and are more fully explained in Notes to the Consolidated Financial Statements. Contractual Obligations Total (in thousands) Operating Lease Obligations $ 447 Purchase Obligations 16,137 Other Liabilities 171 Total Contractual Obligations $ 16,755 As explained in Note 12, Stock Based Compensation Plans, to the Consolidated Financial Statements included in this report, the Company is obligated to make payments to plan participants. Due to the uncertain nature of the payments, due to numerous variables, including the potential change in stock price, and employment status of participants and any applicable forfeitures, the amounts are not disclosed in the above table. The liability associated with this plan as of December 31, 2022, which is anticipated to be paid within the next year, is $665,000. Future Impact of Known Trends or Uncertainties The Company’s operations are sensitive to a number of market and extrinsic factors, any one of which could materially adversely affect the Company’s business, competitive position, results of operations or financial condition in any given year. See Item 1A, Risk Factors, for a detailed description. Critical Accounting Policies and Estimates Note 2, Significant Accounting Policies, to the Consolidated Financial Statements included in this report, includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. We evaluate our estimates on an on-going basis. Estimates are used for, but not limited to, revenue recognition and related sales incentives, provisions for credit losses, inventory reserves, valuation of goodwill, product liability reserves, valuation of phantom stock, and accounting for income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe our judgments related to these accounting estimates are appropriate. Actual results may differ from these estimates under different assumptions or conditions. Revenue Recognition The Company’s accounting policy relating to revenue recognition reflects the impact of the adoption of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), which is discussed further in the Notes to the Consolidated Financial Statements. As a result of the adoption of ASC 606, the Company records revenue based upon a five-step approach. The Company sells goods on typical, unmodified free on board (FOB) shipping point terms. As the seller, it can be determined that the shipped goods meet the agreed-upon specifications in the contract or customer purchase order (e.g., items, quantities, and prices) with the buyer, so customer acceptance would be deemed a formality, as noted in ASC 606-10-55-86. As a result, the Company has a legal right to payment upon shipment of the goods. Based upon the above, the Company has concluded that transfer of control substantively transfers to the customer upon shipment. Other than standard product warranty provisions, the sales arrangements provide for no other post-shipment obligations. The Company offers rebates and other sales incentives, promotional allowances, or discounts to certain customers, typically related to purchase volume, and are classified as a reduction of revenue and recorded at the time of sale. The Company periodically evaluates whether an allowance for sales returns is necessary. Historically, the Company has experienced minimal sales returns. If it is believed there are to be material potential sales returns, the Company will provide the necessary provision against sales. - 26 - Provision for Credit Losses The Company maintains allowances for credit losses, which represent an estimate of expected losses over the remaining contractual life of its receivables considering current market conditions and estimates for supportable forecasts when appropriate. The estimate is a result of the Company’s ongoing assessments and evaluations of collectability, historical loss experience, and future expectations in estimating credit losses in its receivable portfolio. For accounts receivable, the Company uses historical loss experience rates and applies them to a related aging analysis while also considering customer and/or economic risk where appropriate. Determination of the proper amount of allowances requires management to exercise judgment about the timing, frequency and severity of credit losses that could materially affect the provision for credit losses and, as a result, net earnings. The allowances consider numerous quantitative and qualitative factors that include receivable type, historical loss experience, delinquency trends, collection experience, current economic conditions, estimates for supportable forecasts, when appropriate, and credit risk characteristics. Changes in allowances may occur in the future as the above referenced quantitative and qualitative factors change. Inventories Inventories are valued at the lower of cost or net realizable value. The cost of inventories is determined by the first-in, first-out (FIFO) method. The Company generally considers inventory quantities beyond two years of usage, measured on a historical usage basis, to be excess inventory and reduces the carrying value of inventory accordingly. These reductions to the inventory carrying values are estimates, which could vary significantly, either favorably or unfavorably, from actual amounts if future economic conditions, sales levels, or competitive conditions change. Goodwill In accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 350, Intangibles – Goodwill and Other (ASU 2017-04) , using the simplified method as adopted, the Company performed an annual impairment test as of December 31, 2022. This test did not indicate any impairment of goodwill as the Company’s estimated fair value of the reporting unit exceeded carrying value. The test may be performed more frequently if we believe indicators of impairment might exist. These indicators may include changes in macroeconomic and industry conditions, overall financial performance, and other relevant entity-specific events. Product Liability Reserves Product liability reserves represent the estimated unpaid amounts under the Company’s insurance policies with respect to existing claims. The Company uses the most current available data to estimate claims. As explained more fully under Note 11, Commitments and Contingencies, to the Consolidated Financial Statements included in this report for various product liability claims covered under the Company’s general liability insurance policies, the Company must pay certain defense and settlement costs within its deductible or self-insured retention limits, ranging primarily from $25,000 to $3,000,000 per claim, depending on the terms of the policy in the applicable policy year, up to an aggregate amount. The Company is vigorously defending against all known claims. It is possible that the Company may incur increased litigation costs in the future due to a variety of factors, including a higher number of claims, higher legal costs, and higher insurance deductibles or retentions. Litigation is subject to many uncertainties and management is unable to predict the outcome of the pending suits and claims. From time to time, depending upon the nature of a particular case, the Company may decide to spend more than a deductible or retention to enable more discretion regarding the defense, although this is not common. It is possible that the results of operations or liquidity of the Company, as well as the Company’s ability to procure reasonably priced insurance, could be adversely affected by the pending litigation, potentially materially. The Company is currently unable to estimate the ultimate liability, if any, that may result from the pending litigation, or potential litigation from future claims or claims that have not yet come to our attention, and accordingly, the liability in the Consolidated Financial Statements primarily represents an accrual for legal costs for services previously rendered, settlements for Claims not yet paid, and anticipated settlements for claims within the Company’s remaining retention under its insurance policies. - 27 - Stock Based Compensation Plans In 2006, the Company adopted a Phantom Stock Plan (the “Plan”), which allows the Company to grant phantom stock units (“Units”) to certain key employees, officers, or directors. The Units each represent a contractual right to payment of compensation in the future based upon the market value of the Company’s common stock and are accordingly recorded as liabilities. The Units follow a vesting schedule over three years from the grant date and are then paid upon maturity. In accordance with FASB ASC Topic 718, Compensation - Stock Compensation (“Topic 718”), the Company uses the Black-Scholes option pricing model as its method for determining the fair value of the Units. The liabilities for the Units are adjusted to market value over time from the grant dates to the related maturity dates. The Company recognizes the reversal of any previously recognized compensation expense on forfeited nonvested Units in the period the Units are forfeited. The Plan has been amended and restated, for all grants made starting January 1, 2023, to set the vesting method to three-year cliff vesting following the grant date, with full value paid upon maturity. Additionally, for grants made starting January 1, 2023, upon retirement at age 67 or greater, and with one year of continuous service prior to retirement, vesting of the issued grant(s) would accelerate on a pro-rata basis, 1/3 per year from the grant date. The Company does not believe the amended and restated plan will have a material impact upon compensation expense. Further details of the Plan are provided in Note 12, Stock Based Compensation Plans, to the Consolidated Financial Statements included in this report. Any significant changes in the Company’s stock price may have a material impact upon the valuation of the Units. Income Taxes The Company accounts for tax liabilities in accordance with the FASB ASC Topic 740, Income Taxes . Under this method the Company recorded tax expense and related deferred taxes and tax benefits. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize the benefit, or that future deductibility is uncertain. The Company’s accounting for deferred tax consequences represents the best estimate of those future events. Changes in estimates, due to unanticipated events or otherwise, could have a material effect on the financial condition and results of operations of the Company. The Company continually evaluates its deferred tax assets to determine if a valuation allowance is required. Recent Accounting Pronouncements In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting . The ASU applies to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the ASU do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. The impact of the adoption of ASU 2020-04 did not have a material impact on the Company’s Consolidated Financial Statements. In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions for recognizing deferred taxes for equity method investments, performing intraperiod allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group, among others. The amendments in ASU 2019-12 are effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Company adopted this new guidance, and it did not have a material impact on its Consolidated Financial Statements. Item 7A - QUANTITATATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company does not engage in the purchase or trading of market risk sensitive instruments. The Company does not presently have any positions with respect to hedge transactions such as forward contracts relating to currency fluctuations. No market risk sensitive instruments are held for speculative or trading purposes. - 28 -