Annual Report for Fiscal Year Ending 01-03, 2026 (Form 10-K)

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk primarily from changes in foreign currency exchange rates and interest rates. To reduce such risks, we selectively use financial instruments and other proactive management techniques. All hedging transactions strictly prohibit the use of financial instruments for trading or speculative purposes. A discussion of our accounting policies for derivative financial instruments is included within Notes 2 and 9, of the Notes to the Consolidated Financial Statements included in this Annual Report.

Interest Rate Risk

Our exposure to interest rate risk results from variable debt outstanding under our term loans and revolving credit facility with PNC Bank. We pay interest on outstanding borrowings at interest rates that fluctuate based upon changes in various base rates. As of January 3, 2026, we had $105.5 million in borrowings outstanding under the revolving credit facility and $262.5 million in borrowings outstanding under the term loans. Based on our level of variable rate debt outstanding during the year ended January 3, 2026, a one percentage point increase in the reference average interest rate, which generally equaled 6.7%, would have resulted in an approximate $4.4 million increase in financing costs for the year ended January 3, 2026. This analysis excludes any effects from interest rate swap contracts as such contracts were terminated on June 25, 2024.

As of December 28, 2024, we had $150.3 million in borrowings outstanding under the revolving credit facility, $300.3 million in borrowings outstanding under the term loans. Based on our level of variable rate debt outstanding during the year ended December 28, 2024, a one percentage point increase in the reference average interest rate, which generally equaled 6.1%, would have resulted in an approximate $4.0 million increase in financing costs for the year ended December 28, 2024. This analysis excludes any effects from interest rate swap contracts as such contracts were terminated on June 25, 2024.

Foreign Currency Risk

Our exposure to foreign currency exchange fluctuations relate primarily, but not limited to, our locations in Italy, Germany, South Korea, the United Kingdom, China and India. Our operations in these countries are exposed to fluctuations in foreign currency rates primarily from payments received from customers, payments made to suppliers and loans denominated in foreign currencies. During the year ended December 30, 2023, we economically hedged certain foreign currency risks by entering into forward foreign exchange contracts. These contracts were not designated as hedging instruments for accounting purposes. These forward foreign exchange contracts ended in 2023 and the Company did not enter into new contracts in 2024.

During the year ended January 3, 2026, we economically hedged the receivable related to the sale of Custom Fluidpower. This contract was not designated as a hedging instrument for accounting purposes. This forward foreign exchange contract ended in October 2026. A discussion of our accounting policies for derivative financial instruments is included within Notes 2 and 9 of the Notes to the Consolidated Financial Statements included in this Annual Report.

The strengthening of the U.S. dollar can have an unfavorable impact on our results of operations and financial position as foreign denominated operating results are translated into U.S. dollars. The result of a 10% decrease in the 2025 average exchange rates of the currencies in which our transactions are denominated would have resulted in a decrease in annual sales of $31.3 million for the year ended January 3, 2026. The result of a 10% decrease in the 2024 average exchange rates of the currencies in which our transactions are denominated would have resulted in a decrease in annual sales of $29.5 million for the year ended December 28, 2024. This sensitivity analysis assumes that each exchange rate changed in the same direction relative to the U.S. dollar and incorporates the effects of our forward contracts. This analysis excludes the potential effects that changes in foreign currency exchange rates may have on actual sales or price levels. Similarly, a 10% decline in foreign currency exchange rates relative to the U.S. dollar on our January 3, 2026 and December 28, 2024 financial position would have resulted in a $60.8 million and $60.0 million reduction to equity (accumulated other comprehensive loss), respectively, as a result of non-U.S. dollar denominated assets and liabilities being translated into U.S. dollars, our reporting currency.