0001654954-23-002848.txt : 20230314 0001654954-23-002848.hdr.sgml : 20230314 20230314163131 ACCESSION NUMBER: 0001654954-23-002848 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 89 CONFORMED PERIOD OF REPORT: 20221231 FILED AS OF DATE: 20230314 DATE AS OF CHANGE: 20230314 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EASTERN CO CENTRAL INDEX KEY: 0000031107 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 060330020 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-35383 FILM NUMBER: 23731488 BUSINESS ADDRESS: STREET 1: 3 ENTERPRISE DRIVE STREET 2: SUITE 408 CITY: SHELTON STATE: CT ZIP: 06484 BUSINESS PHONE: 203-729-2255 MAIL ADDRESS: STREET 1: 3 ENTERPRISE DRIVE STREET 2: SUITE 408 CITY: SHELTON STATE: CT ZIP: 06484 10-K 1 eml_10k.htm FORM 10-K eml_10k.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

For the Fiscal Year ended December 31, 2022 

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________________ to _______________

 

Commission File Number 001-35383

 

THE EASTERN COMPANY

(Exact name of registrant as specified in its charter)

 

Connecticut

06-0330020

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

 

3 Enterprise Drive, Suite 408, Shelton, Connecticut

06484

(Address of principal executive offices)

(Zip Code)

  

Registrant’s telephone number, including area code: (203) 729-2255

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading

Symbol(s)

Name of each exchange

on which registered

Common Stock, No Par Value

EML

NASDAQ Global Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated Filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

 

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the fi ling reflect the correction of an error to previously issued financial statements. ☐

 

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No ☒

 

As of July 2, 2022, the last day of registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was $101,241,244 (based on the closing sales price of the registrant’s common stock on the last trading date prior to that date). Shares of the registrant’s common stock held by each officer and director and shares held in trust by the pension plans of the Company have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

 

As of February 15, 2023, 6,221,976 shares of the registrant’s common stock, no par value per share, were issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Certain information required for Part III of this report is incorporated herein by reference to portions of the proxy statement for the Company’s 2023 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 31, 2022.

 

 

The Eastern Company

Form 10-K

 

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2022

 

TABLE OF CONTENTS 

 

Page

Table of Contents

Safe Harbor Statement

3.

PART I

Item 1.

Business

4.

Item 1A.

Risk Factors

7.

Item 1B.

Unresolved Staff Comments

16.

Item 2.

Properties

17.

Item 3.

Legal Proceedings

18.

Item 4.

Mine Safety Disclosures

18.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19.

Item 6.

Reserved

19.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

31.

Item 8.

Financial Statements and Supplementary Data

32.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

67.

Item 9A.

Controls and Procedures

67.

Item 9B.

Other Information

69.

Item 9C.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

69.

 

 

 

 

 

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

70.

Item 11.

Executive Compensation

70.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

71.

Item 13.

Certain Relationships and Related Transactions, and Director Independence

72.

 

Item 14.

Principal Accounting Fees and Services

72.

PART IV

Item 15.

Exhibits, Financial Statement Schedules

73.

Exhibit Index

74.

Item 16.

Form 10-K Summary

76.

Signatures

78.

 

 

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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES

 

LITIGATION REFORM ACT OF 1995

 

 

Statements contained in this Annual Report on Form 10-K of The Eastern Company (together with its consolidated subsidiaries, unless otherwise specified or suggested by the context, the “Company,” “Eastern,” “we,” “us,” or “our”) that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “would,” “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” “plan,” “potential,” “opportunities,” or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These factors include the impact of the COVID-19 pandemic and resulting economic effects, including supply chain disruptions, cost inflation, rising interest rates, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, and the impact of market conditions on pension plan funded status. Other factors include, but are not limited to: restrictions on operating flexibility imposed by the agreement governing our credit facility; the effect on interest rates of the replacement of the London Interbank Offered Rate (LIBOR) with a Secured Overnight Financing Rate (SOFR); risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability; the inability to achieve the savings expected from global sourcing of materials; the impact of higher raw material and component costs, including the impact of supply chain shortages and inflation, particularly steel, plastics, scrap iron, zinc, copper and electronic components; lower-cost competition; our ability to design, introduce and sell new or updated products and related components; market acceptance of our products; the inability to attain expected benefits from acquisitions or the inability to effectively integrate such acquisitions and achieve expected synergies; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, and general industrial markets; costs and liabilities associated with environmental compliance; the impact of climate change or terrorist threats and the possible responses by the U.S. and foreign governments; failure to protect our intellectual property; cyberattacks; materially adverse or unanticipated legal judgments, fines, penalties or settlements; and other risks identified and discussed in Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-K and that may be identified from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the Securities and Exchange Commission (the “SEC”). Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions. Also, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses. The Company undertakes no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise, except as required by law.

 

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PART I

 

ITEM 1 BUSINESS

 

General Development of Business

 

The Eastern Company was incorporated under the laws of the State of Connecticut in October 1912, succeeding a co-partnership established in October 1858. The businesses of the Company design, manufacture and sell unique engineered solutions for industrial markets.

 

Today, the Company maintains 17 physical locations across North America, Europe, and Asia.

 

BUSINESS HIGHLIGHTS

 

On October 19, 2022, the Company sold its Argo EMS business (“Argo”). Argo supplies printed circuit boards and other electronic assemblies to original equipment manufacturers in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial control, medical, and military products.

 

On November 3, 2021, the Company sold its Greenwald Industries division (“Greenwald”). Greenwald is an original equipment manufacturer (“OEM”) offering a range of payment solutions from coin-vending products to smart card systems and payment applications.

 

On November 22, 2021, the Company sold its Frazer & Jones Company division (“Frazer & Jones”). Frazer & Jones is a high quality ductile and malleable iron foundry located in Syracuse, NY.

   

In the second fiscal quarter of 2021 the Company determined that the companies included in its Diversified Products segment, including Argo, Greenwald, and Frazer & Jones, no longer fit with our long-term strategy and met the criteria to be treated as held for sale, and that the assets held for sale qualify for discontinued operations.

 

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Description of Business

 

The Eastern Company manages industrial businesses that design, manufacture and sell unique engineered solutions to industrial markets. We believe Eastern’s businesses operate in industries with long-term macroeconomic growth opportunities.

 

Eastern manages the financial, operational, and strategic performance of its businesses to increase cash generation, operating earnings, and long-term shareholder value. Among other things, Eastern monitors financial and operational performance of each of its businesses and instills consistent financial discipline. Eastern’s management analyzes and pursues prudent organic growth strategies and works to execute attractive external growth and acquisition opportunities.

 

In addition, Eastern recruits and retains talented managers to operate its businesses. We look for leaders who are accountable, maintain cost discipline, act quickly, and build strong followership.

 

Company Operations

 

The Company’s operations consist of Big 3 Precision, including Big 3 Precision Products Inc. (“Big 3 Products”) and Big 3 Mold Services, Inc. (“Big 3 Mold”), Hallink Moulds, Inc. (“Hallink Moulds” or “Hallink”), and Associated Toolmakers Ltd. (“Associated Toolmakers”); Eberhard Manufacturing Company (“Eberhard Manufacturing”), Eastern Industrial Ltd, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries (together, “Eberhard”); and Velvac Holdings Inc. (“Velvac”). These businesses design, manufacture, and market a diverse product line of custom and standard vehicular and industrial hardware, including turnkey returnable packaging solutions, access and security hardware, mirrors, and mirror-cameras.

 

Big 3 Products and Big 3 Mold’s turnkey returnable packaging solutions are used in the assembly processes of vehicles, aircraft, and durable goods and in the production processes of plastic packaging products, packaged consumer goods and pharmaceuticals. Big 3 Products works with leading OEMs to design and produce custom returnable transport packaging to integrate with OEM assembly processes. Big 3 Mold is a global leader in the design and manufacture of blow mold tools. Hallink Moulds is a leader in innovative injection blow mold tooling and is a leading supplier of blow molds and change parts to the food, beverage, healthcare, and chemical industry. Hallink specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry offering integrated turnkey solutions to its customers worldwide.

 

Eberhard, a global leader in the engineering and manufacturing of access and security hardware, offers a standard product line of rotary latches, compression latches, draw latches, hinges, camlocks, key switches, padlocks, and handles, among other products, as well as comprehensive development and program management services for custom electromechanical and mechanical systems designed for specific OEMs and customer applications. Eberhard’s products are found in an expansive range of applications and products globally.

 

Velvac is a designer and manufacturer of proprietary vision technology for OEMs and aftermarket applications, and a leading provider of aftermarket components to the heavy-duty truck market in North America. Velvac serves diverse, niche segments within the heavy- and medium-duty truck, motorhome, and bus markets.

 

Human Capital

 

We believe our success depends on the skills, experience, and industry knowledge of our key talent. As such, our management team places significant focus and attention on the attraction, development, and retention of employees, as well as ensuring our corporate culture reflects Eastern’s values, and our Board of Directors (our “Board”) provides oversight for various employee initiatives. Eastern values and our Code of Business Conduct and Ethics guide our actions, reflect our culture, and drive our performance. We have made and continue to make investments in training, and we have a well-established performance management process.

 

An engaged, innovative, skilled, and collaborative workforce is critical to our continued leadership in the design and manufacture of unique engineered solutions to industrial markets. We operate globally under policies and programs that provide competitive wages, benefits, and terms of employment. We are committed to efforts to increase diversity and foster an inclusive work environment that supports our global workforce through recruiting efforts and equitable compensation policies.

 

The health and safety of our employees is also a top priority. Our focus on the reduction of injuries and illnesses has significantly improved our safety performance. We have attained these improvements by fostering a global safety culture supported with regular training and education that includes robust systems and philosophies centered on personal responsibility and accountability. The Board established an Environment, Health and Safety Committee in 2019. There is a high level of leadership engagement, ensuring installation and maintenance of appropriate safety equipment at all our manufacturing sites worldwide combined with vigorous reviews of root causation and systemic corrective actions of any safety incidents that may occur.

 

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Table of Contents

 

In response to the emergence of COVID-19 in early 2020, we implemented a proactive internal procedure and complied with local, federal, and international governmental guidance that has enabled us to operate safely.

Each of our facilities continues to adhere to such guidance as it has evolved, and we have also adjusted our remote worker safety procedures to ensure that remote employees are better integrated into our safety and health systems.

 

Employee levels are managed to align with business demand and management believes it currently has sufficient human capital to operate its business successfully. As of December 31, 2022, we employed 1,191 full-time employees: 607 in the United States and 584 in other countries. Approximately 24% of employees in the United States are represented by collective bargaining agreements. We believe that our relations with employees, unions and works’ councils are in good standing.

 

General

 

Patent and trademark protection for the various product lines of the Company is limited, but the Company believes the current patents and trademark protection is sufficient to protect the Company’s competitive positions. Patent durations are from 1 to 20 years. No business operation is dependent on any patent, nor would the loss of any patent have any material adverse effect on the Company’s business.

 

During the second fiscal quarter of 2021, the Company announced plans to sell the companies included in our Diversified Products segment, these assets met the criteria to be treated as held for sale and reported as discontinued operations. Subsequently, in the fourth quarter of fiscal 2021, the Company sold Greenwald and Frazer & Jones. In the fourth quarter of 2022, the Company sold Argo.

  

The Company’s businesses are not subject to seasonal variations.

  

Customers of the Company are broad-based by geography and by market, and sales are not highly concentrated by customer. Only one customer exceeded 10% of accounts receivable for each of fiscal 2022 and 2021. Foreign sales were not significant for fiscal years 2022 and 2021.

 

The Company encounters competition in its businesses. Imports from Asia and Latin America with favorable currency exchange rates and low-cost labor have created additional pricing pressure. The Company competes successfully by offering high-quality, custom engineered products on a timely basis. To compete, the Company deploys internal engineering resources, maintains cost effective manufacturing capabilities through its wholly owned Asian subsidiaries, expands its product lines through product development and acquisitions, and maintains sufficient inventory for fast turnaround of customer orders.

 

The Company does not anticipate that compliance with federal, state, or local environmental laws or regulations is likely to have a material effect on the Company’s capital expenditures, earnings, or competitive position.

 

The Company obtains materials from nonaffiliated domestic sources, as well as from Company-affiliated and unaffiliated sources in Asia. Availability and prices of raw materials and outside services were affected by measures taken in response to the COVID-19 pandemic, as well as by global trade restrictions, for some of the Company’s businesses during 2022. We expect raw materials and outside services to be more readily available in 2023 unless resurgence of the COVID-19 pandemic occurs or trade restrictions continue, but prices may remain elevated or increase further.

 

The Company’s ratio of working capital (current assets less current liabilities) to sales was 26.1% in 2022 and 27.2% in 2021. Working capital includes cash held in various foreign subsidiaries. Other factors affecting working capital include our average days’ sales in accounts receivable, inventory turnover ratio and payment of vendor accounts payable. In some cases, the company must hold extra inventory due to extended lead time in receiving products ordered from our foreign subsidiaries to ensure product is available for our customers. The Company continues to monitor working capital needs with the goal of reducing our ratio of working capital to sales.

 

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Table of Contents

 

Available Information

 

The Company makes available, free of charge through its Internet website at http://www.easterncompany.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information posted on the Company’s website is not incorporated into this Form 10-K and is not part of this Form-10K. The Company’s reports filed with, or furnished to, the SEC are also available on the SEC’s website at www.sec.gov.

 

ITEM 1A RISK FACTORS

 

The Company’s business is subject to a variety of risks and uncertainties, including, without limitation, the risks and uncertainties described below. In addition to the other information contained in this Form 10-K and the Company’s other filings with the SEC, these risk factors should be considered carefully in evaluating the Company’s business. If any of these risks, or any risks not presently known to the Company or currently deemed immaterial by the Company, materialize, the Company’s business, reputation, stock price, financial condition or results of operations could be materially adversely affected, and the Company may not be able to achieve its goals or expectations.

 

This section should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and accompanying notes in Item 8, Financial Statements and Supplementary Data of this Form 10-K.

 

Risks Related to Our Business

 

Our financial and operating performance has been and may continue to be adversely affected by COVID-19 pandemic and the resulting economic conditions, including inflation, rising interest rates, and potential recessionary pressures, and may be adversely affected by future developments with respect to this or another epidemic.

 

As a result of the COVID-19 pandemic and its impact on economic conditions, the Company has experienced and could continue to experience disruptions to its business, its operations, the delivery of its products and customer demand for its products, including the following:

 

·

The broader economic impact of the COVID-19 pandemic, including resurgences, may continue to result in unfavorable operating earnings and cash flow generation in the months to follow. Current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in economic slowdowns that have caused and are likely to continue to cause contractions in some or all the markets we serve. This has led to and may continue to lead to decreased demand for the Company’s products, which in turn has negatively impacted, and may continue to negatively impact, the Company’s financial condition and operating results. Other macroeconomic factors also remain dynamic, and any causes of market size contraction, and overall economic slowdowns could reduce the Company’s sales or erode operating margin, in either case reducing earnings. In addition, volatile global economic conditions may cause foreign exchange rate fluctuations, which could result in increases or decreases in earnings and may adversely affect the value of the Company’s assets outside the United States. Increased pricing in response to fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on demand for the Company’s products, which would affect sales and profits. Exchange rate fluctuations could also increase pricing pressure and impair the ability of the Company’s products to compete with products imported from regions with favorable exchange rates.

·

Supply shortages and supply chain disruptions originally triggered by shutdowns and other restrictions imposed to slow the spread and resurgence of COVID-19 have impacted and may continue to impact the prices and availability of certain of the raw materials and components used in the production of the Company’s products, which could impair the Company’s ability to procure the required raw materials and components for its operations or increase the cost of manufacturing its products. The Company may be unable to pass increases in the cost of raw materials and components on to its customers and could experience reductions to its profit margins. Also, any decrease in the availability of raw materials and components could impair the Company’s ability to meet production requirements in a timely manner or at all.

·

The economic downturn has resulted and could continue to result in the carrying value of goodwill or other intangible assets exceeding their fair value, which has required and could continue to require the Company to recognize asset impairment.

      

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·

To the extent the Company draws under the revolving portion of the Credit Agreement, debt of the Company would increase. Such an increase in indebtedness could adversely affect the Company’s financial results or ability to incur additional debt and could negatively impact credit ratings. The continuing economic impact of the COVID-19 pandemic, including any resurgences, could also negatively impact the Company’s compliance with the financial covenants under the Credit Agreement or the interest rate of borrowings under the Credit Agreement. In addition, as a result of the risks described above, the Company may in the future be required to raise additional debt or equity financing, and the availability, terms and cost of such financing would depend on, among other things, global economic conditions, conditions in the global financing markets, trading prices of the Company’s common stock, the credit ratings of the Company, and the outlook for the industries in which the Company operates, all of which could be negatively impacted by the COVID-19 pandemic, including the extent of any resurgences, and related economic effects, including inflation, rising interest rates, and potential recessionary pressures. There can be no assurance that such financing would be available on acceptable terms, in sufficient quantities, or at all.

·

Pension plan funded status, the ratio of plan assets over plan liabilities, is largely influenced by current market conditions. To the extent asset returns and interest rates, which are used to discount future plan benefits, change from prior measurement periods, the plan’s funded ratio has the potential to change significantly.

 

 

Any of the foregoing effects of the COVID-19 pandemic and resulting economic conditions, if it persists, worsens or recurs, or the future occurrence of any other epidemic, could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Indebtedness may affect our business and may restrict our operating flexibility.

 

As of December 31, 2022, the Company had $64,147,000 in total consolidated indebtedness. Subject to restrictions contained in the Credit Agreement, the Company may incur additional indebtedness in the future, including indebtedness incurred to finance acquisitions. The level of indebtedness and servicing costs associated with that indebtedness could have important effects on our operation and business strategy. For example, the indebtedness could:

 

·

Place the Company at a competitive disadvantage relative to the Company’s competitors, some of which have lower debt service obligations and greater financial resources;

·

Limit the Company’s ability to borrow additional funds;

·

Limit the Company’s ability to complete future acquisitions;

·

Limit the Company’s ability to pay dividends;

·

Limit the Company’s ability to make capital expenditures; and

·

Increase the Company’s vulnerability to general adverse economic and industry conditions.

 

The Company’s ability to make scheduled principal payments, to pay interest on, or to refinance our indebtedness and to satisfy other debt obligations will depend upon future operating performance, which may be affected by factors beyond the Company’s control. In addition, there can be no assurance that future borrowings or the issuance of equity would be available to the Company on favorable terms for the payment or refinancing of the Company’s debt. If the Company were unable to service its indebtedness, the business, financial condition, and results of operation would be materially adversely affected.

 

The Credit Agreement contains covenants requiring the Company to achieve certain financial and operations results and maintain compliance with specified financial ratios. The Company’s ability to meet the financial covenants or requirements in the Credit Agreement may be affected by events beyond our control, and the Company may not be able to satisfy such covenants and requirements.

 

The Credit Agreement also contains a number of restrictive covenants that could adversely affect the Company’s ability to operate its business. These covenants restrict, among other things, the Company’s ability to:

 

·

Merge with or into another company or sell assets;

·

Grant liens;

·

Incur additional indebtedness;

·

Make investments or guarantee indebtedness of another person or entity;

·

Pay dividends, make distributions or repurchase equity;

·

Engage in certain transactions with affiliates; and

·

Make certain changes to the Company’s business.

 

 

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A breach of these covenants or the Company’s inability to comply with the financial ratios, tests or other restrictions contained in our Credit Agreement could result in an event of default under the Credit Agreement. Upon the occurrence of an event of default under the Credit Agreement and/or the expiration of any grace periods, the lenders could elect to declare all amounts outstanding under our credit facility, together with accrued interest, to be immediately due and payable. If this were to occur, the Company’s assets may not be sufficient to fully repay the amounts due under our credit facility or the Company’s other indebtedness.

 

The phaseout of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate such as SOFR, may adversely affect interest rates.

 

Central banks around the world, including the FRB, are working to implement the transition from the London Interbank Offered Rate (“LIBOR”) to replacement benchmarks including the Secured Overnight Financing Rate (“SOFR”) in the United States. The ICE Benchmark Administration (the “IBA”) ceased publication of all settings of non-US dollar LIBOR and the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings scheduled to be discontinued after June 30, 2023. The Adjustable Interest Rate Act (the “LIBOR Act”), which was signed into law on March 15, 2022, provided a replacement framework for outstanding financial contracts tied to LIBOR once LIBOR ceases to be published. The LIBOR Act provides a statutory mechanism and safe harbor that applies on a nationwide basis to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board based on SOFR, for certain contracts that reference LIBOR and contain no or insufficient fallback provisions. The LIBOR Act preempts and supersedes any state or local law, statute, rule, regulation, or standard relating to the selection or use of a benchmark replacement or related changes and allows parties that already have effective fallback provisions to opt out of the legislation. On December 16, 2022, the Federal Reserve adopted a final rule implementing the LIBOR Act that, among other things, identifies the applicable SOFR-based benchmark replacements under the LIBOR Act for various contact types. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate which has implications for how interest and other payments are based. The change from LIBOR to SOFR may adversely affect interest rates and result in higher borrowing costs. The effect of this change is still unknown and could materially and adversely affect the Company’s results of operations, cash flows and liquidity.

 

Risks Related to Competition and Global Operations

 

The Company’s business is subject to risks associated with conducting business overseas.

 

International operations could be adversely affected by changes in political and economic conditions, trade protection measures, restrictions on repatriation of earnings, differing intellectual property rights and changes in regulatory requirements that restrict the sales of products or increase costs. Changes in exchange rates between the U.S. dollar and foreign currencies could result in increases or decreases in earnings and may adversely affect the value of the Company’s assets outside the United States. The Company’s operations are also subject to the effects of international trade agreements and regulations. These trade agreements could impose requirements that adversely affect the Company’s business, such as, but not limited to, setting quotas on products that may be imported from a particular country into the Company’s key markets in North America.

 

The Company’s ability to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes, severe weather or increased homeland security requirements in the United States or other countries. These issues could delay importation of products or require the Company to locate alternative ports or warehousing providers to avoid disruption to customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on the Company’s business, financial conditions, or results of operations.

 

In addition, the Company’s growth strategy involves expanding sales of its products into foreign markets. There is no guarantee that the Company’s products will be accepted by foreign customers or how long it may take to develop sales of the Company’s products in these foreign markets.

 

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Supply chain disruptions, delays in production, and forecast inaccuracies have affected and could continue to affect our ability to meet customer demand, lead to higher costs, result in excess inventory, and could have an adverse effect on our results of operations and financial condition.

 

Raw materials needed to manufacture products are obtained from numerous suppliers. Under normal market conditions, these raw materials are readily available on the open market from a variety of producers. However, from time to time, the prices and availability of these raw materials fluctuate due to the impact of inflation, as well as changes in existing and expected rates of inflation, which could impair the Company’s ability to procure the required raw materials for its operations or increase the cost of manufacturing its products. If the price of raw materials increases, the Company may be unable to pass these increases on to its customers and could experience reductions to its profit margins. Additionally, any decrease in the availability of raw materials could impair the Company’s ability to meet production requirements in a timely manner or at all.

 

The Company faces active global competition and if it does not compete effectively, its business may suffer.

 

The Company encounters competition in all its business operations, and imports from Asia and Latin America with favorable currency exchange rates and low-cost labor have resulted in pricing pressure. The Company competes with other companies that offer comparable products or that produce different products appropriate for the same uses. To remain profitable and defend market share, the Company must continue to offer high quality custom engineered products on a timely basis, develop new products or update existing products to compete with new or updated products introduced by competitors, deploy internal engineering resources, maintain cost-effective manufacturing capabilities through its wholly owned Asian subsidiaries, expand its product lines through product development and acquisitions, and maintain sufficient inventory for fast turnaround of customer orders. The Company may not be able to compete effectively on all these fronts and with all its competitors, and the failure to do so could have a material adverse effect on its sales and profit margins.

 

In addition, the Company may have to reduce prices on its products and services, or make other concessions, to stay competitive and retain market share. Price reductions taken by the Company in response to customer and competitive pressures, as well as price reductions and promotional actions taken to drive demand that may not result in anticipated sales levels, could also negatively impact the Company’s business.

 

Tariffs, trade sanctions and political instability may impact the availability or cost of raw materials, which could adversely affect our margins, ability to meet customer demand, business, results of operations and financial condition.

 

The Company obtains raw materials used in the production of its products from domestic sources, as well as from Company-affiliated and unaffiliated sources in Asia. Changes in international trade duties and other aspects of international trade policy, both in the United States and abroad, could materially impact the cost of these raw materials. For example, from March 2018 until March 2021, the United States imposed an additional 25% tariff under Section 232 of the Trade Expansion Act of 1962, as amended, on steel products imported into the United States. While these tariffs have mostly been lifted on imports from countries other than China, imports from many jurisdictions are subject to limitations on volume, after which substantial tariffs will be reimposed. The United States also imposed a 10% tariff on all aluminum imports into the United States, with initial exemptions for aluminum imported from certain U.S. trading partners. Such actions could increase steel and aluminum costs and decrease supply availability. In response to the invasion of Ukraine by the military forces of the Russian Federation, the United States, the European Union and other jurisdictions have imposed sanctions that, among other things, prohibit the importation of a wide array of commodities and products from Russia, which is a major global supplier of nickel. Any increase in nickel, steel and/or aluminum prices that is not offset by an increase in the Company’s prices could have an adverse effect on the Company’s business, financial position, results of operations or cash flows. In addition, if the Company is unable to acquire timely nickel, steel or aluminum supplies, the Company may need to decline customer orders, which could also have an adverse effect on the business, financial position, results of operations or cash flows of the Company.

 

In addition to sustained increases in the cost of raw materials, the military conflict between Ukraine and Russia and the related sanctions and trade restrictions have continued to cause supply disruptions with respect to component parts for our products and resulted in higher oil and other commodity prices that have increased shipping and transportation costs. If the conflict persists or escalates, this may further disrupt global supply chains and could result in shortages of key raw materials or component parts that the Company’s suppliers require to satisfy our needs. Any increases in the cost, or shortages, of raw materials or energy may continue to create supply issues for critical materials that could constrain the Company’s manufacturing levels, which may lead to inability to meet demand for our products and could result in a loss of business and possible reduced margins for the Company if the cost increases cannot be fully offset by higher selling prices.

 

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Changes in competition in the markets that the Company services could impact revenues and earnings.

 

Any change in competition may result in lost market share or reduced prices, which could result in reduced profits and margins. This may impair the ability to grow or even maintain current levels of revenues and earnings. The loss of certain customers could adversely affect the Company’s business, financial condition, or results of operations until such business is replaced, and no assurances can be made that the Company would be able to regain or replace any lost customers.

 

Risks Related to Acquisitions and Organic Growth

 

The inability to develop new or updated products could limit growth.

 

Demand for new products, or the need to update existing products to compete with new or updated products offered by competitors, could adversely affect the Company’s performance, ability to maintain current levels of revenues and earnings, and prospects for future growth if the Company were unable to develop and introduce new competitive products or updates to existing products at favorable profit margins. The uncertainties associated with developing and introducing new products or updates to existing products, such as the market demands and the costs of development and production, may impede the successful development and introduction of new products or updates to existing products. Acceptance of the new or updated products may not meet sales expectations due to several factors, such as the Company’s potential inability to accurately predict market demand or to resolve technical issues in a timely and cost-effective manner. Additionally, the inability to develop new or updated products on a timely basis could result in the loss of business to competitors.

 

The inability to identify or complete acquisitions could limit growth.

 

The Company’s future growth may partly depend on its ability to acquire and successfully integrate new businesses. The Company intends to seek additional acquisition opportunities, both to expand into new markets and to enhance the Company’s position in existing markets. However, there can be no assurances that the Company will be able to successfully identify suitable candidates, negotiate appropriate terms, obtain financing on acceptable terms, complete proposed acquisitions, successfully integrate acquired businesses or expand into new markets. Once acquired, operations may not achieve anticipated levels of revenues or profitability.

 

Acquisitions involve risk, including difficulties in the integration of the operations, technologies, services and products of the acquired companies and the diversion of management’s attention from other business concerns. Although the Company’s management will endeavor to evaluate the risks inherent in any particular transaction, there can be no assurances that the Company’s management will properly ascertain all such risks. In addition, prior acquisitions have resulted, and future acquisitions could result in the incurrence of substantial debt and other expenses. Future acquisitions may also result in potentially dilutive issuances of equity securities. Difficulties encountered with acquisitions may have a material adverse effect on our business, financial condition, and results of operations.

 

We may be unable to successfully execute or effectively integrate acquisitions of any businesses we may acquire in the future.

 

We regularly review our portfolio of businesses and pursue growth through acquisitions. We may not be able to complete transactions on favorable terms, on a timely basis, or at all, and the success of any such acquisitions depends on our ability to combine the acquired business with our existing business in a manner that does not disrupt our and the acquired business’s ongoing relationships with customers, suppliers, and employees. Our results of operations and cash flows may be adversely impacted by (i) the failure of acquired businesses to meet or exceed expected returns, including risk of impairment; (ii) the failure to integrate multiple acquired businesses into the Company simultaneously and on schedule or to achieve expected synergies and (iii) the discovery of unanticipated liabilities, cybersecurity and compliance issues, labor relations difficulties or other problems in acquired businesses for which we lack contractual protections, or insurance or indemnities.

 

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Risks Related to Technology and Information Security

 

Our technology is important to the Company’s success and the failure to protect this technology could put the Company at a competitive disadvantage.

 

Some of the Company’s products rely on proprietary technology; therefore, the Company believes that the development and protection of intellectual property rights through patents, copyrights, trade secrets, trademarks, confidentiality agreements and other contractual provisions are important to the future success of its business. Despite the Company’s efforts to protect proprietary rights, unauthorized parties or competitors may copy or otherwise obtain and use the Company’s products or technology. Actions to enforce these rights may result in substantial costs and diversion of resources and the Company makes no assurances that any such actions will be successful.

 

In addition to the United States, we have applied for intellectual property protection in other jurisdictions with respect to certain innovations and new products, product features, and processes. The laws of certain foreign countries in which we do business, or may contemplate doing business in the future, do not recognize intellectual property rights or protect them to the same extent as U.S. law. As a result, these factors could weaken our competitive advantage with respect to our products, services, and brands in foreign jurisdictions, which could adversely affect our financial performance. We may also encounter significant problems in protecting and defending our licensed and owned intellectual property in foreign jurisdictions. For example, China currently affords less protection to a company’s intellectual property than some other jurisdictions. As such, the lack of strong patent and other intellectual property protection in China may significantly increase our vulnerability regarding unauthorized disclosure or use of our intellectual property and undermine our competitive position. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.

 

The Company relies on information and technology for many of its business operations, which could fail and cause disruption to the Company’s business operations.

  

The Company’s business operations are dependent upon information technology networks and systems to securely transmit, process and store electronic information and to communicate among its locations around the world and with clients and vendors. A shut-down of, or inability to access, one or more of the Company’s facilities, a power outage, a ransomware incident, or a failure of one or more of the Company’s information technology, telecommunications or other systems could significantly impair the Company’s ability to perform such functions on a timely basis. Computer viruses, cyberattacks, other external hazards and human error could result in the misappropriation of assets or sensitive information, corruption of data or operational disruption. If sustained or repeated, such a business interruption, system failure, service denial or data loss and damage could result in a deterioration of the Company’s ability to write and process orders, provide customer service, or perform other necessary business functions.

 

A breach in the security of the Company’s software or information technology systems could harm its reputation, result in a loss of current and potential customers, and subject the Company to material claims, which could materially harm our operating results and financial condition.

 

If the Company’s security measures are breached, an unauthorized party may obtain access to the Company’s data or users’ or customers’ data. In addition, cyberattacks and similar acts could lead to interruptions and delays in operations or customer processing or a loss or breach of the Company’s or a customer’s data. Because the techniques used to obtain unauthorized access, disable, or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventative measures. The risk that these types of events could seriously harm the Company’s business is likely to increase as the Company expands its reliance on technology for its operations and order processing and enhances the number of web-based products we offer, the services we provide, and our global operations.

 

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Data breaches and other serious cybersecurity incidents have increased globally, along with the methods, techniques and complexity of attacks, including use of viruses, ransomware and other malicious software, phishing and other efforts to discover and exploit any design flaws, bugs or other security vulnerabilities. Continued geopolitical turmoil, including the ongoing conflict between Russia and Ukraine, has heightened the risk of cyberattacks. We have been, and likely will continue to be, subject to such cyberattacks, although none has had a material impact on our operations. Also, the same cybersecurity threats exist for the third parties with whom we interact and share information and cyberattacks on third parties that possess or use our customer, personnel and other information could adversely impact us in the same way as would a direct cyberattack on us. The Company is subject to federal, state, and international laws and regulations relating to the collection, use, retention, security and transfer of personally identifiable information and individual payment data. The information, security and privacy requirements imposed by such laws and regulations are constantly evolving and are becoming increasingly demanding in the United States and other jurisdictions in which the Company operates. In addition, the interpretation and application of consumer and data protection laws in the United States and elsewhere are often uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with the Company’s data practices. If so, in addition to the possibility of fines or other penalties, this could result in an order requiring that the Company change its data practices, which could be costly, divert management attention, and have an adverse effect on the Company’s business and results of operations. The Company has incurred and may continue to incur significant costs relating to compliance with these laws and regulations, including costs related to updating certain business practices and systems and ensuring continued compliance. Further, any changes to laws or regulations, including new restrictions or requirements applicable to our business, or an increase in enforcement of existing laws and regulations, could expose the Company to additional costs and liability.

 

Any security breaches for which the Company is, or is perceived to be, responsible, in whole or in part, or any actual or perceived violations of data privacy laws and regulations, could subject the Company to legal claims or legal proceedings, including regulatory investigations, which could harm the Company’s reputation and result in significant litigation costs and damage awards or settlement amounts. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could materially harm our operating results and financial condition. Security breaches also could cause the Company to lose current and potential customers, which could have an adverse effect on the Company’s business. Moreover, the Company may be required to expend significant financial and other resources to further protect against security breaches or to rectify problems caused by any security breach.

 

Litigation, Compliance and Regulatory Risks

 

Delays in, or disagreements with the Company’s independent registered public accounting firm regarding, the Company’s evaluation of its internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on the market price of the Company’s stock or its borrowing ability. In addition, future changes in operating conditions could result in inadequate internal control over financial reporting.

 

The Company is an “accelerated filer” as defined in Rule 12b-2 under the Exchange Act and is thus required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires the Company to include in its report management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of the end of the fiscal period for which the Company is filing its Annual Report on Form 10-K. This report must also include disclosure of any material weaknesses in internal control over financial reporting that the Company has identified. Additionally, the Company’s independent registered public accounting firm is required to issue a report on the Company’s internal control over financial reporting and their evaluation of the operating effectiveness of the Company’s internal control over financial reporting. The Company’s assessment requires it to make subjective judgments, and the independent registered public accounting firm may not agree with the Company’s assessment. If the Company or its independent registered public accounting firm were unable to complete the assessments within the period prescribed by Section 404 and thus be unable to conclude that the internal control over financial reporting is effective, investors could lose confidence in the Company’s reported financial information, which could have an adverse effect on the market price of the Company’s common stock or impact the Company’s borrowing ability. In addition, changes in operating conditions and changes in compliance with policies and procedures currently in place may result in inadequate internal control over financial reporting in the future.

 

Environmental compliance costs and liabilities could increase the Company’s expenses and adversely affect the Company’s financial condition.

 

The Company’s operations and properties are subject to laws and regulations relating to environmental protection, including air emissions, water discharges, waste management and workplace safety. These laws and regulations can result in the imposition of substantial fines and sanctions for violations and could require the installation of pollution control equipment or operational changes to limit pollution emissions and/or decrease the likelihood of accidental hazardous substance releases. The Company must conform its operations and properties to these laws and adapt to regulatory requirements in the countries in which the Company’s businesses operate as these requirements change.

 

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The Company uses and generates hazardous substances and wastes in its operations and, as a result, could be subject to potentially material liabilities relating to the investigation and clean-up of contaminated properties and to claims alleging personal injury. The Company has experienced, and expects to continue to experience, costs relating to compliance with environmental laws and regulations. In connection with the Company’s acquisitions, the Company may assume significant environmental liabilities, some of which it may not be aware of at the time of acquisition. In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require the Company to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition, and results of operations.

  

Natural disasters, changes in climate, and geo-political events may negatively impact our business.

 

Natural disasters, changes in climate, and geo-political events could materially adversely affect our financial performance. The occurrence of one or more natural disasters, such as hurricanes, tropical storms, floods, fires, earthquakes, tsunamis, cyclones, typhoons, weather conditions such as major or extended winter storms, droughts and tornadoes, whether as a result of climate change or otherwise, severe changes in climate and geo-political events, such as war, civil unrest or terrorist attacks in a country in which we operate or in which our suppliers are located could adversely affect our operations and financial performance.

 

The Company could be subject to litigation, which could have a material impact on the Company’s business, financial condition, or results of operations.

 

From time to time, the Company’s operations are parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, and environmental and employment matters, which are defended and settled in the ordinary course of business. Any litigation to which the Company may be subject could have a material adverse effect on its business, financial condition, or results of operations. See Item 3 – Legal Proceedings of this Form 10-K for a discussion of current litigation.

 

The Company could be subject to additional tax liabilities.

 

The Company is subject to income tax laws of the United States, its states, and municipalities and those of other foreign jurisdictions in which the Company has business operations. These laws are complex, evolving, and subject to interpretations by the taxpayer and the relevant governmental taxing authorities.

 

The Company’s future annual and quarterly tax rates could be affected by numerous factors, including changes in the (1) applicable tax laws; (2) composition of earnings in countries with differing tax rates; or (3) recoverability of our deferred tax assets and liabilities. Beginning in 2022, the U.S. Tax Cuts and Jobs Act of 2017 eliminated the existing option to deduct research and development expenditures and requires taxpayers to amortize them over five years pursuant to IRC Section 174. This requirement is expected to reduce our cash flows. In August 2022, the United States enacted the Inflation Reduction Act of 2022 (the “IRA”) which includes a new 15% corporate minimum tax as well as a 1% excise tax on fair value of corporate stock repurchases made after December 31, 2022. The IRA could have a negative impact on our tax position. Many countries and organizations such as the Organization for Economic Cooperation and Development are also actively considering changes to existing tax laws or have proposed or enacted new laws that could increase our tax obligations in countries where we do business or cause us to change the way we operate our business. Any of these developments or changes in federal, state, or international tax laws or tax rulings could adversely affect our effective tax rate and our results of operations.

 

Significant judgment and interpretation are required in determining the Company’s worldwide provision for income taxes. In the ordinary course of business, transactions arise where the ultimate tax determination is uncertain. Although the Company believes that our tax estimates are reasonable, the outcome of tax audits and any related litigation could be materially different from that which is reflected in historical income tax provisions and accruals. Based on the status of a given tax audit or related litigation, a material effect on the Company’s income tax provision or net income may result during the period or periods from the initial recognition of a particular matter in the Company’s reported financial results to the final closure of that tax audit or settlement of related litigation when the ultimate tax and related cash flow is known with certainty.

 

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General Risk Factors

 

The Company’s goodwill or indefinite-lived intangible assets may become impaired, which could require a significant charge to earnings be recognized.

 

Under accounting principles generally accepted in the United States, goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment at least annually. Future operating results used in the assumptions, such as sales or profit forecasts, may not materialize, and the Company has been and could in the future be required to record a significant charge to earnings in the financial statements during the period in which any impairment is determined, resulting in an unfavorable impact on our results of operations.

 

The Company may need additional capital in the future, which may not be available on acceptable terms, if at all.

 

From time to time, the Company has historically relied on outside financing to fund expanded operations, capital expenditure programs and acquisitions. The Company may require additional capital in the future to fund operations or strategic opportunities. The Company cannot be assured that additional financing will be available on favorable terms, or at all. In addition, the terms of available financing may place limits on the Company’s financial and operating flexibility. If the Company is unable to obtain sufficient capital in the future, the Company may not be able to expand or acquire complementary businesses and may not be able to continue to develop new products or otherwise respond to changing business conditions or competitive pressures.

 

The Company’s stock price may become highly volatile, and investors may not be able to sell their shares at their desired prices, or at all.

 

The Company’s stock price may change dramatically when buyers seeking to purchase shares of the Company’s common stock exceed the shares available on the market, or when there are no buyers to purchase shares of the Company’s common stock when shareholders are trying to sell their shares. The Company’s common stock has historically been “thinly” traded, meaning that the number of persons interested in purchasing shares of Company common stock at prevailing prices at any given time may be relatively small. This may contribute to price volatility, as the trading of relatively small quantities of shares by our shareholders may disproportionately influence share price and may prevent investors from selling their shares at or above their purchase price if there is not sufficient demand for the shares at the time of sale.

 

The Company depends on key management, sales and marketing and technical personnel, the loss of whom could harm its businesses.

 

The Company depends on key management and technical personnel. The loss of one or more key employees could materially and adversely affect the Company.

 

The Company’s success also depends on its ability to attract and retain highly qualified technical, sales and marketing and management personnel necessary for the maintenance and expansion of its activities. The Company faces strong competition for such personnel and may not be able to attract or retain such personnel. In addition, when the Company experiences periods with little or no profits, a decrease in compensation based on profits may make it difficult to attract and retain highly qualified personnel.

 

To attract and retain executives and other key employees, the Company must provide a competitive compensation package. If the Company’s profits decrease, or if the Company’s total compensation package is not viewed as competitive, the Company’s ability to attract, retain and motivate executives and key employees could be weakened. The failure to successfully hire and retain executives and key employees or the loss of any executives and key employees could have a significant impact on our operations.

 

The Company may not be able to reach acceptable terms for contracts negotiated with its labor unions and be subject to work stoppages or disruption of production.

 

During 2023, union contracts covering approximately 21% of the Company’s total workforce will expire. The Company has been successful in negotiating new contracts over the years but cannot guarantee that will continue and the Company has, in the past experienced, and could in the future experience, temporary work stoppages during negotiation of such contracts. Failure to negotiate new union contracts, or any work stoppage that is prolonged, could result in the disruption of production, inability to deliver product, or a number of unforeseen circumstances, any of which could have an unfavorable material impact on the Company’s results of operations or financial condition.

 

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Deterioration in the creditworthiness of several major customers could have a material impact on the Company’s business, financial condition, or results of operations.

 

Included as a significant asset on the Company’s balance sheet are accounts receivable from our customers. If several large customers become insolvent or are otherwise unable to pay for products or become unwilling or unable to make payments in a timely manner, it could have an unfavorable material impact on the Company’s results of operations or financial condition.

 

Although the Company is not dependent on any one customer, deterioration in several large customers at the same time could have an unfavorable material impact on the Company’s results of operations or financial condition. One customer exceeded 14% of total accounts receivable for fiscal 2022 and one customer exceeded 10% of total accounts receivable for fiscal 2021.

 

The Company’s operating results may fluctuate, which makes the results of operations difficult to predict and could cause the results to fall short of expectations.

 

The Company’s operating results may fluctuate because of several factors, many of which are outside of our control. As a result, comparing the Company’s operating results on a period-to-period basis may not be meaningful, and past results should not be relied upon as an indication of future performance. Quarterly, year to date, and annual costs and expenses as a percentage of revenues may differ significantly from historical or projected levels. Future operating results may fall below expectations. These types of events could cause the price of the Company’s stock to fall.

 

New or existing U.S. or foreign laws and regulations could subject the Company to claims or otherwise impact the Company’s business, financial condition, or results of operations.

 

The Company is subject to a variety of laws, regulations, rules, and policies in both the U.S. and foreign countries that are costly to comply with, can result in negative publicity and diversion of management time and effort, and can subject the Company to claims or other remedies. These laws, regulations, rules, and policies could relate to any of an array of issues including, but not limited to, environmental, tax, intellectual property, trade secrets, product liability, contracts, antitrust, employment, securities, import/export and unfair competition. These laws and regulations may differ in different jurisdictions and are subject to change. The cost of maintaining compliance under multiple and changing regulatory regimes, and expenditures that may be required to comply with new laws and regulations, may adversely affect the Company’s business, financial condition, and results of operations. In the event that the Company fails to comply with or violates applicable U.S. or foreign laws or regulations or customer policies, the Company could be subject to civil or criminal claims or proceedings that may result in monetary fines, penalties or other costs against the Company or its employees, which may adversely affect the Company’s operating results, financial condition, customer relations and ability to conduct its business.

 

ITEM 1B UNRESOLVED STAFF COMMENTS

 

None.

 

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ITEM 2 PROPERTIES

 

The Company leases 3,947 square feet of corporate office space in Shelton, Connecticut. The current lease expires on March 31, 2033.

 

All the Company’s properties are owned or leased and are adequate to satisfy current requirements. All the Company’s properties have the necessary flexibility to cover any long-term expansion requirements.

 

Company facilities include the following:

 

Big 3 Products in Centralia, Illinois owns 156,160 square feet of administrative and manufacturing space located in an industrial park. The single-story building is steel frame with steel siding and roof.

 

Big 3 Products in Dearborn, Michigan leases 86,250 square feet of building space. The building is made from industrial block. Approximately 6,000 square feet of office space is used for design engineers. The current lease expires on February 4, 2025.

 

Big 3 Products in Chesterfield, Michigan leases 45,000 square feet for a design and manufacturing facility. This building is industrial block and metal frame. The current lease expires on February 28, 2026.

 

Big 3 Mold in Millville, New Jersey owns 54,450 square feet of building space. The building is industrial block.

 

Big 3 Precision in Pleasant Hill, Missouri leases 1,000 square feet of office space. The building is metal frame. The current lease expires on April 2, 2023.

 

Big 3 Precision in Kimball, Michigan leases 3,500 square feet of building space. The current lease expires on February 28, 2026, with an option to renew for an additional twelve months.

 

Associated Tool, a wholly owned subsidiary in Farndon, UK leases 16,000 square feet of building space. The building is industrial block and metal frame. The current lease expires on December 17, 2026.

 

Hallink Moulds, a wholly owned subsidiary in Cambridge, Ontario, leases 15,000 square feet of building space. The building is industrial block and metal frame. The current lease expires on January 31, 2024, with the option to renew for an additional twenty-four months.

 

Eberhard Manufacturing in Strongsville, Ohio owns 9.6 acres of land and a building containing 157,580 square feet, located in an industrial park. The building is steel frame, is one-story and has curtain walls of brick, glass, and insulated steel panels. The building has two high bays, one of which houses two units of automated warehousing.

 

Eberhard Manufacturing leases 8,551 square feet of office space in Arlington Heights, IL. The current lease expires on September 1, 2026.

 

Eastern Industrial Ltd., a wholly owned subsidiary in Shanghai, China, leases brick and concrete buildings containing approximately 47,500 square feet of space that are in both industrial and commercial areas. In 2022, Eastern Industrial, Ltd. entered a three-year lease, which expires on March 31, 2025, and is renewable.

 

The World Lock Co. Ltd. Subsidiary leases 5,285 square feet of space in a building located in Taipei, Taiwan. The building is made from brick and concrete and is protected by a fire alarm and sprinklers. The current lease expires on October 31, 2023.

 

The Dongguan Reeworld Security Products Ltd. Subsidiary leases 103,800 square feet of space in concrete buildings that are in an industrial park in Dongguan, China. The current lease expires on May 31, 2027, and is renewable.

 

Velvac, Inc., a wholly owned subsidiary in New Berlin, Wisconsin, leases a 98,000 square foot building. The building includes 17,000 square feet of office space and 81,000 square feet of warehousing and distribution operations. The current lease expires on May 31, 2024.

 

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Velvac de Reynosa, S. De R.L De C.V., a maquiladora wholly owned in Reynosa, Tamaulipas, Mexico, leases 150,000 square feet of building space located in an industrial park identified as Lots 2, 3 and 4. The building is one level and is made from brick and concrete. The current lease expires on December 1, 2030.

 

All owned properties are free and clear of any encumbrances.

 

ITEM 3 LEGAL PROCEEDINGS

 

The Company is party to various legal proceedings from time to time related to its normal business operations. Currently, the Company is not involved in any material pending legal proceedings, and no such material proceedings are known to the Company to be contemplated by governmental authorities.

 

In 2016, the Company created a plan to remediate a landfill of spent foundry sand maintained at the Company’s previously owned metal casting facility in New York. This plan was agreed to by the New York State Department of Environmental Conservation (the “NYSDEC”) on March 27, 2018. Based on estimates provided by the Company’s environmental engineers, the anticipated cost to remediate and monitor the landfill was $430,000. The Company accrued for and expensed the entire $430,000 in the first quarter of 2018 and fiscal 2017. In the fall of 2018, detailed construction drawings were prepared by an outside consultant in conjunction with informal progress reviews by the NYSDEC. Long-term groundwater monitoring commenced in April 2019. Verbal approval for the closure plan was received from the NYSDEC in May 2019, and written approval was received in October 2020. Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap was completed in October 2021. A closure report and long-term maintenance plan were submitted to the NYSDEC in November 2021. The 30-year annual groundwater monitoring and site maintenance program are underway and will continue through 2048.

 

ITEM 4 MINE SAFETY DISCLOSURES

 

Not applicable.

 

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PART II

 

 

ITEM 5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s common stock is quoted on the NASDAQ Global Market under the symbol “EML”. The approximate number of record holders of the Company common stock on December 31, 2022 was 295.

The Company expects to continue its policy of paying regular cash dividends, although there can be no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial condition.

 

During fiscal years 2022 and 2021, there were no sales by the Company of its securities that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).

On May 2, 2018, the Company announced that its Board of Directors had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.

 

The Company made no share repurchases during the fourth quarter of 2022, as set forth in the table below:

 

Issuer Repurchases of Equity Securities

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

(a)

(b)

(c)

(d)

October 2, 2022 to October 29, 2022

--

--

--

60,284

October 30, 2022 to November 26, 2022

--

--

--

60,284

November 27, 2022 to December 31, 2022

--

--

--

60,284

Total

--

--

--

60,284

 

ITEM 6 RESERVED

 

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ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The Company’s fiscal year ends on the Saturday nearest to December 31. Fiscal years 2022 and 2021 were each 52 weeks in length. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to results for “2022” or “fiscal year 2022” mean the fiscal year ended December 31, 2022, and references to results for “2021” or “fiscal year 2021” mean the fiscal year ended January 1, 2022. References to the “fourth quarter of 2022” or the “fourth fiscal quarter of 2022” mean the thirteen-week period from October 2, 2022 to December 31, 2022, and references to the “fourth quarter of 2021” or the “fourth fiscal quarter of 2021” mean the thirteen-week period from October 3, 2021 to January 1, 2022.

 

The following analysis excludes discontinued operations.

 

Summary

 

Sales for 2022 were $279.3 million compared to $246.5 million for 2021. Net income for 2022 was $11.1 million, or $1.77 per diluted share, compared to $16.2 million, or $2.58 per diluted share, for 2021. Sales for the fourth quarter of 2022 were $69.1 million compared to $59.6 million for the same period in 2021. Net income for the fourth quarter of 2022 was $0.2 million, or $0.03 per diluted share compared to $3.9 million, or $0.62 per diluted share, for the comparable 2021 period.

 

During 2022, the Company experienced rising material costs, supply chain disruption, labor shortages and abnormally high freight costs all having a negative impact on our gross margin. The Company’s backlog was $72.5 million on December 31, 2022, compared to $82.8 million on January 1, 2022, primarily due to a decrease of $5.0 million in backlog for locks and hardware at Eberhard, a decrease of $7.1 million in backlog at Big 3 for mold services and returnable packaging, offset by an increase of $1.8 million in backlog related to the launch of new mirror programs for Class 8 trucks being awarded to our Velvac subsidiary.

 

During 2022 the Company experienced price increases for many of the raw materials used in producing its products, including: scrap iron, stainless steel, hot and cold rolled steel, zinc, copper, aluminum, and nickel. These increases have negatively impacted and could continue to negatively impact the Company’s gross margin if raw material prices increase too rapidly for the Company to recover those cost increases through either price increases to our customers or cost reductions in other areas of the business.

 

Impact of COVID-19, Current Political and Economic Conditions and Supply Chain Disruptions

 

The COVID-19 pandemic has affected our business, including our supply chain, our operations, the labor force, costs and interest rates throughout 2021 and 2022. We continue to follow CDC guidelines, social distancing, and sanitizing work areas. During the past two years and continuing into 2023, the Company implemented a broad range of policies and procedures to ensure that employees at all our locations remain healthy. Steps that we have taken to reduce the risk of COVID-19 to our employees include, among others: protecting employee health by instructing employees to stay home if they exhibit symptoms of COVID-19. We maintain a clean work environment by frequently cleaning all touch points with products that meet EPA criteria for use against COVID-19; educating employees to clean their personal workspace at the beginning and the end of every shift; and providing hand sanitizer and disposable wipes. We encourage social distancing and continue to seek and implement additional methods to reduce the risk of COVID-19 to our employees. As a result of these measures, the COVID-19 pandemic had minimal impact on our North American capacity utilization at most of our production facilities. Many of the Company’s employees have received COVID-19 vaccinations, and we will continue to encourage our workforce to get vaccinated.

 

Current global economic conditions, resulting from the COVID-19 pandemic and other factors, are highly volatile. Many of the markets we serve are facing inflation and rising interest rates, which has led to and may continue to lead to contractions resulting in decreased demand for our products. Decreased demand has in turn negatively impacted, and may continue to negatively impact, our financial condition and operating results. Any further or prolonged market contractions or economic slowdowns could materially adversely affect our sales or operating margin, which would in turn reduce earnings. Volatile global economic conditions may also cause foreign exchange rate fluctuations, which could result in material increases or decreases in earnings and may adversely affect the value of the Company’s assets outside the United States. Increased pricing in response to fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on demand for the Company’s products, which would affect sales and profits. Exchange rate fluctuations could also increase pricing pressure and impair the ability of the Company’s products to compete with products imported from regions with favorable exchange rates.

 

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In the second quarter of 2022, we experienced interruptions of our operations and supply base in China as a result of a new variant of COVID-19 and the local response to minimize its spread. A more significant resurgence of the COVID-19 pandemic or development of additional severe or highly contagious variants could cause further disruptions in our business and could adversely affect our financial condition, results of operations and cash flows. In addition, supply shortages and supply chain disruptions originally triggered by shutdowns and other restrictions imposed to slow the spread and resurgence of COVID-19 have impacted and may continue to impact the prices and availability of certain of the raw materials and components used in the production of our products.

 

The impact of economic contraction and supply chain disruptions has been exacerbated by the effects of tariffs, trade sanctions and global political instability. International trade policies, such as tariffs on imports from China and on aluminum imports, have increased our costs. Sanctions imposed as a result of the Ukraine conflict prohibit importation of a variety of products from Russia, which is a major global supplier of nickel, and have resulted in higher oil and other commodity prices that have increased shipping and transportation costs. Supply chain constraints and tariffs may result in cost increases that we are not able to offset with price increases, which could have a material adverse effect on our business, financial position, results of operations or cash flows. Further, trade restrictions and supply chain constraints have affected our ability to meet customer demand. If such conditions persist and we are unable to acquire necessary raw materials or components in a timely manner or at all, we may be unable to meet production requirements and may need to cancel or decline orders, which could have a material adverse effect on our reputation as well as our business and financial results.

 

The extent to which our operations will be further affected by COVID-19 and its lasting economic impact, including supply chain disruptions, cost inflation and rising interest rates, in fiscal year 2023 is dependent on future developments including new COVID-19 variants and governmental restrictions, the duration of the Russia–Ukraine conflict and related sanctions, actions taken by the Federal Reserve to stabilize the economy, and other factors outside our control. With the inherent uncertainty of the COVID-19 pandemic, volatile economic conditions and political instability, it is difficult to predict with any confidence the likely ultimate impact of these conditions on our future operations and the extent of actual and potential effects on our consolidated business, results of operations and financial condition. For further discussion of these risks, see Part I, Item 1A, Risk Factors, of this Form 10-K.

 

Critical Accounting Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Areas of uncertainty that require judgments, estimates and assumptions include items such as the allowance for doubtful accounts; inventory accounting; the testing of goodwill and other intangible assets for impairment; and pensions and other postretirement benefits. Management uses historical experience and all available information to make its estimates and assumptions, but actual results will inevitably differ from the estimates and assumptions that are used to prepare the Company’s financial statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and related footnotes provide a meaningful and fair presentation of the Company’s financial position and results of operations.

 

Management believes that the application of these estimates and assumptions on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company’s operating results and financial condition.

 

Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews the collectability of its receivables on an ongoing basis, considering a combination of factors that require judgment and estimates, including among others, our customers’ access to capital, customers’ willingness or ability to pay, customer payment patterns, general economic conditions and geopolitical trends, and our ongoing relationship with our customers. The Company reviews potential problems, such as past due accounts, a bankruptcy filing or deterioration in the customer’s financial condition, to ensure that the Company has adequately accrued for potential loss. Accounts are considered past due based on when payment was originally due. If a customer’s situation changes, such as a bankruptcy or a change in its creditworthiness, or there is a change in the current economic climate, the Company may modify its estimate of the allowance for doubtful accounts. The Company will write off accounts receivable after reasonable collection efforts have been made and the accounts are deemed uncollectible. If our estimates and assumptions as to collectability were materially incorrect, or if any of our significant customers were to develop unexpected and immediate financial problems that would prevent payment of amounts due to us, and our allowance for doubtful accounts were inadequate, this could result in an unexpected loss in profitability.

 

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As of December 31, 2022 and January 1, 2022, the Company’s allowance for doubtful accounts total was $677,000 and $515,000, respectively. As of December 31, 2022, and January 1, 2022, the Company’s bad debt expense was $208,000 and $48,000 respectively.

 

Inventory

 

Inventories are valued at the lower of cost or net realizable value. Cost is determined by the last-in, first-out (“LIFO”) method at Eberhard while Big 3 Precision and Velvac are valued using a first-in, first-out (“FIFO”) method. Accordingly, a LIFO valuation reserve is calculated using the dollar value link chain method.

 

We review the net realizable value of inventory in detail on an ongoing basis, considering deterioration, obsolescence, estimated future demand, current market conditions, and other factors. Based on these assessments, we provide for an inventory reserve in the period in which an impairment is identified. The reserve fluctuates with market conditions, design cycles, and other economic factors and could vary significantly, whether favorably or unfavorably, from actual results due to, among other things, unanticipated changes in economic conditions, customer demand, or the competitive landscape.

 

The inventory reserve for excess or obsolete inventory reduced the Company’s inventory valuation by $1,926,000 and $1,115,000 as of December 31, 2022 and January 1, 2022, respectively.

 

Goodwill and Other Intangible Assets

 

Intangible assets with finite useful lives are generally amortized on a straight-line basis over the periods benefited. Goodwill and other intangible assets with indefinite useful lives are not amortized. The Company performs annual qualitative assessments on goodwill and other intangible assets as of the end of each fiscal year by comparing the estimated fair value of each reporting unit with its carrying amount. Additionally, the Company performs an interim analysis 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 or 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. 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, including (i) macroeconomic conditions, (ii) market and industry conditions, (iii) cost factors, (iv) overall financial performance, (v) other relevant entity-specific events, and (vi) events affecting a reporting unit. 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.

 

The Company performed its annual qualitative assessment as of the end of each of fiscal 2022 and 2021 on the carrying value of goodwill and determined that it is more likely than not that no impairment of goodwill existed as of such dates. See Note 3 – Accounting Policies – Goodwill, in Item 8, Financial Statements and Supplementary Data of this Form 10-K for more detail.

 

Pension and Other Postretirement Benefits

 

The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions about such factors as expected return on plan assets, discount rates at which liabilities could be settled, rate of increase in future compensation levels, mortality rates, and trends in health insurance costs. These assumptions are reviewed annually and updated as required. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect the expense recognized and obligations recorded in future periods.

 

The discount rate used is based on a single equivalent discount rate derived with the assistance of our actuaries by matching expected future benefit payments in each year to the corresponding spot rates from the FTSE Pension Liability Yield Curve, comprised of high quality (rated AA or better) corporate bonds. The Company calculates its service and interest costs in future years by applying the specific spot rates along the selected yield curve to the relevant projected cash flows.

 

The expected long-term rate of return on assets is also developed with input from the Company’s actuarial firms. We consider the Company’s historical experience with pension fund asset performance, the current and expected allocation of our plan assets and expected long-term rates of return. The long-term rate-of-return assumption used for determining net periodic pension expense was 7.5% for 2022 and 2021. The Company reviews the long-term rate of return each year.

 

Future actual pension income and expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company’s pension plans.

 

The Company expects to make cash contributions of approximately $800,000 and $50,000 to our pension plans and other postretirement plan, respectively, in 2023.

 

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In connection with our pension and other postretirement benefits, the Company reported income of $3.3 million and $2.1 million (net of tax) on its Consolidated Statement of Comprehensive Income for fiscal years 2022 and 2021, respectively. The main factor driving this expense was the change in the discount rate during the applicable period.

 

Assumptions used to determine net periodic pension benefit cost for the fiscal years indicated were as follows:

 

2022

2021

Discount rate

2.75% - 2.81%

2.40% - 2.48%

Expected return on plan assets

7.5%

7.5%

Rate of compensation increase

0.0%

0.0%

 

Assumptions used to determine net periodic other postretirement benefit cost are the same as those assumptions used for the pension benefit cost, except that the rate of compensation is not applicable for other postretirement benefit cost.

 

The changes in assumptions had the following effect on the net periodic pension and other postretirement costs recorded in Other Comprehensive Income as follows:

 

Year ended

December 31,

January 1,

2022

2022

Discount rate

$26,970,888$5,412,964

Additional recognition due to significant event

--(71,547)

Asset gain or (loss)

(22,838,898 )(781,059 )

Amortization of:

Unrecognized gain or (loss)

1,552,0851,717,776

Unrecognized prior service cost

70,49399,380

Other

(1,538,804 )(3,105,208 )

Comprehensive income, before tax

4,215,7643,272,306

Income tax

(941,964 )(1,208,497 )

Comprehensive income, net of tax

$3,273,800$2,063,809

 

The Plan has been investing a portion of the assets in long-term bonds to better match the impact of changes in interest rates on its assets and liabilities and thus reduce some of the volatility in Other Comprehensive Income. Please refer to Note 10 – Retirement Benefit Plans in Item 8, Financial Statements and Supplementary Data of this Form 10-K for additional disclosures concerning the Company’s pension and other postretirement benefit plans.

 

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RESULTS OF OPERATIONS

 

Fourth Quarter 2022 Compared to Fourth Quarter 2021

 

The following table shows, for the fourth quarter of 2022 and 2021, selected line items from the consolidated statements of income as a percentage of net sales for the Company’s operations. The Company’s continuing operations include (1) Big 3 Precision, including Big 3 Products and Big 3 Mold, Hallink Moulds, and Associated Toolmakers; (2) Eberhard Manufacturing, Eastern Industrial Ltd., World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries Ltd.; and (3) Velvac Holdings.

 

Three Months Ended

December 31, 2022

January 1, 2022

Net Sales

100.0%100.0%

Cost of Products Sold

83.4%79.8%

Gross Margin

16.6%20.2%

Product Development Expense

1.5%1.7%

Selling and Administrative Expense

13.6%12.5%

Restructuring Costs

1.0%--

Operating Profit

0.5%6.0%

 

Net sales in the fourth quarter of 2022 increased 15.8% to $69.1 million from $59.6 million in the fourth quarter of 2021. Sales increases were due to higher demand for trucks accessories, distribution products and automotive returnable packaging and improved pricing. Sales volume of existing products increased 10.5%, prices and new products contributed 5.3% in sales growth in the fourth quarter of 2022 when compared to sales in the fourth quarter of 2021. New products included various truck, mirrors, latches, and accessories.

 

Sales of new products contributed 1.4% to sales growth in the fourth quarter compared to 8% sales growth from new products in the fourth quarter of 2021. New products in the fourth quarter included various new truck mirrors and truck latches.

 

Cost of products sold in the fourth quarter of 2022 increased $10.0 million or 21% from the corresponding period in 2021. The increase in cost of products sold is primarily attributable to increased sales volume, increases in the cost of materials, increases in freight costs due to expedite fees associated with supply chain constraints, and other inventory write-offs.

 

Gross margin as a percentage of net sales for the fourth quarter of 2022 was 16.6% compared to 20.2% in the prior year fourth quarter. The decrease reflects the combination of higher material and freight costs and other inventory write-offs.

 

Product development expenses in the fourth quarter of 2022 of $1.1 million were flat when compared to the fourth quarter of 2021. As a percentage of net sales, product development costs were 1.5% and 1.7% for the fourth quarter of 2022 and 2021 respectively as part of our investment in new products at Eberhard and Velvac.

 

Selling and administrative expenses in the fourth quarter of 2022 increased 1.1% compared to the fourth quarter of 2021. The increase was primarily the result of increased payroll and payroll related expenses, increased travel, and other selling expenses.

 

Restructuring expenses of $0.7 million were recognized in the fourth quarter of 2022 due to a warehouse consolidation into Eberhard.

 

Net income for the fourth quarter of 2022 decreased 95% to $0.2 million, or $0.03 per diluted share, from $3.9 million, or $0.62 per diluted share, in 2021. In the fourth quarter of 2022, net income was negatively impacted by restructuring costs of $0.5 million, net of tax, related to a warehouse consolidation into Eberhard.

 

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Fiscal Year 2022 Compared to Fiscal Year 2021

 

The following table shows, for fiscal year 2022 and fiscal year 2021, selected line items from the consolidated statements of income as a percentage of net sales for the Company’s operations. The Company’s continuing operations include (1) Big 3 Precision, including Big 3 Products, Big 3 Mold, Hallink Moulds and Associated Toolmakers Ltd.; (2) Eberhard Manufacturing Company, Eberhard Hardware, Eastern Industrial Ltd., Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd. and World Security Industries Ltd.; and (3) Velvac Holdings.

 

Fiscal Year Ended

December 31, 2022

January 1, 2022

Net Sales

100.0%100.0%

Cost of Products Sold

79.0%77.0%

Gross Margin

21.0%23.0%

Product Development Expense

1.5%1.6%

Selling and Administrative Expense

14.1%14.3%

Restructuring Costs

0.3%--

Operating Profit

5.1%7.1%

 

Summary

 

Net sales for 2022 increased 13% to $279.3 million from $246.5 million in 2021. The sales increase was primarily due to higher demand for trucks accessories, distribution products and automotive returnable packaging. Sales volume of existing products increased by 7% in 2022 compared to 2021 while price increases and new products increased sales in 2022 by 6%. Sales of new products contributed 3% to sales growth in 2022 compared to 8% sales growth from new products in 2021. New products in 2022 included various new truck mirrors, truck compression latches, cable locks, and locking assemblies.

 

Cost of products sold increased by $30.9 million or 16% to $220.6 million in 2022 from $189.8 million in 2021. The increase in cost of products sold is primarily attributable to increased sales volume, increases in the price of materials, increases in freight costs due to expedite fees associated with supply chain constraints, and other inventory write-offs. Tariffs incurred during 2022 were $3.1 million from China-sourced products as compared to $2.9 million in 2021. Most of the tariffs were recovered through price increases.

 

Gross margin as a percentage of sales was 21% in 2022 compared to 23% in 2021. The decrease reflects the combination of higher material and freight costs and other inventory write-offs.

 

Product development expenses as a percentage of sales was 1.5% and 1.6% in 2022 and 2021, respectively, as the Company continues on-going efforts to develop new products to better serve our customers.

  

Restructuring expenses of $0.7 million were recognized in 2022 due to a warehouse consolidation into Eberhard.

   

Selling and administrative expenses increased $4.3 million or 12% to $39.5 million in 2022 from $35.2 million in 2021. The increase relates to increased payroll and payroll related costs, increased travel, and other selling expenses.

   

Net income for 2022 decreased 32% to $11.1 million, or $1.77 per diluted share, from $16.2 million, or $2.58 per diluted share, in 2021. In 2022, net income was negatively impacted by restructuring costs of $0.5 million, net of tax, related to a warehouse consolidation into Eberhard, and loss on sale of the Wheeling, IL building in the first quarter of 2022 of $0.2 million, net of tax, partially offset by a gain on sale of the Eastern corporate office building in the third quarter of 2022 of $0.5 million, net of tax. Net income for 2021 was positively impacted by a $1.4 million gain, net of tax, related to the sale of the Eberhard Hardware property in the first quarter, partially offset by factory relocation and start-up costs of $0.5 million, net of tax.

 

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Other Items

 

The following table shows the amount of change from the year ended January 1, 2022 to the year ended December 31, 2022 in other items (dollars in thousands):

 

Amount

%

Interest expense

$52830%

Other income

$-859-26%

Income taxes

$46415%

 

Interest expense increased in 2022 from 2021 due to increased interest rates.

 

Other income in 2022 decreased $0.9 million over 2021. Other income in 2022 included a favorable $1.8 million pension cost adjustment and a $0.6 million gain on the sale of the Eastern corporate office building. In 2021, other income included a favorable $1.5 million pension cost adjustment and a $1.8 million gain on the sale of the Eberhard Hardware property.

 

The effective tax rate for 2022 was 23% compared to the 2021 effective tax rate of 7%. The effective tax rate for 2022 was increased compared to 2021 due to the impact of foreign subsidiaries on the effective tax rate in 2021 and a greater impact from research and development tax credits in 2021. Total income taxes paid were $3.7 million in 2022 and $2.3 million in 2021.

 

Liquidity and Sources of Capital

 

The primary source of the Company’s cash is earnings from operating activities adjusted for cash generated from or used for net working capital. The most significant recurring non-cash items included in net income are depreciation and amortization expense. Changes in working capital fluctuate with the changes in operating activities. As sales increase, there generally is an increased need for working capital. The Company closely monitors inventory levels and attempts to match production to expected market demand, keeping tight control over the collection of receivables, and optimizing payment terms on its trade and other payables. The maintenance of appropriate inventory levels considering demand has been and may continue to be challenged by supply chain disruptions, which have led in some cases to a deficiency inventory that has required us to pay expedited freight fees on some of our products to timely fulfill customer orders. Coupled with increased materials costs, this has decreased our margins. If these disruptions persist and we are unable to maintain sufficient inventory on hand, we may need to cancel or decline orders, and we may be unable to offset increased material and freight costs fully by increasing prices on our products, any of which could have a material adverse impact on our liquidity.

 

The Company is dependent on continued demand for its products and subsequent collection of accounts receivable from its customers. The Company serves a broad base of customers and industries with a variety of products. As a result, any fluctuations in demand or payment from a particular industry or customer should not have a material impact on the Company’s sales and collection of receivables. Management expects that the Company’s foreseeable cash needs for operations, capital expenditures, debt service and dividend payments will continue to be met by the Company’s operating cash flows and available credit facility.

 

The following table shows key financial ratios at the end of each fiscal year:

 

2022

2021

Current ratio

2.72.5

Average days’ sales in accounts receivable

5664

Inventory turnover

3.43.0

Ratio of working capital to sales

26.1%27.2%

Total debt to shareholders’ equity

50.7%62.2%

    

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The following table shows important liquidity measures as of the fiscal year-end balance sheet date for each of the preceding two years (in millions):

 

2022

2021

Cash and cash equivalents

- Held in the United States

$7.4$4.3

- Held by foreign subsidiaries

2.82.3
10.26.6

Working capital

78.374.1

Net cash (used in) provided by operating activities

7.4(7.8)

Change in working capital impact on net cash

used in operating activities

(5.2 )(22.9 )

Net cash provided by (used in) in investing activities

5.113.6

Net cash used in by financing activities

(11.8 )(20.3 )

 

All cash held by foreign subsidiaries is readily convertible into other currencies, including the U.S. dollar.

 

Net cash provided by operating activities was $7.4 million in 2022 compared to $7.8 million net cash used in operating activities in 2021. In 2022, the Company contributed $0.2 million to its defined benefit retirement plan.

 

In 2022, cash used to support additional working capital requirements was $5.2 million, which was primarily due to management’s focus on ensuring availability of inventory to meet customer demands during the current supply chain constraints. In 2021, cash used to support additional working capital requirements was $22.9 million.

 

The Company provided $5.1 million and $13.6 million for investing activities in 2022 and 2021, respectively. In 2022, the company sold a business associated with its discontinued operations for $5.8 million and two of its buildings for $2.2 million. The Company also issued a note receivable of $0.4 million as part of the sale of one of its buildings. In 2021, the company sold businesses associated with its discontinued operations for $17.3 million and one of its buildings for $1.7 million, the Company also issued a note receivable of $2.5 million as part of the sale of the discontinued operations. The Company issued notes receivable of $0.4 million as part of the sale of property. These transactions are more fully discussed in Note 2 – Discontinued Operations in Item 8, Financial Statements of this Form 10-K. The Company invested in capital expenditures of $3.4 million and $3.7 million in 2022 and 2021, respectively. Capital expenditures in fiscal year 2023 are expected to be approximately $6.9 million.

 

In 2022, the Company made total debt payments of $17.5 million, of which $10.0 million was a repayment of the $10.0 million that had been drawn under the revolving credit facility during 2022 and used $2.8 million for payment of dividends. The Company has $20.0 million available on its revolving line of credit. See Note 6 - Debt in Item 8, Financial Statements for further discussion on the Company’s debt facilities.

 

In 2021, the Company made total debt payments of $17.3 million, of which $11.0 million was an accelerated principal payment, and used $2.8 million for payment of dividends. The Company did not draw down on its $20.0 million revolving credit facility in 2021.

 

The Company leases certain equipment and buildings under cancelable and non-cancelable operating leases that expire at various dates up to five years. Rent expense amounted to approximately $2.7 million in 2022 and $2.3 million in 2021.

 

On August 30, 2019, the Company entered into the Credit Agreement with Santander Bank, N.A., for itself, M&T Bank, National Association and TD Bank, N.A. as lenders (the “Credit Agreement”), that included a $100.0 million term portion and a $20.0 million revolving commitment portion. Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with M&T Bank, N.A. (approximately $19.0 million) and to acquire Big 3 Precision. The term portion of the loan required quarterly principal payments of $1.25 million for an 18-month period beginning December 31, 2019. The repayment amount then increased to $1.875 million per quarter beginning September 30, 2021, and continues through June 30, 2023. The repayment amount then increases to $2.5 million per quarter beginning September 30, 2023, and continues through June 30, 2024. The term loan is a five-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. The interest rates on the term and revolving credit portion of the Credit Agreement vary. The interest rates may vary based on the LIBOR rate plus a margin spread of 1.25% to 2.25%. 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 August 30, 2019, with Santander Bank, N.A., as administrative agent.

 

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The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.

 

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50.0 million, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when LIBOR exceeds 1.44%. On December 31, 2022, the interest rate for half ($24.0 million) of the term portion was 6.1%, using a one-month LIBOR rate, and 3.19% on the remaining balance ($40.0 million) of the term loan based on a one-month LIBOR rate.

 

The interest rates on the Credit Agreement and interest rate swap contract are susceptible to that the transition from LIBOR to alternative benchmark rates such as SOFR. Information regarding this transition is provided below.

 

Central banks around the world, including the FRB, are working to implement the transition from the London Interbank Offered Rate (“LIBOR”) to replacement benchmarks including the Secured Overnight Financing Rate (“SOFR”) in the United States. The ICE Benchmark Administration (the “IBA”) ceased publication of all settings of non-US dollar LIBOR and the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings scheduled to be discontinued after June 30, 2023. The Adjustable Interest Rate Act (the “LIBOR Act”), which was signed into law on March 15, 2022, provided a replacement framework for outstanding financial contracts tied to LIBOR once LIBOR ceases to be published. The LIBOR Act provides a statutory mechanism and safe harbor that applies on a nationwide basis to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board based on SOFR, for certain contracts that reference LIBOR and contain no or insufficient fallback provisions. The LIBOR Act preempts and supersedes any state or local law, statute, rule, regulation, or standard relating to the selection or use of a benchmark replacement or related changes and allows parties that already have effective fallback provisions to opt out of the legislation. On December 16, 2022, the Federal Reserve adopted a final rule implementing the LIBOR Act that, among other things, identifies the applicable SOFR-based benchmark replacements under the LIBOR Act for various contact types. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate which has implications for how interest and other payments are based. The change from LIBOR to SOFR may adversely affect interest rates and result in higher borrowing costs. The effect of this change is still unknown and could materially and adversely affect the Company’s results of operations, cash flows and liquidity.

 

28

Table of Contents

 

Non-GAAP Financial Measures

 

The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP.

 

To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income from continuing operations, diluted earnings per share from continuing operations, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

 

Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis across periods by removing the impact of certain items that management believes do not directly reflect our underlying operating performance.

 

Adjusted Earnings Per Share from Continuing Operations is defined as earnings per share from continuing operations excluding, when incurred, certain per share gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs. We believe that Adjusted Earnings Per Diluted Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis from period to period.

 

Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring expenses. Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

 

Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, U.S. GAAP financial measures.

 

We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.

 

29

Table of Contents

    

Reconciliation of Non-GAAP Measures

Adjusted Net Income and Adjusted Earnings per Share from Continuing Operations Calculation

For the Three and Twelve Months ended December 31, 2022 and January 1, 2022

($000’s)

Three Months Ended

Twelve Months Ended

December 31, 2022

January 1, 2022

December 31, 2022

January 1, 2022

Net income from continuing operations as reported per generally accepted accounting principles (GAAP)

$167$3,913$11,050$16,182

Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP):

Basic

0.030.621.782.58

Diluted

0.030.621.772.58

Adjustments:

Gain on sale of Eberhard Hardware Ltd building, net of tax

(1,353)A

Factory relocation, net of tax

105B

Factory start-up costs, net of tax

161C348C

Loss on sale of Wheeling, IL building, net of tax

202

D

Gain on sale of Eastern corporate office building, net of tax

(474)

E

Restructuring costs, net of tax

525

F

525

F

Total adjustments

525161253(900)

Adjusted net income from continuing operations (Non-GAAP)

$692$4,074$11,303$15,282

Adjusted earnings per share from continuing operations (Non-GAAP):

Basic

$0.11$0.65$1.82$2.44

Diluted

$0.11$0.65$1.81$2.44

A) Gain on sale of Eberhard Hardware Ltd property

B) Costs incurred on relocation of ILC facility in Wheeling, IL

C) Costs incurred on start-up of Eberhard factory in Reynosa, MX

D) Loss on sale of ILC building in Wheeling, IL

E) Gain on sale of Eastern corporate office building

F) Restructuring costs associated with warehouse consolidation into Eberhard

  

30

Table of Contents

     

Reconciliation of Non-GAAP Measures

Adjusted EBITDA from Continuing Operations Calculation

For the Three and Twelve Months ended December 31, 2022 and January 1, 2022

($000’s)

Three Months Ended

Twelve Months Ended

December 31, 2022

January 1, 2022

December 31, 2022

January 1, 2022

Net income from continuing operations as reported per generally accepted accounting principles (GAAP)

$167$3,913$11,050$16,182

Interest expense

6923592,2761,748

Provision for income taxes

(146)(802)3,3522,771

Depreciation and amortization

1,8462,0527,2357,241

Gain on sale of Eberhard Hardware Ltd building

(1,841)A

Factory relocation

139B

Factory start-up costs

215C465C

Loss on sale of Wheeling, IL building

269

D

Gain on sale of Eastern corporate office building

(624)

E

Restructuring costs

700

F

700

F

Adjusted EBITDA from continuing operations (Non-GAAP)

$3,259$5,737$24,258$26,708

A) Gain on sale of Eberhard Hardware Ltd property

B) Costs incurred on relocation of ILC facility in Wheeling, IL

C) Costs incurred on start-up of Eberhard factory in Reynosa, MX

D) Loss on sale of ILC building in Wheeling, IL

E) Gain on sale of Eastern corporate office building

F) Restructuring costs associated with warehouse consolidation into Eberhard

  

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a result of the Company’s status as a smaller reporting company pursuant to Rule 12b-2 of the Exchange Act, the Company is not required to provide information under this Item 7A.

 

31

Table of Contents

 

 

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Eastern Company

 

Consolidated Balance Sheets

 

 

 

December 31,

 

 

January 1,

 

 

 

2022

 

 

2022

 

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$10,187,522

 

 

$6,168,304

 

Accounts receivable, less allowances: 2022-$677,000; 2021-$515,000

 

 

42,886,250

 

 

 

43,151,500

 

Inventories:

 

 

 

 

 

 

 

 

Raw materials and component parts

 

 

25,924,696

 

 

 

25,113,487

 

Work in process

 

 

9,323,082

 

 

 

9,636,009

 

Finished goods

 

 

29,388,813

 

 

 

28,112,846

 

 

 

 

64,636,591

 

 

 

62,862,342

 

 

 

 

 

 

 

 

 

 

Current portion of note receivable

 

 

1,006,421

 

 

 

1,027,125

 

Prepaid expenses and other assets

 

 

6,598,774

 

 

 

6,943,691

 

Current assets held for sale

 

 

-

 

 

 

3,521,899

 

Total Current Assets

 

 

125,315,558

 

 

 

123,674,861

 

 

 

 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

 

 

 

Land

 

 

824,344

 

 

 

1,292,890

 

Buildings

 

 

14,360,165

 

 

 

16,318,957

 

Machinery and equipment

 

 

40,928,380

 

 

 

39,323,233

 

Accumulated depreciation

 

 

(30,000,797)

 

 

(28,631,329)

Property, Plant and Equipment, net

 

 

26,112,092

 

 

 

28,303,751

 

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

 

Goodwill

 

 

70,777,459

 

 

 

72,211,873

 

Trademarks

 

 

5,514,886

 

 

 

5,409,720

 

Patents, technology and other intangibles net of accumulated amortization

 

 

18,819,897

 

 

 

22,863,497

 

Long term note receivable, less current portion

 

 

2,276,631

 

 

 

2,726,698

 

Deferred income taxes

 

 

488,989

 

 

 

-

 

Right of Use Assets

 

 

12,217,521

 

 

 

11,138,535

 

Total Other Assets

 

 

110,095,383

 

 

 

114,350,323

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$261,523,033

 

 

$266,328,935

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

32

Table of Contents

 

 

 

 

December 31,

 

 

January 1,

 

 

 

2022

 

 

2022

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable

 

$27,638,317

 

 

$29,633,974

 

Accrued compensation

 

 

3,327,832

 

 

 

4,375,867

 

Other accrued expenses

 

 

3,944,964

 

 

 

4,808,000

 

Current portion of lease liability

 

 

3,059,547

 

 

 

2,664,895

 

Current portion of long-term debt

 

 

9,010,793

 

 

 

7,500,000

 

Current liabilities held for sale

 

 

-

 

 

 

580,990

 

Total Current Liabilities

 

 

46,981,453

 

 

 

49,563,726

 

 

 

 

 

 

 

 

 

 

Deferred income taxes

 

 

-

 

 

 

1,151,759

 

Other long-term liabilities

 

 

754,762

 

 

 

668,354

 

Lease liability

 

 

9,195,205

 

 

 

8,639,339

 

Long-term debt, less current portion

 

 

55,136,231

 

 

 

63,813,522

 

Accrued postretirement benefits

 

 

666,222

 

 

 

1,284,589

 

Accrued pension cost

 

 

22,174,465

 

 

 

26,605,382

 

Total Liabilities

 

 

134,908,338

 

 

 

151,726,671

 

 

 

 

 

 

 

 

 

 

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 Issued: 9,056,421 shares in 2022 and 9,029,852 shares in 2021

 

 

 

 

 

 

 

 

Outstanding: 6,221,976 shares in 2022 and 6,265,527 shares in 2021

 

 

33,586,165

 

 

 

32,620,008

 

Treasury Stock: 2,834,445 shares in 2022 and 2,765,325 shares in 2021

 

 

(22,544,684)

 

 

(20,907,613)

Retained earnings

 

 

138,985,852

 

 

 

129,422,625

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(1,140,978)

 

 

818,446

 

Unrealized (loss) gain on interest rate swap, net of tax

 

 

1,449,754

 

 

 

(355,988)

Unrecognized net pension and postretirement benefit costs, net of tax

 

 

(23,721,414)

 

 

(26,995,214)

Accumulated other comprehensive loss

 

 

(23,412,638)

 

 

(26,532,756)

Total Shareholders’ Equity

 

 

126,614,695

 

 

 

114,602,264

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$261,523,033

 

 

$266,328,935

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

33

Table of Contents

 

The Eastern Company

 

Consolidated Statements of Income

 

 

 

Year Ended

 

 

 

December 31,

 

 

January 1,

 

 

 

2022

 

 

2022

 

Net sales

 

$279,265,146

 

 

$246,522,823

 

Cost of products sold

 

 

(220,648,900)

 

 

(189,756,610)

Gross margin

 

 

58,616,246

 

 

 

56,766,213

 

 

 

 

 

 

 

 

 

 

Product development expense

 

 

(4,241,211)

 

 

(4,101,399)

Selling and administrative expenses

 

 

(39,508,849)

 

 

(35,218,028)

Restructuring costs

 

 

(699,868)

 

 

-

 

Operating profit

 

 

14,166,318

 

 

 

17,446,786

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(2,275,612)

 

 

(1,747,723)

Other income

 

 

2,512,211

 

 

 

3,371,497

 

Income from continuing operations before income taxes

 

 

14,402,917

 

 

 

19,070,560

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

(3,352,456)

 

 

(2,888,217)

Net income from continuing operations

 

$11,050,461

 

 

$16,182,343

 

 

 

 

 

 

 

 

 

 

Discontinued Operations (see note 2)

 

 

 

 

 

 

 

 

Gain from operations of discontinued units

 

$1,360,773

 

 

$2,870,588

 

Gain (loss) on sale of businesses

 

 

305,539

 

 

 

(11,807,512)

Income tax (expense) benefit

 

 

(414,855)

 

 

2,103,752

 

Net gain (loss) on discontinued operations

 

$1,251,457

 

 

$(6,833,172)

 

 

 

 

 

 

 

 

 

Net Income

 

$12,301,918

 

 

$9,349,171

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations:

 

 

 

 

 

 

 

 

Basic

 

$1.78

 

 

$2.58

 

 

 

 

 

 

 

 

 

 

Diluted

 

$1.77

 

 

$2.58

 

 

 

 

 

 

 

 

 

 

Gain (loss) per share from discontinued operations:

 

 

 

 

 

 

 

 

Basic

 

$0.20

 

 

$(1.09)

 

 

 

 

 

 

 

 

 

Diluted

 

$0.20

 

 

$(1.09)

 

 

 

 

 

 

 

 

 

Total earnings per share:

 

 

 

 

 

 

 

 

Basic

 

$1.98

 

 

$1.49

 

 

 

 

 

 

 

 

 

 

Diluted

 

$1.97

 

 

$1.49

 

 

 

 

 

 

 

 

 

 

Cash dividends per share:

 

$0.44

 

 

$0.44

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

34

Table of Contents

 

The Eastern Company

 

Consolidated Statements of Comprehensive Income

 

 

 

Year Ended

 

 

 

December 31,

 

 

January 1,

 

 

 

2022

 

 

2022

 

Net income

 

$12,301,918

 

 

$9,349,171

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Change in foreign currency translation

 

 

(1,959,424)

 

 

(135,418)

Change in fair value of interest rate swap, net of tax cost of: $531,425 in 2022 and $327,118 in 2021

 

 

1,805,742

 

 

 

1,035,604

 

Change in pension and other postretirement benefit costs, net of taxes of: $941,964 in 2022 and $1,208,497 in 2021

 

 

3,273,800

 

 

 

2,063,809

 

Total other comprehensive income

 

 

3,120,118

 

 

 

2,963,995

 

Comprehensive income

 

$15,422,036

 

 

$12,313,166

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

35

Table of Contents

 

The Eastern Company

 

Consolidated Statements of Shareholders’ Equity 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Common

 

 

Common

 

 

Treasury

 

 

Treasury

 

 

Retained

 

 

Comprehensive

 

 

Shareholders'

 

 

 

Shares

 

 

Stock

 

 

Shares

 

 

Stock

 

 

Earnings

 

 

Income (Loss)

 

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 2, 2021

 

 

8,996,625

 

 

$31,501,041

 

 

 

(2,749,729)

 

($20,537,963)

 

 

$122,840,131

 

 

($29,496,751)

 

 

$104,306,458

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,349,171

 

 

 

 

 

 

9,349,171

 

Cash dividends declared,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.44 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,766,677)

 

 

 

 

 

(2,766,677)

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(135,418)

 

 

(135,418)

Change in fair value of interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,035,604

 

 

 

1,035,604

 

Change in pension and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

postretirement benefit costs,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,063,809

 

 

 

2,063,809

 

Stock Options Exercised

 

 

14,681

 

 

 

196,950

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

196,950

 

Treasury Stock Purchase

 

 

 

 

 

 

 

 

 

 

(14,596)

 

 

(369,650)

 

 

 

 

 

 

 

 

 

 

(369,650)

Issuance of SARS

 

 

 

 

 

 

418,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

418,000

 

Issuance of Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for directors' fees

 

 

18,546

 

 

 

504,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

504,017

 

Balances at January 1, 2022

 

 

9,029,852

 

 

$32,620,008

 

 

 

(2,764,325)

 

($20,907,613)

 

 

$129,422,625

 

 

($26,532,756)

 

 

$114,602,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12,301,918

 

 

 

 

 

 

 

12,301,918

 

Cash dividends declared,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.44 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,738,691)

 

 

 

 

 

 

(2,738,691)

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,959,424)

 

 

(1,959,424)

Change in fair value of interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

rate swap

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,805,742

 

 

 

1,805,742

 

Change in pension and other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

postretirement benefit costs,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,273,800

 

 

 

3,273,800

 

Stock Options Exercised

 

 

1,370

 

 

 

(58,515)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(58,515)

Treasury Stock Purchase

 

 

 

 

 

 

 

 

 

 

(70,120)

 

 

(1,637,071)

 

 

 

 

 

 

 

 

 

 

(1,637,071)

Issuance of SARS

 

 

 

 

 

 

504,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

504,694

 

Issuance of Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for directors' fees

 

 

25,199

 

 

 

519,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

519,978

 

Balances at December 31, 2022

 

 

9,056,421

 

 

$33,586,165

 

 

 

(2,834,445)

 

($22,544,684)

 

 

$138,985,852

 

 

($23,412,638)

 

 

$126,614,695

 

 

See accompanying notes.

 

36

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

December 31, 2022

 

 

January 1, 2022

 

Operating Activities

 

 

 

 

 

 

Net income

 

$12,301,918

 

 

$9,349,171

 

Less: Gain (loss) from discontinued operations

 

 

1,251,457

 

 

 

(6,833,172)

Income from continuing operations

 

$11,050,461

 

 

$16,182,343

 

Adjustments to reconcile net income to net cash provided

 

 

 

 

 

 

 

 

by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,235,143

 

 

 

7,241,073

 

Unrecognized pension and postretirement benefits

 

 

(3,575,749)

 

 

(4,032,917)

Gain on sale of equipment and other assets

 

 

(274,238)

 

 

(2,470,339)

Provision for doubtful accounts

 

 

207,040

 

 

 

73,097

 

Stock compensation expense

 

 

966,157

 

 

 

1,118,967

 

Deferred taxes

 

 

(3,047,762)

 

 

(3,010,111)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,075,218)

 

 

(11,282,090)

Inventories

 

 

(5,298,977)

 

 

(19,608,565)

Prepaid expenses and other

 

 

(293,348)

 

 

(3,527,171)

Other assets

 

 

193,784

 

 

 

(519,478)

Accounts payable

 

 

(1,741,258)

 

 

8,834,545

 

Accrued compensation

 

 

(923,146)

 

 

947,171

 

Other accrued expenses

 

 

3,905,457

 

 

 

2,296,052

 

Net cash provided by (used in) operating activities

 

 

7,328,346

 

 

 

(7,757,423)

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Marketable securities

 

 

 

 

 

28,951

 

Business disposition

 

 

 

 

 

2,325

 

Issuance of notes receivable

 

 

(400,000)

 

 

(2,500,000)

Payments received from notes receivable

 

 

870,771

 

 

 

821,868

 

Proceeds from sale of businesses

 

 

5,814,019

 

 

 

17,030,726

 

Proceeds from sale of building and equipment

 

 

2,171,073

 

 

 

1,980,729

 

Purchases of property, plant and equipment

 

 

(3,365,594)

 

 

(3,719,815)

Net cash provided by investing activities

 

 

5,090,269

 

 

 

13,644,784

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Proceeds from issuance of long-term debt and notes payable

 

 

260,793

 

 

 

 

Proceeds from short term borrowings (revolver)

 

 

10,000,000

 

 

 

 

Principal payments on long-term debt

 

 

(17,505,501)

 

 

(17,274,410)

Financing leases, net

 

 

(155,386)

 

 

126,797

 

Purchase common stock for treasury

 

 

(1,637,072)

 

 

(369,651)

Dividends paid

 

 

(2,738,691)

 

 

(2,755,686)

Net cash used in financing activities

 

 

(11,775,857)

 

 

(20,272,950)

 

 

 

 

 

 

 

 

 

Discontinued Operations

 

 

 

 

 

 

 

 

Cash provided by (used in) operating activities

 

 

3,135,874

 

 

 

5,733,884

 

Cash used in investing activities

 

 

 

 

 

(1,022,256)

Cash provided by discontinued operations

 

 

3,135,874

 

 

 

4,711,628

 

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(193,540)

 

 

174,756

 

Net change in cash and cash equivalents

 

 

3,585,092

 

 

 

(9,499,205)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

6,602,430

 

 

 

16,101,635

 

Cash and cash equivalents at end of period ¹

 

$10,187,522

 

 

$6,602,430

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest

 

$2,502,883

 

 

$2,271,818

 

Income taxes

 

 

3,679,678

 

 

 

2,318,018

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Right of use asset

 

 

1,078,986

 

 

 

(1,456,128)

Lease liability

 

 

(950,518)

 

 

1,329,331

 

 

¹ includes cash from assets held for sale of $0.4 million as of January 1, 2022

 

See accompanying notes

 

37

Table of Contents

 

The Eastern Company

 

Notes to Consolidated Financial Statements

 

1. Description of Business

 

The Eastern Company, and its subsidiaries (the “Company,” “Eastern,” “we,” “us” or “our”) manages industrial businesses that design, manufacture and sell engineered solutions to industrial markets. Eastern’s businesses operate in industries with long-term macroeconomic growth opportunities. We look to acquire businesses that produce stable and growing earnings and cash flows. Eastern may pursue acquisitions in industries other than those in which its businesses currently operate if an acquisition presents an attractive opportunity.

 

Eastern manages the financial, operational, and strategic performance of its businesses to increase cash generation, operating earnings, and long-term shareholder value.

 

Eastern encompasses four operating entities within the United States, one wholly owned Canadian subsidiary located in Cambridge, Ontario, Canada, a wholly owned Taiwanese subsidiary located in Taipei, Taiwan, a wholly owned subsidiary in Hong Kong, two wholly owned Chinese subsidiaries (one located in Shanghai, China, and one located in Dongguan, China), a wholly owned subsidiary in Reynosa, Mexico and a wholly owned subsidiary in Wrexham, United Kingdom.

 

Company Operations

 

The Company’s operations consist of Big 3 Precision, including Big 3 Precision Products, Inc. (“Big 3 Products”) and Big 3 Mold Services, Inc. (“Big 3 Mold”), Hallink Moulds, Inc. (“Hallink Moulds”), and Associated Toolmakers Ltd. (“Associated Toolmakers”); Eberhard Manufacturing Company (“Eberhard Manufacturing”), Eberhard Hardware Manufacturing Ltd. (“Eberhard Hardware”), Eastern Industrial Ltd, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries (together “Eberhard”); and Velvac Holdings Inc. (“Velvac”). These businesses design, manufacture, and market a diverse product line of custom and standard vehicular and industrial hardware, including turnkey returnable packaging solutions, access and security hardware, mirrors, and mirror-cameras.

 

Big 3 Products and Big 3 Mold’s turnkey returnable packaging solutions are used in the assembly processes of vehicles, aircraft, and durable goods and in the production processes of plastic packaging products, packaged consumer goods and pharmaceuticals. Big 3 Products works with original equipment manufacturers (“OEMs”) to design and produce custom returnable transport packaging to integrate with OEM assembly processes. Big 3 Mold designs and manufactures blow mold tools. Hallink Moulds is a producer of injection blow mold tooling and is a supplier of blow molds and change parts to the food, beverage, healthcare, and chemical industry. Hallink specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry offering integrated turnkey solutions to its customers worldwide.

 

In 2020, we combined all businesses associated with Eberhard Manufacturing and Illinois Lock Company to create Eberhard, which specializes in the engineering and manufacturing of access and security hardware. Eberhard offers a standard product line of rotary latches, compression latches, draw latches, hinges, camlocks, key switches, padlocks, and handles among other products, as well as comprehensive development and program management services for custom electromechanical and mechanical systems designed for specific OEMs and customer applications. Eberhard’s products are found in an expansive range of applications and products globally.

 

Velvac is a designer and manufacturer of proprietary vision technology for OEMs and aftermarket applications, and a provider of aftermarket components to the heavy-duty truck market in North America. Velvac serves diverse, niche segments within the heavy- and medium-duty truck, motorhome, and bus markets.

Sales are made to customers primarily in North America.

 

38

Table of Contents

 

The Eastern Company

 

Notes to Consolidated Financial Statements (continued)

 

2. Discontinued Operations

 

We determined that the companies previously included in our former Diversified Products segment no longer fit with our long-term strategy and have initiated the process of selling the companies within the former Diversified Products segment. Selling these companies will allow management to focus on our core capabilities and offerings.

 

The former Diversified Products segment met the criteria to be held for sale and furthermore, we determined that the assets held for sale qualified for discontinued operations. As such, the financial results of the former Diversified Products segment are reflected in our condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, both current and non-current assets and liabilities of discontinued operations are reflected in the condensed consolidated balance sheets for both periods presented.

 

On October 19, 2022, the Company sold its Argo EMS business (“Argo”). Argo supplies printed circuit boards and other electronic assemblies to original equipment manufacturers in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial control, medical, and military products.

 

On November 3, 2021, the Company sold its Greenwald Industries, Inc. division (“Greenwald”). Greenwald, located in Chester, CT, is an OEM manufacturer offering a range of payment solutions from coin-vending products to smart card systems and payment applications.

 

On November 22, 2021, the Company sold its Frazer & Jones Company division (“Frazer & Jones”). Frazer & Jones is a ductile and malleable iron foundry located in Syracuse, NY. Eastern has exited the mining business to focus on our three core businesses.

 

39

Table of Contents

 

The Eastern Company

 

Notes to Consolidated Financial Statements (continued)

 

Summarized Financial Information of Discontinued Operations

 

The following table represents income from discontinued operations, net of tax:

 

Year Ended

December 31, 2022

January 1, 2022

Net sales

$7,574,181$44,289,411

Cost of products sold

(5,137,380)(24,873,717)

Gross margin

2,436,80119,415,694

Selling and administrative expenses

(891,519)(15,962,532)

Restructuring benefit (costs)

305,539(11,807,512)

Operating income (loss)

1,850,821(8,354,350)

Interest expense

(184,509)(582,574)

Income (loss) from discontinued operations before income taxes

1,666,312(8,936,924)

Income tax (expense) benefit

(414,855)2,103,752

Gain (loss) from discontinued operations, net of tax

$1,251,457$(6,833,172)

 

The following table represents the assets and liabilities from discontinued operations:

 

40

Table of Contents

 

Eastern Company

 

Notes to Consolidated Financial Statements (continued)

 

December 31, 2022

January 1, 2022

Cash

$-$434,126

Accounts receivable

-1,153,274

Inventory

-1,258,032

Prepaid expenses

-59,850

Property, plant and equipment, net

-591,920

Right of use assets

-24,697

Total assets of discontinued operations

$-$3,521,899

Current assets of discontinued operations

$-$3,521,899

Non-current assets of discontinued operations

--

Total assets of discontinued operations

$-$3,521,899

Accounts payable

$-$167,794

Accrued compensation and other accrued expenses

-388,499

Current portion of lease liability

-24,697

Total liabilities of discontinued operations

$-$580,990

Current liabilities of discontinued operations

$-$580,990

Non-current liabilities of discontinued operations

--

Total liabilities of discontinued operations

$-$580,990

 

3. Accounting Policies

 

Fiscal Year

 

The Company’s year ends on the Saturday nearest to December 31. Based on this policy, fiscal years 2022 and 2021 were each comprised of 52 weeks. References in these Notes to the consolidated financial statements to “2022” or “fiscal year 2022” mean the fiscal year ended December 31, 2022, and references to “2021” or “fiscal year 2021” mean the fiscal year ended January 1, 2022. References to the “fourth quarter of 2022” or the “fourth fiscal quarter of 2022” mean the thirteen-week period from October 2, 2022 to December 31, 2022, and references to the “fourth quarter of 2021” or the “fourth fiscal quarter of 2021” mean the thirteen-week period from October 3, 2021 to January 1, 2022.

 

41

Table of Contents

 

Eastern Company

 

Notes to Consolidated Financial Statements (continued)

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions are eliminated.

 

Reclassification

 

Product development expense is not a cost of product sold. Rather, these expenses are related to product development. The reclassification of these expenses does not affect the net income reported.

 

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. On an ongoing basis the Company evaluates its estimates, including those related to product returns, bad debts, carrying value of inventories, intangible and other long-lived assets, income taxes, pensions and other postretirement benefits. Actual results could differ from those estimates.

 

Foreign Currency

 

For foreign operations asset and liability accounts are translated with an exchange rate at the respective balance sheet dates; income statement accounts are translated at the average exchange rate for the years. Resulting translation adjustments are made directly to a separate component of shareholders’ equity – “Accumulated other comprehensive (loss) – Foreign currency translation”. Foreign currency exchange transaction gains and losses are not material in any year.

 

Cash Equivalents

 

Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents. The Company has deposits that exceed amounts insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution. Approximately 27% of available cash is located outside of the United States in our foreign subsidiaries.

 

Accounts Receivable

 

Accounts receivable are stated at their net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews the collectability of its receivables on an ongoing basis considering a combination of factors. The Company reviews potential problems, such as past due accounts, a bankruptcy filing or deterioration in the customer’s financial condition, to ensure the Company is adequately accrued for potential loss. Accounts are considered past due based on when payment was originally due. If a customer’s situation changes, such as a bankruptcy or change in creditworthiness, or there is a change in the current economic climate, the Company may modify its estimate of the allowance for doubtful accounts. The Company will write off accounts receivable after reasonable collection efforts have been made and the accounts are deemed uncollectible. As of December 31, 2022 and January 1, 2022, the Company’s allowance for doubtful accounts total was $677,000 and $515,000, respectively. As of December 31, 2022, and January 1, 2022, the Company’s bad debt expense was $208,000 and $48,000 respectively.

 

Inventories

 

Inventories are valued at the lower of cost or net realizable value. Cost is determined by the last-in, first-out (LIFO) method at Eberhard ($23.6 million on December 31, 2022) and by the first-in, first-out (FIFO) method for inventories at Big 3 Precision, Velvac and outside the U.S. ($41.0 million on December 31, 2022).

 

42

Table of Contents

 

Eastern Company

 

Notes to Consolidated Financial Statements (continued)

 

Cost exceeds the LIFO carrying value by approximately $4.2 million on December 31, 2022 and $3.6 million on January 1, 2022. There was no material LIFO quantity liquidation in 2022 or 2021. In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete inventory.

 

Property, Plant and Equipment and Related Depreciation

 

Property, plant, and equipment (including equipment under capital lease) are stated at cost. Depreciation expense ($3,257,519 in 2022, $3,255,894 in 2021) is computed using the straight-line method based on the following estimated useful lives of the assets: Buildings - 10 to 39.5 years; Machinery and equipment - 3 to 10 years.

 

Impairment of Long-Lived Assets

 

In accordance with Accounting Standards Codification (“ASC”) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its long-lived assets and certain intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In such an event, the carrying value of long-lived assets is reviewed by management to determine if the value may be impaired. If this review indicates that the carrying amount will not be recoverable, as determined based on the estimated expected future cash flows attributable to the asset over the remaining amortization period, management will reduce the carrying amount to recognize the impairment and recognize an impairment loss. The measurement of the impairment loss to be recognized is to be based on the difference between the fair value and the carrying amount of the asset. Fair value is defined as the amount of which the asset could be bought or sold in a current transaction between willing parties. Where quoted market prices in active markets are not available, management would estimate fair value based on the best information available in the circumstances such as the price of similar assets, a discounted cash flow analysis or other techniques. No impairment losses were recognized for the years ended December 31, 2022 and January 1, 2022.

 

Goodwill

 

The Company tests its reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events and circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. The Company tests reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources.

 

The Company performed qualitative assessments of goodwill as of the end of fiscal 2022 and determined that no impairment existed at the end of 2022.

 

The Company will continue to perform annual qualitative assessments as of the end of each fiscal year. Additionally, the Company will perform an interim analysis whenever conditions warrant.

 

43

Table of Contents

 

Eastern Company

 

Notes to Consolidated Financial Statements (continued)

 

Intangible Assets

 

Patents are recorded at cost and are amortized using the straight-line method over the lives of the patents. Technology and licenses are recorded at cost and are amortized on a straight-line basis over periods ranging from 1 to 24 years. Non-compete agreements and customer relationships are amortized using the straight-line method over their useful lives. Trademarks are deemed to have indefinite lives. If facts and circumstances indicate that the carrying value of the intangible assets, including definite life intangible assets, may be impaired, an evaluation is performed to determine if a write-down is required. No impairment losses were recognized for the periods ended December 31, 2022 and January 1, 2022.

 

Fair Value of Financial 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 pension assets, see Note 10, Retirement Benefit Plans, and an interest rate swap.

 

The Company’s interest rate swap is not an exchange-traded instrument. However, it is valued based on observable inputs for similar liabilities and accordingly is classified as Level 2. The amount of the interest rate swap is included in other accrued liabilities.

 

The carrying amounts of other financial instruments (cash and cash equivalents, accounts receivable, accounts payable and debt) as of December 31, 2022 and January 1, 2022, approximate fair value because of their short-term nature and market based interest rates.

 

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 elected to account 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, warehouse, 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. The Company’s option to extend certain leases ranges from 1–124 months. 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.

 

44

Table of Contents

 

Eastern Company

 

Notes to Consolidated Financial Statements (continued)

 

Currently, the Company has 22 operating leases and two finance leases with a lease liability of $12.3 million as of December 31, 2022. The finance lease arrangements are immaterial. The basis, 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. We rent or sublease one real estate property to two unrelated third parties. There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company. The weighted average remaining lease term is 5.7 years. The weighted average discount rate used was 5.0%.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606 when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

 

The Company considers several factors in determining that control transfers to the customer upon shipment of products. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risk and rewards of ownership at the time of shipment.

 

Big 3 Mold may employ the efforts expended method for the percentage of completion for revenue recognition for certain transactions. The efforts expended method calculates the proportion of effort expended to date in comparison to the total effort expected to be expended for the contract. The amount of revenue recognized employing the percentage of completion method was $1,385,000 for the year ended December 31, 2022 and $795,000 for the year ended January 1, 2022.

 

Based on historical experience, product returns have been immaterial, and the Company does not accrue a reserve for product returns. For the years ended December 31, 2022 and January 1, 2022, the Company recorded sales returns of $580,000 and $395,000, respectively, as a reduction to revenue.

 

Sales and similar taxes that are imposed on the Company’s sales and collected from the customer are excluded from revenues.

 

Costs for shipping and handling activities, including those activities that occur after transfer of control to the customer, are recorded as cost of sales and are expensed as incurred.

 

For the years ended December 31, 2022 and January 1, 2022, the Company recorded no revenues related to performance obligations satisfied in prior periods. The Company has elected to use the practical expedient to exclude disclosure of transaction prices allocated to remaining performance obligations, and when the Company expects to recognize such revenue, for all periods prior to the date of initial application of the standard.

    

See Note 12 – Geographic Information regarding the Company’s revenue disaggregated by geography.

 

Cost of Goods Sold

 

Cost of goods sold reflects the cost of purchasing, manufacturing, and preparing a product for sale. These costs generally represent the expenses to acquire or manufacture products for sale (including an allocation of depreciation and amortization) and are primarily comprised of direct materials, direct labor, and overhead, which includes indirect labor, facility and equipment costs, inbound freight, receiving, inspection, purchasing, warehousing and any other costs related to the purchasing, manufacturing, or preparation of a product for sale.

 

Shipping and Handling Costs

 

Shipping and handling costs are included in cost of goods sold.

 

45

Table of Contents

 

Eastern Company

 

Notes to Consolidated Financial Statements (continued)

 

Product Development Costs

 

Product development costs, charged to expense as incurred, were $4,241,211 in 2022 and $4,101,399 in 2021 and include costs to develop new or enhance existing products to better serve our customers.

 

Selling and Administrative Expenses

 

Selling and administrative expenses include all operating costs of the Company that are not directly related to the cost of purchasing, manufacturing, and preparing a product for sale. These expenses represent selling and administrative expenses for support functions and related overhead.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. Advertising costs were $269,659 in 2022 and $200,482 in 2021.

 

Stock - Based Compensation

 

The Company accounts for its stock-based awards in accordance with ASC 718-10, Compensation, which requires a fair value measurement and recognition of compensation expense for all share-based payment awards made to its employees and Directors, including employee stock awards and restricted stock awards. The Company estimates the fair value of granted stock awards using the Black-Scholes valuation model at the date of grant. This model requires the Company to make estimates and assumptions including, without limitation, estimates regarding the length of time an employee will retain vested stock awards before exercising them, the estimated volatility of the Company’s common stock price and the number of awards that will be forfeited prior to vesting. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination of the fair value of stock-based compensation and consequently, the related amount recognized in the Company’s consolidated statements of operations.

 

Under the terms of the Director’s Fee Program, the directors receive their director’s fees in common shares of the Company.

 

Income Taxes

 

The Company and its U.S. subsidiaries file a consolidated federal income tax return.

 

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

 

The Company accounts for uncertain tax positions pursuant to the provisions of ASC 740 which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. These provisions detail how companies should recognize, measure, present, and disclose uncertain tax positions that have or are expected to be taken. As such, the financial statements will reflect expected future tax consequences of uncertain tax positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. See Note 8 - Income Taxes.

 

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Notes to Consolidated Financial Statements (continued)

 

4. Goodwill

 

The following is a roll-forward of goodwill for 2022 and 2021:

 

2022

Beginning Balance

$72,211,873

Disposition

(1,225,226)

Foreign Exchange

(209,188)

Ending Balance

$70,777,459

2021

Beginning Balance

$72,219,404

Foreign Exchange

(7,531)

Ending Balance

$72,211,873

     

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Notes to Consolidated Financial Statements (continued)

 

5. Intangibles

 

Trademarks are not amortized as their lives are deemed to be indefinite. Amortization expense recognized in 2022 and 2021 was $3,953,838 and $3,985,179, respectively. Total amortization expense for each of the next five years is estimated to be as follows: 2023 - $4.7 million; 2024 - $3.9 million; 2025 - $3.9 million; 2026 - $3.9 million and 2027 - $3.9 million.

 

Weighted-Average

Amortization

2022

Period (Years)

Gross Amount

Patents and developed technology

$7,412,1014.8

Customer relationships

25,883,7094.8

Non-compete agreements

1,040,7142.4

Total Gross Intangibles

$34,340,5244.7

Accumulated Amortization

Patents and developed technology

$3,395,729

Customer relationships

11,620,461

Non-compete agreements

504,437

Accumulated Amortization

$15,520,627

Net 2022 per Balance Sheet

$18,819,897

2021

Gross Amount

Patents and developed technology

$6,749,1696.5

Customer relationships

26,040,6915.9

Non-compete agreements

1,111,7563.3

Total Gross Intangibles

$33,901,6165.9

Accumulated Amortization

Patents and developed technology

$2,959,782

Customer relationships

7,759,667

Non-compete agreements

318,670

Accumulated Amortization

$11,038,119

Net 2021 per Balance Sheet

$22,863,497

   

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Notes to Consolidated Financial Statements (continued)

 

6. Debt

 

On August 30, 2019, the Company entered into the Credit Agreement with Santander Bank, N.A., for itself, M&T Bank, National Association. and TD Bank, N.A. as lenders (the “Credit Agreement”), that included a $100 million term portion and a $20 million revolving commitment portion. Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with M&T Bank, N.A. (approximately $19 million) and to acquire Big 3 Precision. The term portion of the loan required quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increased to $1,875,000 per quarter beginning September 30, 2021, and continues through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023, and continues through June 30, 2024. The term loan is a 5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. The Company borrowed $10,000,000 on the revolving credit facility and subsequently paid it back during 2022 and did not borrow any funds on the revolving commitment portion of the facility during 2021. The interest rates on the term and revolving credit portion of the Credit Agreement vary. The interest rates may vary based on the LIBOR rate plus a margin spread of 1.25% to 2.25%. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its U.S. subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019 with Santander 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 4.25 to 1. In addition, the Company will be required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.

 

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On December 31, 2022, the interest rate for half ($24.0 million) of the term portion was 6.1%, using a one-month LIBOR rate, and 3.19% on the remaining balance ($40.0 million) of the term loan based on a one-month LIBOR rate.

 

The interest rates on the Credit Agreement and the interest rate swap contract are susceptible to that the transition from LIBOR to alternative benchmark rates such as SOFR. Information regarding this transition is provided below.

 

The ICE Benchmark Administration (the “IBA”) ceased publication of all settings of non-US dollar LIBOR and the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings scheduled to be discontinued after June 30, 2023. The Adjustable Interest Rate Act (the “LIBOR Act”), which was signed into law on March 15, 2022, provided a replacement framework for outstanding financial contracts tied to LIBOR once LIBOR ceases to be published. The LIBOR Act provides a statutory mechanism and safe harbor that applies on a nationwide basis to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board based on SOFR, for certain contracts that reference LIBOR and contain no or insufficient fallback provisions. The LIBOR Act preempts and supersedes any state or local law, statute, rule, regulation, or standard relating to the selection or use of a benchmark replacement or related changes and allows parties that already have effective fallback provisions to opt out of the legislation. On December 16, 2022, the Federal Reserve adopted a final rule implementing the LIBOR Act that, among other things, identifies the applicable SOFR-based benchmark replacements under the LIBOR Act for various contact types. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate, which has implications for how interest and other payments are based.

 

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Notes to Consolidated Financial Statements (continued)

 

6. Debt (continued)

 

Debt consists of:

 

2022

2021

Term loans

$64,147,028$71,313,522

Revolving credit loan

64,147,02871,313,522

Less current portion

9,010,7937,500,000
$55,136,231$63,813,522

 

Amounts are net of unamortized discounts and debt issuance costs of $113,769 as of December 31, 2022 and $186,478 as of January 1, 2022.

 

The Company paid interest of $2,502,883 in 2022 and $2,271,818 in 2021.

 

The Company’s loan covenants under the Credit Agreement require the Company to maintain a consolidated fixed charge coverage ratio of at least 1.25 to 1, which is to be tested quarterly on a twelve-month trailing basis. In addition, the Company is required to show a senior net leverage ratio not to exceed 4.25 to 1. The Company was in compliance with all covenants as of December 31, 2022. In addition, the Company has restrictions on, among other things, new capital leases, purchases or redemptions of its capital stock, mergers and divestitures, and new borrowing. The Company was in compliance with all covenants as of December 31, 2022 and January 1, 2022.

 

As of December 31, 2022, scheduled annual principal maturities of long-term debt for each of the next five years follow:

 

2023

9,010,793

2024

55,136,231

Thereafter

$64,147,028

 

7. Stock Options and awards

 

Stock Awards

 

As of December 31, 2022, the Company has one incentive stock award plan, The Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”), for officers, other key employees, and non-employee Directors. Incentive stock awards 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 awards are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. Under the 2020 Plan, non-qualified stock awards granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors. The Company granted 43,300 and 27,300 awards during 2022 and 2021, respectively.

    

The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an award 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 SARs in 2022 or 2021.

 

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Notes to Consolidated Financial Statements (continued)

 

7. Stock options and awards (continued)

 

Stock-based compensation expense in connection with stock awards and SARs was $504,694 for awards granted to employees during fiscal year 2022 and $418,000 for awards granted to employees during fiscal year 2021. For the 2022 fiscal year, the Company used several assumptions which included an expected term of 3 years, volatility deviation of 47.15% to 47.70% and a risk-free rate of 2.04% to 2.66%. For the 2021 fiscal year, the Company used several assumptions which included an expected term of 4 years, volatility deviation of 47.25% to 48.55% and a risk-free rate of 0.18 to 0.35%.

 

As of December 31, 2022, there were 808,101 shares of common stock reserved and available for future grant under 2020 Plan.

 

The following tables set forth the outstanding SARs for the period specified:

 

Year Ended

December 31, 2022

Year Ended

January 1, 2022

Units

Weighted - Average Exercise Price

Units

Weighted - Average Exercise Price

Outstanding at beginning of period

180,833$22.88244,001$21.87

Issued

----

Exercised

(16,667)21.20(55,668)