Eastern Co 10-K for FY2023
Eastern Co (EML)
About this 10-K
Eastern Co filed this 10-K on March 12, 2024, covering the fiscal year ended December 30, 2023 (FY2023).
Headline figures
Fiscal year ended December 30, 2023, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $273.45M
- down 2.1% from $279.27M a year earlier
- Net income
- $8.59M
- down 30.2% from net income of $12.3M a year earlier
- Diluted EPS
- $1.37
- down 30.5% from $1.97 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Fiscal Year ended |
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
(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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 ☐
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 ☐
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.
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).
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 | ☐ | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company |
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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
As of July 1, 2023, 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 $
As of February 15, 2024,
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 2024 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 30, 2023.
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The Eastern Company
Form 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 30, 2023
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections |
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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Certain Relationships and Related Transactions, and Director Independence |
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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 higher raw material and component costs and cost inflation, supply chain disruptions and shortages, particularly with respect to steel, plastics, scrap iron, zinc, copper, and electronic components; |
| · | delays in delivery of our products to our customers; |
| · | the impact of global economic conditions and rising interest rates, and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, and general industrial markets, including the impact, length and degree of economic downturns on the customers and markets we serve and demand for our products, reductions in production levels, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, the potential impact of bank failures on our ability to access financing or capital markets, and the impact of market conditions on pension plan funded status; |
| · | restrictions on operating flexibility imposed by the agreement governing our credit facility; |
| · | 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; |
| · | 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 acquired businesses and achieve expected synergies; |
| · | costs and liabilities associated with environmental compliance; |
| · | the impact of climate change, natural disasters, geopolitical events, and public health crises, including pandemics (such as COVID-19) and epidemics, and any related Company or government policies or actions; |
| · | military conflict (including the Russia/Ukraine conflict, the conflict in Israel and surrounding areas, the possible expansion of such conflicts and geopolitical consequences) or terrorist threats and the possible responses by the U.S. and foreign governments; |
| · | failure to protect our intellectual property; |
| · | cyberattacks; and |
| · | materially adverse or unanticipated legal judgments, fines, penalties, or settlements. |
The Company is also subject to 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 because 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 fifteen physical locations across North America and Asia.
BUSINESS HIGHLIGHTS
On June 29, 2023, the Company acquired certain assets of Sureflex, Inc. (“Sureflex”). Sureflex, which manufactures tractor-trailer electrical connection cable assemblies, is part of Eastern’s Velvac subsidiary.
On May 1, 2023, the Company announced plans to close Associated Toolmakers, Limited, its European mold tooling service facility based in the U.K. The closure was completed in the second quarter of 2023.
On October 19, 2022, the Company sold its Argo EMS business (“Argo”). Argo supplied 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.
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 the 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.
The Eastern Company has one reportable segment: Engineered Solutions. The Engineered Solutions segment provides engineered solutions to support our customers’ needs primarily in the commercial transportation and logistics markets. The Chief Operating Decision Maker (CODM) uses both segment gross profit and segment profit or loss from operations before interest and income taxes to allocate resources (including employees, property, and financial or capital resources) for the Engineered Solutions segment predominantly in the annual budget and forecasting process.
Company Operations
The Engineered Solutions segment consists of Big 3 Precision, including Big 3 Precision Products Inc. (“Big 3 Products”) and Big 3 Mold Services, Inc. (“Big 3 Mold”), and Hallink Moulds, Inc. (“Hallink Moulds” or “Hallink”); 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 industries. 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.
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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. This committee is responsible for reviewing the overall performance of the Company’s health and safety program and making recommendations to management. 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.
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 30, 2023, we employed 1,199 full-time employees: 614 in the United States and 585 in other countries. Approximately 21% 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.
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 2023 and fiscal 2022. Foreign sales were not significant for the fiscal years 2023 and 2022.
The Company encounters competition in its business. 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.
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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. Raw materials and outside services were more readily available in 2023.
The Company’s ratio of working capital (current assets less current liabilities) to sales was 25.6% in 2023 and 26.1% in 2022. 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 the 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.
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 Competition and Global Operations
The Company’s business is subject to risks associated with conducting business overseas.
International operations have been and could in the future 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. 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. Some of the Company’s competitors import products from Asia and Latin America that benefit from favorable currency exchange rates and lower cost labor, which has created downward pricing pressure with respect to the Company’s products that is likely to continue. Exchange rate fluctuations have at times and could in the future exacerbate this pricing pressure and impair the ability of the Company’s products to compete with products imported from regions with favorable exchange rates.
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.
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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.
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 the Company’s 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 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. For example, supply shortages and supply chain disruptions originally triggered by shutdowns and other restrictions imposed to slow the spread and resurgence of COVID-19 impacted the prices and availability of certain raw materials and components used in the production of the Company’s products. The Company may be unable to pass all of these price increases on to its customers and could experience reductions in its profit margins. 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. Similarly, any prolonged interruption in service by one of our key component suppliers could have a material adverse effect on our business, results of operations and financial condition. Additionally, we may not be able to establish additional or replacement suppliers for such components within a reasonable period of time, or on commercially reasonable terms, if at all, which could result in delays or interruptions in our operations, which in turn would adversely affect our business, results of operations and financial condition.
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. Additionally, technological developments and enhancements of products and services offerings in our industry may require an expanded use of artificial intelligence (“AI”) and machine learning; if we are unable to keep pace with the rate of these and other developments, our ability to effectively compete could be adversely affected. We expect the level of competition to remain high in the future, which, if not effectively matched or exceeded, could limit our ability to maintain or increase our profitability. 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.
Furthermore, 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.
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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 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.
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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 Annual Report on Form 10-K 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 the report. 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, geo-political events and public health crises, including pandemics (such as COVID-19) and epidemics, and any related Company or government policies or actions may negatively impact our business.
Natural disasters, changes in climate, geo-political events, and public health crises, including pandemics (such as COVID-19) and epidemics, as well as Company or government policies adopted or actions taken as a result of such events, could materially adversely affect our business and 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, geo-political events, such as war, civil unrest or terrorist attacks, or public health crises in a country in which we operate or in which our suppliers are located could result in loss of human life, significant property and equipment damage, environmental pollution, or reputational harm and could adversely affect our operations and financial performance. Our business and operations may be disrupted if we do not respond, or are perceived not to respond, in an appropriate manner to any of these hazards and risks or any other major crisis or if we are unable to efficiently restore or replace affected operational components and capacity. Countermeasures to address global health crises, epidemics or pandemics, such as those that were taken to reduce the spread of COVID-19, may result in reduced demand for our products; disruptions to our supply chain, the global economy or financial or commodity markets; disruptions in our contractual arrangements with our service providers, suppliers and other counterparties; failures by our suppliers, contract manufacturers, contractors, joint venture partners and external business partners, to meet their obligations to us; or reduced workforce productivity. Any such occurrence could materially and adversely impact our financial condition, results of operations, cash flows or liquidity position. Further, our insurance may not be adequate to compensate us for all resulting losses described above, and the cost to obtain adequate coverage may increase for us in the future or may not be available.
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 interpretation 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 flow. 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.
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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.
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, data privacy and security, 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.
Risks Related to Our Indebtedness
Indebtedness may affect our business and may restrict our operating flexibility.
As of December 30, 2023, the Company had $43.9 million 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. |
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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 operations would be materially adversely affected.
The Credit Agreement contains covenants requiring the Company to achieve certain financial and operational 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 several 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. |
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.
Risks Related to Global Economic Conditions
Global economic conditions have in the past and may in the future have a material adverse effect on the Company’s financial condition and operating results.
Global economic conditions have in the past and may in the future impact the Company’s results. For example, volatile economic conditions that resulted from the COVID-19 pandemic led to economic slowdowns that caused contractions in some or all the markets we serve, and these impacts have continued and may continue for the foreseeable future. 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.
Economic conditions or changes in asset returns interest rates could increase our pension plan funding obligations and reduce our profitability
In addition, 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. Declines in interest rates and projected rates of return could require us to make significant additional contributions to our pension plans in the future.
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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 business.
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.
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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.
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 several unforeseen circumstances, any of which could have an unfavorable material impact on the Company’s results of operations or financial condition. During 2024, no union contracts are scheduled to expire.
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 represented 12% of total accounts receivable for fiscal 2023 and one customer represented 14% of total accounts receivable for fiscal 2022.
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.
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ITEM 1B UNRESOLVED STAFF COMMENTS
None.
ITEM 1C CYBERSECURITY
The Company’s Board recognizes the critical importance of maintaining the trust and confidence of our customers, clients, business partners and employees. The Board is actively involved in oversight of the Company’s risk management program, and cybersecurity represents a key component of the Company’s overall approach to enterprise risk management (“ERM”). The Company’s cybersecurity policies, standards, processes, and practices are fully integrated into the Company’s ERM program and are based on recognized frameworks established by the National Institute of Standards and Technology, the International Organization for Standardization and other applicable industry standards. In general, the Company seeks to address cybersecurity risks through a comprehensive, cross-functional approach that is focused on preserving the confidentiality, security, and availability of the information that the Company collects and stores by identifying, preventing, and mitigating cybersecurity threats and effectively responding to cybersecurity incidents when they occur.
Risk Management and Strategy
As one of the critical elements of the Company’s overall ERM approach, the Company’s cybersecurity program is focused on the following key areas:
Governance: As discussed in more detail under the heading “Governance,” The Board’s oversight of cybersecurity risk management is supported by the Audit Committee of the Board (the “Audit Committee”), which regularly interacts with the Company’s ERM function, the Company’s Director of Information Technology & Cybersecurity, and other members of management and relevant management committees and councils, including management’s Cybersecurity Council.
Collaborative Approach: The Company has implemented a comprehensive, cross-functional approach to identifying, preventing and mitigating cybersecurity threats and incidents, while also implementing controls and procedures that are designed to provide for the prompt and appropriate internal reporting of certain cybersecurity incidents, either in the form of a single unauthorized occurrence or a series of unauthorized occurrences, so that decisions regarding the public disclosure and reporting of such incidents can be made by management in a timely manner.
Technical Safeguards: The Company deploys technical safeguards that are designed to protect the Company’s information systems from cybersecurity threats, including firewalls, intrusion prevention and detection systems, anti-malware functionality and access controls, which are evaluated and improved through vulnerability assessments and cybersecurity threat intelligence.
Incident Response and Recovery Planning: The Company has established and maintains comprehensive incident response and recovery plans intended to fully and timely address the Company’s response to a cybersecurity incident, and such plans are tested and evaluated on a regular basis.
Third-Party Risk Management: The Company maintains a comprehensive, risk-based approach to identifying and overseeing cybersecurity risks presented by third parties, including vendors, service providers and other external users of the Company’s systems, as well as the systems of third parties that could adversely impact our business in the event of a cybersecurity incident affecting those third-party systems.
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Education and Awareness:The Company provides regular, mandatory training for personnel regarding cybersecurity threats to equip the Company’s personnel with effective tools to proactively address cybersecurity threats and prevent incursions, and to communicate the Company’s evolving information security policies, standards, processes, and practices. Our awareness program includes assessment of our personnel’s preparedness through regular phishing e-mail alerts, highlighted banners that warn about external senders, and tests administered to help the Company’s personnel interrogate, navigate around, and avoid clicking suspicious and unfamiliar links from unknown senders.
The Company engages in the periodic assessment and testing of the Company’s policies, standards, processes, and practices that are designed to address cybersecurity threats and incidents. These efforts include a wide range of activities, including audits, assessments, tabletop exercises, threat modeling, vulnerability testing and other exercises focused on evaluating the effectiveness of our cybersecurity measures and planning. The Company engages third parties to perform assessments on our cybersecurity measures, including information security maturity assessments, audits and independent reviews of our information security control environment and operating effectiveness. The results of such assessments, audits and reviews are reported to the Audit Committee and the Board, and the Company adjusts its cybersecurity policies, standards, processes, and practices as appropriate based on the information provided by these assessments, audits, and reviews.
Governance
The Board, in coordination with the Audit Committee, oversees the Company’s ERM process, including the management of risks arising from cybersecurity threats. The Board and the Audit Committee each receive regular presentations and reports on cybersecurity risks, which address a wide range of topics including recent developments, evolving standards, vulnerability assessments, third-party and independent reviews, the threat environment, technological trends, and information security considerations arising with respect to the Company’s peers and third parties. The Board and the Audit Committee also receive prompt and timely information regarding any cybersecurity incident that meets established reporting thresholds, or that management otherwise deems to be significant, as well as ongoing updates regarding any such incident until it has been addressed. On an annual basis, the Board and the Audit Committee discuss the Company’s approach to cybersecurity risk management with the members of management’s Cybersecurity Council, which includes the Company’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), Director of Risk, and Director of Information Technology & Cybersecurity.
The Cybersecurity Council, in coordination with the Company’s outside legal counsel, works collaboratively across the Company to implement a program designed to protect the Company’s information systems from cybersecurity threats and to promptly respond to any cybersecurity incidents in accordance with the Company’s incident response and recovery plans. To facilitate the success of the Company’s cybersecurity risk management program, multidisciplinary teams throughout the Company are deployed to address cybersecurity threats and to respond to cybersecurity incidents. Through ongoing communications with these teams, the Director of Information Technology & Cybersecurity and the Cybersecurity Council monitor the prevention, detection, mitigation and remediation of cybersecurity threats and incidents in real time and report such threats and incidents to the Audit Committee when appropriate.
The Director of Information Technology & Cybersecurity has served in various roles in information technology and information security for over 25 years, including the design and management of operational and cybersecurity activities of two large public companies. The Director of Information Technology & Cybersecurity holds undergraduate and graduate degrees in computer science and is certified in NIST, CMMC, CIS, and GDPR. The Company’s CEO and CFO each hold undergraduate and graduate degrees in their respective fields, and each has over 20 years of experience managing risks at the Company and at similar companies, including risks arising from cybersecurity threats.
Cybersecurity threats, including as a result of previous cybersecurity incidents, have not materially affected and are not reasonably likely to affect the Company, including its business strategy, results of operations or financial condition.
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.
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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 Kimball, Michigan leases 3,500 square feet of building space. The current lease expires on March 1, 2026, with an option to renew for an additional twelve months.
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 February 1, 2025, 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 28, 2026.
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, 2029.
Velvac, Inc. leases 100,000 square feet of warehouse space in Pharr, TX. The current lease expires on April 15, 2025.
Velvac de Reynosa, S. De R.L De C.V., a maquiladora wholly owned in Reynosa, Tamaulipas, Mexico, leases 225,000 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. In July 2023, the Company received NYSDEC approval for the closure report and long-term maintenance plan. The 30-year annual groundwater monitoring and site maintenance program is underway and will continue through 2048.
ITEM 4 MINE SAFETY DISCLOSURES
Not applicable.
| 18 |
| Table of Contents |
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 30, 2023 was 276.
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 conditions.
During fiscal years 2023 and 2022, 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 August 21, 2023, the Company announced that its Board had approved a new share repurchase program authorizing the Company to repurchase up to 200,000 shares of the Company’s common stock through August 20, 2028. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
The Company made the following share repurchases during the fourth quarter of 2023, 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 1, 2023 to October 28, 2023 |
|
| 10,000 |
|
| $ | 18.05 |
|
|
| 10,000 |
|
|
| 176,762 |
|
October 29, 2023 to November 25, 2023 |
|
| 6,762 |
|
|
| 17.44 |
|
|
| 6,762 |
|
|
| 170,000 |
|
November 26, 2023 to December 30, 2023 |
|
| 10,000 |
|
|
| 19.18 |
|
|
| 10,000 |
|
|
| 160,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 26,762 |
|
|
| 18.32 |
|
|
| 26,762 |
|
|
| 160,000 |
|
ITEM 6 RESERVED
| 19 |
| Table of Contents |
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 2023 and 2022 were each 52 weeks in length. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to results for “2023” or “fiscal year 2023” mean the fiscal year ended December 30, 2023, and references to results for “2022” or “fiscal year 2022” mean the fiscal year ended December 31, 2022. References to the “fourth quarter of 2023” or the “fourth fiscal quarter of 2023” mean the thirteen-week period from October 1, 2023 to December 30, 2023, and 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.
The following analysis excludes discontinued operations.
Summary
Sales for 2023 were $273.5 million compared to $279.3 million for 2022. Net income for 2023 was $8.6 million, or $1.37 per diluted share, compared to $11.1 million, or $1.77 per diluted share, for 2022. Sales for the fourth quarter of 2023 were $67.0 million compared to $69.1 million for the same period in 2022. Net income for the fourth quarter of 2023 was $3.5 million, or $0.56 per diluted share compared to $0.2 million, or $0.03 per diluted share, for the comparable 2022 period.
The Company’s backlog was $80.1 million on December 30, 2023, compared to $72.5 million on December 31, 2022, primarily due to an increase of $5.7 million in backlog at Big 3 for mold services and returnable packaging and an increase of $6.3 million in backlog related to the launch of new mirror programs for Class 8 trucks being awarded to our Velvac subsidiary, partially offset by a decrease of $4.4 million in backlog for locks and hardware at Eberhard.
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.
| 20 |
| Table of Contents |
As of December 30, 2023 and December 31, 2022, the Company’s allowance for doubtful accounts total was $0.6 million and $0.7 million, respectively. As of December 30, 2023, and December 31, 2022, the Company’s bad debt expense was $0.1 million and $0.2 million, 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 $1.7 million and $1.9 million as of December 30, 2023 and December 31, 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 2023 and 2022 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 both 2023 and 2022. The Company reviews the long-term rate of return each year.
Future actual pension income and expenses 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.
| 21 |
| Table of Contents |
The Company expects to make cash contributions of approximately $2,100,000 and $50,000 to our pension and other postretirement plans, respectively, in 2024.
In connection with our pension and other postretirement benefits, the Company reported income of $1.6 million and $3.3 million (net of tax) on its Consolidated Statement of Comprehensive Income for fiscal years 2023 and 2022, respectively. The main factor driving this income 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:
|
| 2023 |
|
| 2022 |
| ||
Discount rate |
| 5.21% - 5.23 | % |
| 2.75% - 2.81 | % | ||
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 for the fiscal years were as follows:
|
| 2023 |
|
| 2022 |
| ||
Discount rate |
|
| 5.28 | % |
|
| 2.93 | % |
Expected return on plan assets |
|
| 4.0 | % |
|
| 4.0 | % |
Rate of compensation increase |
|
| 4.3 | % |
|
| 4.3 | % |
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 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Discount rate |
| $ | (1,829,210 | ) |
| $ | 26,970,888 |
|
Additional recognition due to significant event |
|
| -- |
|
|
| -- |
|
Asset gain or (loss) |
|
| 2,396,043 |
|
|
| (22,838,898 | ) |
Amortization of: |
|
|
|
|
|
|
|
|
Unrecognized gain or (loss) |
|
| 1,303,879 |
|
|
| 1,552,085 |
|
Unrecognized prior service cost |
|
| 4,241 |
|
|
| 70,493 |
|
Other |
|
| 25,632 |
|
|
| (1,538,804 | ) |
Comprehensive income, before tax |
|
| 1,900,585 |
|
|
| 4,215,764 |
|
Income tax |
|
| (307,548 | ) |
|
| (941,964 | ) |
Comprehensive income, net of tax |
| $ | 1,593,037 |
|
| $ | 3,273,800 |
|
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 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.
| 22 |
| Table of Contents |
RESULTS OF OPERATIONS
Fourth Quarter 2023 Compared to Fourth Quarter 2022
The following table shows, for the fourth quarter of 2023 and 2022, 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, and Hallink Moulds; (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 30, 2023 |
|
| December 31, 2022 |
| ||
|
|
|
|
|
|
| ||
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of Products Sold |
|
| 73.2 | % |
|
| 83.4 | % |
Gross Margin |
|
| 26.8 | % |
|
| 16.6 | % |
Product Development Expense |
|
| 2.0 | % |
|
| 1.5 | % |
Selling and Administrative Expense |
|
| 16.8 | % |
|
| 13.6 | % |
Restructuring Costs |
|
| - |
|
|
| 1.0 | % |
Operating Profit |
|
| 8.0 | % |
|
| 0.5 | % |
Net sales in the fourth quarter of 2023 decreased 3.0% to $67.0 million from $69.1 million in the fourth quarter of 2022. Sales decreases were due to lower demand for trucks accessories and returnable transport packaging products. Net sales of existing products decreased 7.7% while price increases and new products increased net sales by 4.7% in the fourth quarter of 2023 when compared to sales in the fourth quarter of 2022. New products included various truck mirror assemblies, rotary latches, D-rings, and mirror cams.
Sales of new products contributed 1.1% to sales growth in the fourth quarter of 2023 compared to 1.4% sales growth from new products in the fourth quarter of 2022. New products in the fourth quarter of 2023 included various new truck mirrors and truck latches.
Cost of products sold in the fourth quarter of 2023 decreased $8.5 million or 15% from the corresponding period in 2022. The decrease in cost of products sold is primarily attributable to lower sales volume, decreases in the cost of materials, lower freight costs, and a favorable adjustment to the LIFO reserve.
Gross margin as a percentage of net sales for the fourth quarter of 2023 was 26.8% compared to 16.6% in the prior year fourth quarter. The increase is primarily due to lower material and freight costs, improved pricing, and a favorable adjustment to the LIFO reserve in the fourth quarter of 2023 combined with other inventory write-offs in the fourth quarter of 2022.
Product development expenses increased $0.3 million, or 24%, in the fourth quarter of 2023 compared to the corresponding period in 2022 as we continue to invest in new products at Eberhard, Velvac and Big 3. As a percentage of net sales, product development costs were 2.0% for the fourth quarter of 2023 compared to 1.5% for the corresponding period in 2022.
Selling and administrative expenses in the fourth quarter of 2023 increased 19.9% compared to the fourth quarter of 2022. As a percentage of net sales, selling and administrative costs were 16.8% for the fourth quarter of 2023 compared to 13.6% for the corresponding period in 2022. The increase was primarily the result of increased payroll and payroll-related expenses, legal and professional, and selling costs.
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 2023 increased to $3.5 million, or $0.56 per diluted share, from $0.2 million, or $0.03 per diluted share, in 2022. 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.
| 23 |
| Table of Contents |
Fiscal Year 2023 Compared to Fiscal Year 2022
The following table shows, for fiscal year 2023 and fiscal year 2022, 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 30, 2023 |
|
| December 31, 2022 |
| ||
|
|
|
|
|
|
| ||
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of Products Sold |
|
| 76.2 | % |
|
| 79.0 | % |
Gross Margin |
|
| 23.8 | % |
|
| 21.0 | % |
Product Development Expense |
|
| 2.0 | % |
|
| 1.5 | % |
Selling and Administrative Expense |
|
| 16.2 | % |
|
| 14.1 | % |
Restructuring Costs |
|
| - |
|
|
| 0.3 | % |
Operating Profit |
|
| 5.6 | % |
|
| 5.1 | % |
Summary
Net sales for 2023 decreased 2% to $273.5 million from $279.3 million in 2022. The sales decrease was primarily due to lower demand for truck accessories and returnable transport packaging products. Net sales of existing products decreased by 6% in 2023 compared to 2022 while price increases and new products increased net sales in 2023 by 4%. Sales of new products contributed 1% to sales growth in 2023 compared to 3% sales growth from new products in 2022. New products in 2023 included various new truck mirror assemblies, rotary latches, D-rings, and mirror cams.
Cost of products sold decreased $12.4 million or 6% to $208.2 million in 2023 from $220.6 million in 2022. The decrease in the cost of products sold is primarily attributable to lower sales volumes, decreases in the cost of materials, lower freight costs, and a favorable adjustment to the LIFO reserve. Tariffs incurred during 2023 were $2.2 million from China-sourced products as compared to $3.1 million in 2022. Most tariffs were recovered through price increases.
Gross margin as a percentage of sales was 24% in 2023 compared to 21% in 2022. The increase primarily reflects the impact of improved pricing and lower material and freight costs.
Product development expenses as a percentage of sales was 2.0% and 1.5% in 2023 and 2022, respectively, as the Company continues to invest in new products at Eberhard, Velvac and Big 3 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 $4.7 million or 12% to $44.2 million in 2023 from $39.5 million in 2022. The increase primarily relates to severance and other accrued compensation expenses of $1.8 million related to the elimination of the chief operating officer position and the departure of our previous chief executive officer during the first quarter of 2023 and legal, professional, and selling costs and payroll-related expenses. The increase in selling expenses reflects our investments in sales capabilities and changes in management personnel.
Net income for 2023 decreased 22% to $8.6 million, or $1.37 per diluted share, from $11.1 million, or $1.77 per diluted share, in 2022. In 2023, net income was negatively impacted by unfavorable pension cost adjustments of $1.1 million, $1.4 million expense associated with the closure of Associated Toolmakers Limited in the second quarter of 2023, and an unfavorable working capital adjustment of $0.4 million in the third quarter of 2023 related to the sale of the Greenwald business, partially offset by a $1.6 million favorable adjustment for the final settlement of our swap agreement with Santander in the second quarter of 2023. In 2022, net income was impacted by favorable pension cost adjustments of $1.8 million, 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.
| 24 |
| Table of Contents |
Other Items
The following table shows the amount of change from the year ended December 31, 2022 to the year ended December 30, 2023 in other items (dollars in thousands):
|
| Amount |
|
| % |
| ||
Interest expense |
| $ | 1,231 |
|
|
| 54 | % |
|
|
|
|
|
|
|
|
|
Other income |
| $ | -3,197 |
|
| -127 | % | |
|
|
|
|
|
|
|
|
|
Income taxes |
| $ | -946 |
|
| 28 | % | |
Interest expense increased in 2023 from 2022 due to increased interest rates.
Other income and expense in 2023 decreased $3.2 million over 2022. Other income and expense in 2023 included an unfavorable $1.1 million pension cost adjustment, $1.4 million expense associated with the closure of Associated Toolmakers Limited in the second quarter of 2023, and an unfavorable working capital adjustment of $0.4 million in the third quarter of 2023 related to the sale of the Greenwald business, partially offset by a $1.6 million favorable adjustment for the final settlement of our swap agreement with Santander in the second quarter of 2023 and $0.7 million of other favorable items. In 2022, other income included a favorable $1.8 million pension cost adjustment, a $0.6 million gain on the sale of the Eastern corporate office building, and $0.4 million of other favorable items, partially offset by a $0.3 million loss on the sale of the Wheeling, IL building.
The effective tax rate for 2023 was 22% compared to the 2022 effective tax rate of 23%. Total income taxes paid were $6.6 million in 2023 and $3.7 million in 2022.
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 in the next 12 months from December 30, 2023 and beyond by the Company’s operating cash flows and available credit facility.
| 25 |
| Table of Contents |
The following table shows key financial ratios at the end of each fiscal year:
|
| 2023 |
|
| 2022 |
| ||
Current ratio |
|
| 2.6 |
|
|
| 2.7 |
|
Average days’ sales in accounts receivable |
|
| 48 |
|
|
| 56 |
|
Inventory turnover |
|
| 3.5 |
|
|
| 3.4 |
|
Ratio of working capital to sales |
|
| 25.4 | % |
|
| 26.1 | % |
Total debt to shareholders’ equity |
|
| 33.2 | % |
|
| 50.7 | % |
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):
|
| 2023 |
|
| 2022 |
| ||
Cash and cash equivalents |
|
|
|
|
|
| ||
- Held in the United States |
| $ | 7.0 |
|
| $ | 7.4 |
|
- Held by foreign subsidiaries |
|
| 1.3 |
|
|
| 2.8 |
|
|
|
| 8.3 |
|
|
| 10.2 |
|
Working capital |
|
| 69.5 |
|
|
| 78.3 |
|
Net cash provided by operating activities |
|
| 26.5 |
|
|
| 7.4 |
|
Change in working capital impact on net cash provided by (used in) operating activities |
|
| 9.7 |
|
|
| (5.2 | ) |
Net cash (used in) provided by in investing activities |
|
| (5.4 | ) |
|
| 5.1 |
|
Net cash used in by financing activities |
|
| (22.9 | ) |
|
| (11.9 | ) |
All cash held by foreign subsidiaries is readily convertible into other currencies, including the U.S. dollar.
Net cash provided by operating activities was $26.5 million in 2023 compared to $7.4 million net cash provided by operating activities in 2022. In 2023, the Company contributed $1.3 million to its defined benefit retirement plan.
In 2023, reductions in working capital requirements provided $9.7 million, driven primarily reductions in accounts receivable and inventory. In 2022, cash used to support additional working capital requirements was $5.2 million.
The Company used $5.4 million for investing activities in 2023, and investing activities provided $5.1 million in 2022. In 2023, the Company invested $6.4 million in capital expenditures, invested $1.0 million in marketable securities, acquired a business for $0.4 million, and received payments on notes receivable of $2.4 million. In 2022, the Company sold a business associated with its discontinued operations for $5.8 million and two of its buildings for an aggregate of $2.2 million. The Company also issued a note receivable of $0.4 million as part of the sale of one of its buildings. 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 $6.4 million and $3.4 million in 2023 and 2022, respectively. Capital expenditures in fiscal year 2024 are expected to be approximately $11.1 million.
In 2023, the Company made total debt payments of $79.7 million, of which $59.3 million was an accelerated principal payment and used $2.8 million for payment of dividends. The Company anticipates dividend payments in fiscal 2024 to be approximately $2.8 million. The Company has $30.0 million available on its revolving line of credit. See Note 6 - Debt in Item 8, Financial Statements and Supplementary Data for further discussion on the Company’s debt facilities.
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 leases certain equipment and buildings under cancelable and non-cancelable operating leases that expire at various dates for up to ten years. Rent expenses amounted to approximately $4.0 million in 2023 and $3.3 million in 2022.
| 26 |
| Table of Contents |
On June 16, 2023, the Company entered into a credit agreement with TD Bank, N.A., Wells Fargo Bank, Bank of America, and M&T Bank as lenders (the “Credit Agreement”), that included a $60 million term portion and a $30 million revolving commitment portion. The proceeds of the term loan were used to repay the Company’s remaining outstanding term loan and to terminate its existing credit facility with Santander Bank, N.A. (approximately $59 million). The term loan portion of the credit facility requires quarterly principal payments of (i) $750,000 beginning on September 30, 2023 through June 30, 2025, (ii) $1,125,000 beginning on September 30, 2025 through June 30, 2027, and (iii) $1,500,000 beginning on September 30, 2027 through March 31, 2028, with the balance of the term loan payable on the maturity date of June 16, 2028. Amounts outstanding under the revolving portion of the credit facility are generally due and payable on June 16, 2028, the expiration date of the Credit Agreement. The Company can elect to prepay some or all the outstanding balance from time to time without penalty. A commitment fee is payable on the unused portion of the revolving credit facility based on the Company’s consolidated ratio of net debt to adjusted EBITDA from time to time. Currently, the commitment fee is 0.30%.
The term loan bears interest at a variable rate based on the term secured overnight financing rate (“SOFR”), plus an adjustment of ten basis points, plus an applicable margin of 1.875% to 2.625%, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.875% to 1.625% or term SOFR, plus an adjustment of ten basis points, plus an applicable margin of 1.875% to 2.625%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated as of June 16, 2023, with TD Bank, N.A., as administrative agent.
The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 3.5 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. A decrease in earnings due to the impact of current economic conditions and inflationary pressures or the resulting harm to the financial condition of our customers, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and our fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and could cause us to fail to comply with the covenants under our Covenant Agreement.
In addition to funding capital requirements, we may use available cash to pay down our indebtedness, to make investments, which may include investments in publicly traded securities, or to make acquisitions that we believe will complement or expand our existing businesses.
As of the end of the fourth quarter of 2023, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
| 27 |
| 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, executive severance, 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, executive severance, and restructuring costs. We believe that Adjusted Earnings Per 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, executive severance, 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.
| 28 |
| 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 30, 2023 and December 31, 2022 |
|
|
|
|
|
|
| |||||||||
($000's) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three Months Ended |
|
| Twelve Months Ended |
| ||||||||||
|
| December 30, 2023 |
|
| December 31, 2022 |
|
| December 30, 2023 |
|
| December 31, 2022 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 3,517 |
|
| $ | 167 |
|
| $ | 8,585 |
|
| $ | 11,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 0.57 |
|
|
| 0.03 |
|
|
| 1.38 |
|
|
| 1.78 |
|
Diluted |
|
| 0.56 |
|
|
| 0.03 |
|
|
| 1.37 |
|
|
| 1.77 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of Wheeling, IL building |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 269 | A |
Gain on sale of corporate office building |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (624 | )B |
Restructuring costs |
|
| - |
|
|
| 700 | C |
|
| - |
|
|
| 700 | C |
Severance and accrued compensation |
|
| - |
|
|
| - |
|
|
| 1,799 | D |
|
| - |
|
Greenwald final sale adjustment |
|
| - |
|
|
| - |
|
|
| 390 | E |
|
| - |
|
Business closure costs |
|
| - |
|
|
| - |
|
|
| 1,448 | F |
|
| - |
|
Non-GAAP tax impact of adjustments (1) |
|
| - |
|
|
| (175 | ) |
|
| (909 | ) |
|
| (92 | ) |
Total adjustments |
|
| - |
|
|
| 525 |
|
|
| 2,728 |
|
|
| 253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income from continuing operations (Non-GAAP) |
| $ | 3,517 |
|
| $ | 692 |
|
| $ | 11,313 |
|
| $ | 11,303 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per share from continuing operations (Non-GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.57 |
|
| $ | 0.11 |
|
| $ | 1.82 |
|
| $ | 1.82 |
|
Diluted |
| $ | 0.56 |
|
| $ | 0.11 |
|
| $ | 1.81 |
|
| $ | 1.81 |
|
(1) | Estimate of the tax effect of the items identified to determine a non-GAAP annual effective tax rate applied to the pretax amount in order to calculate the non-GAAP provision for income tax |
A) | Loss on sale of ILC building in Wheeling, IL |
B) | Gain on sale of Eastern corporate office building |
C) | Restructuring costs associated with warehouse consolidation into Eberhard |
D) | Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the former Chief Executive Officer |
E) | Final settlement of working capital adjustment associated with Greenwald sale |
F) | Associated Toolmakers Limited closure costs |
| 29 |
| Table of Contents |
Reconciliation of Non-GAAP Measures |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Adjusted EBITDA from Continuing Operations Calculation |
|
|
|
|
|
|
|
|
|
| ||||||
For the Three and Twelve Months ended December 30, 2023 and December 31, 2022 |
|
|
|
|
|
|
| |||||||||
($000's) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three Months Ended |
|
| Twelve Months Ended |
| ||||||||||
|
| December 30, 2023 |
|
| December 31, 2022 |
|
| December 30, 2023 |
|
| December 31, 2022 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 3,517 |
|
| $ | 167 |
|
| $ | 8,585 |
|
| $ | 11,050 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 932 |
|
|
| 692 |
|
|
| 3,507 |
|
|
| 2,276 |
|
Provision for income taxes |
|
| 728 |
|
|
| (146 | ) |
|
| 2,407 |
|
|
| 3,352 |
|
Depreciation and amortization |
|
| 1,995 |
|
|
| 1,846 |
|
|
| 7,466 |
|
|
| 7,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on sale of Wheeling, IL building |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 269 | A |
Gain on sale of Eastern corporate office building |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (624 | )B |
Restructuring costs |
|
| - |
|
|
| 700 | C |
|
| - |
|
|
| 700 | C |
Severance and accrued compensation |
|
| - |
|
|
| - |
|
|
| 1,799 | D |
|
| - |
|
Greenwald final sale adjustment |
|
| - |
|
|
| - |
|
|
| 390 | E |
|
| - |
|
Business closure costs |
|
| - |
|
|
| - |
|
|
| 1,448 | F |
|
| - |
|
Adjusted EBITDA from continuing operations (Non-GAAP) |
| $ | 7,172 |
|
| $ | 3,259 |
|
| $ | 25,602 |
|
| $ | 24,258 |
|
A) | Loss on sale of ILC building in Wheeling, IL |
B) | Gain on sale of Eastern corporate office building |
C) | Restructuring costs associated with warehouse consolidation into Eberhard |
D) | Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the former Chief Executive Officer |
E) | Final settlement of working capital adjustment associated with Greenwald sale |
F) | Associated Toolmakers Limited closure costs |
| 30 |
| Table of Contents |
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 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
ASSETS |
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ |
|
| $ |
| ||
Marketable Securities |
|
|
|
|
|
| ||
Accounts receivable, less allowances: 2023-$ |
|
|
|
|
|
| ||
Inventories: |
|
|
|
|
|
|
|
|
Raw materials and component parts |
|
|
|
|
|
| ||
Work in process |
|
|
|
|
|
| ||
Finished goods |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Current portion of note receivable |
|
|
|
|
|
| ||
Prepaid expenses and other assets |
|
|
|
|
|
| ||
Total Current Assets |
|
|
|
|
|
| ||
|
|
|
|
|
| |||
Property, Plant and Equipment |
|
|
|
|
|
|
|
|
Land |
|
|
|
|
|
| ||
Buildings |
|
|
|
|
|
| ||
Machinery and equipment |
|
|
|
|
|
| ||
Accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
Property, Plant and Equipment, net |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
| ||
Trademarks |
|
|
|
|
|
| ||
Patents, technology and other intangibles net of accumulated amortization |
|
|
|
|
|
| ||
Long term note receivable, less current portion |
|
|
|
|
|
| ||
Deferred income taxes |
|
|
|
|
|
| ||
Right of Use Assets |
|
|
|
|
|
| ||
Total Other Assets |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
|
| 32 |
| Table of Contents |
|
| December 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
|
| ||
Accounts payable |
| $ |
|
| $ |
| ||
Accrued compensation |
|
|
|
|
|
| ||
Other accrued expenses |
|
|
|
|
|
| ||
Current portion of operating lease liability |
|
|
|
|
|
| ||
Current portion of financing lease liability |
|
|
|
|
|
| ||
Current portion of long-term debt |
|
|
|
|
|
| ||
Total Current Liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
|
|
|
|
| ||
Operating lease liability, less current portion |
|
|
|
|
|
| ||
Financing lease liability, less current portion |
|
|
|
|
|
| ||
Long-term debt, less current portion |
|
|
|
|
|
| ||
Accrued postretirement benefits |
|
|
|
|
|
| ||
Accrued pension cost |
|
|
|
|
|
| ||
Total Liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Shareholders’ Equity |
|
|
|
|
|
|
|
|
Voting Preferred Stock, no par value: |
|
|
|
|
|
|
|
|
Authorized and unissued: |
|
|
|
|
|
|
|
|
Nonvoting Preferred Stock, no par value: |
|
|
|
|
|
|
|
|
Authorized and unissued: |
|
|
|
|
|
|
|
|
Common Stock, no par value, Authorized: |
|
|
|
|
|
|
|
|
Issued: |
|
|
|
|
|
|
|
|
Outstanding: |
|
|
|
|
|
| ||
Treasury Stock: |
|
| ( | ) |
|
| ( | ) |
Retained earnings |
|
|
|
|
|
| ||
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
| ( | ) |
|
| ( | ) |
Unrealized gain on interest rate swap, net of tax |
|
|
|
|
|
| ||
Unrecognized net pension and postretirement benefit costs, net of tax |
|
| ( | ) |
|
| ( | ) |
Accumulated other comprehensive loss |
|
| ( | ) |
|
| ( | ) |
Total Shareholders’ Equity |
|
|
|
|
|
| ||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
|
| 33 |
| Table of Contents |
The Eastern Company
Consolidated Statements of Income
|
| Year Ended |
| |||||
|
| December 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Net sales |
| $ |
|
| $ |
| ||
Cost of products sold |
|
| ( | ) |
|
| ( | ) |
Gross margin |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Product development expense |
|
| ( | ) |
|
| ( | ) |
Selling and administrative expenses |
|
| ( | ) |
|
| ( | ) |
Restructuring costs |
|
|
|
|
| ( | ) | |
Operating profit |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Interest expense |
|
| ( | ) |
|
| ( | ) |
Other (expense) income |
|
| ( | ) |
|
|
| |
Income from continuing operations before income taxes |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Income taxes |
|
| ( | ) |
|
| ( | ) |
Net income from continuing operations |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Discontinued Operations (see note 2) |
|
|
|
|
|
|
|
|
Gain from operations of discontinued units |
| $ |
|
| $ |
| ||
Gain (loss) on sale of businesses |
|
|
|
|
|
| ||
Income tax (expense) benefit |
|
|
|
|
| ( | ) | |
Net gain (loss) on discontinued operations |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Net Income |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
|
Basic |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Diluted |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Gain (loss) per share from discontinued operations: |
|
|
|
|
|
|
|
|
Basic |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Diluted |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Total earnings per share: |
|
|
|
|
|
|
|
|
Basic |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Diluted |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Cash dividends per share: |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
|
| 34 |
| Table of Contents |
The Eastern Company
Consolidated Statements of Comprehensive Income
|
| Year Ended |
| |||||
|
| December 30, |
|
| December 31, |
| ||
|
| 2023 |
|
| 2022 |
| ||
Net income |
| $ |
|
| $ |
| ||
Other comprehensive income: |
|
|
|
|
|
|
|
|
Change in foreign currency translation |
|
|
|
|
| ( | ) | |
Change in fair value of interest rate swap, net of tax cost of: $(426,659) in 2023 and $531,425 in 2022 |
|
| ( | ) |
|
|
| |
Change in pension and other postretirement benefit costs, net of taxes of: $307,548 in 2023 and $941,964 in 2022 |
|
|
|
|
|
| ||
Total other comprehensive income |
|
|
|
|
|
| ||
Comprehensive income |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
|
| 35 |
| Table of Contents |
The Eastern Company
Consolidated Statements of Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| Other |
|
|
| |||||||||||||
|
| Common |
|
| Common Stock |
|
| Treasury |
|
| Treasury Stock |
|
| Retained |
|
| Comprehensive |
|
| Shareholders' |
| |||||||
|
| Shares |
|
| Amount |
|
| Shares |
|
| Amount |
|
| Earnings |
|
| Income (Loss) |
|
| Equity |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balances at January 1, 2022 |
|
|
|
| $ |
|
|
| ( | ) |
| $ | ( |
|
| $ |
|
| $ | ( |
|
| $ |
| ||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cash dividends declared, $0.44 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |
Change in fair value of interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Change in pension and other postretirement benefit costs, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Stock Options Exercised |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) | ||
Treasury Stock Purchase |
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| ( | ) |
Issuance of SARS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Issuance of Common Stock for directors' fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Balances at December 31, 2022 |
|
|
|
| $ |
|
|
| ( | ) |
| $ | ( |
|
| $ |
|
| $ | ( |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Cash dividends declared,$0.44 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,765,686 | ) |
|
|
|
|
|
| (2,765,686 | ) |
Currency translation adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Change in fair value of interest rate swap |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) |
Change in pension and other postretirement benefit costs, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Stock Options Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Treasury Stock Purchase |
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
| ( | ) |
Issuance of stock awards, net |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) | |
Issuance of Common Stock for directors' fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Balances at December 30, 2023 |
|
|
|
| $ |
|
|
| ( | ) |
| $ | ( |
|
| $ |
|
| $ | ( |
|
| $ |
| ||||
See accompanying notes.
| 36 |
| Table of Contents |
The Eastern Company
Consolidated Statements of Cash Flows
|
| Year Ended |
| |||||
|
| December 30, 2023 |
|
| December 31, 2022 |
| ||
Operating Activities |
|
|
|
|
|
| ||
Net income |
| $ |
|
| $ |
| ||
Less: Gain from discontinued operations |
|
|
|
|
|
| ||
Income from continuing operations |
| $ |
|
| $ |
| ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
| ||
Reduction in carrying amount of ROU assets |
|
| ( | ) |
|
| ( | ) |
Change in operating lease liability |
|
|
|
|
|
| ||
Unrecognized pension and postretirement benefits |
|
|
|
|
| ( | ) | |
Loss (gain) on sale of equipment and other assets |
|
|
|
|
| ( | ) | |
Provision for doubtful accounts |
|
|
|
|
|
| ||
Stock compensation expense |
|
|
|
|
|
| ||
Deferred taxes |
|
| ( | ) |
|
| ( | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
| ( | ) | |
Inventories |
|
|
|
|
| ( | ) | |
Prepaid expenses and other |
|
|
|
|
| ( | ) | |
Other assets |
|
|
|
|
|
| ||
Accounts payable |
|
| ( | ) |
|
| ( | ) |
Accrued compensation |
|
|
|
|
| ( | ) | |
Other accrued expenses |
|
| ( | ) |
|
|
| |
Net cash provided by operating activities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Marketable securities |
|
| ( | ) |
|
|
| |
Business acquisition |
|
| ( | ) |
|
|
| |
Issuance of notes receivable |
|
|
|
|
| ( | ) | |
Payments received from notes receivable |
|
|
|
|
|
| ||
Proceeds from sale of businesses |
|
|
|
|
|
| ||
Proceeds from sale of building and equipment |
|
|
|
|
|
| ||
Purchases of property, plant and equipment |
|
| ( | ) |
|
| ( | ) |
Net cash (used in) provided by investing activities |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt and notes payable |
|
|
|
|
|
| ||
Proceeds from short term borrowings (revolver) |
|
|
|
|
|
| ||
Principal payments on short-term borrowings (revolver) |
|
| ( | ) |
|
|
| |
Proceeds from new long-term debt refinancing |
|
|
|
|
|
| ||
Principal payments on long-term debt |
|
| ( | ) |
|
| ( | ) |
Financing leases, net |
|
|
|
|
| ( | ) | |
Purchase common stock for treasury |
|
| ( | ) |
|
| ( | ) |
Dividends paid |
|
| ( | ) |
|
| ( | ) |
Net cash used in financing activities |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
Cash provided by operating activities |
|
|
|
|
|
| ||
Cash provided by discontinued operations |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| ( | ) |
|
| ( | ) |
Net change in cash and cash equivalents |
|
| ( | ) |
|
|
| |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
|
|
|
|
| ||
Cash and cash equivalents at end of year |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest |
| $ |
|
| $ |
| ||
Income taxes |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Right of use asset |
|
|
|
|
|
| ||
Lease liability |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
|
|
|
|
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”) manage 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), and a wholly owned subsidiary in Reynosa, Mexico.
The Eastern Company has one reportable segment: Engineered Solutions. The Engineered Solutions segment provides engineered solutions to support our customer’s needs primarily in the commercial transportation and logistics markets. The Chief Operating Decision Maker (CODM) uses both segment gross profit and segment profit or loss from operations before interest and income taxes to allocate resources (including employees, property, and financial or capital resources) for the Engineered Solutions segment predominantly in the annual budget and forecasting process.
Company Operations
The Engineered Solutions segment consists of Big 3 Precision, including Big 3 Precision Products, Inc. (“Big 3 Products”) and Big 3 Mold Services, Inc. (“Big 3 Mold”) and Hallink Moulds, Inc. (“Hallink Moulds”); 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
In the second quarter of 2021, we determined that the companies previously included in our former Diversified Products segment no longer fit with our long-term strategy and initiated the process of selling the companies within the former Diversified Products segment to 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 Argo EMS are reflected in our condensed consolidated statements of operations as discontinued operations for 2022.
On October 19, 2022, the Company sold its Argo EMS business (“Argo”). Argo supplied 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 30, 2023 |
|
| December 31, 2022 |
| ||
|
|
|
|
|
|
| ||
Net sales |
| $ |
|
| $ |
| ||
Cost of products sold |
|
|
|
|
| ( | ) | |
Gross margin |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
|
|
|
| ( | ) | |
Restructuring benefit (costs) |
|
|
|
|
|
| ||
Operating income (loss) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations before income taxes |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
|
|
|
| ( | ) | |
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations, net of tax |
| $ |
|
| $ |
| ||
3. ACCOUNTING POLICIES
Fiscal Year
The Company’s year ends on the Saturday nearest to December 31. Based on this policy, fiscal years 2023 and 2022 were each comprised of 52 weeks. References in these Notes to the consolidated financial statements to “2023” or “fiscal year 2023” mean the fiscal year ended December 30, 2023, and references to “2022” or “fiscal year 2022” mean the fiscal year ended December 31, 2022. References to the “fourth quarter of 2023” or the “fourth fiscal quarter of 2023” mean the thirteen-week period from October 1, 2023 to December 30, 2023, and 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.
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.
| 40 |
| Table of Contents |
Eastern Company
Notes to Consolidated Financial Statements (continued)
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 $
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 30, 2023 and December 31, 2022, the Company’s allowance for doubtful accounts total was $
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 ($
Cost exceeded the LIFO carrying value by approximately $
Property, Plant and Equipment and Related Depreciation
Property, plant, and equipment (including equipment under finance lease of $
| 41 |
| Table of Contents |
Eastern Company
Notes to Consolidated Financial Statements (continued)
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 by 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 30, 2023 and December 31, 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 2023 and 2022 and determined that no impairment existed at the end of 2023 and 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.
| 42 |
| 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
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 marketable securities (Level 1) and pension assets, see Note 10, Retirement Benefit Plans.
The carrying amounts of other financial instruments (cash and cash equivalents, marketable securities, accounts receivable, accounts payable and debt) as of December 30, 2023 and December 31, 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, warehouses, and office equipment as well as finance leases for 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. Many 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 1–120 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.
| 43 |
| Table of Contents |
Eastern Company
Notes to Consolidated Financial Statements (continued)
Currently, the Company has 22 operating leases with a lease liability of $
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 by employing the percentage of completion method was $
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 30, 2023 and December 31, 2022, the Company recorded sales returns of $
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 30, 2023 and December 31, 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.
The Company notes that it is impracticable to provide revenues from external customers for each product and service.
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 the cost of goods sold.
| 44 |
| Table of Contents |
Eastern Company
Notes to Consolidated Financial Statements (continued)
Product Development Costs
Product development costs, charged to expense as incurred, were $
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 $
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 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 U.S. 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.
| 45 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
4. GOODWILL
The following is a roll-forward of goodwill for 2023 and 2022:
|
| 2023 |
| |
|
|
|
| |
Beginning Balance |
| $ |
| |
Acquisition |
|
|
| |
Disposition |
|
| ( | ) |
Foreign Exchange |
|
|
| |
Ending Balance |
| $ |
| |
|
|
|
|
|
|
| 2022 |
| |
|
|
|
|
|
Beginning Balance |
| $ |
| |
Disposition |
|
| ( | ) |
Foreign Exchange |
|
| ( | ) |
Ending Balance |
| $ |
| |
| 46 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
5. INTANGIBLES
Trademarks are not amortized as their lives are deemed to be indefinite. Amortization expense recognized in 2023 and 2022 was $
|
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|
| Weighted-Average |
| ||
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| Amortization |
| ||
|
| 2023 |
|
| Period (Years) |
| ||
Gross Amount |
|
|
|
|
|
| ||
Patents and developed technology |
| $ |
|
|
|
| ||
Customer relationships |
|
|
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|
|
| ||
Non-compete agreements |
|
|
|
|
|
| ||
Total Gross Intangibles |
| $ |
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Accumulated Amortization |
|
|
|
|
|
|
|
|
Patents and developed technology |
| $ |
|
|
|
|
| |
Customer relationships |
|
|
|
|
|
|
| |
Non-compete agreements |
|
|
|
|
|
|
| |
Accumulated Amortization |
| $ |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Net 2023 per Balance Sheet |
| $ |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
| 2022 |
|
|
|
|
| |
Gross Amount |
|
|
|
|
|
|
|
|
Patents and developed technology |
| $ |
|
|
|
| ||
Customer relationships |
|
|
|
|
|
| ||
Non-compete agreements |
|
|
|
|
|
| ||
Total Gross Intangibles |
| $ |
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Accumulated Amortization |
|
|
|
|
|
|
|
|
Patents and developed technology |
| $ |
|
|
|
|
| |
Customer relationships |
|
|
|
|
|
|
| |
Non-compete agreements |
|
|
|
|
|
|
| |
Accumulated Amortization |
| $ |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Net 2022 per Balance Sheet |
| $ |
|
|
|
|
| |
| 47 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
6. DEBT
On June 16, 2023, the Company entered into a Credit Agreement with TD Bank, N.A., Wells Fargo Bank, Bank of America, and M&T Bank as lenders (the “Credit Agreement”), that included a $
The term loan bears interest at a variable rate based on the term secured overnight financing rate (“SOFR”), plus an adjustment of ten basis points, plus an applicable margin of
The Company’s loan covenants under the Credit Agreement require
Debt consists of:
|
| 2023 |
|
| 2022 |
| ||
Term loans |
| $ |
|
| $ |
| ||
Revolving credit loan |
|
|
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|
|
| ||
|
|
|
|
|
|
| ||
Less current portion |
|
|
|
|
|
| ||
|
| $ |
|
| $ |
| ||
Amounts are net of unamortized discounts and debt issuance costs of $
The Company paid interest of $
The Company’s loan covenants under the Credit Agreement require
| 48 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
6. DEBT (continued)
As of December 30, 2023, scheduled annual principal maturities of long-term debt, net of deferred financing fees, for each of the next five years follow:
2024 |
|
|
| |
2025 |
|
|
| |
2026 |
|
|
| |
2027 |
|
|
| |
2028 |
|
|
| |
Thereafter |
|
|
| |
|
| $ |
|
7. STOCK OPTIONS AND AWARDS
Stock Awards
As of December 30, 2023, 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
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 2023 or 2022.
Stock-based compensation (income)/expense, including forfeitures, in connection with stock awards and SARs previously granted to employees was $(
As of December 31, 2023, there were
The following tables set forth the outstanding SARs for the period specified:
|
| Year Ended December 30, 2023 |
|
| Year Ended December 31, 2022 |
| ||||||||||
|
| Units |
|
| Weighted - Average Exercise Price |
|
| Units |
|
| Weighted - Average Exercise Price |
| ||||
Outstanding at beginning of period |
|
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|
| $ |
|
|
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| $ |
| ||||
Expired |
|
| ( | ) |
|
|
|
|
| - |
|
|
|
| ||
Exercised |
|
| ( | ) |
|
|
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|
| ( | ) |
|
|
| ||
Forfeited |
|
| ( | ) |
|
|
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|
| ( | ) |
|
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| ||
Outstanding at end of period |
|
|
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| ||||
| 49 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
SARs Outstanding and Exercisable | ||||||||||||||||||||||||
Range of Exercise Prices |
| Outstanding as of December 30, 2023 |
|
| Weighted- Average Remaining Contractual Life |
|
| Weighted- Average Exercise Price |
|
| Exercisable as of December 30, 2023 |
|
| Weighted- Average Remaining Contractual Life |
|
| Weighted- Average Exercise Price |
| ||||||
$ |
|
|
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|
| $ |
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| $ |
| ||||||
The following tables set forth the outstanding stock grants for the period specified:
|
| Year Ended December 30, 2023 |
|
| Year Ended December 31, 2022 |
| ||
|
| Shares |
|
| Shares |
| ||
Outstanding at beginning of period |
|
|
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|
| ||
Issued |
|
|
|
|
|
| ||
Exercised |
|
| ( | ) |
|
| - |
|
Forfeited |
|
| ( | ) |
|
| ( | ) |
Outstanding at end of period |
|
|
|
|
|
| ||
As of December 30, 2023, outstanding SARs and awards had an intrinsic value of $
| 50 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES
Deferred income taxes are provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those for income tax reporting purposes. Deferred income tax (assets) liabilities relate to:
|
| 2023 |
|
| 2022 |
| ||
Property, plant, and equipment |
| $ |
|
| $ |
| ||
Right of Use Asset |
|
|
|
|
|
| ||
Intangible assets |
|
|
|
|
|
| ||
Other |
|
|
|
|
|
| ||
Foreign Withholding Tax |
|
|
|
|
|
| ||
Total deferred income tax liabilities |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Other postretirement benefits |
|
| ( | ) |
|
| ( | ) |
Inventories |
|
| ( | ) |
|
| ( | ) |
Allowance for doubtful accounts |
|
| ( | ) |
|
| ( | ) |
Accrued compensation |
|
| ( | ) |
|
| ( | ) |
Lease Obligation |
|
| ( | ) |
|
| ( | ) |
Pensions |
|
| ( | ) |
|
| ( | ) |
Foreign Tax Credit |
|
| ( | ) |
|
| ( | ) |
Total deferred income tax assets |
|
| ( | ) |
|
| ( | ) |
Net deferred income tax (assets) liabilities |
| $ | ( | ) |
| $ | ( | ) |
Income before income taxes consists of:
|
| 2023 |
|
| 2022 |
| ||||||||||||||||||
|
| Continuing Operations |
|
| Discontinued Operations |
|
| Total Income Statement |
|
| Continuing Operations |
|
| Discontinued Operations |
|
| Total Income Statement |
| ||||||
|
|
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|
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|
|
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| ||||||
Domestic |
| $ |
|
|
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|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Foreign |
|
|
|
|
|
|
|
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|
|
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|
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| ||||||
|
| $ |
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
The provision for income taxes follows:
|
| 2023 |
|
| 2022 |
| ||||||||||||||||||
|
| Continuing Operations |
|
| Discontinued Operations |
|
| Total Income Statement |
|
| Continuing Operations |
|
| Discontinued Operations |
|
| Total Income Statement |
| ||||||
Current |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Federal |
| $ |
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
Foreign |
|
|
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|
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|
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| ||||||
State |
|
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| ||||||
Deferred: |
|
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|
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|
|
|
|
|
|
Federal |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Foreign |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
| ||||
State |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
|
|
| ( | ) | ||
|
| $ |
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||||
| 51 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (continued)
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows:
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| Amount |
|
| Percent |
|
| Amount |
|
| Percent |
| ||||
Income taxes using U.S. federal statutory rate |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
State income taxes, net of federal benefit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Impact on Foreign Repatriation Tax Reform |
|
| 306,330 |
|
|
|
|
|
| - |
|
|
|
| ||
Impact of foreign subsidiaries on effective tax rate |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
| |
Impact of Research & Development tax credit |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Uncertain tax positions reserve |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other net |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
|
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows for continuing operations:
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| Amount |
|
| Percent |
|
| Amount |
|
| Percent |
| ||||
Income taxes using U.S. federal statutory rate |
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
State income taxes, net of federal benefit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Impact on Foreign Repatriation Tax Reform |
|
| 306,330 |
|
|
|
|
|
| - |
|
|
|
| ||
Impact of foreign subsidiaries on effective tax rate |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
|
| |
Impact of Research & Development tax credit |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Uncertain tax positions reserve |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Other net |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
|
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows for discontinued operations:
|
| 2023 |
|
| 2022 |
| ||||||||||
|
| Amount |
|
| Percent |
|
| Amount |
|
| Percent |
| ||||
Income taxes using U.S. federal statutory rate |
|
|
|
|
| % |
| $ |
|
|
| % | ||||
State income taxes, net of federal benefit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ |
|
|
| % |
| $ |
|
|
| % | ||||
Total income taxes paid were $
Under accounting standards (ASC 740), a deferred tax liability is not recorded for the excess of the financial reporting (book) basis over the tax basis of an investment in a foreign subsidiary if the indefinite reinvestment criteria are met. Effective for foreign earnings after December 30, 2017, if such earnings are distributed in the form of cash dividends, the Company would not be subject to additional U.S. income taxes but could be subject to foreign income and withholding taxes. A provision has not been made for additional U.S. federal and foreign taxes on December 30, 2023 on approximately $
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The list of changes is comprehensive. The changes include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other Codification adjustments have been made to employee stock ownership plans. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted ASU 2019-12 in the first interim period of 2021.
| 52 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (continued)
On December 14, 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures which applies to all entities subject to income taxes. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. For public business entities (PBEs), the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is currently in the process of evaluating the effect of this guidance on its financial statements.
A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows:
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
| ||
Balance at beginning of year |
| $ |
|
| $ |
| ||
Increase for positions taken during the current period |
|
|
|
|
|
| ||
Increase (decrease) for positions taken during the prior period |
|
| ( | ) |
|
|
| |
Decrease resulting from the expiration of the statute of limitations |
|
| ( | ) |
|
| ( | ) |
Balance at end of year |
| $ |
|
| $ |
| ||
The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2019 and non-U.S. income tax examinations by tax authorities prior to 2017.
Included in the balance as of December 30, 2023, are $
The total amount of unrecognized tax benefits could increase or decrease within the next twelve months for several reasons, including the closure of federal, state, and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under ASC 740. The Company believes that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.
| 53 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
9. LEASES
The Company enters into leases for manufacturing facilities, warehouses, sales offices, plant equipment, vehicles, and certain other equipment with varying end dates from April 2024 to April 2033, including renewal options.
The following table (in millions) represents the impact of leasing on the consolidated balance sheets:
|
| Balance Sheet Classification |
| December 30, 2023 |
|
| December 31, 2022 |
| ||
Assets: |
|
|
|
|
|
|
|
| ||
Operating lease assets, net |
| Right of use assets |
| $ |
|
| $ |
| ||
Finance lease right of use assets, net |
| Property, plant and equipment, net |
|
|
|
|
|
| ||
Total leased assets, net |
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
Current operating lease liabilities |
| Current portion of operating lease liability |
|
|
|
|
|
| ||
Current finance lease liabilities |
| Current portion of financing lease liability |
|
|
|
|
|
| ||
Noncurrent operating lease liabilities |
| Operating lease liability, less current portion |
|
|
|
|
|
| ||
Noncurrent finance lease liabilities |
| Financing lease liability, less current portion |
|
|
|
|
|
| ||
Total lease liabilities |
|
|
| $ |
|
| $ |
| ||
Cash paid included in the measurement of operating lease liabilities was $
Cash paid included in the measurement of finance lease liabilities was $
Total operating lease expense was $
Total financing lease expense was $
| 54 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
The future payments (in millions) due under non-cancelable operating and finance leases as of December 30, 2023 are as follows:
|
| Operating |
|
| Finance |
| ||
2024 |
| $ |
|
| $ |
| ||
2025 |
|
|
|
|
|
| ||
2026 |
|
|
|
|
|
| ||
2027 and thereafter |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Less effects of discounting |
|
| ( | ) |
|
| ( | ) |
Lease liabilities recognized |
| $ |
|
| $ |
| ||
As of December 30, 2023, the weighted average lease term for all operating and finance leases is
10. RETIREMENT BENEFIT PLANS
The Company has non-contributory defined benefit pension plans covering some U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for its salaried plan, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law.
The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.
Components of the net periodic benefit cost of the Company’s pension benefit plans for the fiscal year indicated were as follows:
|
| 2023 |
|
| 2022 |
| ||
Service cost |
| $ |
|
| $ |
| ||
Interest cost |
|
|
|
|
|
| ||
Expected return on plan assets |
|
| ( | ) |
|
| ( | ) |
Amortization of prior service cost |
|
|
|
|
|
| ||
Amortization of the net loss |
|
|
|
|
|
| ||
Net periodic benefit cost |
| $ |
|
| $ | ( | ) | |
Service costs are reported in the cost of products sold and the other components of net periodic benefit costs are reported in other income in the consolidated statements of income.
| 55 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
Assumptions used to determine net periodic benefit cost for the Company’s pension benefit plans for the fiscal year indicated were as follows:
|
| 2023 |
|
| 2022 |
| ||
Discount rate |
|
|
|
| ||||
- Pension plans |
| % |
| % | ||||
- Supplemental pension plans |
|
| % |
|
| % | ||
Expected return on plan assets |
|
| % |
|
| % | ||
Rate of compensation increase |
|
| % |
|
| % | ||
Components of the net periodic benefit cost of the Company’s other postretirement benefit plan were as follows:
|
| 2023 |
|
| 2022 |
| ||
Service cost |
| $ |
|
| $ |
| ||
Interest cost |
|
|
|
|
|
| ||
Expected return on plan assets |
|
| ( | ) |
|
| ( | ) |
Amortization of prior service cost |
|
|
|
|
|
| ||
Amortization of the net loss |
|
| ( | ) |
|
| ( | ) |
Net periodic benefit cost |
| $ |
|
| $ |
| ||
Assumptions used to determine net periodic benefit cost for the Company’s other postretirement plan for the fiscal year indicated were as follows:
|
| 2023 |
|
| 2022 |
| ||
Discount rate |
|
| % |
|
| % | ||
Expected return on plan assets |
|
| % |
|
| % | ||
Rate of compensation increase |
|
| % |
|
| % | ||
As of December 30, 2023, and December 31, 2022, the status of the Company’s pension benefit plans and other postretirement benefit plan was as follows:
|
| Pension Benefit |
|
| Other Postretirement Benefit |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Benefit obligation at beginning of year |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Change in discount rate |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
Service cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Actuarial (gain)/loss |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
| ( | ) | |
Benefits paid |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Benefit obligation at end of year |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Fair value of plan assets at beginning of year |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Actual return on plan assets |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
| ||
Employer contributions |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Benefits paid |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Fair value of plan assets at end of year |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 56 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
|
| Pension Benefit |
|
| Other Postretirement Benefit |
| ||||||||||
Funded Status |
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net amount recognized in the balance sheet |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
Amounts recognized in accumulated other comprehensive income consist of: |
|
|
| |||||||||||||
|
|
|
|
| ||||||||||||
|
| Pension Benefit |
|
| Other Postretirement Benefit |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Net (loss)/gain |
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ |
| ||
Prior service (cost) credit |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ |
| ||
Change in the components of accumulated other comprehensive income consist of:
|
| Pension Benefit |
|
| Other Postretirement Benefit |
| ||||||||||
|
| 2023 |
|
| 2022 |
|
| 2023 |
|
| 2022 |
| ||||
Balance at beginning of period |
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ |
| ||
Charged to net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net loss (gain) |
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | ||
Liability (gains)/losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Asset (gains)/losses deferred |
|
|
|
|
| ( | ) |
|
| ( | ) |
|
|
| ||
Other |
|
| ( | ) |
|
| ( | ) |
|
|
|
|
|
| ||
Balance at end of period |
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ |
| ||
Assumptions used to determine the projected benefit obligations for the Company’s pension benefit plans and other postretirement benefit plan for the fiscal year indicated were as follows:
| 2023 |
|
| 2022 |
| |||
Discount rate |
|
|
|
| ||||
- Pension plans |
| % |
| % | ||||
- Supplemental pension plans |
|
| % |
|
| % | ||
- Other postretirement plan |
|
| % |
|
| % | ||
On December 30, 2023 and December 31, 2022, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $
| 57 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
Information for the under-funded pension plans with a projected benefit obligation and an accumulated benefit obligation in excess of plan assets:
|
| 2023 |
|
| 2022 |
| ||
Number of plans |
|
|
|
|
|
| ||
Projected benefit obligation |
| $ |
|
| $ |
| ||
Accumulated benefit obligation |
|
|
|
|
|
| ||
Fair value of plan assets |
|
|
|
|
|
| ||
Net amount recognized in accrued benefit liability |
| $ | ( | ) |
| $ | ( | ) |
Estimated future benefit payments to participants of the Company’s pension plans are $
Estimated future benefit payments to participants of the Company’s other postretirement plan are $
The Company expects to make cash contributions to its qualified pension plans of approximately $
We consider a number of factors in determining and selecting assumptions for the overall expected long-term rate of return on plan assets. We consider the historical long-term return experience of our assets, the current and expected allocation of our plan assets, and expected long-term rates of return. We derive these expected long-term rates of return with the assistance of our investment advisors and generally base these rates on a 10-year horizon for various asset classes and consider the expected positive impact of active investment management. We base our expected allocation of plan assets on a diversified portfolio consisting of domestic and international equity securities and fixed income securities.
We consider a variety of factors in determining and selecting our assumptions for the discount rate at the end of the year. In 2023, as in 2022, we developed each plan’s discount rate 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.
| 58 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
The fair values of the Company’s pension plan assets on December 30, 2023 and December 31, 2022, utilizing the fair value hierarchy discussed in Note 3 – Accounting Policies – Fair Value of Financial Instruments, follow:
|
| December 30, 2023 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Cash and Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common/collective trust funds |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Equities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Eastern Company Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
RITC Russell Investments Russell 1000® Index Fund (a) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
RITC Small Cap Fund (b) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
RITC International Fund (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
RITC Emerging Markets Fund (d) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
RITC World Equity Fund (e) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
RITC Global Real Estate Securities Fund (f) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
RITC Global Listed Infrastructure Fund (g) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
RITC Commodities Fund (h) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
RIIFL High Yield Bond Fund (i) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Fixed Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective trust funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Duration LDI Fixed Income Funds (j) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• Russell 25 Year LDI Fixed Income Fund |
|
|
|
|
|
|
|
|
|
|
|
| ||||
• Russell 14 Year LDI Fixed Income Fund |
|
|
|
|
|
|
|
|
|
|
|
| ||||
STRIPS Fixed Income Funds (k) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• Russell 15 to 20 Year STRIPS Fixed Income Fund |
|
|
|
|
|
|
|
|
|
|
|
| ||||
• Russell 10 to 15 Year STRIPS Fixed Income Fund |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 59 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
|
| December 31, 2022 |
| |||||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||
Cash and Equivalents: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Common/collective trust funds |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Equities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Eastern Company Common Stock |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Common/collective trust funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell Multi Asset Core Plus Fund (l) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Fixed Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective trust funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Duration LDI Fixed Income Funds (j) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• Russell 25 Year LDI Fixed Income Fund |
|
|
|
|
|
|
|
|
|
|
|
| ||||
• Russell 14 Year LDI Fixed Income Fund |
|
|
|
|
|
|
|
|
|
|
|
| ||||
STRIPS Fixed Income Funds (k) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• Russell 15 to 20 Year STRIPS Fixed Income Fund |
|
|
|
|
|
|
|
|
|
|
|
| ||||
• Russell 10 to 15 Year STRIPS Fixed Income Fund |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Equity common funds primarily hold publicly traded common stock of both U.S and international companies selected for purposes of total return and to maintain equity exposure consistent with policy allocations. The Level 1 investment is made up of shares of The Eastern Company Common Stock and is valued at market price. Level 2 investments include commingled funds valued at unit values provided by the investment managers, which are based on the fair value of the underlying publicly traded securities.
| 60 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
| (a) | The RITC Russell Investments Russell 1000® Index Fund - Series I seeks to replicate the performance of the Russell 1000® Index as closely as possible before the deduction of Fund expenses. The Fund invests, through an underlying fund, primarily in stocks that closely match the composition of the Russell 1000® Index. The stocks in the index are highly diversified across industries and sectors. The Fund practices a passive investment approach and seeks to replicate the performance of the Russell 1000® Index. |
| (b) | The RITC Small Cap Fund seeks to provide long-term capital appreciation. It aims to outperform the Russell 2000® Index while managing volatility and maintaining diversification similar to the Index over a full market cycle. The Fund invests primarily in common stocks of U.S. small capitalization companies. Advisors in the Fund use a wide range of criteria and disciplines, focusing on factors such as: undervalued or under-researched companies, special situations, emerging growth, asset plays and turnarounds. |
| (c) | The RITC International Fund seeks to provide long-term growth of capital. It aims to outperform the MSCI World ex USA Index Net (the “Index”) while managing volatility and maintaining diversification similar to the index over a full market cycle. The Fund invests primarily in equity securities issued by Non-U.S. companies and in depositary receipts and other derivatives representing economic ownership of securities of non-U.S. companies. Seeks to invest in most of the developed nations of the world to maintain a high degree of diversification among countries and currencies. Employs multiple managers with distinct investment styles (growth, market-oriented and value), which are intended to be complementary. |
| (d) | The RITC Emerging Markets Fund seeks to provide the potential for long-term growth of capital. It aims to outperform the MSCI Emerging Markets Index Net over a full market cycle. The Fund Invests in equity securities of companies located in, or are economically tied to, emerging market countries. Securities are denominated principally in foreign currencies and are typically held outside the U.S. The Fund employs a multi-style (growth, market-oriented and value) and multi-manager approach whereby portions of the fund are allocated to different money managers who employ distinct styles. |
| (e) | The RITC World Equity Fund seeks to provide long-term capital appreciation. It aims to outperform the MSCI World Net Dividend Index over a full market cycle. The Fund employs specialist global equity advisors using global stock and sector selection strategies. Advisors invest across the world, without being limited by national borders or to specific regions, and typically take more aggressive positions on stocks and sectors and the extended equity markets. Their cross-border approach offers a different, complementary source of excess returns to Russell Investments' U.S. and International funds. |
| (f) | The RITC Global Real Estate Securities Fund seeks to provide current income and long-term capital growth. It strives to outperform the FTSE EPRA NAREIT Developed Index Net TRI with above-average consistency over a full market cycle. The Fund invests principally in equity securities of real estate companies, primarily in real estate investment trusts (REITs), other property trusts and real estate-related companies listed on global stock exchanges, predominantly in North America, Europe, Asia, and Australia. It employs a multi-manager approach whereby portions of the fund are allocated to different money managers whose approaches are intended to complement one another. |
| (g) | The RITC Global Listed Infrastructure Fund seeks to provide the potential for excess return streams, stable income potential, and a possible hedge against inflation. It seeks to outperform the S&P Infrastructure Index over a full market cycle. The Fund invests in a diversified portfolio of listed companies that provide services essential for a functioning modern economy, including roads, utilities, hospitals, schools, and airports. Employs multiple managers with complementary strategies with each manager expected to take an active management approach with a ’pure play’ bias - meaning they select companies with assets that tend to be monopolistic, highly regulated, long-lived, with steady cash flows. |
| (h) | The RITC Commodities Fund is designed to provide the potential for long-term growth of capital and income. It seeks to outperform the Bloomberg Commodity Index Total Return with above-average consistency over a full market cycle. The Fund invests in commodity index-linked securities, other commodity-linked securities, derivative instruments, cash, and fixed income securities that together are intended to provide exposure to the performance of the collateralized commodity futures market. Combines strategies with different payoffs over different phases of an economic and stock market cycle. Multiple advisors, funds and strategies are employed to reduce style or strategy concentration risk. |
| (i) | The RIIFL High Yield Bond Fund seeks to provide current income and capital appreciation. It aims to outperform the ICE BofA Developed Markets High Yield Constrained Index (USD-hedged) over an interest rate cycle. The Fund invests primarily in non-investment grade, high yielding fixed income securities issued by companies from around the globe. These securities are commonly referred to as "junk bonds." A majority of the Fund's holdings are U.S. dollar denominated. |
| (j) | The Target Duration LDI Fixed Income Funds seek to outperform their respective Barclays-Russell LDI Indexes over a full market cycle. These Funds invest primarily in investment grade corporate bonds that closely match those found in discount curves used to value U.S. pension liabilities. They seek to provide additional incremental return through modest interest rate timing, security selection and tactical use of non-credit sectors. Generally, for use in combination with other bond funds to gain additional credit exposure, with the goal of reducing the mismatch between a plan’s assets and liabilities. |
| (k) | The STRIPS (Separate Trading of Registered Interest and Principal of Securities) Funds seek to provide duration and Treasury exposure by investing in an optimized subset of the STRIPS universe with a similar duration profile as the Barclays U.S. Treasury STRIPS 10-15 year, 15-20 year or 25+ year Index. These passively managed funds are generally used with other bond funds to add additional duration to the asset portfolio. This will help reduce the mismatch between a plan’s assets and liabilities. |
| (l) | The investment objective of the RITC (formerly Russell) Multi-Asset Core Plus Fund seeks to provide long-term growth of capital over a market cycle by offering a diversified portfolio of funds and separate accounts investing in global stock, return seeking fixed income, commodities, global real estate, and opportunistic investments. They hold a dynamic mix of underlying Russell Investments funds and/or separate accounts. Russell Investments is a strong proponent of disciplined strategic asset allocation and rebalancing strategies and believes that unstable movements in the market have the potential to create opportunities. By identifying short-term mispricing and making small tactical adjustments to the Multi-Asset Core Plus Fund, they believe there is potential to enhance returns while continuing to manage risks. |
The investment portfolio contains a diversified blend of common stocks, bonds, cash equivalents, and other investments, which may reflect varying rates of return. The investments are further diversified within each asset classification. The portfolio diversification provides protection against a single security or class of securities having a disproportionate impact on aggregate performance. The Company has elected to change its investment strategy to better match the assets with the underlying plan liabilities. Currently, the long-term target allocations for plan assets are 50% in equities and 50% in fixed income although the actual plan asset allocations may be within a range around these targets. The actual asset allocations are reviewed and rebalanced on a periodic basis to maintain the target allocations. It is expected that, as the funded status of the plans improves, more assets will be invested in long-duration fixed income instruments.
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| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
The plans’ assets include 217,018 shares of the common stock of the Company having a market value of $
U.S. salaried and non-union hourly employees and most employees of the Company’s Canadian subsidiaries are covered by defined contribution plans.
The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code covering substantially all U.S. non-union employees. This plan allows participants to make voluntary contributions of up to 100% of their annual compensation on a pretax basis, subject to IRS limitations. The plan provides for contributions by the Company at its discretion.
The Company made contributions to the plan as follows:
|
| 2023 |
|
| 2022 |
| ||
Regular matching contributions |
| $ |
|
| $ |
| ||
Transitional credit contributions |
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| ||
Non-discretionary contributions |
|
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| ||
Total contributions made for the period |
| $ |
|
| $ |
| ||
The non-discretionary contribution of $
Effective January 1, 2023, the non-discretionary contributions are being contributed on a weekly basis.
11. EARNINGS PER SHARE
The denominators used in the earnings per share computations follow:
|
| 2023 |
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| 2022 |
| ||
Basic: |
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|
| ||
Weighted average shares outstanding |
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Diluted: |
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|
Weighted average shares outstanding |
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|
| ||
Dilutive stock awards |
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| ||
Denominator for diluted earnings per share |
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|
| ||
There were no anti-dilutive stock equivalents in 2023 or 2022.
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| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. GEOGRAPHIC INFORMATION
|
| 2023 |
|
| 2022 |
| ||
Geographic Information: |
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|
| ||
Net Sales: |
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|
| ||
United States |
| $ |
|
| $ |
| ||
Foreign |
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|
|
| ||
|
| $ |
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| $ |
| ||
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|
Foreign sales are primarily to customers in North America. |
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|
Identifiable Assets: |
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|
|
United States |
| $ |
|
| $ |
| ||
Foreign |
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|
|
| ||
|
| $ |
|
| $ |
| ||
13. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which amends the reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We do not expect this new standard to have a significant impact to our disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 240), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit disaggregated between domestic and foreign and (3) income tax expense or benefit from continuing operations disaggregated by Federal, state, and foreign. The update also requires entities to disclose their income tax payments to various jurisdictions. This standard is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. We do not expect this new standard to have a significant impact to our disclosures.
The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company.
| 63 |
| Table of Contents |
The Eastern Company
Notes to Consolidated Financial Statements (continued)
14. CONTINGENCIES
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 legal proceedings.
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 $
15. CONCENTRATION OF RISK
Credit Risk
Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As of December 30, 2023, and December 31, 2022, there was one significant concentration of credit risk. One customer represented
Interest Rate Risk
The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based on term SOFR, plus an adjustment of ten basis points, plus an applicable margin of
Currency Exchange Rate Risk
The Company’s currency exposure is concentrated in the Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB, and Hong Kong dollar. Because of the Company’s limited exposure to any single foreign market, any exchange gains or losses have not been material and are not expected to be material in the future. As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments.
| 64 |
| Table of Contents |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Eastern Company
Shelton, Connecticut
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Eastern Company (the Company) as of December 30, 2023 and December 31, 2022, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 30, 2023, including the related notes and financial statement schedule appearing under Item 15(a)(2) on Form 10-K (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 30, 2023, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2024 expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment Assessment of Goodwill
Description of the Critical Audit Matter and the Relevant Accounts and Disclosures
As described in Notes 3 and 4 to the financial statements, the Company’s consolidated goodwill balance is $70.8 million as of December 30, 2023. Management tests 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. As disclosed by management, reporting units are tested for impairment by utilizing qualitative factors that include a) macroeconomic conditions, b) market and industry conditions, c) cost factors, d) overall financial performance, e) other relevant entity-specific events, and f) events affecting a reporting unit.
Principal Considerations for the Designation of the Critical Audit Matter
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments is a critical audit matter are (i) the significant judgments and assumptions used by management when developing the qualitative factors that are part of the impairment assessment; and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant judgments and assumptions related to the qualitative factors.
How the Critical Audit Matter was Addressed in the Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments. These procedures also included, among others (i) testing management’s process for developing the qualitative factors; (ii) evaluating the appropriateness of the qualitative factors; and (iii) testing the completeness and accuracy of underlying data used in the qualitative factors by corroborating and recalculating the relevant metrics. Evaluating management’s significant judgments and assumptions related to qualitative factors involved evaluating whether those significant judgments and assumptions used by management were reasonable considering (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/
Fiondella, Milone & LaSaracina LLP
We have served as the Company’s auditor since 2009.
March 12, 2024
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| Table of Contents |
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A CONTROLS AND PROCEDURES
Management’s Responsibility for Financial Statements
Management is responsible for the integrity and objectivity of all information presented in this Form 10-K. The consolidated financial statements were prepared in conformity with U.S. GAAP and include amounts based on management’s best estimates and judgments. Management believes the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements fairly represent the Company’s financial position and results of operations.
The Audit Committee of the Board of Directors, which is composed solely of independent directors, meets regularly with the independent registered public accountants, Fiondella, Milone & LaSaracina LLP, the internal auditors and representatives of management to review accounting, financial reporting, internal control, and audit matters, as well as the nature and extent of the audit effort. The Audit Committee is responsible for the engagement of the independent registered public accountants. The independent registered public accountants and internal auditors have access to the Audit Committee.
Evaluation of Disclosure Controls and Procedures
As of the end of the fiscal year ended December 30, 2023, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 240.13a-15. As defined in Exchange Act Rules 240.13a-15(e) and 240.15d-15(e), “the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuers management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.” Based upon that evaluation, the CEO and CFO concluded that the Company’s current disclosure controls and procedures were effective as of the December 30, 2023 evaluation date.
The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO have concluded that these controls and procedures are effective at the “reasonable assurance” level.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 240.13a-15(f) and 240.15d-15(f). Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, our management concluded that our control over financial reporting was effective as of December 30, 2023. The Company’s registered public accounting firm, Fiondella, Milone & LaSaracina LLP, has issued an attestation report on the Company’s internal control over financial reporting. The attestation report is set forth below in this Item 9A.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2023, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 66 |
| Table of Contents |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
The Eastern Company
Shelton, Connecticut
Opinion on Internal Control over Financial Reporting
We have audited The Eastern Company’s (the Company) internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows of the Company, and our report dated March 12, 2024, expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting under Item 9A on Form 10-K. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/Fiondella, Milone & LaSaracina LLP
Fiondella, Milone & LaSaracina LLP
Glastonbury, Connecticut
March 12, 2024
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| Table of Contents |
ITEM 9B OTHER INFORMATION
None.
ITEM 9C DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
| 68 |
| Table of Contents |
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information concerning directors is incorporated herein by reference to the information under the captions “Item No. 1 – Election of Directors” in the Company’s definitive proxy statement (the “Proxy Statement”) for the 2024 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A not later than 120 days after December 30, 2023.
The information concerning the Company’s executive officers is incorporated herein by reference to the information under the caption “Executive Officer Biographies” in the Proxy Statement.
The information concerning the Company’s Audit Committee is incorporated herein by reference to the information under the captions “Audit Committee Financial Expert” and “The Board of Directors and Committees” in the Proxy Statement. The Audit Committee Charter is also available on the Company’s website at http://www.easterncompany.com by clicking on Governance in the “About Us” menu.
The information concerning compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to the information under the caption “Delinquent Section 16(a) Reports” if any, in the Proxy Statement.
The Company’s Board of Directors has adopted a Code of Business Conduct and Ethics that applies to the Company’s Chief Executive Officer, Chief Financial Officer, and the Company’s other financial professionals. The Code of Business Conduct and Ethics is available on the Company’s website at https://www.easterncompany.com/ by clicking on Governance in the “About Us” menu. We intend to disclose any amendment or waiver to the Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or person performing similar functions, on our website within four business days after such amendment or waiver.
ITEM 11 EXECUTIVE COMPENSATION
Information concerning director and executive compensation is incorporated herein by reference to the information under the captions “Director Compensation in Fiscal 2023,” “Executive Compensation,” “Stock Based Awards,” “Outstanding Equity Awards at Fiscal Year-End,” and “Termination of Employment and Change in Control Arrangements” in the Proxy Statement. The Compensation Committee of the Board of Directors operates under the Compensation Committee Charter, which can be found on the Company’s website at https://www.easterncompany.com/ by clicking on Governance in the “About Us” menu.
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| Table of Contents |
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Securities authorized for issuance under equity compensation plans
The following table sets forth information regarding securities authorized for issuance under the Company’s equity compensation plans as of December 30, 2023, consisting of the Company’s 2020 Executive Stock Incentive Plan (the “2020 Plan”).
Equity Compensation Plan Information | ||||||||||||
Plan category |
| Number of securities to be issued upon exercise of outstanding awards, warrants and rights |
|
| Weighted-average exercise price of outstanding awards, warrants and rights |
|
| Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) |
| |||
|
| (a) |
|
| (b) |
|
| (c) |
| |||
Equity compensation plans approved by security holders |
|
| 55,100 |
|
| $ | 17.97 |
|
|
| 880,973 |
|
Equity compensation plans not approved by security holders |
|
| - |
|
|
| - |
|
|
| - |
|
Total |
|
| 55,100 |
|
| $ | 17.97 |
|
|
| 880,973 |
|
Security ownership of certain beneficial owners and management:
(a) | Information concerning security ownership of certain beneficial owners is incorporated herein by reference to the information under the caption “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement. |
|
|
(b) | Information concerning security ownership of management is incorporated herein by reference to the information under the captions “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement. |
|
|
(c) | Changes in Control |
|
|
| None. |
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information regarding transactions with related persons is incorporated herein by reference to information under the caption “Policies and Procedures Concerning Related Persons Transactions” in the Proxy Statement. Information regarding director independence is incorporated herein by reference to the information under the captions “Item No.1 – Election of Directors” and “The Board of Directors and Committees” in the Proxy Statement.
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is incorporated herein by reference to the information under the caption “Item No. 3 – Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement.
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| Table of Contents |
PART IV
ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) Documents filed as part of this Form 10-K:
(1) Financial statements
(2) Financial Statement Schedules
Schedule II — Valuation and qualifying accounts begins on page [73] of this Form 10-K. Schedules other than those listed above have been omitted because the required information is contained in the financial statements and notes thereto, or because such schedules are not required or applicable.
| 71 |
| Table of Contents |
Exhibit Index
Exhibit No. |
| Description | ||
| ||||
|
|
| ||
| ||||
|
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| ||
| ||||
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| ||||
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| ||||
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| ||||
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| ||||
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| ||||
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| Form of The Eastern Company Stock Award Agreement (filed herewith) | |||
|
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| ||
| ||||
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| ||
| Consent of Fiondella, Milone & LaSaracina LLP (filed herewith). | |||
|
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| ||
| ||||
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|
| ||
| ||||
|
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| ||
| The Eastern Company Clawback Policy in the Event of a Financial Restatement (filed herewith). | |||
|
|
| ||
101 |
| The following materials from the Company’s Annual Report on Form 10-K for the year ended December 30, 2023, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets as of December 30, 2023 and December 31, 2022; (ii) the Consolidated Statements of Income for the fiscal years ended December 30, 2023 and December 31, 2022; (iii) the Consolidated Statements of Comprehensive Income for the fiscal years ended December 30, 2023 and December 31, 2022; (iv) the Consolidated Statements of Shareholders’ Equity for the fiscal years ended December 30, 2023 and December 31, 2022; (v) the Consolidated Statements of Cash Flows for the fiscal years ended December 30, 2023 and December 31, 2022; and (vi) the Notes to the Consolidated Financial Statements (filed herewith). | ||
|
|
| ||
104 |
| Cover Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101). | ||
* Management contract, compensatory plan or arrangement.
| 72 |
| Table of Contents |
The Eastern Company and Subsidiaries
Schedule II – Valuation and Qualifying accounts
COL. A |
| COL. B |
|
| COL. C |
|
| COL. D |
|
| COL. E |
| ||||||||
|
|
|
|
| ADDITIONS |
|
|
|
|
|
|
| ||||||||
Description |
| Balance at Beginning of Period |
|
| (1) Charged to Costs and Expenses |
|
| (2) Charged to Other Accounts-Describe |
|
| Deductions – Describe |
|
| Balance at End of Period |
| |||||
Fiscal year ended December 30, 2023: Deducted from asset accounts: Allowance for doubtful accounts |
| $ | 676,678 |
|
| $ | 51,270 |
|
| $ | 0 |
|
| $ | -163,132 | (a) |
| $ | 564,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended December 31, 2022: Deducted from asset accounts: Allowance for doubtful accounts |
| $ | 515,000 |
|
| $ | 629,000 |
|
| $ | 0 |
|
| $ | -467,000 | (a) |
| $ | 677,000 |
|
(a) Uncollectible accounts written off, net of recoveries.
ITEM 16 FORM 10-K SUMMARY
None.
| 73 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 12, 2024 | THE EASTERN COMPANY |
| |
|
|
|
|
| By | /s/ Nicholas Vlahos |
|
|
| Nicholas Vlahos |
|
|
| Chief Financial Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Mark A. Hernandez |
| March 12, 2024 |
Mark A. Hernandez President, Chief Executive Officer, and Director (Principal Executive Officer) |
|
|
|
|
|
/s/ Nicholas Vlahos |
| March 12, 2024 |
Nicholas Vlahos Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
|
|
|
|
|
/s/ James A. Mitarotonda |
| March 12, 2024 |
James A. Mitarotonda Chairman of the Board |
|
|
|
|
|
/s/ Fredrick D. DiSanto |
| March 12, 2024 |
Fredrick D. DiSanto Director |
|
|
|
|
|
/s/ John W. Everets |
| March 12, 2024 |
John W. Everets Director |
|
|
|
|
|
/s/ Charles W. Henry |
| March 12, 2024 |
Charles W. Henry Director |
|
|
|
|
|
/s/ Peggy B. Scott |
| March 12, 2024 |
Peggy B. Scott Director |
|
|
|
|
|
/s/ Michael J. Mardy |
| March 12, 2024 |
Michael J. Mardy Director |
|
|
| 74 |
EXHIBIT 10.9
THE EASTERN COMPANY
2020 EXECUTIVE STOCK INCENTIVE PLAN
STOCK AWARD AGREEMENT
AGREEMENT made as of _____ __, 20__ between THE EASTERN COMPANY, a Connecticut corporation (hereinafter called the "Company") and ________ (hereinafter called the "Executive").
W I T N E S S E T H
WHEREAS, the Board of Directors of the Company has established The Eastern Company 2020 Executive Stock Incentive Plan (the “Plan”) in order to provide selected employees of the Company and its affiliated companies with awards of compensation based on the value of the shares of common stock of the Company; and
WHEREAS, pursuant to Section 6.2 of the Plan, the Compensation Committee of the Board of Directors of the Company (the “Committee”) may from time to time award shares of stock; and
WHEREAS, the Committee has determined that it would be in the best interests of the Company and its shareholders to award, on a contingent basis, the shares of stock described in this Agreement to the Executive as an inducement for the Executive to remain in the service of the Company or its division or subsidiary corporations (as such terms are defined in Section 424 of the Internal Revenue Code of 1986, as amended) (collectively, the “Company Group”), and as an incentive for extraordinary efforts during such service:
NOW, THEREFORE, it is agreed as follows:
| 1) | Agreement to Grant Stock. The Company hereby agrees to grant to the Executive up to a maximum of ________ (____) shares of common stock, no par value per share, of the Company (the "Stock"), subject to the terms and conditions hereinafter set forth. |
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| 2) | Issuance of Stock. The shares of Stock shall be issued to the Executive as of the dates set forth in Section 3, subject to the satisfaction of the requirements set forth therein. Since the shares of Stock are being issued to the Executive at zero cost, no payment is required for the issuance of the shares. The certificate or certificates for the shares of Stock shall be registered in the name of the Executive and shall be issued in accordance with the provisions of Section 5. |
| 3) | Performance Goals and Grant Dates. |
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| a) | Grant Dates. Shares of the Stock shall be issued to Executive on the _____ __, 20__, _____ __, 20__ and _____ __, 20__ (the “Grant Dates”) as set forth below, provided that the Executive remains an employee of the Company Group on each Grant Date and the Company’s achievement of two performance thresholds. |
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| (i) | Issuance based on continued employment (a total of __% of Stock subject to Grant): |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Executive remains a full time employee of the Company on _____ __, 20__. |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Executive remains a full time employee of the Company on _____ __, 20__. |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Executive remains a full time employee of the Company on _____ __, 20__. |
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| (ii) | Issuance based on the Company’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”) (__% of the Stock subject to the Grant): |
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| · | 20__ Target |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for the twelve (12) months ending _____ __, 20__ is equal to or greater than _________ dollars ($___). |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s EBITDA for the twelve (12) months ending _____ __, 20__ is equal to ________ dollars ($___). |
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| · | The Executive shall also receive a pro-rata number of shares of Stock between ___ and ___ on the Grant Date of _____ __, 20__ for any portion of the EBITDA achieved that falls between $___ and $___, based upon the percent of the incremental EBITDA achieved. |
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| · | 20__ Target |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for the twelve (12) months ending _____ __, 20__ is equal to or greater than ________ dollars ($___). |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s EBITDA for the twelve (12) months ending _____ __, 20__ is equal to _______ dollars ($___). |
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| · | The Executive shall also receive a pro-rata number of shares of Stock between ___ and ___ on the Grant Date of _____ __, 20__ for any portion of the EBITDA achieved that falls between $___ and $___, based upon the percent of the incremental EBITDA achieved. |
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| · | 20__ Target |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s earnings before interest, taxes, depreciation, and amortization (“EBITDA”) for the twelve (12) months ending _____ __, 20__ is equal to or greater than _______ dollars ($___). |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s EBITDA for the twelve (12) months ending _____ __, 20__ is equal to _______ dollars ($___). |
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| · | The Executive shall also receive a pro-rata number of shares of Stock between ___ and ___ on the Grant Date of _____ __, 20__ for any portion of the EBITDA achieved that falls between $___ and $___, based upon the percent of the incremental EBITDA achieved. |
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| (iii) | Issuance based on the Company’s return on invested capital (“ROCE”) (__% of the Stock subject to the Grant): |
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| · | 20__ Target |
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| · | ____ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s return on invested capital (“ROCE”) for the twelve (12) months ending _____ __, 20__ is equal to or greater than ___%. |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s ROCE for the twelve (12) months ending _____ __, 20__ is equal to ___%. |
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| · | The Executive shall also receive a pro-rata number of shares of Stock between ___ and ___ on the Grant Date of _____ __, 20__ for any portion of the ROCE achieved that falls between ___% and ___%, based upon the percent of the incremental ROCE achieved. |
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| · | 20__ Target |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s return on invested capital (“ROCE”) for the twelve (12) months ending _____ __, 20__ is equal to or greater than ___%. |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s ROCE for the twelve (12) months ending _____ __, 20__ is equal to ___%. |
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| · | The Executive shall also receive a pro-rata number of shares of Stock between ___ and ___ on the Grant Date of _____ __, 20__ for any portion of the ROCE achieved that falls between ___% and ___%, based upon the percent of the incremental ROCE achieved. |
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| · | 20__ Target |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s return on invested capital (“ROCE”) for the twelve (12) months ending _____ __, 20__ is equal to or greater than ___%. |
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| · | ___ shares of Stock shall be issued on the Grant Date of _____ __, 20__ if the Company’s ROCE for the twelve (12) months ending _____ __, 20__ is equal to ___%. |
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| · | The Executive shall also receive a pro-rata number of shares of Stock between ___ and ___ on the Grant Date of _____ __, 20__ for any portion of the ROCE achieved that falls between ___% and ___%, based upon the percent of the incremental ROCE achieved. |
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| · | The Company’s computation of ROCE does not include any potential acquisitions. The Company shall compute ROCE by dividing (I) total fiscal year adjusted earnings before interest and taxes by (II) total assets less total current liabilities. |
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| b) | Forfeiture. Any shares of Stock which are not required to be issued on the Grant Date pursuant to this Section 3(a) shall be forfeited and shall not thereafter be granted, except to the extent provided in Section 3(c). |
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| c) | Issuance upon a Change in Control. Notwithstanding the provisions of Section 3(a) and Section 3(b), upon a Change in Control of the Company on or before the Grant Date, one hundred percent (100%) of the Stock shall be issued to the Executive pursuant to this Agreement, provided that the shares of Stock have not previously been forfeited pursuant to Section 3(d) below or Section 5. |
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| For purposes of this Section 3(c), a Change in Control shall mean: |
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| (i) | The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of the combined voting power of the outstanding securities of the Company (the "Outstanding Voting Securities"); provided, however, that for purposes of this Section 3(c)(i), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (A), (B) and (C) of Section 3(c)(iii); or |
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| (ii) | Individuals who, as of the date of this Agreement, constitute the Board of Directors of the Company (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, that any individual who becomes a director subsequent to the date of this Agreement and whose election, or nomination for election, by the shareholders of the Company was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board; or |
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| (iii) | Consummation of a reorganization, merger, consolidation, or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination") unless, following such Business Combination, (A) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than eighty percent (80%) of the combined voting power of the then outstanding voting securities of the entity resulting from such Business Combination (including, without limitation, an entity which as a result of such transaction owns the Company or all or substantially all of the assets of the Company either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Voting Securities; (B) no Person (excluding any entity resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such entity resulting from such Business Combination) beneficially owns, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding voting securities of such entity except to the extent that such ownership existed prior to the Business Combination; and (C) at least a majority of the members of the governing board of the entity resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement providing for such Business Combination; or |
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| (iv) | Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. |
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| d) | Forfeiture. If the Executive is not entitled to the issuance of shares of the Stock pursuant to this Section 3 on or before the Grant Date (or on or before the Extended Grant Date if Section 3(b) is applicable), then Executive’s rights to the issuance and grant of such shares shall automatically be forfeited, and the Executive shall have no rights with respect to such shares. |
| 4) | Termination of Employment. In the event that the Executive’s employment with the Company terminates prior to the Grant Date, then Executive’s rights to the issuance and grant of such shares shall automatically be forfeited, and the Executive shall have no rights with respect to such shares. If the Company has granted the right to issuance and grant in the event of termination in any other agreement with the Executive, the rights to the issuance and grant in the other agreement shall prevail. |
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| For purposes of this Agreement, the Executive’s employment with the Company Group shall not be deemed to have terminated if the Executive is on a bona fide leave of absence that was approved by a member of the Company Group in writing in advance, provided that the terms of the leave of absence or applicable law require the Executive to be credited with service with such member of the Company Group during the leave of absence. Notwithstanding the above, the Executive’s employment with the Company Group shall be deemed to have terminated when the approved leave of absence ends if the Executive does not immediately return to active employment with a member of the Company Group. The Committee shall have the sole discretion to determine which leaves of absence will count for this purpose, and when the Executive’s employment with the Company Group shall be deemed to have terminated. |
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| 5) | Issuance of Stock Certificates. |
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| a) | Within a reasonable period of time after the Grant Date, the Company shall issue in the name of the Executive a certificate or certificates representing the shares of Stock. |
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| b) | Upon the issuance of a certificate or certificates representing shares of Stock in accordance with the provisions of Section 5(a), the Executive shall thereupon be deemed to be a shareholder with respect to all of the shares of the Company's common stock represented by such certificate or certificates. The Executive shall thereafter have, with respect to such shares, all of the rights of a shareholder of the Company (including the right to vote the shares of Stock and the right to receive any cash or stock dividends on such Stock). |
| 6) | Adjustment of Shares of Stock |
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| a) | If through, or as a result of, any merger, consolidation, sale of all or substantially all of the assets of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, but excluding issuance of shares of stock as the result of incentive compensation or other customary remuneration: (i) the outstanding shares of common stock of the Company are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or (ii) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to shares of common stock of the Company or other securities, then the aggregate number of shares of Stock shall be proportionately adjusted. |
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| b) | Any adjustments under this Section 6 will be made by the Board of Directors of the Company, whose determination as to what adjustments, if any, will be made and the extent thereof will be final, binding and conclusive. No fractional shares will be issued pursuant to the Stock on account of any such adjustments. |
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| c) | The grant of the Stock shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate, or to dissolve, liquidate, sell or transfer all or any part of its business or assets. |
| 7) | Assignment. This Agreement may not be assigned, transferred, pledged or hypothecated in any way (whether by operation of law or otherwise) other than by will or the laws of descent and distribution and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge or hypothecation of this Agreement which is contrary to the provisions hereof, and any levy upon, attachment of or similar process with respect to this Agreement, shall be null and void and without effect. The Company shall have the right to terminate this Agreement, in the event of any such assignment, transfer, pledge, hypothecation, levy, attachment or similar process, by notice to that effect to the person then entitled to exercise the Executive's rights under this Agreement; provided, however, that such a termination of this Agreement shall not prejudice any rights or remedies which the Company may have under this Agreement or otherwise. |
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| 8) | Rights of Executive. The Executive shall have no rights as a shareholder with respect to the shares of Stock subject to this Agreement prior to the Grant Date. |
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| 9) | Plan Incorporated. The Eastern Company 2020 Executive Stock Incentive Plan (which was approved by the Company's shareholders at their annual meeting on April 29, 2020) is incorporated herein and made a part hereof as if fully set forth herein. The Plan and any subsequent amendment thereto shall control in the event there is any conflict between the Plan and this Agreement and as to all such matters as are not covered in this Agreement. In the event the Plan is hereafter amended so as to conflict with any of the terms and provisions hereof or to require the inclusion of additional terms herein, then upon the effective date of said amendment this Agreement shall be deemed amended to fully comply therewith. |
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| 10) | Continuance of Employment. Neither the Plan nor the granting of any rights to acquire shares of Stock imposes any obligation on the Company or any parent or subsidiary corporation to continue the employment of the Executive. |
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| 11) | Disputes. Any dispute or disagreement which shall arise under or as a result of, or in any way relate to the interpretation or construction of, this Agreement shall be resolved by the Committee. |
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| 12) | Binding Effect. All obligations imposed upon the Executive and all rights granted to the Company hereunder or under the Plan shall be binding upon the Executive's heirs, legal representatives and successors. |
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| 13) | Securities Law Considerations |
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| a) | The shares of Stock to be issued under the Plan have been registered under the Securities Act of 1933, as amended (the “Securities Act”) on Form S-8. Notwithstanding the above, the Company shall not be obligated to take any other action in order to cause the issuance of the shares of Stock under this Agreement to comply with any law. |
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| b) | The Executive, by accepting this contingent award of the Stock, does hereby represent that, by virtue of his position with the Company, the Executive has access to the kind of financial and other information about the Company as would be contained in a registration statement filed under the Securities Act. |
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| c) | The provisions of this Section 13(c) shall apply to this contingent award of Stock except to the extent that, in the opinion of counsel for the Company, such provisions are not required by the Securities Act or any other applicable law, regulation or rule of any governmental agency. |
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| The Executive hereby represents, warrants and covenants that: |
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| (i) | The shares of Stock shall be acquired for the Executive’s account for investment only and not with a view to, or for sale in connection with, any distribution of the shares in violation of the Securities Act or any rule or regulation under the Securities Act. |
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| (ii) | The Executive has had such opportunity as he has deemed adequate to obtain from representatives of the Company such information as is necessary to permit the Executive to evaluate the merits and risks of his investment in shares of common stock of the Company. |
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| (v) | The Executive is able to bear the economic risk of holding the shares of Stock for an indefinite period. |
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| (vi) | The shares of Stock have been registered under the Securities Act on Form S-8. Because the shares were registered, they are not restricted securities for purposes of Rule 144. However, if the Executive is an affiliate of the Company for purposes of Rule 144, the shares will constitute affiliate shares for purposes of Rule 144. According to Rule 144(b)(2), shares owned by an affiliate are subject to the following restrictions of Rule 144: (i) adequate current public information regarding the Company must be available; (ii) the amount of securities sold by the affiliate during a three month period cannot exceed the greater of one percent (1%) of the Company's issued and outstanding shares of common stock or the average weekly trading volume of the Company's common stock during the preceding four week period; (iii) the shares must be sold in a broker's transaction; and (iv) the affiliate must file Form 144 if the shares of common stock of the Company sold during a three month period exceed 5,000 shares or have an aggregate sale price in excess of $50,000. |
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| (vii) | The Executive agrees that, if the Company offers for sale for the first time any shares of common stock of the Company pursuant to a registration statement under the Securities Act, the Executive will not, without the prior written consent of the Company, publicly offer, sell, contract to sell or otherwise dispose of, directly or indirectly, any shares of Stock for a period of one hundred eighty (180) days after the effective date of such registration statement. |
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| (viii) | The Company may impose restrictions upon the sale, pledge or other transfer of any shares of Stock (including the placement of appropriate legends on stock certificates) if, in the judgment of the Company and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Securities Act, the securities laws of any state, or any other law. |
| 14) | Certain Cutback of Payments. Notwithstanding anything to the contrary in this Agreement, if the issuance of any shares of Stock pursuant to this Agreement is deemed to constitute a “parachute payment” under Code Section 280G, then the sum of such parachute payment and any other payments made by the Company to the Executive which are considered parachute payments shall be limited to the greatest amount which may be paid to the Executive under Code Section 280G without causing any loss of deduction to the Company under Code Section 280G, but only if, by reason of such reduction, the Committee reasonably determines that the net after-tax benefit of the Executive shall exceed the net after-tax benefit if such reduction were not made. The Company shall accomplish any such reduction required pursuant to this Section 15 by first reducing or eliminating any cash payments (with the payments to be made furthest in the future being reduced first and then by reducing or eliminating any other remaining parachute payments. |
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written.
| THE EASTERN COMPANY |
| GRANTEE | ||||
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| By: |
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| By: |
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| Name: | Fred DiSanto |
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| Name: |
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| Title: | Chairman of Compensation Comm. |
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| Address: |
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| Address: | 3 Enterprise Drive, Suite 408 |
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| Shelton, CT 06484 |
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EXHIBIT 21
LIST OF DIVISIONS AND SUBSIDIARIES
OF
THE EASTERN COMPANY
| Name of Division |
| State or Other Jurisdiction of Incorporation or Organization |
| Eberhard Manufacturing |
| Ohio |
| Illinois Lock Company |
| Illinois |
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| Name of Subsidiary |
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| Big 3 Precision Products, Inc. |
| Delaware |
| Big 3 Precision Mold Services, Inc. |
| Delaware |
| Dongguan Reeworld Security Products Ltd. |
| China |
| Eastern Engineered Systems, Inc. |
| Delaware |
| Eastern Industrial Ltd |
| China |
| Hallink Moulds, Inc. |
| Canada |
| Velvac Holdings, Inc. |
| Delaware |
| Velvac, Inc. |
| Delaware |
| Velvac International, Inc. |
| Delaware |
| Velvac de Reynosa, S. De R.L. De C.V. |
| Mexico |
| World Lock Company Ltd. |
| Taiwan |
| World Security Industries Co. Ltd. |
| Hong Kong |
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of The Eastern Company for the year ended December 30, 2023 of our reports dated March 12, 2024 included in its Registration Statement on Form S-8 (Nos. 333-21351, 333-169169 and 333-238565) relating to the consolidated financial statements and financial statement schedule and internal controls for the two years ended December 30, 2023 listed in the accompanying index.
/s/Fiondella, Milone & LaSaracina LLP
Fiondella, Milone & LaSaracina LLP
Glastonbury, Connecticut
March 12, 2024
EXHIBIT 31
CERTIFICATIONS
I, Mark A. Hernandez, certify that:
| 1. | I have reviewed this report on Form 10-K of The Eastern Company. |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. |
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| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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| a) | designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared. |
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| b) | designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. |
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| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| b) | any fraud, whether or not material, which involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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| Dated: March 12, 2024 |
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| /s/ Mark A. Hernandez |
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| Mark A. Hernandez CEO |
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EXHIBIT 31
CERTIFICATIONS
I, Nicholas Vlahos, certify that:
| 1. | I have reviewed this report on Form 10-K of The Eastern Company. |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report. |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. |
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| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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| a) | designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared. |
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| b) | designed such internal control over financial reporting or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. |
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| c) | evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| d) | disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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| a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| b) | any fraud, whether or not material, which involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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| Dated: March 12, 2024 |
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| /s/ Nicholas Vlahos |
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| Nicholas Vlahos CFO |
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EXHIBIT 32
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER
Pursuant to 18 United States Code § 1350,
as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Mark A. Hernandez, the Chief Executive Officer of The Eastern Company (the “Company”) and Nicholas Vlahos, the Chief Financial Officer of the Company, hereby certify that, to the best of their knowledge:
| 1) | The Company’s Annual Report on Form 10-K for the period ended December 30, 2023, and to which this certification is attached as Exhibit 32 (the “Periodic Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and |
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| 2) | The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
In Witness Whereof, the undersigned have set their hands hereto as of the 12th day of March, 2024.
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| /s/ Mark A. Hernandez |
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| Mark A. Hernandez CEO |
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| /s/ Nicholas Vlahos |
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| Nicholas Vlahos CFO |
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A signed original of this written statement required by Section 906 has been provided to The Eastern Company and will be retained by The Eastern Company and furnished to the Securities and Exchange Commission or its staff upon request.
This certification “accompanies” the Form 10-K to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-K, irrespective of any general incorporation language contained in such filing.)
EXHIBIT 97
The Eastern Company
Clawback Policy in the Event of a Financial Restatement
I. Purpose
The purpose of this Clawback Policy in the Event of a Financial Restatement, as may be amended from time to time (this “Policy”), is to describe the circumstances under which a Covered Executive (as defined below) will be required to repay or return Incentive Compensation (as defined below) to The Eastern Company (the “Company”). Each Covered Executive is required to sign and return to the Company the acknowledgement form attached to this Policy pursuant to which such Covered Executive will agree to be bound by, and to abide by, the terms of this Policy (“Acknowledgement Form”). This Policy is effective as of [October 2], 2023 (the “Effective Date”).
II. Administration
This Policy shall be administered by the Compensation Committee (the “Committee”) of the Board of Directors of the Company (the “Board”). The Committee is authorized to interpret and construe this Policy and to make all determinations necessary, appropriate, or advisable for the administration of this Policy. Any determinations made by the Committee shall be final and binding on all affected individuals.
III. Definitions
For purposes of this Policy, the following capitalized terms have the meanings set forth below. Other defined terms not defined in this section are defined elsewhere in this Policy.
A. “Accounting Restatement” means an accounting restatement due to the material noncompliance of the Company with any financial reporting requirement under the securities laws, including any required accounting restatement (a) to correct an error in previously issued financial statements that is material to the previously issued financial statements (a “Big R” restatement), or (b) that corrects an error that is not material to previously issued financial statements, but would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (a “little r” restatement).
The following types of changes to financial statements do not represent error corrections, and therefore would not trigger application of this Policy: (a) retrospective application of a change in accounting principle; (b) retrospective revision to reportable segment information due to a change in the structure of the Company’s internal organization; (c) retrospective reclassification due to a discontinued operation; (d) retrospective application of a change in reporting entity, such as from a reorganization of entities under common control; or (e) retrospective revision for stock splits, reverse stock splits, stock dividends or other changes in capital structure. The foregoing list is not intended to be exhaustive and is subject to any changes in applicable accounting standards.
B. “Covered Executive” has the meaning set forth in Section IV below.
C. “Eligible Incentive Compensation” means all Incentive Compensation (as defined below) that is Received (as defined below) by a Covered Executive (a) on or after the Effective Date and after beginning service as a Covered Executive, (b) who served as a Covered Executive at any time during the performance period for that Incentive Compensation, (c) while the Company has a class of securities listed on The Nasdaq Stock Market LLC (“Nasdaq”) or another national securities exchange or national securities association, and (d) during the applicable Recovery Period (as defined below). For purposes of clarity, in order for Incentive Compensation to qualify as Eligible Incentive Compensation, all four of the conditions listed in this Section III.C must be satisfied.
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D. “Excess Compensation” means, with respect to each Covered Executive in connection with an Accounting Restatement, the amount of Eligible Incentive Compensation that exceeds the amount of Incentive Compensation that otherwise would have been Received had it been determined based on the restated amounts, computed without regard to any taxes paid, as determined by the Committee.
E. “Financial Reporting Measures” are measures that are determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and all other measures that are derived wholly or in part from such measures. Stock price and total shareholder return (and any measures that are derived wholly or in part from stock price or total shareholder return) are considered Financial Reporting Measures for purposes of this Policy. For the avoidance of doubt, a Financial Reporting Measure need not be presented in the Company’s financial statements or included in a filing with the Securities and Exchange Commission (“SEC”).
F. “Incentive Compensation” means any compensation that is granted, earned or vested based wholly or in part upon the attainment of a Financial Reporting Measure.
G. Incentive Compensation shall be deemed “Received” by a Covered Executive in the Company’s fiscal period during which the Financial Reporting Measure applicable to such Incentive Compensation is attained, even if payment or grant of the Incentive Compensation occurs after the end of that period.
H. “Recovery Period” means, with respect to any Accounting Restatement, the Company’s three completed fiscal years immediately preceding the Restatement Date (as defined below) and any transition period (that results from a change in the Company’s fiscal year) of less than nine months within or immediately following those three completed fiscal years.
I. “Restatement Date” means the earlier to occur of (a) the date the Board, a committee of the Board or the officers of the Company authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement, or (b) the date a court, regulator or other legally authorized body directs the Company to prepare an Accounting Restatement.
IV. Covered Executives
This Policy applies to each individual who is or was designated as an “officer” of the Company under Rule 16a-1(f) under the Securities Exchange Act of 1934, as amended (each a “Covered Executive”), whether or not such Covered Executive is serving at the time the Excess Compensation is required to be repaid to the Company. This Policy will apply without regard to whether any misconduct occurred or whether the Covered Executive had any individual knowledge or responsibility related to the erroneous financial statements necessitating the relevant Accounting Restatement. For the avoidance of doubt, in the event that a Covered Executive engages in fraud or misconduct under The Eastern Company Clawback Policy in the Event of Fraud or Misconduct (the “Misconduct Clawback Policy”) that leads to an Accounting Restatement under this Policy, the amount to be recovered shall be the greater of the amount of Excess Compensation calculated in accordance with this Policy and the amount of the Overpayment as calculated under the Misconduct Clawback Policy.
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V. Recoupment of Excess Compensation; Accounting Restatement
A. In the event of an Accounting Restatement, the Company will recover reasonably promptly any Excess Compensation in accordance with this Policy. Accordingly, the Committee will promptly determine the amount of any Excess Compensation for each Covered Executive in connection with such Accounting Restatement and will promptly thereafter provide each Covered Executive with a written notice regarding the required repayment or return, as applicable, and setting forth the amount of Excess Compensation due. For Eligible Incentive Compensation based on (or derived from) stock price or total shareholder return where the amount of Excess Compensation is not subject to mathematical recalculation directly from the information in the applicable Accounting Restatement, the amount will be determined by the Committee based on a reasonable estimate of the effect of the Accounting Restatement on the stock price or total shareholder return upon which the Eligible Incentive Compensation was Received (in which case, the Company will maintain documentation of the determination of such reasonable estimate and provide such documentation to Nasdaq).
B. The Board has broad discretion, based on all applicable facts and circumstances, including consideration of pursuing an appropriate balance of cost and speed of recovery, to determine the appropriate means of recovery of Excess Compensation, subject to it occurring reasonably promptly. To the extent that the Committee determines that a method of recovery other than repayment by the Covered Executive in a lump sum in cash or property is appropriate, the Company will, subject to Section V.D, determine alternative means of recovery, which may include an offer to enter into a repayment agreement (in a form reasonably acceptable to the Committee) with the Covered Executive. For the avoidance of doubt, except as set forth in Section V.D below, in no event may the Company accept an amount that is less than the amount of Excess Compensation in satisfaction of a Covered Executive’s obligations under this Policy.
C. To the extent that a Covered Executive fails to repay all Excess Compensation to the Company when due (as determined in accordance with Section V.B above), the Company will take all actions reasonable and appropriate to recover such Excess Compensation from the applicable Covered Executive. The applicable Covered Executive may, in the discretion of the Committee, be required to reimburse the Company for any and all expenses reasonably incurred (including legal fees) by the Company in recovering such Excess Compensation in accordance with the immediately preceding sentence.
D. Notwithstanding anything in this Policy to the contrary, the Company will not be required to take the actions contemplated by this Section V if the following conditions are met and the Committee determines that recovery would be impracticable:
1. The direct expenses paid to a third party to assist in enforcing the Policy
against a Covered Executive would exceed the amount to be recovered, after the Company has made a reasonable attempt to recover the applicable Excess Compensation, documented such attempts and provided such documentation to Nasdaq;
2. Recovery would violate home country law where that law was adopted prior
to November 28, 2022, provided that, before determining that it would be impracticable to recover any amount of Excess Compensation based on violation of home country law, the Company has obtained an opinion of home country counsel, acceptable to Nasdaq, that recovery would result in such a violation and a copy of the opinion is provided to Nasdaq; or
3. Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of Sections 401(a)(13) or 411(a) of the Internal Revenue Code of 1986, as amended, and regulations thereunder.
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VI. Indemnification Prohibition
The Company is prohibited from indemnifying any Covered Executive against the loss of any Excess Compensation that is repaid, returned or recovered in accordance with the terms of this Policy or any claims relating to the Company’s enforcement of its rights under this Policy. This prohibition also applies to payment to, or reimbursement of, a Covered Executive for premiums for any insurance policy covering any potential losses under this Policy. Further, the Company may not enter into any agreement that exempts any Incentive Compensation from the application of this Policy or that waives the Company’s right to recovery of any Excess Compensation, and this Policy will supersede any such agreement (whether entered into before, on or after the Effective Date).
VII. Amendment; Termination
The Committee may amend or terminate this Policy from time to time in its discretion. Notwithstanding anything in this section to the contrary, no amendment or termination of this Policy will be effective if such amendment or termination would (after taking into account any actions taken by the Company contemporaneously with such amendment or termination) cause the Company to violate any federal securities laws, SEC rule or the rules of Nasdaq or any national securities exchange or national securities association on which the Company’s securities are then listed.
VIII. Other Recoupment Rights; No Additional Payments
The Committee intends that this Policy will be applied to the fullest extent of the law. The Committee may require, through execution of the Acknowledgment Form or otherwise, that any employment agreement, equity award agreement, or any other agreement, plan or arrangement entered into or adopted on or after the Effective Date will, as a condition to the grant of any benefit thereunder, require a Covered Executive to agree to abide by the terms of this Policy. Except as otherwise explicitly provided for in this Policy, any right of recoupment under this Policy is in addition to, and not in lieu of, any other remedies or rights of recoupment that may be available to the Company under the Sarbanes-Oxley Act of 2002 or other applicable law, regulation, rule, or Company policy, or pursuant to the terms of any employment agreement, equity award agreement, or similar agreement, plan or arrangement and any other legal remedies available to the Company.
IX. Successors
This Policy shall be binding and enforceable against all Covered Executives and their beneficiaries, heirs, executors, administrators or other legal representatives.
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Appendix
The Eastern Company
Clawback Policy in the Event of a Financial Restatement
Acknowledgment Form
By signing below, the undersigned acknowledges and confirms that the undersigned has received and reviewed a copy of the Company’s Clawback Policy in the Event of a Financial Restatement, as may be amended from time to time (the “Policy”). Capitalized terms used but not otherwise defined in this Acknowledgement Form have the meaning set forth in the Policy.
By signing this Acknowledgement Form, the undersigned acknowledges and agrees that the undersigned is and will continue to be subject to the Policy both during and after the undersigned’s employment with the Company and that the terms of the Policy are hereby incorporated by reference in any agreement, plan or arrangement providing for payment of Incentive Compensation to any Covered Executive. Further, by signing below, the undersigned agrees to abide by the terms of the Policy, including, without limitation, by returning or repaying any Excess Compensation (as defined in the Policy) to the Company to the extent required by, and in a manner permitted by, the Policy.
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| ____________ ___, 20__ |
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