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.
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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.
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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:
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:
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,
Additional recognition due to significant event -- --
Amortization of:
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.
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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
Cost of Products Sold 73.2 % 83.4 %
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.
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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
Cost of Products Sold 76.2 % 79.0 %
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.
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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 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.
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The following table shows key financial ratios at the end of each fiscal year:
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):
Cash and cash equivalents
- Held in the United States $ 7.0 $ 7.4
- Held by foreign subsidiaries 1.3 2.8
Net cash provided by operating activities 26.5 7.4
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.
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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.
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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.
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Reconciliation of Non-GAAP Measures
For the Three and Twelve Months ended December 30, 2023 and December 31, 2022
Three Months Ended Twelve Months Ended
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 )
Adjusted earnings per share from continuing operations (Non-GAAP):
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
E) Final settlement of working capital adjustment associated with Greenwald sale
F) Associated Toolmakers Limited closure costs
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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
Three Months Ended Twelve Months Ended
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 -
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
E) Final settlement of working capital adjustment associated with Greenwald sale
F) Associated Toolmakers Limited closure costs
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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.
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Eastern Company
Consolidated Balance Sheets
December 30, December 31,
ASSETS
Current Assets
Marketable Securities 986,477 -
Inventories:
Property, Plant and Equipment
Other Assets
See accompanying notes.
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December 30, December 31,
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Current portion of financing lease liability 182,010 -
Financing lease liability, less current portion 728,100 -
Shareholders’ Equity
Voting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Common Stock, no par value, Authorized: 50,000,000 shares
Accumulated other comprehensive loss:
Unrealized gain on interest rate swap, net of tax - 1,449,754
See accompanying notes.
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The Eastern Company
Consolidated Statements of Income
Year Ended
December 30, December 31,
Restructuring costs - (699,868 )
Discontinued Operations (see note 2)
Gain from operations of discontinued units $ - $ 1,360,773
Gain (loss) on sale of businesses - 305,539
Income tax (expense) benefit - (414,855 )
Net gain (loss) on discontinued operations $ - $ 1,251,457
Earnings per share from continuing operations:
Gain (loss) per share from discontinued operations:
Basic $ - $ 0.20
Diluted $ - $ 0.20
Total earnings per share:
Cash dividends per share: $ 0.44 $ 0.44
See accompanying notes.
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The Eastern Company
Consolidated Statements of Comprehensive Income
Year Ended
December 30, December 31,
Other comprehensive income:
See accompanying notes.
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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
Stock Options Exercised -
See accompanying notes.
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The Eastern Company
Consolidated Statements of Cash Flows
Year Ended
Operating Activities
Less: Gain from discontinued operations - 1,251,457
Unrecognized pension and postretirement benefits 47,550 (3,575,749 )
Loss (gain) on sale of equipment and other assets 1,327,649 (274,238 )
Changes in operating assets and liabilities:
Investing Activities
Marketable securities (986,477 ) -
Business acquisition (444,840 ) -
Issuance of notes receivable - (400,000 )
Proceeds from sale of businesses - 5,814,019
Proceeds from sale of building and equipment - 2,171,073
Net cash (used in) provided by investing activities (5,430,298 ) 5,090,269
Financing Activities
Proceeds from issuance of long-term debt and notes payable - 260,793
Proceeds from short term borrowings (revolver) - 10,000,000
Principal payments on short-term borrowings (revolver) (300,029 ) -
Proceeds from new long-term debt refinancing 60,000,000 -
Discontinued Operations
Cash provided by operating activities - 3,135,874
Cash provided by discontinued operations - 3,135,874
Effect of exchange rate changes on cash (37,555 ) (193,540 )
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities
See accompanying notes
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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.
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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.
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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
Cost of products sold - (5,137,380 )
Selling and administrative expenses - (891,519 )
Restructuring benefit (costs) - 305,539
Income (loss) from discontinued operations before income taxes - 1,666,312
Income tax (expense) benefit - (414,855 )
Gain (loss) from discontinued operations, net of tax $ - $ 1,251,457
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.
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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 $250,000, but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution. Approximately 16% of available cash is located outside of the United States in our foreign subsidiaries.
Accounts Receivable
Accounts receivable are stated at their net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews the collectability of its receivables on an ongoing basis considering a combination of factors. The Company reviews potential problems, such as past due accounts, a bankruptcy filing or deterioration in the customer’s financial condition, to ensure the Company is adequately accrued for potential loss. Accounts are considered past due based on when payment was originally due. If a customer’s situation changes, such as a bankruptcy or change in creditworthiness, or there is a change in the current economic climate, the Company may modify its estimate of the allowance for doubtful accounts. The Company will write off accounts receivable after reasonable collection efforts have been made and the accounts are deemed uncollectible. As of December 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.
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 ($18.2 million on December 30, 2023) and by the first-in, first-out (FIFO) method for inventories at Big 3 Precision, Velvac and outside the U.S. ($41.0 million on December 30, 2023).
Cost exceeded the LIFO carrying value by approximately $3.7 million on December 30, 2023 and $4.2 million on December 31, 2022. There was no material LIFO quantity liquidation in 2023 or 2022. In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete inventory.
Property, Plant and Equipment and Related Depreciation
Property, plant, and equipment (including equipment under finance lease of $0.9 million) are stated at cost. Depreciation expense ($3.5 million in 2023, $3.3 million in 2022) is computed using the straight-line method based on the following estimated useful lives of the assets: Buildings - 10 to 39.5 years; Machinery and equipment - 3 to 10 years.
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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.
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Eastern Company
Notes to Consolidated Financial Statements (continued)
Intangible Assets
Patents are recorded at cost and are amortized using the straight-line method over the lives of the patents. Technology and licenses are recorded at cost and are amortized on a straight-line basis over periods ranging from 1 to 20 years. Non-compete agreements and customer relationships are amortized using the straight-line method over their useful lives. Trademarks are deemed to have indefinite lives. If facts and circumstances indicate that the carrying value of the intangible assets, including definite life intangible assets, may be impaired, an evaluation is performed to determine if a write-down is required. No impairment losses were recognized for the years ended December 30, 2023 and December 31, 2022.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
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.
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Eastern Company
Notes to Consolidated Financial Statements (continued)
Currently, the Company has 22 operating leases with a lease liability of $17.2 million and two finance leases with a lease liability of $0.9 million as of December 30, 2023. The basis, terms, and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. We rent or sublease one real estate property to two unrelated third parties. There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company. The weighted average remaining lease term is 7.0 years.
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 $1.1 million for the year ended December 30, 2023 and $1.4 million for the year ended December 31, 2022.
Based on historical experience, product returns have been immaterial, and the Company does not accrue a reserve for product returns. For the years ended December 30, 2023 and December 31, 2022, the Company recorded sales returns of $0.9 million and $0.6 million, respectively, as a reduction to revenue.
Sales and similar taxes that are imposed on the Company’s sales and collected from the customer are excluded from revenues.
Costs for shipping and handling activities, including those activities that occur after transfer of control to the customer, are recorded as cost of sales and are expensed as incurred.
For the years ended December 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.
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Eastern Company
Notes to Consolidated Financial Statements (continued)
Product Development Costs
Product development costs, charged to expense as incurred, were $5.6 million in 2023 and $4.2 million in 2022 and include costs to develop new or enhance existing products to better serve our customers.
Selling and Administrative Expenses
Selling and administrative expenses include all operating costs of the Company that are not directly related to the cost of purchasing, manufacturing, and preparing a product for sale. These expenses represent selling and administrative expenses for support functions and related overhead.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $0.4 million in 2023 and $0.3 million in 2022.
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.
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Notes to Consolidated Financial Statements (continued)
4. GOODWILL
The following is a roll-forward of goodwill for 2023 and 2022:
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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 $4.0 million. Total amortization expense for each of the next five years is estimated to be as follows: 2024 - $3.9 million; 2025 - $3.9 million; 2026 - $3.4 million; 2027 - $2.4 million and 2028 - $1.0 million.
Weighted-Average
Amortization
Gross Amount
Patents and developed technology $ 7,677,970 4.1
Accumulated Amortization
Patents and developed technology $ 4,045,572
Gross Amount
Patents and developed technology $ 7,412,101 4.8
Accumulated Amortization
Patents and developed technology $ 3,395,729
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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 $60 million term portion and a $30 million revolving commitment portion. The proceeds of the term loan were used to repay the Company’s remaining outstanding term loan and to terminate its existing credit facility with Santander Bank, N.A. (approximately $59 million). The term loan portion of the credit facility requires quarterly principal payments of (i) $750,000 beginning on September 30, 2023 through June 30, 2025, (ii) $1,125,000 beginning on September 30, 2025 through June 30, 2027, and (iii) $1,500,000 beginning on September 30, 2027 through March 31, 2028, with the balance of the term loan payable on the maturity date of June 16, 2028. Amounts outstanding under the revolving portion of the credit facility are generally due and payable on the expiration date of the Credit Agreement (June 16, 2028). The Company can elect to prepay some or all 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%. As of September 30, 2023, the Company has not borrowed any funds on the revolving commitment portion of the credit facility.
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.
Debt consists of:
Revolving credit loan — —
Amounts are net of unamortized discounts and debt issuance costs of $564,265 as of December 30, 2023 and $113,769 as of December 31, 2022.
The Company paid interest of $3,388,347 in 2023 and $2,502,883 in 2022.
The Company’s loan covenants under the Credit Agreement require the Company to maintain a consolidated fixed charge coverage ratio of at least 1.25 to 1, which is to be tested quarterly on a twelve-month trailing basis. In addition, the Company is required to show a senior net leverage ratio not to exceed 3.5 to 1. Additionally, the Company has restrictions on, among other things, new capital leases, purchases or redemptions of its capital stock, mergers and divestitures, and new borrowings. The Company was in compliance with all covenants as of December 30, 2023 and December 31, 2022.
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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:
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 82,800 and 43,300 awards during 2023 and 2022, respectively.
The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an award with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. The Company did not issue SARs in 2023 or 2022.
Stock-based compensation (income)/expense, including forfeitures, in connection with stock awards and SARs previously granted to employees was $(74,277) and $504,694 for fiscal years 2023 and 2022, respectively. The Company used fair market value to determine the associated expense with stock awards for the 2023 and 2022 fiscal years.
As of December 31, 2023, there were 880,973 shares of common stock reserved and available for future grant under 2020 Plan.
The following tables set forth the outstanding SARs for the period specified:
Units Weighted - Average Exercise Price Units Weighted - Average Exercise Price
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The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS(continued)
SARs Outstanding and Exercisable
The following tables set forth the outstanding stock grants for the period specified:
Shares Shares
As of December 30, 2023, outstanding SARs and awards had an intrinsic value of $2,289,440.
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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:
Foreign Withholding Tax - 60,462
Net deferred income tax (assets) liabilities $ (2,283,571 ) $ (488,989 )
Income before income taxes consists of:
The provision for income taxes follows:
Current
Deferred:
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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:
Amount Percent Amount Percent
Impact on Foreign Repatriation Tax Reform 306,330 3 - 0
Impact of foreign subsidiaries on effective tax rate (297,728 ) (3 ) (41,404 ) 0
Impact of Research & Development tax credit (136,343 ) (1 ) (131,005 ) (1 )
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows for continuing operations:
Amount Percent Amount Percent
Impact on Foreign Repatriation Tax Reform 306,330 3 - 0
Impact of foreign subsidiaries on effective tax rate (297,728 ) (3 ) (41,404 ) 0
Impact of Research & Development tax credit (136,343 ) (1 ) (131,005 ) (1 )
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows for discontinued operations:
Amount Percent Amount Percent
Income taxes using U.S. federal statutory rate - 0 % $ 349,925 21 %
State income taxes, net of federal benefit - 0 64,930 4
Total income taxes paid were $6,608,084 in 2023 and $3,679,678 in 2022.
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 $11,507,000 of undistributed earnings of foreign subsidiaries because the Company intends to reinvest these funds indefinitely. It is not practicable to estimate the unrecognized deferred tax liability for withholding taxes on these undistributed earnings.
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.
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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:
Increase for positions taken during the current period 34,293 58,586
Increase (decrease) for positions taken during the prior period (59,779 ) -
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 $451,772 of unrecognized tax benefits that would affect the annual effective tax rate. In 2023, the Company recognized accrued interest related to unrecognized tax benefits in income tax expense. The Company had approximately $69,830 of accrued interest as of December 30, 2023.
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.
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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 $ 17.2 $ 12.2
Finance lease right of use assets, net Property, plant and equipment, net 0.9 -
Total leased assets, net 18.1 12.2
Liabilities:
Total lease liabilities $ 18.1 $ 12.3
Cash paid included in the measurement of operating lease liabilities was $4.3 million and $3.6 million for the fiscal years ended December 30, 2023 and December 31, 2022, respectively, all of which were included within the operating cash flow section of the consolidated statements of cash flows. Lease assets obtained in exchange for new operating lease liabilities were $8.5 million and $4.0 million for the fiscal years ended December 30, 2023 and December 31, 2022, respectively.
Cash paid included in the measurement of finance lease liabilities was $0.1 million for the fiscal year ended December 30, 2023 which was included within the financing cash flow section of the consolidated statements of cash flows for the fiscal years ended December 30, 2023.
Total operating lease expense was $4.0 million and $3.3 million for the fiscal years ended December 30, 2023 and December 31, 2022, respectively.
Total financing lease expense was $0.1 million for the fiscal year ended December 30, 2023.
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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
Less effects of discounting (3.0 ) (0.2 )
Lease liabilities recognized $ 17.2 $ 0.9
As of December 30, 2023, the weighted average lease term for all operating and finance leases is 7.0 and 6.1 years, respectively. The weighted average discount rate associated with operating leases was 6.2% while the weighted average discount rate associated with finance leases was 6.4%.
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:
Amortization of prior service cost - 66,252
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.
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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:
Discount rate
- Supplemental pension plans 4.92 % 2.08 %
Expected return on plan assets 7.5 % 7.5 %
Rate of compensation increase 0 % 0 %
Components of the net periodic benefit cost of the Company’s other postretirement benefit plan were as follows:
Amortization of prior service cost 4,241 4,241
Amortization of the net loss (67,581 ) (8,214 )
Assumptions used to determine net periodic benefit cost for the Company’s other postretirement plan for the fiscal year indicated were as follows:
Expected return on plan assets 4.0 % 4.0 %
Rate of compensation increase 4.3 % 4.3 %
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
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The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
Pension Benefit Other Postretirement Benefit
Amounts recognized in accumulated other comprehensive income consist of:
Pension Benefit Other Postretirement Benefit
Prior service (cost) credit - - - -
Change in the components of accumulated other comprehensive income consist of:
Pension Benefit Other Postretirement Benefit
Charged to net periodic benefit cost
Liability (gains)/losses
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:
Discount rate
- Supplemental pension plans 4.72 % 4.92 %
- Other postretirement plan 5.04 % 5.28 %
On December 30, 2023 and December 31, 2022, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $81,862,011 and $80,701,715, respectively.
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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:
Number of plans 5 5
Estimated future benefit payments to participants of the Company’s pension plans are $5.1 million in 2024, $5.3 million in 2025, $5.5 million in 2026, $5.6 million in 2027, $5.7 million in 2028 and a total of $29.1 million from 2029 through 2033.
Estimated future benefit payments to participants of the Company’s other postretirement plan are $46,000 in 2024, $47,000 in 2025, $49,000 in 2026, $49,000 in 2027, $51,000 in 2028 and a total of $281,000 from 2029 through 2033.
The Company expects to make cash contributions to its qualified pension plans of approximately $2,100,000 and to its other postretirement plan of approximately $50,000 in 2024.
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.
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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:
Level 1 Level 2 Level 3 Total
Cash and Equivalents:
Equities:
Fixed Income:
Common/collective trust funds
Target Duration LDI Fixed Income Funds (j)
STRIPS Fixed Income Funds (k)
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The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
Level 1 Level 2 Level 3 Total
Cash and Equivalents:
Equities:
Common/collective trust funds
Fixed Income:
Common/collective trust funds
Target Duration LDI Fixed Income Funds (j)
STRIPS Fixed Income Funds (k)
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.
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The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
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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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 $4,774,396 and $4,184,107 on December 30, 2023 and December 31, 2022, respectively. No shares were purchased in 2023 or 2022 nor were any shares sold in either period. Dividends received during 2023 and 2022 on the common stock of the Company were $95,488 and $95,488, respectively.
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 Eastern Company Savings and Investment Plan as amended effective April 1, 2023 (“401(k) Plan Amendment”) provides for a match of 50% of the first 6% of employee contributions. The 401(k) Plan Amendment also provides for an additional non-discretionary contribution (the “transitional credit”) for certain non-union U.S. employees. The amount of this non-discretionary contribution ranges from 0% to 4% of wages, based on the age of the individual on June 1, 2016. The 401(k) Plan Amendment provides a non-discretionary safe harbor contribution of 3%. All non-union U.S. employees are eligible to join the plan.
The Company made contributions to the plan as follows:
The non-discretionary contribution of $328,953 made in the twelve months ended December 30, 2023 was accrued for and expensed in the prior fiscal year. As of December 31, 2022, the Company had accrued $379,090 for the non-discretionary safe harbor contribution. This amount was expensed in 2022 and was contributed to the plan in January 2023.
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:
Basic:
Diluted:
There were no anti-dilutive stock equivalents in 2023 or 2022.
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The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. GEOGRAPHIC INFORMATION
Geographic Information:
Net Sales:
Foreign sales are primarily to customers in North America.
Identifiable Assets:
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.
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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 $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.
15. CONCENTRATION OF RISK
Credit Risk