THE EASTERN COMPANY The Company's fiscal year ends on the Saturday nearest to
The following analysis excludes discontinued operations.
Summary
Sales for 2022 were
During 2022, the Company experienced rising material costs, supply chain
disruption, labor shortages and abnormally high freight costs all having a
negative impact on our gross margin. The Company's backlog was
During 2022 the Company experienced price increases for many of the raw materials used in producing its products, including: scrap iron, stainless steel, hot and cold rolled steel, zinc, copper, aluminum, and nickel. These increases have negatively impacted and could continue to negatively impact the Company's gross margin if raw material prices increase too rapidly for the Company to recover those cost increases through either price increases to our customers or cost reductions in other areas of the business.
Impact of COVID-19, Current Political and Economic Conditions and Supply Chain Disruptions
The COVID-19 pandemic has affected our business, including our supply chain, our
operations, the labor force, costs and interest rates throughout 2021 and 2022.
We continue to follow CDC guidelines, social distancing, and sanitizing work
areas. During the past two years and continuing into 2023, the Company
implemented a broad range of policies and procedures to ensure that employees at
all our locations remain healthy. Steps that we have taken to reduce the risk of
COVID-19 to our employees include, among others: protecting employee health by
instructing employees to stay home if they exhibit symptoms of COVID-19. We
maintain a clean work environment by frequently cleaning all touch points with
products that meet
Current global economic conditions, resulting from the COVID-19 pandemic and
other factors, are highly volatile. Many of the markets we serve are facing
inflation and rising interest rates, which has led to and may continue to lead
to contractions resulting in decreased demand for our products. Decreased demand
has in turn negatively impacted, and may continue to negatively impact, our
financial condition and operating results. Any further or prolonged market
contractions or economic slowdowns could materially adversely affect our sales
or operating margin, which would in turn reduce earnings. Volatile global
economic conditions may also cause foreign exchange rate fluctuations, which
could result in material increases or decreases in earnings and may adversely
affect the value of the Company's assets outside
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In the second quarter of 2022, we experienced interruptions of our operations
and supply base in
The impact of economic contraction and supply chain disruptions has been
exacerbated by the effects of tariffs, trade sanctions and global political
instability. International trade policies, such as tariffs on imports from
The extent to which our operations will be further affected by COVID-19 and its
lasting economic impact, including supply chain disruptions, cost inflation and
rising interest rates, in fiscal year 2023 is dependent on future developments
including new COVID-19 variants and governmental restrictions, the duration of
the
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in
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
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
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
Intangible assets with finite useful lives are generally amortized on a
straight-line basis over the periods benefited.
The Company performed its annual qualitative assessment as of the end of each of
fiscal 2022 and 2021 on the carrying value of goodwill and determined that it is
more likely than not that no impairment of goodwill existed as of such dates.
See Note 3 - Accounting Policies -
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
The discount rate used is based on a single equivalent discount rate derived with the assistance of our actuaries by matching expected future benefit payments in each year to the corresponding spot rates from the FTSE Pension Liability Yield Curve, comprised of high quality (rated AA or better) corporate bonds. The Company calculates its service and interest costs in future years by applying the specific spot rates along the selected yield curve to the relevant projected cash flows.
The expected long-term rate of return on assets is also developed with input from the Company's actuarial firms. We consider the Company's historical experience with pension fund asset performance, the current and expected allocation of our plan assets and expected long-term rates of return. The long-term rate-of-return assumption used for determining net periodic pension expense was 7.5% for 2022 and 2021. The Company reviews the long-term rate of return each year.
Future actual pension income and expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company's pension plans.
The Company expects to make cash contributions of approximately
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In connection with our pension and other postretirement benefits, the Company
reported income of
Assumptions used to determine net periodic pension benefit cost for the fiscal years indicated were as follows:
2022 2021
Discount rate 2.75% - 2.81% 2.40% - 2.48%
Expected return on plan assets 7.5% 7.5%
Rate of compensation increase 0.0% 0.0%
Assumptions used to determine net periodic other postretirement benefit cost are the same as those assumptions used for the pension benefit cost, except that the rate of compensation is not applicable for other postretirement benefit cost.
The changes in assumptions had the following effect on the net periodic pension
and other postretirement costs recorded in Other Comprehensive Income as
follows:
Year ended
December 31, January 1,
2022 2022
Discount rate $ 26,970,888 $ 5,412,964
Additional recognition due to significant event -- (71,547 )
Asset gain or (loss) (22,838,898 ) (781,059 )
Amortization of:
Unrecognized gain or (loss) 1,552,085 1,717,776
Unrecognized prior service cost 70,493 99,380
Other (1,538,804 ) (3,105,208 )
Comprehensive income, before tax 4,215,764 3,272,306
Income tax (941,964 ) (1,208,497 )
Comprehensive income, net of tax $ 3,273,800 $ 2,063,809 The Plan has been investing a portion of the assets in long-term bonds to better match the impact of changes in interest rates on its assets and liabilities and thus reduce some of the volatility in Other Comprehensive Income. Please refer to Note 10 - Retirement Benefit Plans in Item 8, Financial Statements and Supplementary Data of this Form 10-K for additional disclosures concerning the Company's pension and other postretirement benefit plans.
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RESULTS OF OPERATIONS
Fourth Quarter 2022 Compared to Fourth Quarter 2021
The following table shows, for the fourth quarter of 2022 and 2021, selected
line items from the consolidated statements of income as a percentage of net
sales for the Company's operations. The Company's continuing operations include
(1) Big 3 Precision, including Big 3 Products and Big 3 Mold, Hallink Moulds,
and Associated Toolmakers; (2) Eberhard Manufacturing,
Three Months Ended
December 31, 2022 January 1, 2022
Net Sales 100.0 % 100.0 %
Cost of Products Sold 83.4 % 79.8 %
Gross Margin 16.6 % 20.2 %
Product Development Expense 1.5 % 1.7 %
Selling and Administrative Expense 13.6 % 12.5 %
Restructuring Costs 1.0 % --
Operating Profit 0.5 % 6.0 %
Net sales in the fourth quarter of 2022 increased 15.8% to
Sales of new products contributed 1.4% to sales growth in the fourth quarter compared to 8% sales growth from new products in the fourth quarter of 2021. New products in the fourth quarter included various new truck mirrors and truck latches.
Cost of products sold in the fourth quarter of 2022 increased
Gross margin as a percentage of net sales for the fourth quarter of 2022 was 16.6% compared to 20.2% in the prior year fourth quarter. The decrease reflects the combination of higher material and freight costs and other inventory write-offs.
Product development expenses in the fourth quarter of 2022 of
Selling and administrative expenses in the fourth quarter of 2022 increased 1.1% compared to the fourth quarter of 2021. The increase was primarily the result of increased payroll and payroll related expenses, increased travel, and other selling expenses.
Restructuring expenses of
Net income for the fourth quarter of 2022 decreased 95% to
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Fiscal Year 2022 Compared to Fiscal Year 2021
The following table shows, for fiscal year 2022 and fiscal year 2021, selected
line items from the consolidated statements of income as a percentage of net
sales for the Company's operations. The Company's continuing operations include
(1) Big 3 Precision, including Big 3 Products, Big 3 Mold,
Fiscal Year Ended
December 31, 2022 January 1, 2022
Net Sales 100.0 % 100.0 %
Cost of Products Sold 79.0 % 77.0 %
Gross Margin 21.0 % 23.0 %
Product Development Expense 1.5 % 1.6 %
Selling and Administrative Expense 14.1 % 14.3 %
Restructuring Costs 0.3 % --
Operating Profit 5.1 % 7.1 %
Summary
Net sales for 2022 increased 13% to
Cost of products sold increased by
Gross margin as a percentage of sales was 21% in 2022 compared to 23% in 2021. The decrease reflects the combination of higher material and freight costs and other inventory write-offs.
Product development expenses as a percentage of sales was 1.5% and 1.6% in 2022 and 2021, respectively, as the Company continues on-going efforts to develop new products to better serve our customers.
Restructuring expenses of
Selling and administrative expenses increased
Net income for 2022 decreased 32% to
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Other Items
The following table shows the amount of change from the year ended
Amount %
Interest expense $ 528 30 %
Other income $ -859 -26 %
Income taxes $ 464 15 %
Interest expense increased in 2022 from 2021 due to increased interest rates.
Other income in 2022 decreased
The effective tax rate for 2022 was 23% compared to the 2021 effective tax rate
of 7%. The effective tax rate for 2022 was increased compared to 2021 due to the
impact of foreign subsidiaries on the effective tax rate in 2021 and a greater
impact from research and development tax credits in 2021. Total income taxes
paid were
Liquidity and Sources of Capital
The primary source of the Company's cash is earnings from operating activities adjusted for cash generated from or used for net working capital. The most significant recurring non-cash items included in net income are depreciation and amortization expense. Changes in working capital fluctuate with the changes in operating activities. As sales increase, there generally is an increased need for working capital. The Company closely monitors inventory levels and attempts to match production to expected market demand, keeping tight control over the collection of receivables, and optimizing payment terms on its trade and other payables. The maintenance of appropriate inventory levels considering demand has been and may continue to be challenged by supply chain disruptions, which have led in some cases to a deficiency inventory that has required us to pay expedited freight fees on some of our products to timely fulfill customer orders. Coupled with increased materials costs, this has decreased our margins. If these disruptions persist and we are unable to maintain sufficient inventory on hand, we may need to cancel or decline orders, and we may be unable to offset increased material and freight costs fully by increasing prices on our products, any of which could have a material adverse impact on our liquidity.
The Company is dependent on continued demand for its products and subsequent collection of accounts receivable from its customers. The Company serves a broad base of customers and industries with a variety of products. As a result, any fluctuations in demand or payment from a particular industry or customer should not have a material impact on the Company's sales and collection of receivables. Management expects that the Company's foreseeable cash needs for operations, capital expenditures, debt service and dividend payments will continue to be met by the Company's operating cash flows and available credit facility.
The following table shows key financial ratios at the end of each fiscal year:
2022 2021
Current ratio 2.7 2.5
Average days' sales in accounts receivable 56 64 Inventory turnover
3.4 3.0
Ratio of working capital to sales 26.1 % 27.2 %
Total debt to shareholders' equity 50.7 % 62.2 %
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The following table shows important liquidity measures as of the fiscal year-end balance sheet date for each of the preceding two years (in millions):
2022 2021
Cash and cash equivalents
- Held in the United States $ 7.4 $ 4.3
- Held by foreign subsidiaries 2.8 2.3
10.2 6.6
Working capital 78.3 74.1
Net cash (used in) provided by operating activities 7.4 (7.8 ) Change in working capital impact on net cash used in operating activities
(5.2 ) (22.9 )
Net cash provided by (used in) in investing activities 5.1 13.6 Net cash used in by financing activities
(11.8 ) (20.3 )
All cash held by foreign subsidiaries is readily convertible into other
currencies, including the
Net cash provided by operating activities was
In 2022, cash used to support additional working capital requirements was
The Company provided
In 2022, the Company made total debt payments of
In 2021, the Company made total debt payments of
The Company leases certain equipment and buildings under cancelable and
non-cancelable operating leases that expire at various dates up to five years.
Rent expense amounted to approximately
On
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The Company's loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.
On
The interest rates on the Credit Agreement and interest rate swap contract are susceptible to that the transition from LIBOR to alternative benchmark rates such as SOFR. Information regarding this transition is provided below.
Central banks around the world, including the FRB, are working to implement the
transition from the London Interbank Offered Rate ("LIBOR") to replacement
benchmarks including the Secured Overnight Financing Rate ("SOFR") in
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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
To supplement the consolidated financial statements prepared in accordance with
Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis across periods by removing the impact of certain items that management believes do not directly reflect our underlying operating performance.
Adjusted Earnings Per Share from Continuing Operations is defined as earnings per share from continuing operations excluding, when incurred, certain per share gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs. We believe that Adjusted Earnings Per Diluted Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis from period to period.
Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring expenses. Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Management uses such measures to evaluate performance period over period, to
analyze the underlying trends in our business, to assess our performance
relative to our competitors, and to establish operational goals and forecasts
that are used in allocating resources. These financial measures should not be
considered in isolation from, or as a replacement for,
We believe that presenting non-GAAP financial measures in addition to
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Reconciliation of Non-GAAP
Measures
Adjusted Net Income and Adjusted Earnings per Share from Continuing Operations
Calculation
For the Three and Twelve Months ended December 31, 2022 and
January 1, 2022
($000 's)
Three Months Ended Twelve Months Ended
December 31, January 1, December 31, January 1,
2022 2022 2022 2022
Net income from continuing
operations as reported per
generally accepted accounting
principles (GAAP) $ 167 $ 3,913 $ 11,050 $ 16,182
Earnings per share from
continuing operations as
reported under generally
accepted accounting principles
(GAAP):
Basic 0.03 0.62 1.78 2.58
Diluted 0.03 0.62 1.77 2.58
Adjustments:
Gain on sale of Eberhard
Hardware Ltd building, net of
tax (1,353) A
Factory relocation, net of tax 105 B
Factory start-up costs, net of
tax 161 C 348 C
Loss on sale of Wheeling, IL D
building, net of tax 202
Gain on sale of Eastern
corporate office building, net E
of tax (474 )
Restructuring costs, net of tax 525 F 525 F
Total adjustments 525 161 253 (900)
Adjusted net income from
continuing operations
(Non-GAAP) $ 692 $ 4,074 $ 11,303 $ 15,282
Adjusted earnings per share
from continuing operations
(Non-GAAP):
Basic $ 0.11 $ 0.65 $ 1.82 $ 2.44
Diluted $ 0.11 $ 0.65 $ 1.81 $ 2.44
A) Gain on sale of Eberhard
Hardware Ltd property
B) Costs incurred on relocation
of ILC facility in Wheeling, IL
C) Costs incurred on start-up of
Eberhard factory in Reynosa, MX
D) Loss on sale of ILC building
in Wheeling, IL
E) Gain on sale of Eastern
corporate office building
F) Restructuring costs associated
with warehouse consolidation into
Eberhard
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Reconciliation of Non-GAAP
Measures
Adjusted EBITDA from Continuing
Operations Calculation
For the Three and Twelve Months ended December 31, 2022 and
January 1, 2022
($000 's)
Three Months Ended Twelve Months Ended
December 31, January 1, December 31, January 1,
2022 2022 2022 2022
Net income from continuing
operations as reported per
generally accepted
accounting principles
(GAAP) $ 167 $ 3,913 $ 11,050 $ 16,182
Interest expense 692 359 2,276 1,748
Provision for income taxes (146 ) (802 ) 3,352 2,771
Depreciation and
amortization 1,846 2,052 7,235 7,241
Gain on sale of Eberhard
Hardware Ltd building (1,841) A
Factory relocation 139 B
Factory start-up costs 215 C 465 C
Loss on sale of Wheeling, D
IL building 269
Gain on sale of Eastern E
corporate office building (624 )
Restructuring costs 700 F 700 F
Adjusted EBITDA from
continuing operations
(Non-GAAP) $ 3,259 $ 5,737 $ 24,258 $ 26,708
A) Gain on sale of
Eberhard Hardware Ltd
property
B) Costs incurred on
relocation of ILC facility
in Wheeling, IL
C) Costs incurred on
start-up of Eberhard factory
in Reynosa, MX
D) Loss on sale of ILC
building in Wheeling, IL
E) Gain on sale of Eastern
corporate office building
F) Restructuring costs
associated with warehouse
consolidation into Eberhard
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