Notes to Consolidated Financial Statements
1. Description of Business
The Eastern Company (the “Company”) includes nine separate operating businesses located within the United States, two wholly-owned Canadian subsidiaries (one
located in Tillsonburg, Ontario, Canada, and one in Kelowna, British Columbia, 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), two wholly-owned subsidiaries in Mexico (one located in Lerma, Mexico and one located in Reynosa, Mexico) and a wholly owned subsidiary in Wrexham, United Kingdom.
The operations of the Company consist of three business segments: industrial hardware, security products, and metal products.
Industrial Hardware
The Industrial Hardware segment consists of Big 3 Precision, including Big 3 Products and Big 3 Mold; Eberhard Manufacturing Company, Eberhard Hardware
Manufacturing Ltd., and Eastern Industrial Ltd; Velvac Holdings; Canadian Commercial Vehicles Corporation; and Sesamee Mexicana, S.A. de C.V.
These businesses design, manufacture and market a diverse product line of custom and standard vehicular and industrial hardware, including turnkey returnable
packaging solutions; passenger restraint and vehicular locks, latches, hinges; mirrors, mirror-cameras; and light-weight sleeper boxes and truck bodies. The segment also designs and manufactures a wide selection of fasteners and other closure devices
used to secure access doors on various types of industrial equipment such as metal cabinets, machinery housings and electronic instruments. Big 3 Products and Big 3 Mold’s turnkey returnable packaging solutions are used in the assembly process for
vehicles, aircraft, and durable goods and in the production process of plastic packaging products, packaged consumer goods and pharmaceuticals. Big 3 Products works with leading manufacturers to design and produce custom returnable packaging to
integrate with their assembly processes. Other products are found on tractor-trailer trucks, specialty commercial vehicles, recreational vehicles, fire and rescue vehicles, school buses, military vehicles and other vehicles. In addition, through Big 3
Precision Products and Big 3 Precision Mold Services, Big 3 Precision serves diverse markets including truck, automotive, plastic packaging products, consumer packaged goods and pharmaceuticals. The segment sells directly to “OEM’s” and to
distributors through in-house sales personnel and outside sales representatives. Sales, customer engineering and customer service are primarily provided through in-house sales personnel and engineering staff.
Security Products
The Security Products segment consists of Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and
World Security Industries Ltd.; Greenwald Industries (“Greenwald”); and Argo EMS (formerly Argo Transdata). Illinois Lock Company/CCL Security Products, known in the market as ILC, is a global leader in the design and manufacture of engineered
security and access solutions in the form of mechanical, electronic and wireless products. ILC focuses on the industrial, vehicle accessory, outdoor recreational equipment, medical, and point of sale and vending segments. These products and solutions
are specified and sold to OEM’s, contract equipment manufacturers, and industrial distributors globally. Greenwald designs, manufactures and markets payment systems and coin security products used primarily in the commercial laundry market.
Greenwald’s products include timers, drop meters, coin chutes, money boxes, meter cases, mobile payment apps, smart cards, value transfer stations, smart card readers, card management software, and access control units. Argo EMS supplies printed
circuit boards and other electronic assemblies to original equipment manufacturers in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial controls, medical and military products.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
Metal Products
The Metal Products segment consists of Frazer & Jones, The Frazer & Jones Company, designs and manufactures high quality ductile and malleable iron
castings. Products include valves, rings, torque screws, bean clamps, and concrete anchors. These products are sold to a wide range of industrial markets, including oil, water, gas; truck/automotive rail, and military/aerospace. In addition, the
Company believes that its Metal Products segment, is the largest and most efficient producer of expansion shells for use in supporting the roofs of underground mines in North America.
Sales are made to customers primarily in North America.
2. Business Acquisitions
Load N Lock Systems, Inc.
Effective June 1, 2018 the Company acquired certain assets of Load N Lock Systems, Inc. (“Load N Lock”), including accounts receivable, inventories,
furniture, fixtures and equipment, intellectual property rights, and assumed certain liabilities and rights existing under all sales and purchase agreements. Load N Lock provides innovative truck cap and tonneau cover locks that keep truck contents
safe and secure. Load N Lock developed and patented the first integrated power lock for the automotive industry and has developed numerous truck cap and tonneau cover lock related products. Load N Lock provides its innovative products and solutions
to the automotive industry’s leading manufacturers of truck and automotive accessories in the United States and Asia.
The above acquisition was accounted for under ASC 805 – Business Combinations. Load N Lock has been included in the Security Products segment of the Company
from the date of the acquisition. The cost of the acquisition of Load N Lock was approximately $4,995,000. The excess of the cost of Load N Lock over the fair market value of the net definitive tangible and intangible assets acquired was $2,694,700,
which has been recorded as goodwill.
In connection with the above acquisition, the Company recorded the following intangible assets:
Big 3 Precision Products
On August 30, 2019, the Company and its newly-formed wholly-owned subsidiary, Eastern Engineered Systems, Inc., a Delaware corporation (“EES”) entered into a
Stock Purchase Agreement (the “Stock Purchase Agreement”) with Big 3 Holdings, LLC, a Delaware limited liability company (“Seller”), Big 3 Precision Mold Services, Inc., a Delaware corporation and wholly-owned subsidiary of Seller (“Big 3 Mold”), Big 3
Precision Products, Inc., a Delaware corporation and wholly owned subsidiary of Seller (“Big 3 Products”), Industrial Design Innovations, LLC, a Delaware limited liability company and wholly-owned subsidiary of Big 3 Products (“Design Innovations”),
Sur-Form, LLC, a Delaware limited liability company and wholly-owned subsidiary of Big 3 Products (“Sur-Form”), Associated Toolmakers Limited, a limited company formed under the laws of England and Wales and wholly-owned subsidiary of Big 3 Mold
(“Associated” and together with Big 3 Mold, Big 3 Products, Design Innovations and Sur-Form, collectively “Big 3 Precision”), TVV Capital Partners III, L.P., a Delaware limited partnership, TVV Capital Partners III-A, L.P., a Delaware limited
partnership, Alan Scheidt, Todd Riley, Clinton Hyde, and Big 3 Holdings, LLC, a Delaware limited liability company, as the initial Seller Representative (the “Seller Representative”). On August 30, 2019, pursuant to the Stock Purchase Agreement, the
Company, through EES, acquired all of the outstanding equity interests of Big 3.
Eastern Company
Notes to Consolidated Financial Statements (continued)
2. Business Acquisitions (continued)
Precision Products and Big 3 Mold Services, and indirectly through them, all of the outstanding equity interests in Design The Innovations, Sur-Form and
Associated, for an adjusted purchase cash price of $81.2 million. The Big 3 acquisition was financed with a combination of $2.1 million of cash on hand, a credit agreement (the “Credit Agreement”) with Santander Bank, N.A., for itself and, People’s
United Bank, National Association and TD Bank, N.A. as lenders, providing for a $100.0 million term loan and a $20.0 million revolving credit line. In connection with the Credit Agreement, the Company also used its cash to repay the remaining
balance (approximately $19.1 million) of its then outstanding term loan with People’s United Bank National Association. Through its two divisions, Big 3 Products and Big 3 Mold, Big 3 Precision serves diverse markets including truck, automotive,
plastic packaging products, packaged consumer goods and pharmaceuticals. In particular, Big 3 Precision Products works with leading manufacturers to design and produce custom returnable packaging to integrate with their assembly processes. Big 3 Mold
is a global leader in the design and manufacture of blow mold tools.
The following table summarizes the consideration paid for Big 3 Precision and the amounts of the assets acquired and liabilities assumed recognized at the
acquisition date, as well as the fair value at the acquisition date.
At August 30, 2019:
Accounts Receivable
Acquired receivables are amounts due from customers, and are stated at net realizable value.
Inventories
The estimated fair value of inventories acquired, which is at net realizable value based upon third party valuation specialist.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
2. Business Acquisitions (continued)
Property, Plant and Equipment
The property plant and equipment are estimated at net realizable value at the time of the acquisition based upon third party valuation specialist.
Intangible Assets
The estimated fair value of identifiable intangible assets is determined primarily using the Income Approach method which is a valuation technique that
provides an estimate of the fair value of an asset based on the market participant’s expectations of the cash flows that an asset would generate over its remaining useful life. Some of the more significant assumption inherent in the development of the
identifiable intangible assets valuation, from the perspective of a market participant, include the estimate net cash flows for each year for each project or product, the appropriate discount rate to select in order to measure the risk inherent in each
future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors.
Goodwill Allocation
Goodwill of $44,096,980 arising from the acquisition consists of the difference between the consideration paid and the fair value of the assets and
liabilities acquired. None of the goodwill recognized is expected to be deductible for income tax purposes.
Current Liabilities
Acquired current liabilities are amounts owed to vendors or accrued expenses.
Deferred Revenue
Deferred revenue is the amount of customers deposits at the time of the acquisition.
Income taxes
Income taxes are the estimated amount of state and federal taxes to settle certain tax positions prior to the acquisition.
Deferred Tax Liability
The deferred tax liability is stated at estimated tax liability due to the difference in the book basis of assets compared to the tax basis of those assets
at the time of acquisition.
Acquisition Related Expenses
Included in general and administrative expenses in the consolidated statements of operations for the three and twelve month periods ended December 28, 2019
were $765,000 and $1,184,000, respectively, for acquisition expenses.
3. Accounting Policies
Fiscal Year
The Company’s year ends on the Saturday nearest to December 31. Fiscal years, 2019 and 2018, were 52 weeks each.
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.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
Reclassification
Commencing with the first quarter of 2018, pension service costs have been broken out and reclassified from the gains and losses associated with the pension
assets. The reclassification of these expenses does not affect the net income reported.
Product development expense is not necessarily 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.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 income (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 50% 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 taking into account 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 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.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined by the last-in, first-out (LIFO) method in the U.S. ($31,011,130 for
U.S. inventories at December 28, 2019, excluding Big 3 and Velvac) and by the first-in, first-out (FIFO) method for inventories outside the U.S. ($7,295,793 for inventories outside the U.S. at December 28, 2019). Cost exceeds the LIFO carrying value by
approximately $6,712,162 at December 28, 2019 and $6,957,972 at December 29, 2018. There was no material LIFO quantity liquidation in 2019 or 2018. In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete
inventory.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
Property, Plant and Equipment and Related Depreciation
Property, plant and equipment (including equipment under capital lease) are stated at cost. Depreciation ($4,722,758 in 2019, $4,329,136 in 2018) is
computed generally using the straight-line method based on the following estimated useful lives of the assets: Buildings 10 to 39.5 years; Machinery and equipment 3 to 10 years.
Impairment of Long-Lived Assets
In accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long Lived Assets, the Company reviews
it long lived assets and certain intangible assets for impairment whenever events or changes in circumstances indicate the that carrying amount may not be recoverable. In such an event, the carrying value of long lived assets is reviewed by management
to determine if the value may be impaired. If this review indicates that the carrying amount will not be recoverable, as determined based on the estimated expected future cash flows attributable to the asset over the remaining amortization period,
management will reduce the carrying amount to recognize the impairment and recognize an impairment loss. The measurement of the impairment loss to be recognized is to be based on the difference between the fair value and the carrying amount of the
asset. Fair value is defined as the amount of which the asset could be bought or sold in a current transaction between willing parties. Where quoted market prices in active markets are not available, management would estimate fair value based on the
best information available in the circumstances such as the price of similar assets, a discounted cash flow analysis or other techniques. No impairment losses were recognized for the period ended December 28, 2019 and for the period December 29, 2018.
Goodwill
The Company performed qualitative assessments of goodwill as of the end of fiscal 2019 and fiscal 2018 and determined it is more likely than not that no
impairment of goodwill existed at the end of 2019 or 2018. The Company will perform annual qualitative assessments in subsequent years as of the end of each fiscal year. Additionally, the Company will perform interim analysis whenever conditions
warrant.
Goodwill would be considered impaired whenever the historical carrying amount exceeds the fair value. Pursuant to the qualitative assessment performed,
goodwill was not impaired in 2019 or 2018. Should we reach a different conclusion in the future, additional work would be performed to determine the amount of the non-cash impairment charge to be recognized. The maximum future impairment of goodwill
that could occur is the amount recognized on our balance sheet.
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 generally amortized on a straight-line basis over periods ranging from 5 to 17 years. Generally, non-compete agreements and customer relationships are being amortized using the straight-line method over a period of 5 years. Amortization
expense in 2019 and 2018 was $1,726,539 and $1,452,084, respectively. In the event that 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.
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 Eastern Company
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
The Company’s financial instruments are primarily investments in pension assets, see footnote 11, and consists of an interest rate swap.
The Company’s interest rate swap is not an exchange-traded instrument. However, it is valued based on observable inputs for similar liabilities and
accordingly is classified as Level 2. The amount of the interest rate swap is included in other accrued liabilities.
The carrying amounts of other financial instruments (cash and cash equivalents, accounts receivable, accounts payable and debt) as of December 28, 2019 and
December 29, 2018, approximate fair value based on the expected future cash flows of the related instruments.
Right of Use Assets
In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (“Topic 842”). ASU 2016-02 requires lessees to present
right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. See Note 13 – Recent Accounting Pronouncements.
In calculating the effect of ASU 2016-02, the Company elected the transition method thereby not restating comparable periods. The Company elected to account
for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgments, including making estimates related to the lease term, lease payments, and discount rate. In accordance with the guidance,
the Company recognized ROU assets and lease liabilities for all leases with a term greater than 12 months.
The Company has operating leases for buildings, warehouses and office equipment. Currently, the Company has 45 operating leases with a ROU asset and lease
liability totaling $12,342,000 as of December 28, 2019. The basis, terms and conditions of the leases are determined by the individual agreements. The Company’s option to extend certain leases ranges from 12 – 140 months. All options to extend have
been included in the calculation of the ROU asset and lease liability. The leases do not contain residual value guarantees, restrictions, or covenants that could incur additional financial obligations to the Company. There are no subleases,
sale-leaseback, or related party transactions.
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 generates wholesale revenues primarily from the sale of products to original equipment manufacturers and distributers in the United States. The
Company recognizes revenue upon shipment or transfer of title to the customer as that is when the customer obtains control of the promised goods. The Company typically extends credit terms to its customers based on their creditworthiness and generally
does not receive advance payments. As such, the Company records accounts receivable at the time of shipment, when the Company’s right to the consideration becomes unconditional. Accounts receivable from the Company’s customers are typically due
within 30 days of invoicing. An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment
The Eastern Company
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
trends and the Company’s assessment of the customer’s credit worthiness. As of December 28, 2019 and December 29, 2018, the Company’s
allowance for doubtful accounts total was $556,000 and $680,000, respectively. As of December 28, 2019 and December 29, 2018, the Company’s bad debt expense was $64,000 and $220,000, respectively.
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 division may employ the efforts expended method for the percentage of completion for revenue recognition for certain
transactions. The efforts expended method calculates the proportion of effort expended to date in comparison to the total effort expected to be expended for the contract. The amount of revenue recognized employing the percentage of completion method
was $576,000 for the year ended December 28, 2019. No revenue was recognized employing the percentage of completion method for the year ended December 29, 2018.
Based on historical experience, the Company does not accrue a reserve for product returns. For the years ended December 28, 2019 and
December 29, 2018, the Company recorded sales returns of $613,000 and $725,000, respectively, as a reduction of revenue.
Greenwald Industries generates subscription services revenue from access provided to customers to the division’s specific online
databases. For the years ended December 28, 2019 and December 29, 2018, Greenwald Industries subscription services revenue was $567,000 and $448,000, respectively.
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 subsequent to transfer of control to the customer, are
recorded as cost of sales and are expensed as incurred.
For the years ended December 28, 2019 and December 29, 2018, the Company recorded no revenues related to performance obligations
satisfied in prior periods. As part of the Company’s adoption of the new revenue standard, 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.
There was no subscription services revenue from remaining performance obligations as of December 28, 2019.
See footnote 12 regarding the Company’s revenue disaggregated by reporting segment, intersegment sales by reporting segment and
geography.
Cost of Goods Sold
Cost of goods sold reflects the cost of purchasing, manufacturing and preparing a product for sale. These costs generally represent the expenses to acquire
or manufacture products for sale (including an allocation of depreciation and amortization) and are primarily comprised of direct materials, direct labor, and overhead, which includes indirect labor, facility and equipment costs, inbound freight,
receiving, inspection, purchasing, warehousing and any other costs related to the purchasing, manufacturing or preparation of a product for sale.
Shipping and Handling Costs
Shipping and handling costs are included in cost of goods sold.
Product Development Costs
Product development costs, charged to expense as incurred, were $6,024,567 in 2019, $6,950,969 in 2018.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
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 generally represent administrative expenses for support functions and related overhead.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $462,911 in 2019, $501,615 in 2018.
Software Development Costs
Software development costs, are primarily costs to develop software sold, leased, or otherwise marketed, that are incurred subsequent to the establishment of
technological feasibility are capitalized if significant. Capitalized software development costs are amortized using the straight-line amortization method over the estimated useful life of the applicable software. There were
no capitalized software development costs in the 2019. For the year ended December 29, 2018 capitalized software development costs were $1,813,973.
Stock Based Compensation
The Company accounts for its stock based awards in accordance with Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”), 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 options and restricted stock awards. The Company estimates the fair value of
granted stock options using the Black-Scholes valuation model. 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 options before exercising them, the estimated volatility of the Company’s common stock price and the number of options 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.
For the year ended December 28, 2019, there were 96,000 SARs granted under the 2010 Plan.
Under the terms of the Director’s Fee Program, the directors can elect to receive their Director’s fees in cash or in common shares of the Company. This
election is made at the beginning of each fiscal year and remains in effect for the entire year.
Income Taxes
The Company and its U.S. subsidiaries file a consolidated federal income tax return.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases 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.
On December, 22, 2017, SAB 118 was issued due to the complexities involved in accounting for the enacted Tax Act. SAB 118 requires the company to include in
its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined. Accordingly, the U.S. provision for income tax for 2017 was based on the reasonable estimate guidance provided by
SAB 118. The company has assessed the impact from the Tax Act and recorded the impact in the fourth quarter of 2018.
The Company accounts for uncertain tax positions pursuant to the provisions of FASB Accounting Standards Codification (“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
The Eastern Company
Notes to Consolidated Financial Statements (continued)
3. Accounting Policies (continued)
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 7 Income Taxes.
4. Goodwill
The following is a roll-forward of goodwill for 2019 and 2018:
The Eastern Company
Notes to Consolidated Financial Statements (continued)
5. Intangibles
Trademarks are not amortized as their lives are deemed to be indefinite. Total amortization expense for each of the next five years is estimated to be as
follows: 2020 - $4,082,000; 2021 - $4,062,000; 2022 - $4,055,000; 2023 - $4,055,000 and 2024 - $3,372,000.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
6. Debt
On August 30, 2019, the Company entered into the Credit Agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association. and TD
Bank, N.A. as lenders, that included a $100 million term portion and a $20 million revolving commitment portion. Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility)
with People’s United Bank, N.A. (approximately $19 million) and to acquire Big 3 Precision. The term portion of the loan requires quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then
increases to $1,875,000 per quarter beginning September 30, 2021 and continues through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023 and continues through June 30, 2024. The term loan is a
5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024.
During 2019, the Company did not borrow any funds on the revolving commitment portion of the facility. The interest rates on the term and revolving credit portion of the Credit Agreement vary. The interest rates may vary based on the LIBOR rate plus a
margin spread of 1.25% to 2.25%. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019 with Santander
Bank, N.A., as administrative agent.
The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the
Company will be required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.
On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notational amount of $50,000,000,
which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will
receive interest when the LIBOR rate exceeds 1.44%. On December 28, 2019, the interest rate for half ($50 million) of the term portion was 3.44%, using a one month LIBOR rate, and 3.19% one the remaining balance ($50 million) of the term loan based on
a one month LIBOR rate.
The interest rates on the Credit Agreement, and interest rate swap contract are susceptible to changes to the method that LIBOR rates are determined and to
the potential phasing out of LIBOR after 2021. Information regarding the potential phasing out of LIBOR is provided below.
On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In
the United States, efforts to identify a set of alternative U.S. Dollar reference interest rates have been initiated by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York. At this time, it is
not possible to predict whether any such changes will occur, whether LIBOR will be phased out or any such alternative reference rates or other reforms to LIBOR will be enacted in the United Kingdom, the United States or elsewhere or the effect that any
such changes, phase-out, alternative reference rates or other reforms, if they occur, would have on the amount of interest paid on the Company’s LIBOR-based borrowings. Uncertainty as to the nature of such potential changes, phase-out, alternative
reference rates or other reforms may materially adversely affect interest rates paid by the Company on its borrowings. Reform of, or the replacement or phasing out of, LIBOR and proposed regulation of LIBOR and other “benchmarks” may materially
adversely affect the amount of interest paid on the Company’s LIBOR-based borrowings and could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
6. Debt (continued)
Debt consists of:
1 Amounts are net of unamortized discounts and debt issuance costs of
$360,146 as of December 28, 2019 and $0 as of December 29, 2018.
The Company paid interest of $1,857,961 in 2019, $1,202,272 in 2018.
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 will be required to show a senior net leverage ratio of 4.25 to 1. The Company was in compliance with all covenants as of December 28, 2019. In addition, the
Company has restrictions on, among other things, new capital leases, purchases or redemptions of its capital stock, mergers and divestitures, and new borrowing. The Company was in compliance with all covenants in 2018 and 2019.
As of December 29, 2019, scheduled annual principal maturities of long-term debt for each of the next five years follow:
7. Stock Options and Awards
Stock Options
As of December 28, 2019, the Company had one stock option plan, The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers,
other key employees, and non-employee Directors. Incentive stock options granted under the 2010 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 options are
granted. Restricted stock awards may also be granted to participants under the 2010 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. Under the 2010 Plan, non-qualified stock options granted to
participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors. During 2019 and 2018, no stock options or restricted stock were granted that were subject to the meeting of performance measurements.
For the period of 2019, the Company used several assumptions which included an expected term of 3.5 to 4 years, volatility deviation of 28.88% and 32.33% and a risk free rate of 1.42% to 2.48%. For the period of 2018, the Company used several
assumptions which included an expected term of 3.5 years, volatility deviation of 29.5% and a risk free rate of 2.33%.
The 2010 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option 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. During 2019, the Company issued 96,000 SARs and during 2018
51,000 SARs were issued.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. Stock options and awards (continued)
Stock-based compensation expense in connection with SARs granted to employees during fiscal year 2019 was $397,250 and for 2018 was $276,778.
As of December 28, 2019, there were 178,500 shares of common stock reserved and available for future grant under the above noted 2010 Plan.
The following tables set forth the outstanding SARs for the period specified:
The following tables set forth the outstanding stock grants for the period specified:
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. Stock options and awards (continued)
As of December 28, 2019, outstanding SARs and options had an intrinsic value of $2,898,945.
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:
Income before income taxes consists of:
The Eastern Company
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
The provision for income taxes follows:
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows:
Total income taxes paid were $3,197,984 in 2019 and $3,741,021 in 2018.
Pursuant to the SAB118, the company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of
the related tax impacts and as such has adjusted for the finalization of the tax impacts in the fourth quarter of 2018. The change primarily related to deferred taxes.
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 is 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 at December 28, 2019 on approximately $7,460,584 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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
The Eastern Company
Notes to Consolidated Financial Statements (continued)
8. Income Taxes (continued)
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. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which
financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity
that elects early adoption must adopt all the amendments in the same period. The Company is currently evaluating whether to early adopt ASU 2019-12 in the first interim period of 2020.
A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows:
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 2015 and non-U.S. income tax examinations by tax authorities prior to 2013.
Included in the balance at December 28, 2019, are $1,640,609 of unrecognized tax benefits that would affect the annual effective tax rate. In 2019, the
Company recognized accrued interest related to unrecognized tax benefits in income tax expense. The Company had approximately $57,879 of accrued interest at December 28, 2019.
The total amount of unrecognized tax benefits could increase or decrease within the next twelve months for a number of 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.
9. Leases
The Company leases certain equipment and buildings under operating lease arrangements. Most leases are for a fixed term and for a fixed amount. The Company
is not a party to any leases that have step rent provisions, escalation clauses, capital improvement funding or payment increases based on any index or rate.
Future minimum payments under non-cancelable operating leases with initial or remaining terms in excess of one year during each of the next five years
follow:
The Eastern Company
Notes to Consolidated Financial Statements (continued)
9. Leases (continued)
Rent expense for all operating leases was $3,106,630 in 2019 and $2,552,887 in 2018. The weighted average lease term for all operating leases is five
years. The weighted average discount rate for all operating leases is 5%.
10. Retirement Benefit Plans
The Company has non-contributory defined benefit pension plans covering most 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.
Effective for October 31, 2018, as a result of the collective bargaining agreement between the Frazer and Jones Company, Division of the Eastern Company and
the International Union of Electronic, Electrical, Salaried (Machine and Furniture Workers) CWA-AFL-CIO pension accruals for the covered employees have been frozen. Under ASC 715, the Company is required to remeasure plan assets and obligations
during an interim period whenever a significant event occurs that results in a material change in the net periodic pension cost. The determination of significance is based on judgment and consideration of events and circumstances affecting the pension
costs. After consulting with our actuary, although the freezing of benefits under the Frazer and Jones Plan would normally be considered a significant event pursuant to such standard, there was no remaining unrecognized Prior Service Cost as of the
date of the freeze, thus, Eastern Company did not increase the expense. In addition, the freezing of benefit accruals did not impact the pension benefit obligation. Thus there was no additional recognition required and a remeasurement was not
necessary.
Effective for January 1, 2018, as a result of the collective bargaining agreement between the Illinois Lock Company and the Service Employees International
Union Local, 1 C.L.C. pension accruals for the covered employees have been frozen. Under ASC 715, the Company is required to remeasure plan assets and obligations during an interim period whenever a significant event occurs that results in a
material change in the net periodic pension cost. The determination of significance is based on judgment and consideration of events and circumstances affecting the pension costs. After consulting with our actuary, the freezing of benefits under the
Illinois Lock Plan was considered a significant event pursuant to such standard. As a result, the Company expensed the previously unrecognized Prior Service Cost. The Eastern Company increased the expense by $14,928. The freezing of benefit accruals
did not impact the pension benefit obligation. The additional recognition occurred as of the beginning of the fiscal year; thus, a remeasurement was not necessary.
Components of the net periodic benefit cost of the Company’s pension benefit plans for the fiscal year indicated were as follows:
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:
Components of the net periodic benefit cost of the Company’s other postretirement benefit plan were as follows:
Assumptions used to determine net periodic benefit cost for the Company’s other postretirement plan for the fiscal year indicated were as follows:
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. Retirement Benefit Plans (continued)
As of December 28, 2019 and December 29, 2018, the status of the Company’s pension benefit plans and other postretirement benefit plan was as follows:
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. Retirement Benefit Plans (continued)
Change in the components of accumulated other comprehensive income consist of:
In 2019, the net periodic pension benefit cost included $1,300,134 of net loss and $99,380 of prior service cost and the net periodic other postretirement
benefit cost included $25,509 of net gain and $5,072 of prior service credit. During 2019, the Company bought out certain Retiree Life Insurance benefits for a gain of $454,143.
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:
At December 28, 2019 and December 29 2018, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was
$102,991,053 and $91,533,200, respectively.
Information for the under-funded pension plans with a projected benefit obligation and an accumulated benefit obligation in excess of plan assets:
Estimated future benefit payments to participants of the Company’s pension plans are $4.3 million in 2020, $4.5 million in 2021, $4.7 million in 2022, $4.9
million in 2023, $5.1 million in 2024 and a total of $28.0 million from 2025 through 2029.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. Retirement Benefit Plans (continued)
Estimated future benefit payments to participants of the Company’s other postretirement plan are $50,000 in 2020, $49,000 in 2021, $50,000 in 2022, $51,000
in 2023, $52,000 in 2024 and a total of $293,000 from 2025 through 2029.
The Company expects to make cash contributions to its qualified pension plans of approximately $2,700,000 and to its other postretirement plan of
approximately $50,000 in 2020.
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 2019, as in 2018, 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.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. Retirement Benefit Plans (continued)
The fair values of the company’s pension plans assets at December 28, 2019 and December 29, 2018, utilizing the fair value hierarchy discussed in Note 2,
follow:
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. Retirement Benefit Plans (continued)
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.
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.
The plans’ assets include 217,018 shares of the common stock of the Company having a market value of $6,625,560 and $5,247,495 at December 28, 2019 and
December 29, 2018, respectively. No shares were purchased in 2019 or 2018 nor were and shares sold in either period. Dividends received during 2019 and 2018 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
Notes to Consolidated Financial Statements (continued)
10. Retirement Benefit Plans (continued)
The Company amended the Eastern Company Savings and Investment Plan (“401(k) Plan Amendment”) effective June 1, 2016. The 401(k) Plan Amendment increased
this match to 50% of the first 6% of contributions for the remainder of Fiscal 2016. The 401(k) Plan Amendment also provided for an additional non-discretionary contribution (the “transitional credit”) for certain non-union U.S. employees who were
eligible to participate in the Salaried Plan. 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 increased the non-discretionary safe harbor
contribution to 3%, and changed the eligibility to all non-union U.S. employees.
The Company made contributions to the plan as follows:
At December 28, 2019, the Company had accrued $550,286 for the non-discretionary safe harbor contribution this amount was expensed in 2019 and was
contributed to the plan in January 2020. At December 29, 2018, the Company had accrued $565,748 for the non-discretionary safe harbor contribution. This amount was contributed to the Plan in January 2019 and was expensed in 2018.
11. Earnings per Share
The denominators used in the earnings per share computations follow:
There were no anti-dilutive stock equivalents in 2019 or 2018.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. Reportable Segments
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. Reportable Segments (continued)
13. Recent Accounting Pronouncements
Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases (“Topic 842”). ASU 2016-02 requires lessees to present right-of-use assets and lease liabilities on
the balance sheet for all leases with terms longer than 12 months. The guidance is to be applied at the beginning of the earliest comparative period in the financial statements and is effective for years beginning after December 15, 2018. Early
adoption was permitted. In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842 - Leases. ASU 2018-10 clarifies and increases transparency and comparability among organizations by recognizing lease assets and lease
liabilities on the balance sheet and disclosing key information about leasing transactions. The guidance is to be applied upon adoption of Topic 842 and is effective for years beginning after December 15, 2018. Also in July 2018, the FASB issued ASU
No. 2018-11, Leases. ASU 2018-11 provides clarification and an additional (and optional) transition method to adopt the new leases standard. The guidance is to be applied upon adoption of Topic 842 and is effective for years beginning after December
15, 2018. In March 2019, the FASB issued ASU No. 2019-01, Leases (Topic 842): Codification Improvements. ASU No. 2019-01 aligns the new leases guidance with existing guidance for the fair value of the underlying asset by lessors that are not
manufacturers or dealers and clarifies an exemption for lessors and lessees from a certain interim disclosure requirement associated with adopting the FASB’s new lease accounting standard. The guidance is to be applied upon adoption of Topic 842 and
is effective for years beginning after December 15, 2018. See Note 3 – Right-of-Use Assets.
Upcoming
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740). The amendments in this update simplify the accounting for income taxes by
removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. Early adoption of the amendments is
permitted. For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The adoption of this amendment will not have a material impact on
the consolidated financial statements of the Company.
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.
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 2010, the Company was contacted by the State of Illinois regarding potential ground contamination at its plant in Wheeling, Illinois. The Company entered
into a voluntary remediation program in Illinois and engaged an environmental clean-up company to perform testing and develop a remediation plan. Since 2010, the environmental company completed a number of tests and the design of a final remediation
system was approved in the second quarter of 2018. As of the end of the of 2019, the remediation plan was completed. The State of Illinois has received the documentation related to the remediation and is in the process of approving the final
documentation. The total estimated cost for the remediation system is anticipated to be approximately $50,000, which the Company previously accrued for and expensed in prior years.
In 2016, the Company created a plan to remediate a landfill of spent foundry sand maintained at the Company’s metal casting facility in New York. This plan
was agreed to by the New York Department of Environmental Conservation (the “DEC”) 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 New York
State Department of Environmental Conservation (the “NYSDEC”). Long-term groundwater monitoring commenced in April of 2019. Verbal approval for the closure plan was received from the NYSDEC in May of 2019. Written approval is anticipated in the
first quarter of 2020. Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap, is anticipated in spring of 2020. In the Summer of 2020, following the completion of construction
work, a closure report and maintenance plan will be prepared for the NYSDEC. This closure report and maintenance plan will document the work done and request acknowledgment of satisfactory completion of the Order on Consent between Frazer and Jones,
and the NYSDEC.
15. Concentration of risk
Credit Risk
Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to
the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As of
December 28, 2019 and December 29, 2018, there were no significant concentrations of credit risk. One customer exceeded 10% of total accounts receivable for 2019. No customer exceeded 10% of total accounts receivable for 2018. The maximum exposure
to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.
Interest Rate Risk
The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based
on the LIBOR rate plus a margin spread of 1.25% to 2.25%. The Company has an interest rate swap with a notional amount of $50,000,000 on December 28, 2019 to convert a portion of its 2019 Credit Agreement from variable to fixed rates. The valuation of
this swap is determined using the three month LIBOR rate index and mitigates the Company’s exposure to interest rate risk. Additionally, interest rates on the Company’s debt are susceptible to changes to the method that LIBOR rates are determined and
to the potential phasing out of LIBOR after 2021. More information regarding the potential phasing out of LIBOR is discussed in greater detail under Note 7 to Consolidated Financial Statements.
Currency Exchange Rate Risk
The Company’s currency exposure is concentrated in the Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB, Hong Kong dollar and United Kingdom
pound sterling. Because of the Company’s limited exposure to any single foreign market, any exchange gains or losses have not been material and are not expected to be material in the future. As a result, the Company
The Eastern Company
Notes to Consolidated Financial Statements (continued)
15. Concentration of risk (continued)
does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments.