Notes to Consolidated Financial Statements
1. DESCRIPTION OF BUSINESS
The Eastern Company (the “Company,” “Eastern,” “we,” “us” or “our”) manages industrial businesses that design, manufacture and sell engineered solutions to industrial markets. Eastern’s businesses operate in industries with long-term macroeconomic growth opportunities. We look to acquire businesses that produce stable and growing earnings and cash flows. Eastern may pursue acquisitions in industries other than those in which its businesses currently operate if an acquisition presents an attractive opportunity.
Eastern focuses on proactive financial, operational, and strategic management of its businesses in order to increase cash generation, operating earnings and long-term shareholder value.
Eastern encompasses seven operating entities within the United States, two wholly-owned Canadian subsidiaries (one located in Tillsonburg, Ontario, Canada, and one in Cambridge, Ontario, Canada), a wholly-owned Taiwanese subsidiary located in Taipei, Taiwan, a wholly-owned subsidiary in Hong Kong, two wholly-owned Chinese subsidiaries (one located in Shanghai, China, and one located in Dongguan, China), a wholly-owned subsidiary in Reynosa, Mexico) and a wholly owned subsidiary in Wrexham, United Kingdom. The Company reports in two business segments: Engineered Solutions and Diversified Products.
Engineered Solutions
The Engineered Solutions segment consists of Big 3 Precision, including Big 3 Products and Big 3 Mold (each as defined below), Hallink Moulds, Inc. (“Hallink Moulds”) and Associated Toolmakers Ltd. (as defined below); Eberhard Manufacturing Company, Eberhard Hardware Manufacturing Ltd., and Eastern Industrial Ltd; Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries Ltd. (together “Eberhard”); and Velvac Holdings (“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, mirror-cameras.
Big 3 Products and Big 3 Mold offer turnkey returnable packaging solutions that are used in the assembly process of vehicles, aircraft and durable goods and in the production process of plastic packaging products, packaged consumer goods and pharmaceuticals. Big 3 Products works with manufacturers to design and produce custom returnable packaging to integrate with their assembly processes. Big 3 Mold designs and manufactures blow mold tools. Hallink Moulds manufactures injection blow mold tooling and is a supplier of blow molds and change parts to the food, beverage, healthcare and chemical industry. Hallink Moulds 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 the Eberhard Manufacturing Company and The Illinois Lock Company to create Eberhard, a global leader 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 original equipment manufacturers (“OEMs”) and customer applications. Eberhard’s products are found in various ranges of applications and products globally.
Velvac is a designer and manufacturer of proprietary vision technology for OEMs and aftermarket applications, and a leading provider of aftermarket components to the heavy-duty truck market in North America. Velvac serves diverse, niche segments within the heavy- and medium-duty truck, motorhome, and bus markets.
Diversified Products
The Diversified Products segment consists of Frazer & Jones, Greenwald Industries (“Greenwald”); and Argo EMS (formerly Argo Transdata). Frazer & Jones designs and manufactures high quality ductile and malleable iron castings. Products include valves, torque screws, bean clamps and concrete anchors. These products are sold to a wide range of industrial markets, including oil, water and gas; truck/automotive rail, and military/aerospace. The Company believes Frazer & Jones is a producer of expansion shells for use in supporting the roofs of underground mines in North America. 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 OEMs 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)
Sales are made to customers primarily in North America.
2. BUSINESS ACQUISITIONS
Hallink Moulds, Inc.
Effective August 10, 2020 the Company acquired certain assets, including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights and rights existing under all sales and purchase agreements, and assumed certain liabilities, of Hallink, RSB Inc. These assets are held in our subsidiary, Hallink Moulds. Hallink Moulds produces injection blow mold tooling and is a supplier of blow molds and change parts to the food, beverage, healthcare and chemical industry. Hallink Moulds 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.
Hallink Moulds is included in the Engineered Solutions segment of the Company from the date of the acquisition. The cost of the acquisition of Hallink Moulds was approximately $7,173,000.
The above acquisition was accounted for under ASU 2014-18, Business Combinations (Topic 805). The acquired business is included in the consolidated operating results of the Company from the effective date of the acquisition. The excess of the cost of Hallink Moulds over the fair market value of the net assets acquired of $2,302,000 has been recorded as goodwill. An independent third party was utilized to establish the fair market value of net assets acquired.
In connection with the above acquisition, the Company recorded the following intangible assets:
Asset Class/Description
|
|
Amount
|
|
|
|
Weighted-Average Period in Years
|
|
Patents, technology, and licenses
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
2,345,000
|
|
|
|
6
|
|
Intellectual property
|
|
|
591,000
|
|
|
|
6
|
|
Non-compete agreements
|
|
|
1,001,000
|
|
|
|
5
|
|
|
|
$
|
3,937,000
|
|
|
|
|
|
There is no anticipated residual value relating to these intangible assets.
Big 3 Precision
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. On August 30, 2019, pursuant to the Stock Purchase Agreement, the Company, through EES, acquired all of the outstanding equity interests of Big 3 Products and Big 3 Mold, and indirectly through them, all of the outstanding equity interests in Design Innovations, Sur-Form and Associated, for an adjusted purchase cash price of $81.2 million (the “Big 3 Precision Acquisition”). The Big 3 Precision 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 Products works with leading manufacturers to design and produce custom returnable packaging to integrate with their assembly processes. Big 3 Mold designs and manufactures blow mold tools.
Notes to Consolidated Financial Statements (continued)
2. BUSINESS ACQUISITIONS (continued)
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. An independent third party was utilized to establish the fair market value of net assets acquired.
At August 30, 2019:
Consideration
|
|
|
|
Cash
|
|
$
|
338,714
|
|
Cash proceeds from debt
|
|
|
80,817,039
|
|
|
|
$
|
81,155,753
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed
|
|
|
|
|
Accounts receivable
|
|
$
|
13,649,937
|
|
Inventory
|
|
|
3,240,382
|
|
Prepaid and other assets
|
|
|
32,268
|
|
Property plant and equipment
|
|
|
13,770,170
|
|
Other noncurrent assets
|
|
|
1,337,337
|
|
Other intangible assets
|
|
|
21,054,000
|
|
Current liabilities
|
|
|
(4,910,384
|
)
|
Deferred revenue
|
|
|
(1,585,709
|
)
|
Income tax payable
|
|
|
(2,039,117
|
)
|
Note payable
|
|
|
(375,379
|
)
|
Deferred tax liabilities
|
|
|
(7,114,732
|
)
|
Total identifiable net assets
|
|
|
37,058,773
|
|
Goodwill
|
|
|
44,096,980
|
|
|
|
$
|
81,155,753
|
|
Accounts Receivable
Acquired receivables are amounts due from customers, with fair value based on net realizable value.
Inventories
The estimated fair value of inventories acquired, which are 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 fair 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 $2,302,000 arising from the acquisition of Hallink Moulds consists of the difference between the consideration paid and the fair value of the assets and liabilities acquired.
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 were acquisition expenses for the twelve-month period ended January 2, 2021 of $299,531.
3. ACCOUNTING POLICIES
Fiscal Year
The Company’s year ends on the Saturday nearest to December 31. Based on this policy, fiscal year 2020 was comprised of 53 weeks and fiscal 2019 included 52 weeks. References in these Notes to the consolidated financial statements to “2020” or “fiscal year 2020” mean the fiscal year ended January 2, 2021, and references to “2019” or “fiscal year 2019” mean the fiscal year ended December 28, 2019. References to the “fourth quarter of 2020” or the “fourth fiscal quarter of 2020” mean the thirteen-week period from October 4, 2020 to January 2, 2021, and references to the “fourth quarter of 2019” or the “fourth fiscal quarter of 2019” mean the thirteen-week period from September 29, 2019 to December 28, 2019.
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 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.
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. An adjustment has been made to the Consolidated Balance Sheet for fiscal year ended December 28, 2019 to reclassify customer funded projects from fixed assets to prepaid expenses and other current assets.
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 38% 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.
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. ($27.9 million for U.S. inventories at January 2, 2021, excluding Big 3 Precision and Velvac) and by the first-in, first-out (FIFO) method for inventories outside the U.S. ($5.8 million for inventories outside the U.S. at January 2, 2021) and for Big 3 Precision and Velvac. Cost exceeds the LIFO carrying value by approximately $6.8 million at January 2, 2021 and $6.7 million at December 28, 2019. There was no material LIFO quantity liquidation in 2020 or 2019. In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete inventory.
Property, Plant and Equipment and Related Depreciation
Property, plant and equipment (including equipment under capital lease) are stated at cost. Depreciation expense ($4,843,134 in 2020, $4,722,758 in 2019) 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 its 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 January 2, 2021 and for the period December 28, 2019.
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.
In the second quarter of 2020, management determined that the estimated fair value of Greenwald Industries was likely below its carrying amount. The factors that led to this determination included additional competition, industry movement away from legacy products and intense competition in new mobile payment apps. This fundamental shift in lower cost mobile payment systems away from the higher cost electronic smart card payment systems resulted in our belief that the carrying value of Greenwald exceeded its fair value. As a result, an independent valuation was conducted which estimated that the carrying value exceeded the fair value by approximately $4.0 million. Management recognized this impairment charge in the second quarter.
In December, 2020 the Company announced that the Eberhard Hardware Manufacturing Ltd. subsidiary in Ontario, Canada would be closed and all tangible assets would be moved to Eberhard Manufacturing division in Cleveland, Ohio. As a result, approximately $1.0 million of goodwill associated with Eberhard Hardware Manufacturing Ltd. was impaired and written off the books in December 2020. Management recognized this impairment charge in the fourth quarter of 2020.
The Company performed qualitative assessments of goodwill as of the end of fiscal 2019 and determined it was more likely than not that no impairment existed at the end of 2019.
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.
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 amortized using the straight-line method over a period of 5 years. Amortization expense in 2020 and 2019 was $3,634,378 and $1,726,539, 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. No impairment losses were recognized for the period ended January 2, 2021 and for the period December 28, 2019.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
|
|
|
Level 2
|
Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
|
|
|
Level 3
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.
|
The Company’s financial instruments are primarily investments in pension assets, see Note 10, Retirement Benefit Plans, and 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 January 2, 2021 and December 28, 2019, approximate fair value based on the expected future cash flows of the related instruments.
Leases
The Company presents right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company elected to account for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.
The Company has operating leases for buildings, warehouse and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all of the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. The Company’s option to extend certain leases ranges from 1–119 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.
Currently, the Company has 35 operating leases and three finance leases with a lease liability of $12.8 million as of January 2, 2021. The finance lease arrangements are immaterial. The basis, terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. We rent or sublease a part of one real estate property to a third party. 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.
Total lease expense for each of the next five fiscal years is estimated to be as follows: 2021 - $2,923,761; 2022 - $2,262,399; 2023 - $1,872,491; 2024 - $1,481,832; 2025 - $844,884 and $3,421,563 thereafter. The weighted average remaining lease term is 6.8 years. The interest rate used was 3.5% - 5.0%.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606 when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The Company 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 trends and the Company’s assessment of the customer’s credit worthiness. As of January 2, 2021 and December 28, 2019, the Company’s allowance for doubtful accounts total was $545,000 and $556,000, respectively. As of January 2, 2021, and December 28, 2019, the Company’s bad debt expense was $253,000 and $64,000 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 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 $505,000 for the year ended January 2, 2021 and $576,000 for the year ended December 28, 2019.
Based on historical experience, the Company does not accrue a reserve for product returns. For the years ended January 2, 2021 and December 28, 2019, the Company recorded sales returns of $459,000 and $613,000, 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 January 2, 2021 and December 28, 2019, Greenwald Industries subscription services revenue was $441,000 and $567,000, 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 January 2, 2021 and December 28, 2019, the Company recorded no revenues related to performance obligations satisfied in prior periods. The Company has elected to use the practical expedient to exclude disclosure of transaction prices allocated to remaining performance obligations, and when the Company expects to recognize such revenue, for all periods prior to the date of initial application of the standard.
See Note 12 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 $3,131,035 in 2020 and $6,024,567 in 2019.
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 $303,060 in 2020 and $462,911 in 2019.
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.
Under the terms of the Director’s Fee Program, the directors receive their Director’s fees in common shares of the Company.
Income Taxes
The Company and its U.S. subsidiaries file a consolidated federal income tax return.
Deferred tax assets and liabilities are determined based on differences between financial reporting and tax 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 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.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
4. GOODWILL
The following is a roll-forward of goodwill for 2020 and 2019:
|
|
Engineered
|
|
|
Diversified
|
|
|
|
|
|
|
Solutions
|
|
|
Products
|
|
|
Total
|
|
2020
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
69,614,627
|
|
|
$
|
9,903,385
|
|
|
$
|
79,518,012
|
|
Investment in Hallink Moulds
|
|
|
2,302,000
|
|
|
|
-
|
|
|
|
2,302,000
|
|
Impairment Charge
|
|
|
(972,824
|
)
|
|
|
(4,002,548
|
)
|
|
|
(4,975,372
|
)
|
Foreign Exchange
|
|
|
50,375
|
|
|
|
-
|
|
|
|
50,375
|
|
Ending Balance
|
|
$
|
70,994,178
|
|
|
$
|
5,900,837
|
|
|
$
|
76,895,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineered
|
|
|
Diversified
|
|
|
|
|
|
|
|
Solutions
|
|
|
Products
|
|
|
Total
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Balance
|
|
$
|
24,936,991
|
|
|
$
|
9,903,385
|
|
|
$
|
34,840,376
|
|
Investment in Big 3 Precision
|
|
|
44,636,744
|
|
|
|
-
|
|
|
|
44,636,744
|
|
Foreign Exchange
|
|
|
40,892
|
|
|
|
-
|
|
|
|
40,892
|
|
Ending Balance
|
|
$
|
69,614,627
|
|
|
$
|
9,903,385
|
|
|
$
|
79,518,012
|
|
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: 2021 - $3.8 million; 2022 - $3.8 million; 2023 - $3.8 million; 2024 - $3.0 million and 2025 - $3.0 million.
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Engineered
|
|
|
Diversified
|
|
|
|
|
|
Amortization
|
|
|
|
Solutions
|
|
|
Products
|
|
|
Total
|
|
|
Period (Years)
|
|
2020 Gross Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and developed technology
|
|
$
|
7,063,510
|
|
|
$
|
386,828
|
|
|
$
|
7,450,338
|
|
|
|
9.3
|
|
Customer relationships
|
|
|
26,030,122
|
|
|
|
-
|
|
|
|
26,030,122
|
|
|
|
8.6
|
|
Non-compete agreements
|
|
|
1,107,243
|
|
|
|
-
|
|
|
|
1,107,243
|
|
|
|
4.3
|
|
Intellectual property
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Total Gross Intangibles
|
|
$
|
34,200,875
|
|
|
$
|
386,828
|
|
|
$
|
34,587,703
|
|
|
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and developed technology
|
|
$
|
2,262,507
|
|
|
$
|
379,893
|
|
|
$
|
2,642,400
|
|
|
|
|
|
Customer relationships
|
|
|
4,742,839
|
|
|
|
-
|
|
|
|
4,742,839
|
|
|
|
|
|
Non-compete agreements
|
|
|
106,458
|
|
|
|
-
|
|
|
|
106,458
|
|
|
|
|
|
Intellectual property
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Accumulated Amortization
|
|
$
|
7,111,804
|
|
|
$
|
379,893
|
|
|
$
|
7,491,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net 2020 per Balance Sheet
|
|
$
|
27,089,071
|
|
|
$
|
6,935
|
|
|
$
|
27,096,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Gross Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and developed technology
|
|
$
|
6,607,802
|
|
|
$
|
386,828
|
|
|
$
|
6,994,630
|
|
|
|
10.2
|
|
Customer relationships
|
|
|
23,588,675
|
|
|
|
449,706
|
|
|
|
24,038,381
|
|
|
|
9.6
|
|
Non-compete agreements
|
|
|
64,570
|
|
|
|
407,000
|
|
|
|
471,570
|
|
|
|
1.9
|
|
Intellectual property
|
|
|
-
|
|
|
|
307,370
|
|
|
|
307,370
|
|
|
|
2.0
|
|
Total Gross Intangibles
|
|
$
|
30,261,047
|
|
|
$
|
1,550,904
|
|
|
$
|
31,811,951
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Accumulated Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and developed technology
|
|
$
|
1,941,060
|
|
|
$
|
353,093
|
|
|
$
|
2,294,153
|
|
|
|
|
|
Customer relationships
|
|
|
1,882,781
|
|
|
|
449,706
|
|
|
|
2,332,487
|
|
|
|
|
|
Non-compete agreements
|
|
|
10,832
|
|
|
|
407,000
|
|
|
|
417,832
|
|
|
|
|
|
Intellectual property
|
|
|
-
|
|
|
|
307,369
|
|
|
|
307,369
|
|
|
|
|
|
Accumulated Amortization
|
|
$
|
3,834,673
|
|
|
$
|
1,517,168
|
|
|
$
|
5,351,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net 2019 per Balance Sheet
|
|
$
|
26,426,374
|
|
|
$
|
33,736
|
|
|
$
|
26,460,110
|
|
|
|
|
|
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 and 2020, 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 January 2, 2021, the interest rate for half ($41.9 million) of the term portion was 1.9%, using a one-month LIBOR rate, and 3.19% one the remaining balance ($46.9 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 Financial Conduct Authority (the “FCA”) (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. The ICE Benchmark Administration (the “IBA”) recently announced market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023, which the FCA supports. The Alternative Reference Rates Committee (the “ARRC”), a financial industry group convened by the Federal Reserve Board, has recommended the use of the Secured Overnight Financing Rate (“SOFR”) to replace LIBOR. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate, which has implications for how interest and other payments are based. Changes in the method of calculating the replacement of LIBOR with an alternative rate or benchmark are still in flux, and once an alternative rate is adopted, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect the Company’s results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks at this time. We are working with our senior lender and may need to renegotiate our credit facilities as LIBOR phases out in June 2023.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
6. DEBT (continued)
Debt consists of:
|
|
2020
|
|
|
2019
|
|
Term loans
|
|
$
|
88,693,492
|
|
|
$
|
98,765,233
|
|
Revolving credit loan
|
|
|
—
|
|
|
|
—
|
|
|
|
|
88,693,492
|
|
|
|
98,765,233
|
|
Less current portion
|
|
|
6,437,689
|
|
|
|
5,187,689
|
|
|
|
$
|
82,255,803
|
|
|
$
|
93,577,554
|
|
1 Amounts are net of unamortized discounts and debt issuance costs of $273,312 as of January 2, 2021 and $360,146 as of December 28, 2019.
The Company paid interest of $2,754,980 in 2020, $1,857,961 in 2019.
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 January 2, 2021. 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 2020 and 2019.
As of January 2, 2021, scheduled annual principal maturities of long-term debt for each of the next five years follow:
2021
|
|
$
|
6,437,689
|
|
2022
|
|
|
7,500,000
|
|
2023
|
|
|
8,750,000
|
|
2024
|
|
|
66,005,803
|
|
Thereafter
|
|
|
—
|
|
|
|
$
|
88,693,492
|
|
7. STOCK OPTIONS AND AWARDS
Stock Options
As of January 2, 2021, the Company has one stock option plan, The Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”), for officers, other key employees, and non-employee Directors. The Eastern Company 2010 Executive Stock Incentive Plan expired in February 2020. Incentive stock options 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 options 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 options granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors. During 2020 and 2019, the Company did not grant stock options or restricted stock.
The 2020 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. The Company issued 44,000 SARs during 2020 and 96,000 SARs during 2019.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
Stock-based compensation expense in connection with Stock Awards and SARs granted to employees during fiscal year 2020 was $376,000 and for 2019 was $397,000. For the period of 2020, the Company used several assumptions which included an expected term of 4 years, volatility deviation of 38.62% and a risk-free rate of 0.26%. 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%.
As of January 2, 2021, there were 818,864 shares of common stock reserved and available for future grant under the above noted 2020 Plan.
The following tables set forth the outstanding SARs for the period specified:
|
|
Year Ended
January 2, 2021
|
|
|
Year Ended
December 28, 2019
|
|
|
|
Units
|
|
|
Weighted - Average Exercise Price
|
|
|
Units
|
|
|
Weighted - Average Exercise Price
|
|
Outstanding at beginning of period
|
|
|
276,000
|
|
|
$
|
22.30
|
|
|
|
189,167
|
|
|
$
|
21.46
|
|
Issued
|
|
|
44,000
|
|
|
|
20.20
|
|
|
|
96,000
|
|
|
|
23.65
|
|
Exercised
|
|
|
--
|
|
|
|
--
|
|
|
|
(1,667
|
)
|
|
|
19.10
|
|
Forfeited
|
|
|
(75,999
|
)
|
|
|
22.00
|
|
|
|
(7,500
|
)
|
|
|
21.20
|
|
Outstanding at end of period
|
|
|
244,001
|
|
|
|
21.87
|
|
|
|
276,000
|
|
|
|
22.30
|
|
SARs Outstanding and Exercisable
|
Range of Exercise Prices
|
|
Outstanding as of
January 2, 2021
|
|
|
Weighted- Average Remaining Contractual Life
|
|
|
Weighted- Average Exercise Price
|
|
|
Exercisable as of
January 2, 2021
|
|
|
Weighted- Average Remaining Contractual Life
|
|
|
Weighted- Average Exercise Price
|
|
$
|
19.10-26.30
|
|
|
244,001
|
|
|
|
2.3
|
|
|
$
|
21.87
|
|
|
|
71,172
|
|
|
|
1.3
|
|
|
$
|
20.38
|
|
The following tables set forth the outstanding stock grants for the period specified:
|
|
Year Ended
January 2, 2021
|
|
|
Year Ended
December 28, 2019
|
|
|
|
Shares
|
|
|
Weighted - Average Exercise Price
|
|
|
Shares
|
|
|
Weighted - Average Exercise Price
|
|
Outstanding at beginning of period
|
|
|
25,000
|
|
|
$
|
—
|
|
|
|
25,000
|
|
|
$
|
—
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at end of period
|
|
|
25,000
|
|
|
|
—
|
|
|
|
25,000
|
|
|
|
—
|
|
The Eastern Company
Notes to Consolidated Financial Statements (continued)
7. STOCK OPTIONS AND AWARDS (continued)
Stock Grants Outstanding and Exercisable
|
Range of Exercise Prices
|
|
|
Outstanding as of
January 2, 2021
|
|
|
Weighted- Average Remaining Contractual Life
|
|
|
Weighted- Average Exercise Price
|
|
|
Exercisable as of
January 2, 2021
|
|
|
Weighted- Average Remaining Contractual Life
|
|
|
Weighted- Average Exercise Price
|
|
|
—
|
|
|
|
25,000
|
|
|
|
1.3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
As of January 2, 2021, outstanding SARs and options had an intrinsic value of $1,253,140.
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:
|
|
2020
|
|
|
2019
|
|
Property, plant and equipment
|
|
$
|
4,460,316
|
|
|
$
|
4,638,141
|
|
Right of Use Asset
|
|
|
3,014,148
|
|
|
|
2,933,189
|
|
Intangible assets
|
|
|
8,913,638
|
|
|
|
9,236,711
|
|
Other
|
|
|
|
|
|
|
380,336
|
|
Foreign Withholding Tax
|
|
|
250,432
|
|
|
|
315,747
|
|
Total deferred income tax liabilities
|
|
|
16,638,534
|
|
|
|
17,504,124
|
|
|
|
|
|
|
|
|
|
|
Other postretirement benefits
|
|
|
(279,776
|
)
|
|
|
(239,348
|
)
|
Inventories
|
|
|
(1,091,887
|
)
|
|
|
(1,422,472
|
)
|
Allowance for doubtful accounts
|
|
|
(120,150
|
)
|
|
|
(123,172
|
)
|
Accrued compensation
|
|
|
(399,057
|
)
|
|
|
(311,125
|
)
|
Lease Obligation
|
|
|
(3,014,148
|
)
|
|
|
(2,933,189
|
)
|
Pensions
|
|
|
(7,761,369
|
)
|
|
|
(6,804,275
|
)
|
Foreign Tax Credit
|
|
|
(976,000
|
)
|
|
|
(400,078
|
)
|
Other
|
|
|
(97,072
|
)
|
|
|
--
|
|
Total deferred income tax assets
|
|
|
(13,739,459
|
)
|
|
|
(12,233,659
|
)
|
Net deferred income tax (assets) liabilities
|
|
$
|
2,899,075
|
|
|
$
|
5,270,465
|
|
Income before income taxes consists of:
|
|
2020
|
|
|
2019
|
|
Domestic
|
|
$
|
5,196,096
|
|
|
$
|
12,537,168
|
|
Foreign
|
|
|
829,516
|
|
|
|
3,668,803
|
|
|
|
$
|
6,025,612
|
|
|
$
|
16,205,971
|
|
The Eastern Company
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (continued)
The provision for income taxes follows:
|
|
2020
|
|
|
2019
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
(503,106
|
)
|
|
$
|
2,783,481
|
|
Foreign
|
|
|
1,096,839
|
|
|
|
1,001,270
|
|
State
|
|
|
223,978
|
|
|
|
489,921
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(46,555
|
)
|
|
|
(756,206
|
)
|
Foreign
|
|
|
(65,315
|
)
|
|
|
(225,014
|
)
|
State
|
|
|
(85,751
|
)
|
|
|
(353,623
|
)
|
|
|
$
|
620,090
|
|
|
$
|
2,939,829
|
|
A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows:
|
|
2020
|
|
|
2019
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
Income taxes using U.S. federal statutory rate
|
|
$
|
1,265,378
|
|
|
|
21
|
%
|
|
$
|
3,403,254
|
|
|
|
21
|
%
|
State income taxes, net of federal benefit
|
|
|
96,742
|
|
|
|
1
|
|
|
|
117,276
|
|
|
|
1
|
|
Impact on Foreign Repatriation Tax Reform
|
|
|
139,765
|
|
|
|
2
|
|
|
|
--
|
|
|
|
0
|
|
Impact of foreign subsidiaries on effective tax rate
|
|
|
165,210
|
|
|
|
3
|
|
|
|
(239,823
|
)
|
|
|
(2
|
)
|
Impact of Research & Development tax credit
|
|
|
(188,944
|
)
|
|
|
(3
|
)
|
|
|
(411,090
|
)
|
|
|
(3
|
)
|
Uncertain tax positions reserve
|
|
|
(926,101
|
)
|
|
|
(15
|
)
|
|
|
0
|
|
|
|
0
|
|
Other—net
|
|
|
68,040
|
|
|
|
1
|
|
|
|
70,212
|
|
|
|
1
|
|
|
|
$
|
620,090
|
|
|
|
10
|
%
|
|
$
|
2,939,829
|
|
|
|
18
|
%
|
Total income taxes paid were $3,755,475 in 2020 and $3,197,984 in 2019.
Pursuant to SAB 118, 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 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 at January 2, 2021 on approximately $7,712,164 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. 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 will adopt ASU 2019-12 in the first interim period of 2021.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
8. INCOME TAXES (continued)
On March 27, 2020, the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (the “CARES Act”) became law. The CARES Act includes a variety of economic and tax relief measures intended to stimulate the economy, including loans for small businesses, payroll tax credits/deferrals, and corporate income tax relief. We are analyzing the following components of the CARES Act to determine their effect on our income tax provision:
|
·
|
Net operating losses arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years, which may result in refunds of prior period corporate income tax. The Company had taxable income in 2018 and 2019, thus we would only benefit from this item of CARES Act relief to the extent we incur a tax net operating loss in 2020 that can be carried back. As of October 3, 2020, a tax net operating loss is not expected for taxable year 2020. In addition, this item of CARES Act relief increased the positive evidence supporting utilization of our gross deferred tax assets due to available income in carryback years; this did not change our overall assessment as we do not have a valuation allowance recorded against our deferred tax assets.
|
|
|
|
|
·
|
Furthermore, for taxable years beginning before 2021, net operating loss carryforwards and carrybacks to that year may offset 100% of taxable income in the year. Previously, net operating losses generated through 2017 could offset 100% of taxable income, while losses generated after 2017 could only offset 80% of taxable income. The Company had taxable income in 2018 and 2019 and would carry back a loss generated in 2020 if applicable, leaving minimal opportunity to benefit from this item of CARES Act relief.
|
|
|
|
|
·
|
For taxable years beginning in 2019 and 2020, the interest deduction limitation is increased from 30% to 50% of “adjusted taxable income” (taxable income without interest, tax depreciation and tax amortization) plus interest income. Furthermore, the Company may choose to use the 2019 adjusted taxable income (instead of 2020) in determining the 2020 interest expense limitation. The Company was not subject to an interest limitation in 2019 and therefore expects to use the 2019 adjusted taxable income if needed to avoid or reduce an interest expense limitation in 2020.
|
|
|
|
|
·
|
A technical correction to the Tax Cuts and Jobs Act permits bonus depreciation and a 15-year straight-line recovery period on qualified improvement property placed in service after December 31, 2017. Prior to this technical correction, such property placed in service after 2017 was subject to the 39-year straight-line recovery period and was ineligible for bonus depreciation. To the extent the Company has eligible improvements in 2020, the Company can claim bonus depreciation which would reduce taxes payable and increase the deferred tax liability for fixed assets.
|
|
|
|
|
·
|
Other CARES Act corporate income tax provisions will not significantly impact the Company, including alternative minimum tax refunds and increases in the charitable contributions deduction limitation.
|
The Company will also continue to assess the effect of state level tax relief provisions as enacted, such as state net operating loss rule changes and conformity to the federal interest, depreciation and charitable contribution deduction changes.
A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
2,407,382
|
|
|
$
|
299,722
|
|
Increase (decrease) for positions taken during the current period
|
|
|
(28,637
|
)
|
|
|
137,927
|
|
Increase (decrease) for positions taken during the prior period
|
|
|
--
|
|
|
|
2,039,117
|
|
Increase (decrease) resulting from the expiration of the statute of limitations
|
|
|
(1,300,436
|
)
|
|
|
(69,384
|
)
|
Balance at end of year
|
|
$
|
1,078,309
|
|
|
$
|
2,407,382
|
|
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 2016 and non-U.S. income tax examinations by tax authorities prior to 2014.
Included in the balance at January 2, 2021, are $653,204 of unrecognized tax benefits that would affect the annual effective tax rate. In 2020, the Company recognized accrued interest related to unrecognized tax benefits in income tax expense. The Company had approximately $56,105 of accrued interest at January 2, 2021.
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:
2021
|
|
$
|
2,923,761
|
|
2022
|
|
|
2,262,399
|
|
2023
|
|
|
1,872,491
|
|
2024
|
|
|
1,481,832
|
|
2025
|
|
|
844,884
|
|
|
|
$
|
9,385,367
|
|
Rent expense for all operating leases was $2,840,908 in 2020 and $3,106,630 in 2019. The weighted average lease term for all operating leases is 6.8 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 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:
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
|
|
2020
|
|
|
2019
|
|
Service cost
|
|
$
|
1,065,739
|
|
|
$
|
1,055,410
|
|
Interest cost
|
|
|
2,856,569
|
|
|
|
3,516,318
|
|
Expected return on plan assets
|
|
|
(5,461,044
|
)
|
|
|
(4,761,320
|
)
|
Amortization of prior service cost
|
|
|
99,380
|
|
|
|
99,380
|
|
Amortization of the net loss
|
|
|
1,300,134
|
|
|
|
1,162,196
|
|
Net periodic benefit cost
|
|
$
|
(139,222
|
)
|
|
$
|
1,071,984
|
|
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.
Assumptions used to determine net periodic benefit cost for the Company’s pension benefit plans for the fiscal year indicated were as follows:
|
|
2020
|
|
|
2019
|
|
Discount rate
|
|
|
|
|
|
|
- Pension plans
|
|
3.18% - 3.23
|
%
|
|
4.20% - 4.22
|
%
|
- Supplemental pension plans
|
|
|
2.61
|
%
|
|
|
3.81
|
%
|
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:
|
|
2020
|
|
|
2019
|
|
Service cost
|
|
$
|
43,418
|
|
|
$
|
33,287
|
|
Interest cost
|
|
|
46,668
|
|
|
|
56,755
|
|
Expected return on plan assets
|
|
|
(22,355
|
)
|
|
|
(28,033
|
)
|
Amortization of prior service cost
|
|
|
(8,253
|
)
|
|
|
(5,072
|
)
|
Amortization of the net loss
|
|
|
(25,509
|
)
|
|
|
(47,272
|
)
|
Net periodic benefit cost
|
|
$
|
33,969
|
|
|
$
|
9,665
|
|
Assumptions used to determine net periodic benefit cost for the Company’s other postretirement plan for the fiscal year indicated were as follows:
|
|
2020
|
|
|
2019
|
|
Discount rate
|
|
|
3.35
|
%
|
|
|
4.26
|
%
|
Expected return on plan assets
|
|
|
4.0
|
%
|
|
|
4.0
|
%
|
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
As of January 2, 2021, and December 28, 2019, the status of the Company’s pension benefit plans and other postretirement benefit plan was as follows:
|
|
Pension Benefit
|
|
|
Other Postretirement Benefit
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Benefit obligation at beginning of year
|
|
$
|
102,991,053
|
|
|
$
|
91,533,200
|
|
|
$
|
1,566,019
|
|
|
$
|
2,096,761
|
|
Change in discount rate
|
|
|
10,606,709
|
|
|
|
12,313,831
|
|
|
|
218,000
|
|
|
|
239,138
|
|
Service cost
|
|
|
1,065,739
|
|
|
|
1,055,410
|
|
|
|
43,418
|
|
|
|
33,287
|
|
Interest cost
|
|
|
2,856,569
|
|
|
|
3,516,318
|
|
|
|
46,668
|
|
|
|
56,755
|
|
Actuarial (gain)/loss
|
|
|
(1,786,595
|
)
|
|
|
(1,508,935
|
)
|
|
|
32,282
|
|
|
|
77,813
|
|
Significant Event
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(902,719
|
)
|
Benefits paid
|
|
|
(4,183,750
|
)
|
|
|
(3,918,781
|
)
|
|
|
(14,654
|
)
|
|
|
(35,016
|
)
|
Benefit obligation at end of year
|
|
$
|
111,549,725
|
|
|
$
|
102,991,043
|
|
|
$
|
1,827,169
|
|
|
$
|
1,566,019
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Fair value of plan assets at beginning of year
|
|
$
|
74,359,558
|
|
|
$
|
66,170,875
|
|
|
$
|
558,873
|
|
|
$
|
1,448,126
|
|
Actual return on plan assets
|
|
|
5,568,671
|
|
|
|
11,803,359
|
|
|
|
83,157
|
|
|
|
13,466
|
|
Employer contributions
|
|
|
2,616,623
|
|
|
|
304,105
|
|
|
|
33,343
|
|
|
|
35,016
|
|
Significant Event
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(902,719
|
)
|
Benefits paid
|
|
|
(4,183,750
|
)
|
|
|
(3,918,781
|
)
|
|
|
(33,343
|
)
|
|
|
(35,016
|
)
|
Fair value of plan assets at end of year
|
|
$
|
78,361,102
|
|
|
$
|
74,359,558
|
|
|
$
|
642,030
|
|
|
$
|
558,873
|
|
|
|
Pension Benefit
|
|
|
Other Postretirement Benefit
|
|
Funded Status
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net amount recognized in the balance sheet
|
|
$
|
(33,188,623
|
)
|
|
$
|
(28,631,485
|
)
|
|
$
|
(1,185,139
|
)
|
|
$
|
(1,007,146
|
)
|
Amounts recognized in accumulated other comprehensive income consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefit
|
|
|
Other Postretirement Benefit
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Net (loss)/gain
|
|
$
|
(43,727,607
|
)
|
|
$
|
(36,315,245
|
)
|
|
$
|
349,276
|
|
|
$
|
499,701
|
|
Prior service (cost) credit
|
|
|
(165,632
|
)
|
|
|
(265,012
|
)
|
|
|
0
|
|
|
|
8,253
|
|
|
|
$
|
(43,893,239
|
)
|
|
$
|
(36,580,257
|
)
|
|
$
|
349,276
|
|
|
$
|
507,954
|
|
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:
|
|
Pension Benefit
|
|
|
Other Postretirement Benefit
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Balance at beginning of period
|
|
$
|
(36,580,267
|
)
|
|
$
|
(34,078,976
|
)
|
|
$
|
507,954
|
|
|
$
|
1,345,959
|
|
Change due to availability of final actual assets and census data
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Charged to net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
99,380
|
|
|
|
99,380
|
|
|
|
(8,253
|
)
|
|
|
(5,072
|
)
|
Net loss (gain)
|
|
|
1,300,134
|
|
|
|
1,162,196
|
|
|
|
(25,509
|
)
|
|
|
(47,272
|
)
|
Liability (gains)/losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
(10,606,709
|
)
|
|
|
(12,313,831
|
)
|
|
|
(218,000
|
)
|
|
|
(239,138
|
)
|
Asset (gains)/losses deferred
|
|
|
6,202,764
|
|
|
|
7,724,649
|
|
|
|
60,802
|
|
|
|
(14,567
|
)
|
Significant Event
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(454,143
|
)
|
Other
|
|
|
(4,308,541
|
)
|
|
|
826,325
|
|
|
|
32,282
|
|
|
|
(77,813
|
)
|
Balance at end of period
|
|
$
|
(43,893,239
|
)
|
|
$
|
(36,580,257
|
)
|
|
$
|
349,276
|
|
|
$
|
507,954
|
|
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:
|
|
|
2020
|
|
|
2019
|
|
Discount rate
|
|
|
|
|
|
|
-
|
Pension plans
|
|
2.40% - 2.48
|
%
|
|
3.18% - 3.23
|
%
|
-
|
Supplemental pension plans
|
|
|
1.49
|
%
|
|
|
2.61
|
%
|
-
|
Other postretirement plan
|
|
|
2.66
|
%
|
|
|
3.35
|
%
|
At January 2, 2021 and December 28 2019, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $111,549,725 and $102,991,053, respectively. During 2020, the pension benefit obligation increased between 10.3% to 11.3% due to the decrease in the discount rates from 3.18%-3.23% to 2.40%-2.48%.
Information for the under-funded pension plans with a projected benefit obligation and an accumulated benefit obligation in excess of plan assets:
|
|
2020
|
|
|
2019
|
|
Number of plans
|
|
|
5
|
|
|
|
5
|
|
Projected benefit obligation
|
|
$
|
111,549,725
|
|
|
$
|
102,991,043
|
|
Accumulated benefit obligation
|
|
|
111,549,725
|
|
|
|
102,991,043
|
|
Fair value of plan assets
|
|
|
78,361,102
|
|
|
|
74,359,558
|
|
Net amount recognized in accrued benefit liability
|
|
$
|
(33,188,623
|
)
|
|
$
|
(28,631,485
|
)
|
Estimated future benefit payments to participants of the Company’s pension plans are $4.4 million in 2021, $4.6 million in 2022, $4.8 million in 2023, $5.0 million in 2024, $5.2 million in 2025 and a total of $28.1 million from 2026 through 2030.
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 $49,000 in 2021, $50,000 in 2022, $51,000 in 2023, $52,000 in 2024, $54,000 in 2025 and a total of $302,000 from 2026 through 2030.
The Company expects to make cash contributions to its qualified pension plans of approximately $3,100,000 and to its other postretirement plan of approximately $50,000 in 2021.
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 2020, as in 2019, 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 January 2, 2021 and December 28, 2019, utilizing the fair value hierarchy discussed in Note 3, follow:
|
|
January 2, 2021
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective trust funds
|
|
$
|
—
|
|
|
$
|
347,538
|
|
|
$
|
—
|
|
|
$
|
347,538
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Eastern Company Common Stock
|
|
|
5,230,134
|
|
|
|
|
|
|
|
—
|
|
|
|
5,230,134
|
|
Common/collective trust funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell Multi Asset Core Plus Fund (a)
|
|
|
—
|
|
|
|
35,139,260
|
|
|
|
—
|
|
|
|
35,139,260
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective trust funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Duration LDI Fixed Income Funds (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• Russell 25 Year LDI Fixed Income Fund
|
|
|
—
|
|
|
|
2,506,615
|
|
|
|
—
|
|
|
|
2,506,615
|
|
• Russell 14 Year LDI Fixed Income Fund
|
|
|
—
|
|
|
|
26,452,904
|
|
|
|
—
|
|
|
|
26,452,904
|
|
STRIPS Fixed Income Funds (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
• Russell 15 to 20 Year STRIPS Fixed Income Fund
|
|
|
—
|
|
|
|
3,500,718
|
|
|
|
—
|
|
|
|
3,500,718
|
|
• Russell 10 to 15 Year STRIPS Fixed Income Fund
|
|
|
—
|
|
|
|
5,183,933
|
|
|
|
—
|
|
|
|
5,183,933
|
|
Total
|
|
$
|
5,230,134
|
|
|
$
|
73,130,968
|
|
|
$
|
—
|
|
|
$
|
78,361,102
|
|
The Eastern Company
Notes to Consolidated Financial Statements (continued)
10. RETIREMENT BENEFIT PLANS (continued)
|
|
December 28, 2019
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Cash and Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective trust funds
|
|
$
|
—
|
|
|
$
|
334,138
|
|
|
$
|
—
|
|
|
$
|
334,138
|
|
Equities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Eastern Company Common Stock
|
|
|
6,625,560
|
|
|
|
|
|
|
|
—
|
|
|
|
6,625,560
|
|
Common/collective trust funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russell Multi Asset Core Plus Fund (a)
|
|
|
—
|
|
|
|
33,413,819
|
|
|
|
—
|
|
|
|
33,413,819
|
|
Fixed Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common/collective trust funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Duration LDI Fixed Income Funds (b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
· Russell 8 Year LDI Fixed Income Fund
|
|
|
—
|
|
|
|
12,796,482
|
|
|
|
—
|
|
|
|
12,796,482
|
|
· Russell 14 Year LDI Fixed Income Fund
|
|
|
—
|
|
|
|
11,387,626
|
|
|
|
—
|
|
|
|
11,387,626
|
|
STRIPS Fixed Income Funds (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
· Russell 15 Year STRIPS Fixed Income Fund
|
|
|
—
|
|
|
|
3,050,389
|
|
|
|
—
|
|
|
|
3,050,389
|
|
· Russell 10 Year STRIPS Fixed Income Fund
|
|
|
—
|
|
|
|
4,616,924
|
|
|
|
—
|
|
|
|
4,616,924
|
|
· Russell 28 to 29 Year STRIPS Fixed Income Fund
|
|
|
—
|
|
|
|
2,134,620
|
|
|
|
—
|
|
|
|
2,134,620
|
|
Total
|
|
$
|
6,625,560
|
|
|
$
|
67,733,998
|
|
|
$
|
—
|
|
|
$
|
74,359,558
|
|
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)
|
(a)
|
The investment objective of the RITC (formerly Russell) Multi-Asset Core Plus Fund seeks to provide long-term growth of capital over a market cycle by offering a diversified portfolio of funds and separate accounts investing in global stock, return seeking fixed income, commodities, global real estate and opportunistic investments. They hold a dynamic mix of underlying Russell Investments funds and/or separate accounts. Russell Investments is a strong proponent of disciplined strategic asset allocation and rebalancing strategies, and believes that unstable movements in the market have the potential to create opportunities. By identifying short-term mispricing, and making small tactical adjustments to the Multi-Asset Core Plus Fund, they believe there is potential to enhance returns while continuing to manage risks.
|
|
|
|
|
(b)
|
The Target Duration LDI Fixed Income Funds seek to outperform their respective Barclays-Russell LDI Indexes over a full market cycle. These Funds invest primarily in investment grade corporate bonds that closely match those found in discount curves used to value U.S. pension liabilities. They seek to provide additional incremental return through modest interest rate timing, security selection and tactical use of non-credit sectors. Generally, for use in combination with other bond funds to gain additional credit exposure, with the goal of reducing the mismatch between a plan’s assets and liabilities.
|
|
|
|
|
(c)
|
The STRIPS (Separate Trading of Registered Interest and Principal of Securities) Funds seek to provide duration and Treasury exposure by investing in an optimized subset of the STRIPS universe with a similar duration profile as the Barclays U.S. Treasury STRIPS 10-11 year, 16-16 year or 28-29 year Index. These passively managed funds are generally used with other bond funds to add additional duration to the asset portfolio. This will help reduce the mismatch between a plan’s assets and liabilities.
|
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 $5,230,134 and $6,625,560 at January 2, 2021 and December 28, 2019, respectively. No shares were purchased in 2020 or 2019 nor were any shares sold in either period. Dividends received during 2020 and 2019 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:
|
|
2020
|
|
|
2019
|
|
Regular matching contributions
|
|
$
|
692,846
|
|
|
$
|
540,693
|
|
Transitional credit contributions
|
|
|
264,473
|
|
|
|
305,226
|
|
Non-discretionary contributions
|
|
|
607,342
|
|
|
|
638,745
|
|
Total contributions made for the period
|
|
$
|
1,564,661
|
|
|
$
|
1,484,664
|
|
At January 2, 2021, the Company had accrued $519,177 for the non-discretionary safe harbor contribution this amount was expensed in 2020 and was contributed to the plan in January 2021. At December 28, 2019, the Company had accrued $550,286 for the non-discretionary safe harbor contribution. This amount was contributed to the Plan in January 2020 and was expensed in 2019.
11. EARNINGS PER SHARE
The denominators used in the earnings per share computations follow:
|
|
2020
|
|
|
2019
|
|
Basic:
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
6,237,698
|
|
|
|
6,235,098
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
6,237,698
|
|
|
|
6,235,098
|
|
Dilutive stock options
|
|
|
26,823
|
|
|
|
34,910
|
|
Denominator for diluted earnings per share
|
|
|
6,264,521
|
|
|
|
6,270,008
|
|
There were no anti-dilutive stock equivalents in 2020 or 2019.
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. REPORTABLE SEGMENTS
|
|
2020
|
|
|
2019
|
|
Sales:
|
|
|
|
|
|
|
Sales to unaffiliated customers:
|
|
|
|
|
|
|
Engineered Solutions
|
|
$
|
197,614,590
|
|
|
$
|
186,795,507
|
|
Diversified Products
|
|
|
42,788,524
|
|
|
|
64,947,112
|
|
|
|
$
|
240,403,114
|
|
|
$
|
251,742,619
|
|
|
|
|
|
|
|
|
|
|
Inter-segment Sales:
|
|
|
|
|
|
|
|
|
Engineered Solutions
|
|
$
|
675,389
|
|
|
$
|
1,286,384
|
|
Diversified Products
|
|
|
25,559
|
|
|
|
43,451
|
|
|
|
$
|
700,948
|
|
|
$
|
1,329,835
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes:
|
|
|
|
|
|
|
|
|
Engineered Solutions
|
|
$
|
14,589,675
|
|
|
$
|
16,512,736
|
|
Diversified Products
|
|
|
(7,589,421
|
)
|
|
|
945,118
|
|
Operating Profit
|
|
|
7,000,254
|
|
|
|
17,457,854
|
|
Interest Expense
|
|
|
(2,744,800
|
)
|
|
|
(1,857,961
|
)
|
Other Income
|
|
|
1,770,158
|
|
|
|
606,078
|
|
|
|
$
|
6,025,612
|
|
|
$
|
16,205,971
|
|
|
|
|
|
|
|
|
|
|
Geographic Information:
|
|
|
|
|
|
|
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
225,835,894
|
|
|
$
|
230,920,619
|
|
Foreign
|
|
|
14,567,220
|
|
|
|
20,822,000
|
|
|
|
$
|
240,403,114
|
|
|
$
|
251,742,619
|
|
|
|
|
|
|
|
|
|
|
Foreign sales are primarily to customers in North America.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable Assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
253,689,704
|
|
|
$
|
263,295,787
|
|
Foreign
|
|
|
21,838,650
|
|
|
|
17,367,189
|
|
|
|
$
|
275,528,354
|
|
|
$
|
280,662,976
|
|
|
|
|
|
|
|
|
|
|
Engineered Solutions
|
|
$
|
95,140,639
|
|
|
$
|
91,032,813
|
|
Diversified Products
|
|
|
36,873,709
|
|
|
|
49,219,614
|
|
|
|
|
132,014,348
|
|
|
|
140,252,427
|
|
General corporate
|
|
|
143,514,006
|
|
|
|
140,410,549
|
|
|
|
$
|
275,528,354
|
|
|
$
|
280,662,976
|
|
The Eastern Company
Notes to Consolidated Financial Statements (continued)
12. REPORTABLE SEGMENTS (continued)
Depreciation and Amortization:
|
|
|
|
|
|
|
Engineered Solutions
|
|
$
|
6,795,435
|
|
|
$
|
4,495,380
|
|
Diversified Products
|
|
|
1,682,077
|
|
|
|
1,959,501
|
|
|
|
$
|
8,477,512
|
|
|
$
|
6,454,881
|
|
|
|
|
|
|
|
|
|
|
Capital Expenditures:
|
|
|
|
|
|
|
|
|
Engineered Solutions
|
|
$
|
2,340,762
|
|
|
$
|
4,025,649
|
|
Diversified Products
|
|
|
763,674
|
|
|
|
1,411,509
|
|
|
|
|
3,104,436
|
|
|
|
5,437,158
|
|
Currency translation adjustment
|
|
|
(8,439
|
)
|
|
|
3,330
|
|
General corporate
|
|
|
2,986
|
|
|
|
-
|
|
|
|
$
|
3,098,983
|
|
|
$
|
5,440,488
|
|
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, Accounting Policies – Leases.
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 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 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. Written approval was received in October of 2020. Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap, is anticipated in May 2021. In the third fiscal quarter of 2021, following the completion of construction work, a closure report and maintenance plan is expected to be prepared for the NYSDEC. This closure report and maintenance plan documents the work done and requests 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 January 2, 2021 and December 28, 2019, there was one significant concentration of credit risk. One customer exceeded 10% of total accounts receivable for 2020 and 2019. 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 $46,875,000 on January 2, 2021 to convert a portion of borrowings under the Credit Agreement from variable to fixed rates. The valuation of this swap is determined using the one-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 6, Debt to the 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 does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments.