UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 28, 2024
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________________ to _______________
Commission File Number 001-35383
THE EASTERN COMPANY
(Exact name of registrant as specified in its charter)
Connecticut
06-0330020
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
3 Enterprise Drive, Suite 408, Shelton, Connecticut
06484
(Address of principal executive offices)
(Zip Code)
(203)-729-2255
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, No Par Value
EML
NASDAQ Global Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of September 28, 2024, 6,183,179 shares of the registrant’s common stock, no par value per share, were issued and outstanding.
The Eastern Company
Form 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 2024
TABLE OF CONTENTS
Page
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements (unaudited)
3.
Condensed Consolidated Statements of Operations
Condensed Consolidated Statements of Comprehensive Income
4.
Condensed Consolidated Balance Sheets
5.
Condensed Consolidated Statements of Cash Flows
7.
Notes to Condensed Consolidated Financial Statements
8.
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27.
Item 4.
Controls and Procedures
PART II
OTHER INFORMATION
Legal Proceedings
28.
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
Item 6
Exhibits
29.
SIGNATURES
30.
PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended
Nine Months Ended
September 28, 2024
September 30, 2023
Net sales
Cost of products sold
Gross margin
Product development expense
Selling and administrative expenses
Operating profit
Interest expense
Other (expense) income
Income from continuing operations before income taxes
Income tax expense
Net income from continuing operations
Discontinued Operations (see note B)
Loss from operations of discontinued unit
Loss on classification as held for sale
Income tax benefit
Loss on discontinued operations
Net (loss) income
Earnings per share from continuing operations:
Basic
Diluted
Loss per share from discontinued operations:
Total (loss) earnings per share:
Cash dividends per share
See accompanying notes.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Other comprehensive (loss) income:
Change in foreign currency translation
Change in fair value of foreign currency swap, net of tax benefit of:
2024 - $(106,076) and $(123,179) respectively
Change in fair value of interest rate swap, net of tax benefit of:
2023 - $0 and $(274,957) respectively
Change in pension and postretirement benefit costs, net of taxes of:
2024 - $71,355 and $214,065 respectively; 2023 - $74,360 and $223,079 respectively
Total other comprehensive (loss) income
Comprehensive (loss) income
CONDENSED CONSOLIDATED BALANCE SHEETS
December 30, 2023
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents
Marketable securities
Accounts receivable, less allowances: 2024 - $470,870; 2023 - $534,476
Inventories
Current portion of notes receivable
Prepaid expenses and other assets
Current assets held for sale
Total Current Assets
Property, Plant and Equipment
Accumulated depreciation
Property, Plant and Equipment, Net
Goodwill
Trademarks
Patents and other intangibles net of accumulated amortization
Long-term notes receivable, less current portion
Deferred Income Taxes
Right of Use Assets
Other Long-Term Assets
Long-term assets held for sale
Total Other Assets
TOTAL ASSETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable
Accrued compensation
Other accrued expenses
Current portion of operating lease liability
Current portion of finance lease liability
Current portion of long-term debt
Other current liabilities
Current liabilities held for sale
Total Current Liabilities
Other long-term liabilities
Operating lease liability, less current portion
Finance lease liability, less current portion
Long-term debt, less current portion
Accrued postretirement benefits
Accrued pension cost
Long-term liabilities held for sale
Total Liabilities
Shareholders’ Equity
Voting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
Common Stock, no par value, Authorized: 50,000,000 shares
Issued: 9,127,700 shares as of 2024 and 9,091,815 shares as of 2023
Outstanding: 6,183,179 shares as of 2024 and 6,217,370 shares as of 2023
Treasury Stock: 2,894,521 shares as of 2024 and 2,874,445 shares as of 2023
Retained earnings
Accumulated other comprehensive loss:
Foreign currency translation
Unrealized loss on foreign currency swap, net of tax
Unrecognized net pension and postretirement benefit costs, net of tax
Accumulated other comprehensive loss
Total Shareholders’ Equity
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Operating Activities
Less: Loss from discontinued operations
Income from continuing operations
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization
Reduction in carrying amount of ROU assets
Unrecognized pension and postretirement benefits
Loss on sale of equipment and other assets
Provision for doubtful accounts
Stock compensation expense
Changes in operating assets and liabilities:
Accounts receivable
Prepaid expenses and other
Other assets
Change in operating lease liability
Net cash provided by operating activities
Investing Activities
Business acquisition
Payments received from notes receivable
Proceeds from sale of equipment
Purchases of property, plant, and equipment
Net cash used in investing activities
Financing Activities
Proceeds from new long-term debt financing
Principal payments on long-term debt
Proceeds (payments) on short term borrowings (revolver)
Financing leases, net
Purchase common stock for treasury
Dividends paid
Net cash used in financing activities
Discontinued Operations
Cash provided by operating activities
Cash used in investing activities
Cash provided by discontinued operations
Effect of exchange rate changes on cash
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period ¹
Supplemental disclosure of cash flow information
Interest
Income taxes
Non-cash investing and financing activities
Right of use asset
Lease liability
¹ includes cash from assets held for sale of $0.4 million as of September 28, 2024 and $0.7 million as of September 30, 2023
See accompanying notes
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note A – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2023, filed with the Securities and Exchange Commission on March 12, 2024 (the “2023 Form 10-K”), for additional information.
The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. All intercompany accounts and transactions are eliminated.
The condensed consolidated balance sheet as of December 30, 2023 has been derived from the audited consolidated balance sheet at that date.
The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References in this Quarterly Report on Form 10-Q for the quarterly period ended September 28, 2024 (this “Form 10-Q”) to 2023, the 2023 fiscal year or fiscal 2023 mean the 52-week period ended on December 30, 2023, and references to 2024, the 2024 fiscal year or fiscal 2024 mean the 52-week period ending on December 28, 2024. In a 52-week fiscal year, each quarter has 13 weeks. References to the third quarter of 2023, the third fiscal quarter of 2023 or the three months ended September 30, 2023 mean the 13-week period from July 2, 2023 to September 30, 2023. References to the third quarter of 2024, the third fiscal quarter of 2024 or the three months ended September 28, 2024, mean the 13-week period from June 30, 2024 to September 28, 2024. References to the first nine months of 2023 or the nine months ended September 30, 2023 mean the period from January 1, 2023 to September 30, 2023. References to the first nine months of 2024 or the nine months ended September 28, 2024 mean the period from December 31, 2023 to September 28, 2024.
Certain amounts in the 2023 financial statements have been reclassified to conform with the 2024 presentation with no impact or change to previously reported net income or shareholders’ equity. See Note B, Discontinued Operations, for additional information.
Note B – Discontinued Operations
In the third quarter of 2024 we determined that the Big 3 Mold business no longer fits with our long-term strategy, and we have initiated the process of selling the business. The Mold business is cyclical in nature, requires significant capital investment to remain competitive, and serves different markets than our core businesses. Selling the Big 3 Mold business will allow management to focus on our core capabilities, offerings, and markets served.
In the third quarter of 2024, we determined that the Big 3 Mold business meets the criteria to be held for sale and that the assets held for sale qualify for discontinued operations. As such, the financial results of the Big 3 Mold business are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.
Summarized Financial Information of Discontinued Operations
The following table represents income from discontinued operations, net of tax:
Restructuring costs
Operating loss
Other expense
Loss from discontinued operations before income taxes
Loss from discontinued operations, net of tax
The following table represents the assets and liabilities from discontinued operations:
Cash
Prepaid expenses
Property, plant and equipment, net
Right of use assets
Total assets of discontinued operations
Current assets of discontinued operations¹
Non-current assets of discontinued operations
Accrued compensation and other accrued expenses
Current portion of lease liability
Total liabilities of discontinued operations
Current liabilities of discontinued operations¹
Non-current liabilities of discontinued operations
¹ the total assets and liabilities of discontinued operations are presented as current in the September 28, 2024 consolidated balance sheet as we expect to sell the discontinued operations and collect proceeds within one year.
Note C – Earnings Per Share
The denominators used to calculate earnings per share are as follows:
Basic:
Weighted average shares outstanding
Diluted:
Dilutive stock appreciation rights
Denominator for diluted earnings per share
Note D – Fair Value of Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2
Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable.
The Company’s financial instruments are primarily investments in marketable securities (Level 1), designated foreign currency hedge contracts – see Note P, Financial Instruments and Fair Value Measurements, and pension assets, see Note M, Retirement Benefit Plans.
The carrying amounts of other financial instruments (cash and cash equivalents, marketable securities, accounts receivable, accounts payable and debt) as of September 28, 2024 and December 30, 2023, approximate fair value because of their short-term nature and market-based interest rates.
Note E – Inventories
Inventories consist of the following components:
Raw material and component parts
Work in process
Finished goods
Total inventories¹
¹ Includes inventory of discontinued operations of $1.2 million and $0.9 million as of September 28, 2024 and September 30, 2023, respectively.
Note F - Goodwill
The aggregate carrying amount of goodwill from continuing operations is approximately $58.6 million as of September 28, 2024. A goodwill write-off of approximately $12.1 million was recognized in discontinued operations when classifying the disposal group as held for sale. See Note B – Discontinued Operations for further discussion.
The Company evaluates 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.
Note G – 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 accounts for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.
The Company has operating leases for buildings, warehouses, and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. 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 17 operating leases with a lease liability of $14.8 million and five finance leases with a lease liability of $3.8 million as of September 28, 2024. The 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. There are no related party lease transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.
The future payments (in millions) due under non-cancelable operating and finance leases as of September 28, 2024 are as follows:
Operating
Finance
2024
2025
2026
2027
2028
thereafter
Less effects of discounting
Lease liabilities recognized
As of September 28, 2024, the weighted average lease term for all operating and finance leases was 6.9 and 6.5 years, respectively. The weighted average discount rate associated with operating and finance leases was 6.3% and 6.8%, respectively, as of such date.
Note H - Debt
On June 16, 2023, the Company entered into a credit agreement with TD Bank, N.A., Wells Fargo Bank, Bank of America, and M&T Bank as lenders (the “Credit Agreement”), that included a $60 million term portion and a $30 million revolving commitment portion. The proceeds of the term loan were used to repay the Company’s remaining outstanding term loan and to terminate its existing credit facility with Santander Bank, N.A. (approximately $59 million). The term loan portion of the credit facility requires quarterly principal payments of (i) $750,000 beginning on September 30, 2023 through June 30, 2025, (ii) $1,125,000 beginning on September 30, 2025 through June 30, 2027, and (iii) $1,500,000 beginning on September 30, 2027 through March 31, 2028, with the balance of the term loan payable on the maturity date of June 16, 2028. Amounts outstanding under the revolving portion of the credit facility are generally due and payable on the expiration date of the Credit Agreement (June 16, 2028). The Company can elect to prepay some or all of the outstanding balance from time to time without penalty. A commitment fee is payable on the unused portion of the revolving credit facility based on the Company’s consolidated ratio of net debt to adjusted EBITDA from time to time. Currently, the commitment fee is 0.25%. The Company has $3.0 million of outstanding borrowings under the revolving commitment portion of the credit facility as of September 28, 2024.
The term loan bears interest at a variable rate based on the Term Secured Overnight Financing Rate (“SOFR”), plus an adjustment of ten basis points, plus an applicable margin of 1.875% to 2.625%, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.875% to 1.625% or SOFR, plus an adjustment of ten basis points, plus an applicable margin of 1.875% to 2.625%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated as of June 16, 2023, with TD Bank N.A., as administrative agent.
The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 3.5 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. The Company was in compliance with all its covenants under the Credit Agreement on September 28, 2024, and through the date of filing this Form 10-Q.
Note I - Stock Options and Awards
On February 19, 2020, the Board of Directors of the Company (the “Board”) adopted The Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”). On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The Company has no other existing plan pursuant to which equity awards may be granted.
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 Board. Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Board. During the first nine months of fiscal 2024 and 2023, the Company granted stock awards with respect to 92,016 and 79,500 shares of Company common stock, respectively, that were subject to the meeting of performance measurements or time based. For the first nine months of fiscal years 2024 and 2023, the Company used fair market value to determine the associated expense with stock awards.
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 did not issue any SARs during the first nine months of fiscal 2024 and 2023.
Stock-based compensation (income) expense, including forfeitures, in connection with SARs and stock awards previously granted to employees was approximately $168,000 and $5,000 in the third quarter of 2024 and the third quarter of 2023, respectively, and was approximately $582,000 and $(158,000) in the first nine months of fiscal years 2024 and 2023, respectively.
As of September 28, 2024, there were 792,300 shares of Company common stock reserved and available for future grant under the 2020 Plan.
The following tables set forth the outstanding SARs for the period specified:
Year Ended
Units
Weighted Average Exercise Price
Outstanding at beginning of period
Expired
Exercised
Forfeited
Outstanding at end of period
SARs Outstanding and Exercisable
Range of Exercise Prices
Outstanding as of September 28, 2024
Weighted Average Remaining Contractual Life
Exercisable as of September 28, 2024
The following tables set forth the outstanding stock awards for the period specified:
Shares
Issued
As of September 28, 2024, outstanding SARs and stock awards had an intrinsic value of $3,254,000.
Note J – Share Repurchase Program
On August 21, 2023, the Company announced that the Board had approved a new share repurchase program authorizing the Company to repurchase up to 200,000 shares of the Company’s common stock through August 20, 2028. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
Below is a summary of the Company’s shares repurchased during the third quarter of 2024 under the new share repurchase program.
Period
Total Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
Balance as of June 29, 2024
June 30, 2024 – September 28, 2024
Balance as of September 28, 2024
Note K – Revenue Recognition
The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled. The Company records revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which are delivering goods or services, determines the transaction price, allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.
Customer volume rebates, product returns, discount and allowance are variable considerations and are recorded as a reduction of revenue in the same period that the related sales are recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material.
The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.
Note L - Income Taxes
The Company files income tax returns in the U.S. at the federal and state levels, and in foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2019 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2017.
The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for several reasons, including the closure of federal, state, and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the value of unrecognized tax benefits during the nine months ended September 28, 2024. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.
Note M - Retirement Benefit Plans
The Company has four non-contributory defined benefit pension plans covering most U.S. employees. All of these pension plans are frozen and participants in these plans have not accrued benefits since the date on which these plans were frozen. Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, 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.
Significant disclosures relating to these benefit plans for the third quarter and first nine months of fiscal years 2024 and 2023 are as follows:
Pension Benefits
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of the net loss
Net periodic benefit cost
Other Postretirement Benefits
Net periodic (benefit) cost
The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In fiscal year 2024, the Company expects to make cash contributions to its qualified pension plans of approximately $2,100,000 and approximately $50,000 into its other postretirement plan. As of September 28, 2024, the Company has contributed $1,572,000 to its pension plans and $25,000 to its postretirement plan in fiscal year 2024 and expects to make the remaining contributions as required during the remainder of the fiscal year.
The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion.
The Company made contributions to the 401(k) Plan as follows:
Regular matching contribution
Transitional credit contribution
Non-discretionary contribution
Total contributions for the period
The non-discretionary contribution of $328,953 made in the nine months ended September 30, 2023 was accrued for and expensed in the prior fiscal year.
Effective January 1, 2023, the non-discretionary contributions are being contributed on a weekly basis.
Note N - Recent Accounting Pronouncements
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which amends the reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We do not expect this new standard to have a significant impact on our disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit disaggregated between domestic and foreign and (3) income tax expense or benefit from continuing operations disaggregated by federal, state, and foreign. The update also requires entities to disclose their income tax payments to various jurisdictions. This standard is effective for fiscal years beginning after December 15, 2024. We do not expect this new standard to have a significant impact on our disclosures.
The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company.
Note O - 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 September 28, 2024, there were two significant concentrations of credit risk with customers, who had receivables representing 18% and 11% respectively, of our net accounts receivable. As of December 30, 2023, there was one customer that represented 12% of the Company’s net accounts receivable. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.
The Company has deposits that exceed amounts up to $250,000 that are insured by the Federal Deposit Insurance Corporation (FDIC), but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution.
Interest Rate Risk
The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt under the Credit Agreement, which bears interest at variable rates based on term SOFR, plus an adjustment of ten basis points, plus an applicable margin of 1.875% to 2.625%, depending on the Company’s senior net leverage ratio.
Note P – Financial Instruments and Fair Value Measurements
The Company incurs certain manufacturing, marketing, and selling costs in international markets in local currency. Accordingly, earnings and cash flows are exposed to market risk from changes in foreign currency exchange rates relative to the U.S. dollar, the Company’s reporting currency. The Company has a program in place that is designed to mitigate the exposure to changes in foreign currency exchange rates. The program includes the use of derivative financial instruments to minimize, for a period of time, the impact on its financial results from changes in foreign exchange rates. The Company utilizes foreign currency forward contracts to hedge the anticipated cash flows from transactions denominated in foreign currencies, namely Mexican pesos. This does not eliminate the impact of the volatility of foreign exchange rates. However, because the Company generally enters into forward contracts twelve to eighteen months out, rates are fixed for a twelve-to-eighteen-month period, thereby facilitating financial planning and resource allocation.
Designated Foreign Currency Hedge Contracts
All of the Company’s designated foreign currency hedge contracts as of September 28, 2024 were cash flow hedges under ASC 815, “Derivatives and Hedging” (“ASC 815”). The Company records the effective portion of any change in the fair value of designated foreign currency hedge contracts in other comprehensive income until the related third-party transaction occurs. Once the related third-party transaction occurs, the Company reclassifies the effective portion of any related gain or loss on the designated foreign currency hedge contracts to earnings. In the event the hedged forecasted transaction does not occur, or it becomes probable that it will not occur, the Company will reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. The Company had designated foreign currency hedge contracts outstanding in the contract amount of $12.6 million as of September 28, 2024 and $0.0 million as of December 30, 2023. As of September 28, 2024 a loss of $0.4 million, net of tax, will be reclassified to earnings within the next fifteen months. All currency cash flow hedges outstanding as of September 28, 2024 mature within fifteen months.
Fair Value of Derivative Instruments
The following table presents the effect of the Company’s derivative instruments designated as cash flow hedges under ASC 815 in its unaudited Condensed Consolidated Statements of Operations for the nine months ended September 28, 2024:
Derivative Instruments
Amount of Loss Recognized in Accumulated Other Comprehensive Income
Amount of Loss Reclassified from Accumulated Other Comprehensive Income into Earnings
Location in Condensed Consolidated Statement of Operations
Designated foreign currency hedge contracts, net of tax
ASC 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. The Company determines the fair value of its derivative instruments using the framework prescribed by ASC 820, “Fair Value Measurements and Disclosures,” by considering the estimated amount it would receive or pay to sell or transfer these instruments at the reporting date. Generally, the Company uses inputs that include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; other observable inputs for the asset or liability; and inputs derived principally from, or corroborated by, observable market data by correlation or other means. As of September 28, 2024, the Company has classified its derivative assets and liabilities within Level 2 of the fair value hierarchy prescribed by ASC 815, as discussed below, because these observable inputs are available for substantially the full term of its derivative instruments.
The following tables present the fair value of the Company’s derivative instruments as they appear in its Condensed Consolidated Balance Sheets as of September 28, 2024 and December 30, 2023:
Location in Condensed Consolidated Balance Sheets
As of September 28, 2024
As of December 30, 2023
Derivative Assets:
Designated foreign currency hedge contracts
Other long-term assets
Derivative Liabilities:
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to highlight significant changes in the financial position and results of operations of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the three and nine months ended September 28, 2024. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 30, 2023 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2023, which was filed with the Securities and Exchange Commission (the “SEC”) on March 12, 2024 (the “2023 Form 10-K”).
The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References in this Quarterly Report on Form 10-Q for the quarterly period ended September 28, 2024 (this “Form 10-Q”) to 2023, the 2023 fiscal year or fiscal 2023 mean the 52-week period ended on December 30, 2023, and references to 2024, the 2024 fiscal year or fiscal 2024 mean the 52-week period ending on December 28, 2024. In a 52-week fiscal year, each quarter has 13 weeks. References to the third quarter of 2023, the third fiscal quarter of 2023 or the three months ended September 30, 2023 mean the 13-week period from July 2, 2023 to September 30, 2023. References to the third quarter of 2024, the third fiscal quarter of 2024 or the three months ended September 28, 2024 mean the 13-week period from June 30, 2024 to September 28, 2024. References to the first nine months of 2023 or the nine months ended September 30, 2023 mean the period from January 1, 2023 to September 30, 2023. References to the first nine months of 2024 or the nine months ended September 28, 2024 mean the period from December 31, 2023 to September 28, 2024.
Safe Harbor for Forward-Looking Statements
Statements contained in this Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “would,” “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” “plan,” “potential,” “opportunities,” or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These factors include:
·
The Company is also subject to other risks identified and discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Part I, Item 1A, Risk Factors, and in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the 2023 Form 10-K, and that may be identified from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the SEC.
Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted, and the Company may alter its business strategies to address changing conditions. Also, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses. The Company undertakes no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise, except as required by law.
Recent Development
In the third quarter of 2024 we determined that the Big 3 Mold business no longer fits with our long-term strategy, and we have initiated the process of selling the business. The Mold business is cyclical in nature, requires significant capital investment to remain competitive, and serves different markets than our other businesses. Selling the Big 3 Mold business will allow management to focus on our core capabilities, offerings, and markets served.
In the third quarter of 2024, we determined that the Big 3 Mold business met the criteria to be held for sale and that the assets held for sale qualify for discontinued operations. As such, the financial results of the Big 3 Mold business are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.
The loss recognized in the write-down of the Big 3 Mold business to fair value in the third quarter of 2024 was $19.2 million, net of tax.
The following analysis excludes discontinued operations.
Net sales in the third quarter of 2024 increased 15% to $71.3 million from $62.0 million in the corresponding period in 2023. Net sales for the first nine months of 2024 increased 6% to $206.1 million from $195.1 million in the corresponding period last year. Sales increased in the third quarter of 2024 primarily due to increased demand for returnable transport packaging products, truck mirror assemblies, and truck accessories of $7.4 million, $1.2 million, and $0.7 million, respectively. Sales increases in the first nine months of 2024 were driven by increased demand for truck mirror assemblies and returnable transport packaging products of $13.3 million and $4.6 million respectively, offset by lower demand for truck accessories of $6.9 million. Our backlog as of September 28, 2024 increased 13% to $97.2 million from $86.2 million as of September 30, 2023, primarily driven by increased orders for various truck mirror assemblies of $11.6 million and returnable transport packaging products of $3.2 million.
Net sales of existing products increased 9% in the third quarter of 2024 and decreased 2% for the first nine months of 2024 compared to the corresponding periods in 2023. Price increases and new products increased net sales by 5% in the third quarter of 2024 and 6% in the first nine months of 2024, compared to the corresponding periods in 2023. New products included various truck mirror assemblies, rotary latches, D-rings, handles, and mirror cams.
Cost of products sold increased $6.5 million, or 14%, in the third quarter of 2024 and increased $3.8 million, or 3% in the first nine months of 2024 compared to the corresponding period in 2023 primarily due to higher sales volume, partially offset by other cost savings initiatives. Additionally, the Company paid tariff costs on China-sourced products of approximately $0.6 million and $1.9 million in the third quarter of 2024 and first nine months of 2024 respectively, compared to $0.6 million and $1.7 million in the third quarter of 2023 and first nine months of 2023, respectively. Most tariffs on China-sourced products have been recovered through price increases.
Gross margin as a percentage of sales was 25.5% in the third quarter of 2024 and 25.2% in the first nine months of 2024 compared to 24.9% in the third quarter of 2023 and 22.9% in the first nine months of 2023. Our gross margins in the third quarter of 2024 primarily reflect the impact of price increases to customers to recover increases in raw material costs and other cost savings initiatives.
Product development expenses decreased $0.3 million in the third quarter of 2024 and decreased $0.5 million in the first nine months of 2024 compared to the corresponding periods in 2023 as we continue to invest in new products at our Eberhard, Velvac, and Big 3 businesses. As a percentage of net sales, product development costs were 1.5% for the third quarter of 2024 and 1.8% for the first nine months of 2024, compared to 2.3% and 2.2% for the corresponding periods in 2023.
Selling, general and administrative expenses increased $1.9 million, or 22.1%, in the third quarter of 2024 when compared to the third quarter of 2023 primarily due to higher payroll-related expenses of $1.2 million, legal and professional expenses of $0.3 million, travel expenses of $0.1 million, and other selling and administrative expenses of $0.3 million. Selling and administrative expenses increased $2.0 million, or 6.8%, in the first nine months of 2024 when compared to the corresponding period in 2023 primarily due to higher payroll-related expenses of $1.7 million and other administrative costs.
Interest expense decreased $0.1 million in the third quarter of 2024 and was flat in the first nine months of 2024 compared to the corresponding periods in 2023 due to lower principal balances, partially offset by higher interest rates.
Other income and expense increased $0.1 million in the third quarter of 2024 and decreased $1.1 million in the first nine months of 2024 when compared to the corresponding periods in 2023. The increase in other income and expense of $0.1 million in the third quarter of 2024 was primarily driven by lower pension expense of $0.1 million when compared to the third quarter of 2023. The decrease in other income and expense of $1.1 million for the first nine months of 2024 when compared to the corresponding period in 2023 was primarily driven by $0.3 million lower pension expense in the second quarter of 2023, and an unfavorable final working capital adjustment of $0.4 million related to the sale of the Greenwald business in the first quarter of 2023, partially offset by a $1.6 million favorable adjustment for the final settlement of our swap agreement with Santander in the second quarter of 2023.
Net income for the third quarter of fiscal 2024 was $4.7 million, or $0.75 per diluted share compared to net income of $3.5 million, or $0.55 per diluted share, for the comparable period in 2023. In the first nine months of 2024 net income was $11.7 million, or $1.87 per diluted share compared to net income of $7.8 million, or $1.24 per diluted share for the comparable period in 2023.
A more detailed analysis of the Company’s results of operations and financial condition follows.
Results of Operations
The following table shows, for the periods indicated, selected line items from the condensed consolidated statements of operations as a percentage of net sales:
Selling and administrative expense
Operating Profit
The following table shows the change in sales and operating profit for the third quarter and first nine months of 2024 compared to the third quarter and first nine months of 2023 (dollars in thousands):
Three Months
Nine Months
Ended
Net Sales
Volume
Price
New products
Liquidity and Sources of Capital
The Company generated $8.3 million of cash from operations during the first nine months of fiscal 2024 compared to generating $18.2 million during the first nine months of fiscal 2023. Cash flow from operations in the first nine months of 2024 was lower when compared to the corresponding period in 2023 primarily due to increases in accounts receivable of $11.7 million due to increases in revenue in the third quarter of 2024 when compared to the corresponding period in 2023 and approximately $3.0 million in accounts receivable due to the pre-billing to cover material costs on a specific job.
Additions to property, plant, and equipment were $7.6 million and $4.1 million for the first nine months of 2024 and 2023, respectively. As of September 28, 2024, there were approximately $4.0 million of outstanding commitments for capital expenditures.
The following table shows key financial ratios at the end of each specified period:
Third
Quarter
2023
Fiscal
Year
Current ratio
Average days’ sales in accounts receivable
Inventory turnover
Total debt to shareholders’ equity
The following table shows important liquidity measures as of the balance sheet date for each specified period or for the period, as applicable (in millions):
- Held in the United States
- Held by a foreign subsidiary
Working capital
Change in working capital impact on net cash
used in operating activities
Inventories of $58.1 million as of September 28, 2024 declined by $0.3 million, or 0.5%, when compared to $59.3 million at the end of fiscal year 2023 and declined $1.9 million, or 3.2%, when compared to $60.0 million at the end of the third quarter of fiscal 2023. Accounts receivable, less allowances, were $46.0 million as of September 28, 2024, as compared to $34.2 million at 2023 fiscal year end and $40.0 million at the end of the third quarter of fiscal 2023. Accounts receivable as of September 28, 2024 included approximately $3.0 million for pre-billing to cover material costs on a specific job and adversely impacted average days sales in accounts receivable by 4 days.
On June 16, 2023, the Company entered into a credit agreement with TD Bank, N.A., Wells Fargo Bank, Bank of America, and M&T Bank as lenders (the “Credit Agreement”), and incurred indebtedness under the Credit Agreement in the aggregate principal amount of $60 million in the form of a term loan, the proceeds of which were used to repay the Company’s remaining outstanding term loan and to terminate its existing credit facility with Santander. See Note H Debt, for additional information regarding the terms of the Credit Agreement, including repayment terms, interest rates, and applicable loan covenants. Under the terms of the Credit Agreement, the Company is subject to restrictive covenants that limit our ability to, among other things, incur additional indebtedness, pay dividends, or make other distributions, and consolidate, merge, sell or otherwise dispose of assets, as well as financial covenants that require us to maintain a fixed charge coverage ratio and a maximum senior net leverage ratio. These covenants may limit how we conduct our business, and in the event of certain defaults, our repayment obligations may be accelerated. We were in compliance with all of our covenants as of September 28, 2024 and had no outstanding borrowings under the revolving commitment portion of the credit facility as of such date. On September 6, 2024, the Company drew down $3.0 million on its revolving credit facility to support ongoing working capital requirements. The Company has $27.0 million available on its revolving line of credit.
Cash, cash flow from operating activities and funds available under the revolving credit portion of the Credit Agreement are expected to be sufficient to cover future foreseeable working capital requirements in the short-term (i.e., the next 12 months from September 28, 2024) and separately in the long-term (i.e., beyond the next 12 months). However, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available. In addition, the interest rate on borrowings under the Credit Agreement varies based on our senior net leverage ratio, and the Credit Agreement requires us to maintain a senior net leverage ratio not to exceed 3.50 to 1 and a fixed charge coverage ratio to be not less than 1.25 to 1. A decrease in earnings due to the impact of current economic conditions and inflationary pressures or the resulting harm to the financial condition of our customers, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and our fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and could cause us to fail to comply with the covenants under our Credit Agreement.
In addition to funding capital requirements, we may use available cash to pay down our indebtedness, to make investments, which may include investments in publicly traded securities, or to make acquisitions that we believe will complement or expand our existing businesses.
As of the end of the third quarter of 2024, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. For a full description of our critical accounting estimates, refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of the 2023 Form 10-K. While there have been no material changes to our critical accounting estimates since the filing of the 2023 Form 10-K, we continue to monitor the methodologies and assumptions underlying such critical accounting estimates.
Non-GAAP Financial Measures
The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP.
To supplement the condensed consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations, Adjusted EBITDA from Continuing Operations, Adjusted EBITDA from Discontinued Operations and Adjusted EBITDA, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income, diluted earnings per share, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.
Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis across periods by removing the impact of certain items that management believes do not directly reflect our underlying operating performance.
Adjusted Earnings Per Share from Continuing Operations is defined as earnings per share from continuing operations excluding, when incurred, certain per share gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs. We believe that Adjusted Earnings Per Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis from period to period.
Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses. Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Adjusted EBITDA from Discontinued Operations is defined as net income from discontinued operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses. Adjusted EBITDA from Discontinued Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses. Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, U.S. GAAP financial measures.
We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.
24
Reconciliation of Non-GAAP Measures
Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share
from Continuing Operations Calculation
For the Three and Nine Months ended September 28, 2024 and September 30, 2023
($000's)
Net income from continuing operations as reported per generally accepted accounting principles (GAAP)
Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP):
Adjustments:
Severance and accrued compensation
Greenwald final sale adjustment
Non-GAAP tax impact of adjustments (1)
Total adjustments (non-GAAP)
Adjusted net income from continuing operations (non-GAAP)
Adjusted earnings per share from continuing operations (non-GAAP):
(1) We estimate the tax effect of the items identified to determine a non-GAAP annual effective tax rate applied to the pre-tax amount in order to calculate the non-GAAP provision for income taxes
a) Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the Chief Executive Officer
b) Final settlement of working capital adjustment associated with Greenwald sale
Calculations of Adjusted EBITDA from Continuing Operations, Adjusted EBITDA from Discontinued Operations and Adjusted EBITDA
September 28,
September 30,
Provision for income taxes
Adjusted EBITDA from continuing operations (non-GAAP)
Net income from discontinued operations as reported per generally accepted accounting principles (GAAP)
Adjusted EBITDA from discontinued operations (non-GAAP)
Net income as reported per generally accepted accounting principles (GAAP)
Adjusted EBITDA (non-GAAP)
c) Impact of classifying Big 3 Mold business as held for sale
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the Company’s status as a smaller reporting company pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide information under this Item 3.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
As of September 28, 2024, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) pursuant to Exchange Act Rule 13a-15. As defined in Exchange Act Rules 13a-15(e) and 15d-15(e), “the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.”
The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO have concluded that these controls and procedures are effective at the “reasonable assurance” level as of September 28, 2024.
Changes in Internal Control Over Financial Reporting:
During the period covered by this Form 10-Q, there were no changes in the Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
The Company is a party to various legal proceedings from time to time related to its normal business operations. As of the end of the quarter ended September 28, 2024, the Company does not have any material pending legal proceedings, other than as set forth in Part I, Item 3, Legal Proceedings, of the 2023 Form 10-K, or any material legal proceedings known to be contemplated by governmental authorities.
ITEM 1A – RISK FACTORS
The Company’s business is subject to several risks, some of which are beyond its control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the Company’s shareholders should carefully consider the risk factors discussed in Part I, Item 1A, Risk Factors, of the 2023 Form 10-K. These risk factors could have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity and could cause our operating results to vary significantly from period to period. As of September 28, 2024, there have been no material changes to the risk factors disclosed in the 2023 Form 10-K. The Company may disclose changes to such risk factors or disclose additional risk factors from time to time in its future filings with the SEC. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition, or operating results.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 21, 2023, the Company announced that the Board of Directors of the Company had approved a new share repurchase program authorizing the Company to repurchase up to 200,000 shares of the Company’s common stock through August 20, 2028. The Company’s new share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. Below is a summary of the Company’s share repurchases during the third quarter of 2024 under the new share repurchase program.
June 30, 2024 - August 3, 2024
August 4, 2024 - August 31, 2024
September 1, 2024 - September 28, 2024
Total
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
(a) None.
(b) None.
(c) During the third quarter of 2024, no director or officer of the Company adopted or terminated a “Rule 10b5-1trading arrangement” or “non-Rule 10b5-1trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
ITEM 6 – EXHIBITS
3.1)
Restated Certificate of Incorporation of the Company, as amended (conformed copy) (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on May 6, 2020).
3.2)
Amended and Restated By-Laws of the Company, as amended through March 11, 2022 (incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed on March 11, 2022).
31)
Certifications required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32)
Certifications pursuant to Rule 13a-14(b) and 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**
101)
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 28, 2024, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended September 28, 2024 and September 30, 2023; (ii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 28, 2024, and September 30, 2023; (iii) Condensed Consolidated Balance Sheets (Unaudited) as of September 28, 2024 and December 30, 2023; (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 28, 2024 and September 30, 2023; and (iv) Notes to Condensed Consolidated Financial Statements (Unaudited).**
104)
Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101). **
* Filed herewith.
** Furnished herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
DATE: November 5, 2024
/s/James Mitarotonda
James Mitarotonda
Chairman of the Board
/s/Nicholas Vlahos
Nicholas Vlahos
Vice President and Chief Financial Officer