What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2022-03-17 compared with 2021-03-16 · 140 added, 257 removed, 166 unchanged (71% of the section changed)

2 unchanged sentences

Fiscal year 2021 was 52 weeks in length and fiscal year 2020 was 53 weeks in length.

References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to results for “2020” or “fiscal year 2020” mean the fiscal year ended January 2, 2021, and references to results for “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.

References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to results for “2021” or “fiscal year 2021” mean the fiscal year ended January 1, 2022, and references to results for “2020” or “fiscal year 2020” mean the fiscal year ended January 2, 2021.

References to the “fourth quarter of 2021” or the “fourth fiscal quarter of 2021” mean the thirteen-week period from October 3, 2021 to January 1, 2022, and 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, 2020.

The following analysis excludes discontinued operations.

Sales for 2021 were $246.5 million compared to $197.6 million for 2020.

2 unchanged sentences

Net income for the fourth quarter of 2021 was $3.9 million, or $0.62 per diluted share compared to $3.2 million, or $0.50 per diluted share, for the comparable 2020 period.

Fourth quarter 2019 operating results included three months of Big 3 Precision sales and earnings while the full fiscal year included four months of Big 3 Precision sales and earnings.

Big 3 Precision was acquired on August 30, 2019.

The value of the backlog of orders received by the Company increased as of January 2, 2021, compared to December 28, 2019.

The Company’s backlog was $85.0 million on January 2, 2021, as compared to $71.2 million on December 28, 2019.

The primary reasons for growth from 2019 to 2020 were an increase of $4.6 million in blow mold tooling backlog at our Big 3 Mold subsidiary including $0.8 million in backlog from the acquisition of Hallink Moulds;

an increase of $ 3.2 million in backlog for locks and hardware at Eberhard due to new product launches;

an increase of $3.8 million in backlog related to launch of new mirror program for Class 8 trucks being awarded to our Velvac subsidiary;

and new orders received by Frazer & Jones, which added $10.9 million in backlog for mining products.

Backlog declined at Big 3 Products for returnable packaging by $0.8 million and at Argo EMS for printed circuit boards by $2.0 million.

During the fourth quarter of 2020 the Company experienced price increases for many of the raw materials used in producing its products, including:

During 2021, the Company experienced rising material costs, supply chain disruption, labor shortages and abnormally high freight costs all having a negative impact on our gross margin.

Despite all these challenges, demand for our products are at an all-time high.

The Company’s backlog was $82.8 million on January 1, 2022, compared to $64.7 million on January 2, 2021, primarily due to an increase of $10.1 million in backlog for locks and hardware at Eberhard due to new product launches and an increase of $8.5 million in backlog related to the launch of new mirror programs for Class 8 trucks being awarded to our Velvac subsidiary.

During 2021 the Company experienced price increases for many of the raw materials used in producing its products, including:

scrap iron, stainless steel, hot and cold rolled steel, zinc, copper, aluminum, and nickel.

These increases could negatively impact the Company’s gross margin if raw material prices increase too rapidly for the Company to recover those cost increases through either price increases to our customers or cost reductions in other areas of the business.

On January 15, 2020 the United States and China signed the U.S.-China Phase One trade deal, which among other things rolled back tariffs on $120 billion worth of Chinese products from 15% to 7.5% effective February 14, 2020 and the U.S.

agreed not to proceed with the 15% tariffs on $160 billion worth of consumer goods which was scheduled to take effect December 15, 2019.

However, the 25% tariffs on $250 billion of Chinese imports will remain in effect subject to further reductions depending on the progress of future negotiations.

If China does not follow through their agreed upon commitments and tariffs are reinstated on $550 billion of Chinese products at the 25% rate, it could result in a loss of business and possible reduced margins if the tariffs cannot be offset by higher selling prices.

Critical Accounting Policies and Estimates

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S.

11 unchanged sentences

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.

The Company reviews the collectability of its receivables on an ongoing basis, taking into account a combination of factors.

The Company reviews 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 that the Company has adequately accrued for potential loss.

3 unchanged sentences

Inventories are valued at the lower of cost or net realizable value.

Cost is determined by the last-in, first-out (“LIFO”) method at the Company’s U.S.

facilities, with the exception of Big 3 Precision and Velvac, which are valued on a first-in, first-out (“FIFO”) method.

Cost is determined by the last-in, first-out (“LIFO”) method at Eberhard while Big 3 Precision and Velvac are valued on a first-in, first-out (“FIFO”) method.

Accordingly, a LIFO valuation reserve is calculated using the dollar value link chain method.

We review the net realizable value of inventory in detail on an ongoing basis, giving consideration to deterioration, obsolescence and other factors.

We review the net realizable value of inventory in detail on an ongoing basis, considering deterioration, obsolescence, and other factors.

Based on these assessments, we provide for an inventory reserve in the period in which an impairment is identified.

3 unchanged sentences

Goodwill and other intangible assets with indefinite useful lives are not amortized.

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.

The Company performed its qualitative assessment as of the end of fiscal 2020 on the remainder of its companies and determined that it is more likely than not that no impairment of goodwill existed at the end of 2020 on those companies holding goodwill at the entity level.

The Company performed its annual qualitative assessment as of the end of fiscal 2021 on the carrying value of goodwill and determined that it is more likely than not that no impairment of goodwill existed at the end of 2021.

See Note 4 – Accounting Policies – Goodwill , in Item 8, Financial Statements and Supplementary Data for more detail.

15 unchanged sentences

The Company expects to make cash contributions of approximately $300,000 and $50,000 to our pension plans and other postretirement plan, respectively, in 2022.

In connection with our pension and other postretirement benefits, the Company reported an expense of $5.7 million and $2.7 million (net of tax) on its Consolidated Statement of Comprehensive Income for fiscal years 2020 and 2019, respectively.

In connection with our pension and other postretirement benefits, the Company reported income of $2.1 million and an expense of $5.7 million (net of tax) on its Consolidated Statement of Comprehensive Income for fiscal years 2021 and 2020, respectively.

The main factor driving this expense was the change in the discount rate during the applicable period.

1 unchanged sentence

Discount rate

3.18% - 3.23%

4.20% - 4.22%

Expected return on plan assets

4 unchanged sentences

$ (10,824,709 )

$ (12,552,989 )

Additional recognition due to significant event

6 unchanged sentences

$ (5,695,386 )

$ (2,675,007 )

The Plan has been investing a portion of the assets in long-term bonds in an effort to better match the impact of changes in interest rates on its assets and liabilities and thus reduce some of the volatility in Other Comprehensive Income.

Please refer to Note 10 – Retirement Benefit Plans in in Item 8, Financial Statements and Supplementary Data of this Form 10-K for additional disclosures concerning the Company’s pension and other postretirement benefit plans.

The Plan has been investing a portion of the assets in long-term bonds to better match the impact of changes in interest rates on its assets and liabilities and thus reduce some of the volatility in Other Comprehensive Income.

Please refer to Note 11 – Retirement Benefit Plans in Item 8, Financial Statements and Supplementary Data of this Form 10-K for additional disclosures concerning the Company’s pension and other postretirement benefit plans.

RESULTS OF OPERATIONS

Fourth Quarter 2021 Compared to Fourth Quarter 2020

The following table shows, for the fourth quarter of 2020 and 2019, selected line items from the consolidated statements of income as a percentage of net sales, by segment.

The Company now reports under two segments:

Engineered Solutions and Diversified Products.

The Engineered Solutions segment includes (1) Big 3 Precision, including Big 3 Products and Big 3 Mold, Hallink Moulds, and Associated Toolmakers Ltd.;

(2) Eberhard Manufacturing Company, Eberhard Hardware Manufacturing Ltd., Eastern Industrial Ltd., Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries Ltd.;

The following table shows, for the fourth quarter of 2021 and 2020, selected line items from the consolidated statements of income as a percentage of net sales for the Company’s operations.

The Company’s continuing operations include (1) Big 3 Precision, including Big 3 Products and Big 3 Mold, Hallink Moulds, and Associated Toolmakers;

(2) Eberhard Manufacturing, Eberhard Hardware, Eastern Industrial Ltd., Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries Ltd.;

and (3) Velvac Holdings.

The Diversified Products segment consists of Frazer & Jones;

Greenwald Industries;

and Sesamee Mexicana.

In the fourth quarter of 2019, the Diversified segment includes the CCV.

2020 Fourth Quarter

Cost of Products Sold

Product Development Expense

Selling and Administrative Expense

Goodwill Impairment Loss

Loss on Disposition of Subsidiary

Restructuring Costs

Operating Profit

2019 Fourth Quarter

Three Months Ended

Cost of Products Sold

2 unchanged sentences

Goodwill Impairment Loss

Loss on Disposition of Subsidiary

Restructuring Costs

Operating Profit

Net sales in the fourth quarter of 2020 decreased 12% to $60.4 million from $68.7 million a year earlier.

Sales decreased in the Engineered Solutions segment by 8% to $50.6 million in the fourth quarter of 2020 from $54.7 million in the fourth quarter of 2019 due to lower demand for trucks accessories, distribution products and automotive returnable packaging as a result of the delay in new automotive launches, partly offset by the impact of new program launches and stronger sales of blow mold tooling and related services.

Sales in the Diversified Products segment decreased 30% to $9.9 million in the fourth quarter of 2020 compared to $14.0 million in fourth quarter of 2019 as the result of the sale of Canadian Commercial Vehicles in June 2020 and lower demand for mining products, industrial castings, commercial laundry products, and printed circuit boards.

Sales of new products contributed 4% to sales growth in the fourth quarter compared to 5% of sales growth from new products in the fourth quarter of 2019.

New products in the fourth quarter included various new truck mirrors, a truck compression latch, a cable lock, a mirror cam and a mobile payment app.

Cost of products sold in the fourth quarter of 2020 decreased $3.3 million or 7% from the corresponding period in 2019.

The decrease in cost of products sold is primarily attributable to the reduced sales volume.

During the fourth quarter of 2020, material costs have increased substantially over the third quarter of 2020 for hot rolled steel by 81%;

cold rolled steel by 53%;

aluminum by 16%;

copper and nickel by 23%;

zinc by 17% and scrap iron by 30%.

Net sales in the fourth quarter of 2021 increased 18% to $59.6 million from $50.6 million in the fourth quarter of 2020.

Sales increases were due to higher demand for trucks accessories, distribution products and automotive returnable packaging and improved pricing.

Sales volume of existing products increased 6%, prices and new products contributed 12% in sales growth in the fourth quarter of 2021 when compared to sales in the fourth quarter of 2020.

New products included various truck, mirrors, latches, and accessories.

Sales of new products contributed 8% to sales growth in the fourth quarter compared to 4% sales growth from new products in the fourth quarter of 2020.

New products in the fourth quarter included various new truck mirrors and truck latches.

Cost of products sold in the fourth quarter of 2021 increased $8.5 million or 22% from the corresponding period in 2020.

The increase in cost of products sold is primarily attributable to increased sales volume, increases in the cost of materials, and increases in freight costs due to expedite fees associated with supply chain constraints.

During the fourth quarter of 2021, material costs have begun to decrease from the third quarter of 2021 levels with costs for hot rolled steel decreasing 16% and costs for cold roll steel decreasing by 7%.

Material costs increased over the third quarter of 2021 for aluminum, copper, nickel, and zinc which increased by 2%, 4%, 5% and 15%, respectively.

Gross margin as a percentage of net sales for the fourth quarter of 2021 was 20% compared to 23% in the prior year fourth quarter.

The decrease reflects the combination of higher raw material cost and a decline in facility utilization due to lower sales in the fourth quarter of 2020.

Product development expenses in the fourth quarter of 2020 of $0.7 million were down 11% when compared to the fourth quarter of 2019.

As a percentage of net sales, product development costs were 1.2% and 1.1% for the fourth quarter of 2020 and 2019 respectively.

Selling and administrative expenses in the fourth quarter of 2020 decreased 26% compared to the fourth quarter of 2019.

The decrease was primarily the result of the Company’s initiatives to reduce payroll and payroll related expenses, reduce travel expenses, and other expense reduction initiatives.

Goodwill impairment expense of $1.0 million was incurred in the fourth quarter of 2020 as the Company announced the closure of Eberhard Hardware Manufacturing Ltd.

in Ontario, Canada.

Restructuring expenses of $0.7 million for severance expenses were incurred in the fourth quarter of 2020 due to the closure of Eberhard Hardware Manufacturing Ltd.

Loss on disposal of subsidiary of $2.2 million was incurred in the fourth quarter of 2020 in recognizing the cumulative effects for foreign currency translation on Sesamee Mexicana and CCV.

Net income for the fourth quarter of 2020 decreased 72% to $1.4 million, or $0.23 per diluted share, from $5.0 million, or $0.79 per diluted share, in 2019.

In the fourth quarter of 2020, net income was negatively impacted by non-cash goodwill impairment charges of $0.7 million net of tax, non-recurring restructuring, factory relocation, and transaction costs of $0.9 million net of tax, and a loss on disposition of Sesamee Mexicana and CCV of $1.6 million net of tax.

The decrease reflects the combination of higher material and freight costs.

Product development expenses in the fourth quarter of 2021 of $1.0 million were up 192% when compared to the fourth quarter of 2020.

As a percentage of net sales, product development costs were 1.7% and 0.7% for the fourth quarter of 2021 and 2020 respectively as part of our investment in new products at Eberhard and Velvac.

Selling and administrative expenses in the fourth quarter of 2021 increased 8% compared to the fourth quarter of 2020.

The increase was primarily the result of increased payroll and payroll related expenses, increased travel, and other expenses as business returned to more normal operations in 2021.

Goodwill impairment expense of $1.0 million was incurred in the fourth quarter of 2020 as the Company announced the closure of Eberhard Hardware in Ontario, Canada.

Restructuring expenses of $0.7 million were incurred in the fourth quarter of 2020 due to severance expenses related to the closure of Eberhard Hardware in Ontario Canada.

Net income for the fourth quarter of 2021 increased 24% to $3.9 million, or $0.62 per diluted share, from $3.2 million, or $0.50 per diluted share, in 2020.

In the fourth quarter of 2020, net income was negatively impacted by non-cash goodwill impairment charges of $0.7 million, net of tax, and non-recurring restructuring, factory relocation, and transaction costs of $0.9 million net of tax.

Fiscal Year 2021 Compared to Fiscal Year 2020

The following table shows, for fiscal year 2020 and fiscal year 2019, selected line items from the consolidated statements of income as a percentage of net sales, by segment.

The Company now reports under two segments:

Engineered Solutions and Diversified Products.

The Engineered Solutions segment includes (1) Big 3 Precision, including Big 3 Products and Big 3 Mold, Hallink Moulds and Associated Toolmakers Ltd.;

(2) Eberhard Manufacturing Company, Eberhard Hardware Manufacturing Ltd., Eastern Industrial Ltd., Illinois Lock Company/CCL Security Products, World Lock Company Ltd.

and Dongguan Reeworld Security Products Ltd.;

World Security Industries Ltd.;

The following table shows, for fiscal year 2021 and fiscal year 2020, selected line items from the consolidated statements of income as a percentage of net sales for the Company’s operations.

The Company’s continuing operations include (1) Big 3 Precision, including Big 3 Products, Big 3 Mold, Hallink Moulds and Associated Toolmakers Ltd.;

(2) Eberhard Manufacturing Company, Eberhard Hardware, Eastern Industrial Ltd., Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd.

and World Security Industries Ltd.;

and (3) Velvac Holdings.

The Diversified Products segment consists of Frazer & Jones ;

Greenwald Industries;

Sesamee Mexicana;

Financial measures presented below as “excluding Big 3 Precision” are non-GAAP financial measures.

Fiscal Year 2020

Cost of Products Sold

Product Development Expense

Selling and Administrative Expense

Goodwill Impairment Loss

Loss on Disposition of Subsidiary

Restructuring Costs

Operating Profit

Fiscal Year 2019

Fiscal Year Ended

Cost of Products Sold

2 unchanged sentences

Goodwill Impairment Loss

Loss on Disposition of Subsidiary

Restructuring Costs

Operating Profit

Net sales for 2020 decreased 5% to $240.4 million from $251.7 million in 2019.

The sales decline is primarily due to the decision by many of our industrial and consumer goods customers to close operations as a result of the COVID-19 pandemic and the divestiture of CCV.

Sales in 2020 reflect a full year of sales from the Big 3 Precision Acquisition, as compared to four months of sales in 2019.

Excluding the effects of Big 3 Precision, which closed on August 30, 2019, sales would have been $186.8 million in 2020 compared to $230.4 million in 2019, a decrease of 18.9%.

Sales volume of existing products decreased by 9% in 2020 compared to 2019 while price increases and new products increased sales in 2020 by 4%.

Net income for 2020 decreased 59% to $5.4 million, or $0.86 per diluted share, from $13.3 million, or $2.12 per diluted share, in 2019.

In 2020, net income was negatively impacted by $6.8 million in non-recurring costs, net of tax, including goodwill impairment charges of $3.7 million net of tax, one-time restructuring, factory relocation, and transaction costs of $1.5 million net of tax, and a loss on disposition of Sesamee Mexicana and CCV of $1.6 million net of tax.

Net income for 2019 was adversely affected by non-recurring restructuring costs of $3.9 million net of tax associated with the discontinuation of Road-iQ, a subsidiary of Velvac, and the consolidation of our Composite Panel Technologies facility, as well as an increase in M&A related expense incurred in 2019.

Engineered Solutions

Net sales in the Engineered Solutions segment increased 6% in 2020 to $197.6 million from $186.8 million when compared to 2019.

Without Big 3 Precision sales would have been $144.0 million or a decrease of 13% from $165.4 million in 2019.

Sales volume of existing products increased 1% due to the acquisition of Big 3 Precision.

Excluding Big 3 Precision, sales volume of existing products decreased by 17%, partially offset by price increases and new products which contributed 5% to increased sales.

New product sales include various new truck mirrors, a truck compression latch, a cable lock and a mirror cam.

Cost of products sold in the Engineered Solutions segment increased $14.3 million or 11% to $149.4 million from $135.1 million in 2019.

In 2020 cost of products sold include twelve months of Big 3 Precision expenses whereas 2019 only included 4 months of Big 3 Precision expenses.

Excluding the Big 3 Precision Acquisition, cost of products sold would have been $108.6 million in 2020 compared to $118.7 million in 2019, a decrease of $10.1 million or 9%.

Freight costs are down due to lower sales but freight costs are increasing and ports backlogged in processing container ships are causing delays in meeting scheduled shipping dates.

Metal prices have increased year over year for hot rolled steel by 86%;

Net sales for 2021 increased 25% to $246.5 million from $197.6 million in 2020.

The sales increase was due to higher demand for trucks accessories, distribution products and automotive returnable packaging.

Sales volume of existing products increased by 15% in 2021 compared to 2020 while price increases and new products increased sales in 2021 by 10%.

Sales of new products contributed 8% to sales growth in 2021 compared to 4% sales growth from new products in 2020.

New products in 2021 included various new truck mirrors, truck compression latches, cable locks, and locking assemblies.

Cost of products sold increased by $40.2 million or 27% to $189.8 million in 2021 from $149.5 million in 2020.

The increase in cost of products sold is primarily attributable to increased sales volume, increases in the price of materials, and increases in freight costs due to expedite fees associated with supply chain constraints.

Material costs have increased substantially over prior year for hot rolled steel by 75%;

cold rolled steel by 94%;

copper by 35%;

nickel by 18% and zinc by 16%.

Much of the increase came in the fourth quarter of 2020.

aluminum by 66%;

copper by 36%, nickel by 27% and zinc by 31%.

Many of our supply contracts contain price adjustment clauses when material cost increase by a certain percentage.

Tariffs incurred during 2021 were $2.9 million from China-sourced products as compared to $2.6 million in 2020.

A majority of the tariffs were recovered through price increases.

Excluding the Big 3 Precision Acquisition, costs are down primarily due to lower volume and cost initiatives in cutting payroll and payroll-related expenses by $3.6 million, freight by $2.5 million, shipping expenses by $0.7 million and other expenses by $0.3 million.

However, during 2020 our factories’ productive capacity was underutilized, resulting in $2.1 million in unabsorbed overhead cost which negatively impacted our gross margin in 2020.

Gross margin as a percentage of sales was 24% in 2020 as compared to 28% in 2019.

The decrease reflects the combination of higher raw material costs and a decline in facility utilization due to lower sales in 2020.

Product development expenses as a percentage of sales decreased to 1% in 2020 from 3% in 2019.

The decrease relates to the closure of the Velvac Road-iQ development operations in Bellingham Washington in the second quarter of 2019 as the Company adopted a leaner approach to the development of new vision products.

Most of the tariffs were recovered through price increases.

Gross margin as a percentage of sales was 23% in 2021 compared to 24% in 2020.

The decrease reflects the combination of higher material and freight costs.

Product development expenses as a percentage of sales increased to 1.6% 2021 from 1.4% in 2020.

The increase reflects the Company’s on-going efforts to continue developing new products to better serve our customers.

Selling and administrative expenses increased $5.0 million or 17% to $35.2 million in 2021 from $30.2 million in 2020.

The increase relates to the Big 3 Precision Acquisition in August 2019.

Excluding Big 3 Precision, selling and administrative expenses would have decreased $3.4 million or 14% from $24.5 million in 2019 to $21.1 million in 2020.

Diversified Products

Net sales in the Diversified Products segment decreased by 22.2 million or 34% in 2020 from the 2019 level.

Sales volume of existing products decreased 36% while price increases and new products contributed a 2% increase.

The sales decrease is partially due to the sale of CCV in the second quarter of 2020.

Sales of our mining products were down from 2019 levels by $6.9 million and industrial casting sales were down $2.9 million.

Sales of commercial laundry products were also down from 2019 levels by $2.5 million while printed circuit board sales were down from 2019 levels by $0.8 million.

New product sales include a mobile payment app for the commercial laundry industry and various industrial castings.

Cost of products sold in the Diversified Products segment decreased by $17.5 million or 32% in 2020 from 2019.

The decrease in cost of products sold was primarily attributable to the decrease in sales volume.

Cost reduction initiatives lowered factory payroll and payroll related cost by $3.8 million through various state workshare programs and layoffs where necessary.

The cost of scrap iron increased year over year by 34%.

The cost of scrap iron has increased another 16% in the first quarter of 2021 to $575 per ton.

The Company incurred tariff costs on China-sourced products of $0.2 million in 2020 which was comparable to 2019.

The majority of the tariffs have been offset by price increases.

Gross margin as a percentage of sales in the Diversified Products segment for 2020 decreased to 13% compared to the 2019 level of 16%.

Product development expenses decreased $0.1 million or 5% to $1.3 million for 2020 from $1.4 million for 2019.

The Company continues to invest in the development of new products for our customers to replace legacy products being phased out.

Selling and administrative expenses in the Diversified Products segment decreased by $1.6 million or 23% in 2020 from 2019.

The most significant factors resulting in changes in selling and administrative expenses were a decrease in amortization expense of $0.2 million, a decrease of $0.4 million in payroll and payroll related expenses, a decrease in travel expenses of $0.2 million, a decrease in other administrative expenses of $0.2 million and the sale of CCV, which resulted a decrease in selling and administrative expenses of $0.5 million in 2020 as compared to 2019.

Goodwill impairment loss of $5.0 million was incurred in 2020.

In the second quarter of 2020, the Company 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 payment systems away from the higher cost electronic smart card payment systems resulted in the carrying value of Greenwald exceeding 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.

During the fourth quarter of 2020 the Company announced that its subsidiary Eberhard Hardware Manufacturing Ltd.

in Ontario Canada would be closed and all assets would be moved to Eberhard Manufacturing division in Cleveland, Ohio.

As a result, the amount of goodwill of approximately $1.0 million at this entity level was impaired and written off in December 2020.

Loss on disposal of subsidiary of $2.2 million in non-cash charges were incurred in fiscal year 2020 in recognizing the cumulative effects for foreign currency translation on Sesamee Mexicana and CCV.

Restructuring expenses of $1.0 million incurred in 2020 related to the divestiture of CCV in the second quarter of 2020 and the announced closure of Eberhard Hardware Manufacturing Ltd.

In Ontario, Canada in the fourth quarter of 2020.

2019 restructuring costs of $2.7 million were related to the discontinuation of our Road iQ development operations based in Bellingham, Washington and the relocation costs of Composite Panels Technologies in Salisbury, North Carolina to CCV in Kelowna, British Columbia.

The following table shows the amount of change from the year ended December 28, 2019 as compared to the year ended January 2, 2021 in other items (dollars in thousands):

The increase relates to increased payroll and payroll related costs, increased travel, and other expenses as our businesses returned to more normal operations in 2021.

Net income for 2021 increased by 47% to $16.2 million, or $2.58 per diluted share, from $11.0 million, or $1.76 per diluted share, in 2020.

In 2021, net income was positively impacted by a $1.4 million gain, net of tax, related to the sale of the Eberhard Hardware property in the first quarter, partially offset by one-time factory relocation and start-up costs of $0.5 million, net of tax.

Net income for 2020 was adversely impacted by non-cash goodwill impairment charges of $0.7 million, net of tax and non-recurring restructuring, factory relocation, and transaction costs of $1.3 million, net of tax.

The following table shows the amount of change from the year ended January 2, 2021 as compared to the year ended January 1, 2022 in other items (dollars in thousands):

Interest expense

Interest expense increased in 2020 from 2019 due to the increased level of debt incurred in connection with the acquisitions of Hallink Moulds in the third quarter of 2020 and Big 3 Precision in the third quarter of 2019.

Interest expense decreased in 2021 from 2020 due to principal payments made on long-term debt.

Other income in 2021 increased $1.6 million over 2020.

Other income in 2020 included a favorable $1.2 million pension cost adjustment and a $0.4 million gain on a sale/leaseback transaction.

In 2019, other income included a gain of $0.6 million on the sale of land at the Company headquarters location.

Other income in 2021 included a favorable $1.5 million pension cost adjustment and a $1.8 million gain on the sale of the Eberhard Hardware property.

In 2020, other income included a favorable $1.2 million pension cost adjustment and a $0.4 million gain on a sale/leaseback transaction.

The effective tax rate for 2021 was 8% compared to the 2020 effective tax rate of 10%.

The effective tax rate for 2020 was reduced due to the expiration of statute of limitations for uncertain tax positions.

The effective tax rate for 2021 was reduced due to the impact of foreign subsidiaries on the effective tax rate and the R&D credit.

Total income taxes paid were $2.3 million in 2021 and $3.8 million in 2020.

4 unchanged sentences

As sales increase, there generally is an increased need for working capital.

Since increases in working capital reduce the Company’s cash, management attempts to keep the Company’s investment in net working capital at a reasonable level by closely monitoring inventory levels and matching production to expected market demand, keeping tight control over the collection of receivables and optimizing payment terms on its trade and other payables.

The Company closely monitors inventory levels and attempts to match production to expected market demand, keeping tight control over the collection of receivables, and optimizing payment terms on its trade and other payables.

The Company is dependent on continued demand for its products and subsequent collection of accounts receivable from its customers.

13 unchanged sentences

Working capital

Net cash provided by operating activities

Change in working capital impact on net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash (used in)/provided by financing activities

Net cash (used in) provided by operating activities

Change in working capital impact on net cash used in operating activities

Net cash provided by (used in) in investing activities

Net cash used in by financing activities

All cash held by foreign subsidiaries is readily convertible into other currencies, including the U.S.

Net cash provided by operating activities was $20.7 million in 2020 compared to $23.0 million in 2019.

In 2020 the Company contributed $2.7 million into its defined benefit retirement plan.

In 2020 cash provided by the net change in working capital was $2.0 million which was primarily due to management’s focus on reducing inventories during the pandemic.

In 2019, cash used in the net change in working capital was $0.3 million.

The Company used $9.1 million and $85.8 million for investing activities in 2020 and 2019, respectively.

Net cash used in by operating activities was $7.8 million in 2021 compared to $14.6 million net cash provided by operating activities in 2020.

In 2021 the Company contributed $2.3 million to its defined benefit retirement plan.

In 2021, cash used to support additional working capital requirements was $22.9 million, which was primarily due to management’s focus on ensuring availability of inventory to meet customer demands during the current supply chain constraints.

In 2020, cash used to support additional working capital requirements was $5.6 million.

The Company provided $13.6 million and used $8.4 million for investing activities in 2021 and 2020, respectively.

In 2021 the company sold businesses associated with its discontinued operations for $17.3 million and one of its buildings for $1.7 million, the Company also issued a note receivable of $2.5 million as part of the sale of the discontinued operations.

In 2020 the Company invested $7.2 million to acquire Hallink Moulds and received $3.2 million for divestures of subsidiaries and equipment.

The Company issued notes receivable of $2.2 million as part of the sale of its subsidiaries.

In 2019, the Company invested approximately $81.2 million to acquire Big 3 Precision.

These transactions are more fully discussed in Note 2 to the 2021 Consolidated Financial Statements located in Item 8 of this Form 10-K.

The balance of $3.1 million and $5.4 million in 2020 and 2019, respectively, was used to purchase fixed assets.

The Company invested in capital expenditures of $3.7 million and $2.3 million in 2021 and 2020, respectively.

Capital expenditures in fiscal year 2022 are expected to be approximately $5.3 million.

1 unchanged sentence

The Company did not draw down on its $20.0 million revolving credit facility in 2021.

In 2019, the Company received approximately $67.0 million from financing activities.

The Company refinanced an existing note for $19.1 million and used approximately $10.8 million for debt repayments and $2.8 million for payment of dividends.

The Company entered into the Credit Agreement for $120.0 million, of which the Company received $100.0 million for the term loan portion.

The Company did not draw down on the $20.0 million revolving credit portion.

On January 11, 2022, the Company drew down $5.0 million on its revolving credit facility to support ongoing working capital requirements brought on by current supply chain constraints.

The Company has $15.0 million available on its revolving line of credit.

See Note 7 - Debt for further discussion on the Company’s debt facilities.

In 2020, the Company made total debt payments of $10.0 million, of which $5.0 million was an accelerated principal payment, and used $2.8 million for payment of dividends.

The Company did not draw down on its $20.0 million revolving credit facility in 2020.

The Company leases certain equipment and buildings under cancelable and non-cancelable operating leases that expire at various dates up to five years.

Rent expense amounted to approximately $2.3 million in 2021 and $1.9 million in 2020.

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.

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 $100.0 million term portion and a $20.0 million revolving commitment portion.

18 unchanged sentences

Information regarding the potential phasing out of LIBOR is provided below.

On July 27, 2017, the FCA (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021.

The IBA recently announced market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023 which the FCA supports.

The ARRC, a financial industry group convened by the Federal Reserve Board has recommended the use of SOFR to replace LIBOR.

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.

In December 2020, the ICE Benchmark Administration (the “IBA”) announced a market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023, which the FCA supports.

On March 5, 2021, the IBA released its feedback statement reporting the results of the market consultation.

Pursuant to its feedback statement, the IBA intends to cease publication of all settings of non-US dollar LIBOR and only the one-week and two-month U.S.

dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S.

dollar LIBOR settings being discontinued after June 30, 2023.

The Alternative Reference Rates Committee (ARRC), a financial industry group convened by the Federal Reserve Board, has recommended the use of 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 have 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 alternate 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.

Off-Balance Sheet Arrangements

As of the end of the fiscal year ended January 2, 2021, the Company does not have any material transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, as described by Item 303(a)(4) of Regulation S-K, that have or are reasonably likely to have a material current or future impact on the Company’s financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.

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 a fallback rate (effectively SOFR plus a spread adjustment) will become effective in June 2023 unless adopted earlier.

The effect of this change is still unknown and could adversely affect the Company’s results of operations, cash flow, and liquidity.

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 U.S.

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 accounting principles generally accepted in the United States (“U.S.

To supplement the consolidated financial statements prepared in accordance with U.S.

GAAP, we have presented Adjusted Earnings Per Share, Adjusted Net Income and Adjusted EBITDA, which are considered non-GAAP financial measures.

GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, which are considered non-GAAP financial measures.

The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way.

These measures are not substitutes for their comparable GAAP financial measures, such as net sales, net income, diluted earnings per share, or other measures prescribed by U.S.

These measures are not substitutes for their comparable U.S.

GAAP financial measures, such as net sales, net income, diluted earnings per common share, or other measures prescribed by U.S.

GAAP, and there are limitations to using non-GAAP financial measures.

Adjusted Earnings Per Share is defined as diluted earnings per share excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, factory relocation expenses and restructuring costs.

We believe that Adjusted EPS provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis.

Adjusted Net Income is defined as net income excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, factory relocation expenses and restructuring costs.

Adjusted Net Income 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 from continuing operations before interest expense, provision for income taxes, and depreciation and amortization.

In addition to these adjustments, we exclude, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, factory relocation expenses 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.

We also present certain results “excluding Big 3 Precision” because we believe this allows for more effective comparability to the corresponding prior year period.

Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business, including our business segments, to assess our performance relative to that of our competitors, and to establish operational goals and forecasts that are used in allocating resources.

We believe that presenting non-GAAP financial measures in addition to GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making.

Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of property, factory start-up costs, factory relocation expenses and restructuring costs.

Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

Adjusted Earnings Per Share from Continuing Operations is defined as diluted earnings per share from continuing operations excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, factory start-up costs, factory relocation expenses 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.

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 they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, factory start-up costs, factory relocation expenses and restructuring expenses.

Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business including our business operations, 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.

Reconciliation of expenses from GAAP to Non-GAAP EPS calculation

For the Three and Twelve Months ended January 2, 2021 and December 28, 2019

Reconciliation of Non-GAAP Measures

Adjusted Net Income and EPS from Continuing Operations Calculation

For the Three and Twelve Months ended January 1, 2022 and January 2, 2021

Three Months Ended

Twelve Months Ended

January 2, 2021

December 28, 2019

January 2, 2021

December 28, 2019

Net Income as reported per

generally accepted accounting principles (GAAP)

Earnings Per Share as reported under generally accepted

accounting principles (GAAP):

Adjustments for one-time expenses:

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):

Goodwill impairment loss, net of tax

Loss on sale of Subsidiary, net of tax

Transaction expenses

Gain on sale of Eberhard Hardware property, net of tax

Factory relocation, net of tax

Factory start-up costs, net of tax

Restructuring costs, net of tax

2,181,550 D,F

Total adjustments for one-time expenses

Adjusted Net Income (related to one time expenses);

Adjusted Earnings per share

(related to one time expenses);

Transaction expenses

Total adjustments (Non-GAAP)

Adjusted net income from continuing operations

Adjusted earnings per share from continuing operations (Non-GAAP):

Goodwill impairment

Cost incurred on disposition of Canadian Commercial Vehicles

Cost incurred on relocation of factory in Reynosa, Mexico

Cost incurred on the relocation of Composite Panels Technology

Gain on sale of Eberhard Hardware Ltd property

Cost incurred on relocation of Velvac factory in Reynosa, MX

Costs incurred on announced reorganization of Eberhard Hardware

Cost incurred in the acquisition of Hallink RSB, Inc.

Costs incurred in the closure of Road IQ in Bellingham, WA

Costs incurred on the acquisition of Big 3 Precision

Costs incurred on announced reorganization of Eberhard Hardware Ltd

Loss on disposition of subsidiaries

Use of Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles in the United States (“GAAP”), we disclose certain non-GAAP financial measures including adjusted net income and adjusted earnings per diluted share.

Adjusted net income and adjusted earnings per diluted share exclude one time related expenses.

These measures are not in accordance with GAAP.

Reconciliation of expenses from GAAP to Non-GAAP EBITDA calculation

For the Three and Twelve Months ended January 2, 2021 and December 28, 2019

Costs incurred on relocation of ILC facility in Wheeling, IL

Costs incurred on start-up of Eberhard factory in Reynosa, MX

Reconciliation of Non-GAAP Measures

Adjusted EBITDA from Continuing Operations Calculation

For the Three and Twelve Months ended January 1, 2022 and January 2, 2021

Three Months Ended

Twelve Months Ended

January 2, 2021

December 28, 2019

January 2, 2021

December 28, 2019

Net Income/(loss) as reported per generally accepted accounting principles (GAAP)

Net income from continuing operations as reported per generally accepted accounting principles (GAAP)

Interest expense

Provision for/(benefit from) income taxes

Provision for income taxes

Depreciation and amortization

Goodwill impairment loss

Loss on Sale of Subsidiary

Gain on sale of Eberhard Hardware property

Factory relocation

Factory start-up costs

Restructuring costs

2,664,651 D,F

Transaction costs

Adjusted EBITDA

Transaction expenses

Adjusted EBITDA from continuing operations

Goodwill impairment

Cost incurred on disposition of Canadian Commercial Vehicles

Cost incurred on relocation of factory in Reynosa, Mexico

Cost incurred on the relocation of Composite Panels Technology

Gain on sale of Eberhard Hardware property

Cost incurred on relocation of Velvac factory in Reynosa, MX

Costs incurred on announced reorganization of Eberhard Hardware

Cost incurred in the acquisition of Hallink RSB, Inc.

Costs incurred in the closure of Road IQ in Bellingham, WA

Costs incurred in the acquisition of Big 3 Precision

Costs incurred on announced reorganization of Eberhard Hardware Ltd

Loss on disposition of subsidiaries

Use of Non-GAAP Financial Measures

Adjusted net income and adjusted earnings per diluted share exclude one time related expenses.

These measures are not in accordance with GAAP.

Costs incurred on relocation of ILC facility in Wheeling, IL

Costs incurred on start-up of Eberhard factory in Reynosa, MX

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis