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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2021-11-10 · 92 added, 117 removed, 93 unchanged (69% of the section changed)

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 quarter and nine months ended October 2, 2021.

The interim financial statements and 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 January 2, 2021 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 January 2, 2021, which was filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2021 (the “2020 Form 10-K”).

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 January 1, 2022 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 January 1, 2022, which was filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2022 (the “2021 Form 10-K”).

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31.

References to 2020 or the 2020 fiscal year mean the 53-week period ended on January 2, 2021 and references to 2021 or the 2021 fiscal year mean the 52-week period ending on January 1, 2022.

In a 52-week fiscal year, each quarter is 13 weeks long.

In a 53-week fiscal year, each of the first two fiscal quarters and the fourth quarter are 13 weeks long, and the third fiscal quarter is 14 weeks long.

References to the third quarter of 2020, the third fiscal quarter of 2020 or the three months ended October 3, 2020 mean the period from June 28, 2020 to October 3, 2020.

References to the third quarter of 2021, the third fiscal quarter of 2021 or the three months ended October 2, 2021 mean the 13-week period from July 4, 2021 to October 2, 2021.

References to the nine months ended October 3, 2020 or the first nine months of fiscal 2020 mean the period from December 29, 2019 to October 3, 2020, and references to the nine months ended October 2, 2021 or the first nine months of fiscal 2021 mean the period from January 3, 2021 to October 2, 2021.

References to 2021 or the 2021 fiscal year mean the 52-week period ended on January 1, 2022, and references to 2022 or the 2022 fiscal year mean the 52-week period ending on December 31, 2022.

In a 52-week fiscal year, each quarter has 13 weeks.

References to the first quarter of 2021, the first fiscal quarter of 2021 or the three months ended April 3, 2021, mean the period from January 3, 2021 to April 3, 2021.

References to the first quarter of 2022, the first fiscal quarter of 2022 or the three months ended April 2, 2022, mean the 13-week period from January 2, 2022 to April 2, 2022.

Safe Harbor for Forward-Looking Statements

Statements contained in this Quarterly Report on 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.

Statements contained in this Quarterly Report on Form 10-Q of the Company 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 “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” 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, but are not limited to:

effects of the COVID-19 pandemic, vaccination rates, the emergence of virus variants and the measures being taken to limit the spread and resurgence of COVID-19, including supply chain disruptions, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, and risks associated with employees working remotely or operating with reduced workforce;

the scope and duration of the COVID-19 pandemic, including the extent of resurgences, the development of variants and how quickly and to what extent normal economic activity can resume;

the timing of the distribution of COVID-19 vaccines and rates of vaccination;

risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability;

These factors include the scope and duration of the COVID-19 pandemic, including timing of the distribution of COVID-19 vaccines and rates of vaccination, the extent of resurgences,, the emergence of additional virus variants and how quickly and to what extent normal economic activity can resume, and economic effects of the COVID-19 pandemic, including supply chain disruptions, cost inflation, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, and risks associated with employees working remotely or operating with reduced workforce.

Other factors include, but are not limited to risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability;

restrictions on operating flexibility imposed by the agreement governing our credit facility;

the inability to achieve the savings expected from global sourcing of materials;

the impact of higher raw material and component costs, particularly steel, plastics, scrap iron, zinc, copper and electronic components;

the impact of higher raw material and component costs, including the impact of supply chain shortages and inflation, particularly steel, plastics, scrap iron, zinc, copper and electronic components;

lower-cost competition;

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the inability to attain expected benefits from acquisitions or the inability to effectively integrate such acquisitions and achieve expected synergies;

domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, commercial laundry, mining and general industrial markets;

costs and liabilities associated with environmental compliance;

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COVID-19 Update

The direct impact of the COVID-19 pandemic has been minimal at most of our operations through the third quarter of 2021.

The COVID-19 pandemic has affected our businesses, including our supply chain, our operations, the labor force, and rising costs throughout 2021 and into 2022.

We continue to follow CDC guidelines, including the use of proper personal protection equipment, social distancing, and sanitizing work areas.

All of these measures allowed the majority of our facilities to operate at full capacity where possible barring supply chain issues, port congestion, and labor shortages.

Many of the Company’s employees have received their first COVID-19 vaccination, and we will continue to encourage our workforce to continue to get vaccinated.

We do not anticipate further significant interruption in our operations unless a resurgence of the COVID-19 pandemic occurs.

A significant resurgence of the COVID-19 pandemic could cause further disruptions in our business and could adversely affect our financial condition, results of operations and cash flow.

During 2020 and continuing into 2021 the Company implemented a broad range of policies and procedures to ensure that employees at all of our locations remain healthy.

As a result of these measures, the COVID pandemic had minimal impact on our capacity utilization at most of our production facilities in the first quarter of 2022.

Many of the Company’s employees have received COVID-19 vaccinations, and we will continue to encourage our workforce to get vaccinated.

In the second quarter of 2022, we are experiencing interruptions in China of our operations and supply base as a result of another variant of COVID-19 and the response to minimize its spread.

A more significant resurgence of the COVID-19 pandemic or development of additional severe or highly contagious variants could cause further disruptions in our business and could adversely affect our financial condition, results of operations and cash flow.

During the past two years and continuing into 2022, the Company implemented a broad range of policies and procedures to ensure that employees at all our locations remain healthy.

Steps that we have taken to reduce the risk of COVID-19 to our employees include, among others:

protecting employee health by instructing employees to stay home if they exhibit symptoms of COVID-19;

requiring employees to wear masks upon entry into the workplace;

providing standard surgical masks, unless this conflicts with OSHA requirements;

and educating employees on hand hygiene to help stop the spread.

providing standard surgical masks and educating employees on hand hygiene to help stop the spread.

We maintain a clean work environment by frequently cleaning all touch points with products that meet EPA criteria for use against COVID-19;

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and providing hand sanitizer and disposable wipes.

We have minimized in-person contact between employees and with visitors;

required essential employees to work from home if they are able to do so effectively;

developed and implemented practices for social distancing in our facilities;

and reduced the number and size of in-person meetings.

We have eliminated all non-essential workplace travel, discouraged carpooling, and where we have multiple shifts, staggered shift start and stop times, break times, and lunchtimes to minimize congregations at the time clocks or break areas.

Where possible, we have closed or restricted break rooms and cafeterias or used extra rotations to reduce the number of employees in the break rooms or cafeterias at one time to achieve social distancing norms.

We continue to seek and implement additional methods to further reduce the risk of COVID-19 to our employees.

Although we sustained delays and disruptions in 2020 to our supply chain and operations, the majority of our facilities have returned to normal operations however, one facility experienced an outbreak of COVID-19 among several employees resulting in closure of the factory for a few days at the end of June 2021.

Currently, we do not anticipate further interruption of our operations unless a resurgence of the COVID-19 pandemic (including variants) occurs, which could cause further disruptions in our business and could adversely affect our financial condition, results of operations and cash flow.

The future extent of the effect of the COVID-19 pandemic on our operational and financial performance will depend in large part on the emergence of virus variants, vaccination rates, continued mask wearing, social distancing and other developments, that cannot be predicted with confidence at this time.

With the inherent uncertainty of the COVID-19 pandemic it is difficult to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations and the extent it could have on our consolidated business, results of operations and financial condition.

We encourage social distancing, limit in-person meetings, eliminated all non-essential workplace travel and continue to seek and implement additional methods to reduce the risk of COVID-19 to our employees.

To the extent our operations will be further affected by COVID-19 in 2022 is dependent on future developments including new COVID variants, effectiveness of vaccines, new medication, and government restrictions.

All these factors could result in further supply chain shortages and resulting cost inflation, increased operating cost, difficulty in finding workers, continued port congestion, and higher shipping costs.

With the inherent uncertainty of the COVID-19 pandemic it is difficult to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations and the extent of the effects it could have on our consolidated business, results of operations and financial condition.

For a discussion of certain COVID-19-related risks, see Part I, Item 1A, “ Risk Factors ”, of the 2021 Form 10-K.

General Overview

We have determined that the companies included in our Diversified Products segment no longer fit with our long-term strategy, and we have initiated the process of divesting the companies within the Diversified Products segment.

Selling the companies within this segment will allow management to focus on our core capabilities and offerings.

The Diversified Products segment meets the criteria to be held for sale and, furthermore, we determined that the assets held for sale qualify as discontinued operations.

As such, the financial results of the Diversified Products segment 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 Diversified Products segment to fair value in the second quarter of 2021 was $8.1 million, net of tax.

In the third quarter of 2021 a gain of $1.0 million, net of tax was recognized to adjust the Diversified Products segment to fair value.

Anticipated cash flow over the next twelve months is approximately $25.0 million.

The majority of this cash is expected to be used to pay down debt.

On November 3, 2021 the Company sold its Greenwald Industries, Inc.

division (“Greenwald”) for a sales price of $8.0 million, subject to a final working capital adjustment.

Greenwald, which is located in Chester, CT, is an OEM manufacturer offering a range of payment solutions from coin-vending products to smart card systems and payment applications.

The following analysis excludes discontinued operations.

Net sales in the third quarter of 2021 increased 15% to $63.9 million from $55.7 million in the corresponding period in 2020 and net sales for the first nine months of 2021 increased 27% to $186.9 million from $147.1 million in the same period last year.

Sales increased for both the third quarter and nine-month periods due to increased demand for truck accessories, automotive returnable packaging, blow mold tooling, and distribution products.

Backlog as of October 2, 2021 was up 44% to $83.1 million from $57.7 million as of October 3, 2020.

Net sales of existing products increased 4% in the third quarter of 2021 and 18% for the first nine months of 2021 compared to the corresponding periods in 2020.

Price increases and new products increased net sales by 10% in the third quarter of 2021 and 10% for the first nine months of 2021, compared to the corresponding periods in 2020.

Net sales in the first quarter of 2022 increased 12% to $69.0 million from $61.8 million in the corresponding period in 2021.

Sales increased in the first quarter due to increased demand for truck accessories and automotive returnable transport packaging products as well as from distributors.

Our returnable transport packaging sales benefit from the increase in new automotive product launches, including several electric vehicle launches.

Our backlog as of April 2, 2022 was up 23% to $85.8 million from $69.7 million as of April 3, 2021.

Net sales of existing products increased 4% in the first quarter of 2022 compared to the corresponding period in 2021.

Price increases and new products increased net sales by 8% in the first quarter of 2022 compared to the corresponding period in 2021.

New products included various truck mirror assemblies, rotary latches, D-rings, and mirror cams.

Cost of products sold increased $6.3 million, or 15%, in the third quarter of 2021 and increased $31.8 million, or 29% for the first nine months of 2021 compared to the corresponding periods in 2020.

The increases are primarily due to higher sales volume, increases in the prices of material, and increases in freight rates.

The prices of several frequently used raw materials prices have increased significantly, year-over-year.

For example, the price of most common forms of hot-rolled steel increased 245% between the third quarter of 2020 and the third quarter of 2021;

cold-rolled steel increased 206%;

Price increases primarily reflect our efforts to recover an increase in raw material and freight costs.

Cost of products sold increased $8.2 million, or 18%, in the first quarter of 2022 compared to the corresponding period in 2021.

The increase is primarily due to higher sales volume, as well as increases in the cost of materials and freight rates.

The cost of several frequently used raw materials have increased significantly, year-over-year.

For example, the cost of most common forms of cold-rolled steel increased 21% between the first quarter of 2021 and the first quarter of 2022;

nickel increased 41%;

scrap iron increased 85%;

and copper and zinc increased 22% and 33% respectively.

Additionally, our freight costs increased $1.4 million, or 110%, in the third quarter of 2021 and increased $3.5 million, or 99%, in the first nine months of 2021 when compared to the corresponding periods in 2020.

This increase is due to increased sales volume and freight rates as shipping demand has exceeded available carriers.

Price increases to our customers recovered a portion of the increase in raw material prices and freight rates.

Finally, the Company paid tariff costs on China-sourced products of approximately $0.6 million and $2.0 million in the third quarter and first nine months of 2021 respectively, compared to $0.6 million and $2.4 million in the third quarter and first nine months of fiscal 2020 respectively.

All tariffs on China-sourced products have been recovered through price increases.

Gross margin as a percent of sales was 24% in the third quarter and 24% in the first nine months of fiscal 2021 compared to 24% in the third quarter and 25% in the first nine months of fiscal 2020.

Product development expense increased $0.4 million, or 73% in the third quarter of 2021 and increased $0.7 million, or 28%, in the first nine months of 2021 compared to the corresponding periods in 2020.

As a percentage of net sales, product development costs were 1.5% and 1.6% for the third quarter and first nine months of 2021, respectively, and 1.0%, and 1.6% for the corresponding periods in 2020, respectively.

Selling and administrative expense increased $0.9 million, or 11%, in the third quarter of 2021 and increased $4.5 million, or 19% in the first nine months of 2021 compared to the corresponding period in 2020 primarily due to increased commissions and other selling costs, amortization expense, payroll-related expenses, and incentive costs, which were suspended in the first quarter of fiscal 2020.

Interest expense decreased $0.1 million in the third quarter and decreased $0.2 million for the first nine months of 2021 compared to the corresponding periods in 2020.

Other income was flat in the third quarter and increased $2.4 million in the first nine months of 2021 compared to the corresponding periods in 2020.

The increase in other income of $2.4 million in the first nine months was driven by a gain on the sale of the Eberhard Hardware Ltd.

Building of $1.8 million and a favorable return on pension plan assets of $0.6 million.

Net income from continuing operations for the third quarter of fiscal 2021 was $3.8 million, or $0.61 per diluted share compared to net income of $3.2 million, or $0.51 per diluted share for the comparable period in 2020.

In the first nine months of 2021 net income from continuing operations was $12.3 million, or $1.96 per diluted share compared to net income of $7.9 million, or $1.26 per diluted share for the comparable period in 2020.

Additionally, our freight costs increased $0.4 million, or 18%, in the first quarter of 2022 when compared to the corresponding period in 2021.

This increase is due to increased sales volume as shipping demand has exceeded available carriers’ capacity.

Price increases to our customers recovered a portion of the increase in raw material costs and freight rates.

Finally, the Company paid tariff costs on China-sourced products of approximately $0.6 million in the first quarter of 2022, compared to $0.6 million in the first quarter of fiscal 2021.

Most tariffs on China-sourced products have been recovered through price increases.

Gross margin as a percent of sales was 21% in the first quarter of fiscal 2022 compared to 25% in the first quarter of fiscal 2021.

Our gross margin in the first quarter of fiscal 2022 reflects the rapid increase in raw material prices.

Product development expense increased $0.2 million, or 18% in the first quarter of 2022 when compared to the corresponding period in 2021.

As a percentage of net sales, product development costs were 1.7% for the first quarter of 2022 and 1.6% for the corresponding period in 2021.

Selling and administrative expense increased $0.9 million, or 10%, in the first quarter of 2022 when compared to the corresponding period in 2021 primarily due to increased commissions and other selling costs, payroll-related expenses, and travel costs.

This increase in selling expenses reflect both the increase in sales as well as our investments in sales capabilities.

Interest expense decreased $0.1 million in the first quarter of 2022 compared to the corresponding period in 2021.

Other income was down $1.9 million in the first quarter of 2022 compared to the corresponding period in 2021.

The decrease in other income of $1.9 million in the first quarter was primarily driven by a gain on the sale of the Eberhard Hardware Ltd.

building of $1.8 million in the first quarter of 2021.

Net income from continuing operations for the first quarter of fiscal 2022 was $2.7 million, or $0.43 per diluted share compared to net income of $5.7 million, or $0.90 per diluted share for the comparable period in 2021.

A more detailed analysis of the Company’s results of operations and financial condition follows:

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Three Months Ended

Nine Months Ended

April 2, 2022

April 3, 2021

Cost of products sold

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Operating Profit

The following table shows the change in sales and operating profit for the third quarter and first nine months of fiscal 2021 compared to the third quarter and first nine months of fiscal 2020 (dollars in thousands):

The following table shows the change in sales and operating profit for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 (dollars in thousands):

Operating Profit

Liquidity and Sources of Capital

The Company consumed approximately $3.3 million of cash from continuing operations during the first nine months of fiscal 2021 compared to generating approximately $19.4 million during the first nine months of fiscal 2020.

The cash flows in the first nine months of fiscal 2021 were lower when compared to the corresponding period last year due to an increase in inventory and accounts receivable partially offset by an increase in accounts payable.

The effects of the COVID-19 pandemic are continuing to impact the supply chain and as such inventories and accounts payable have increased due to increased shipping time and port congestion as well as selective pre-buying of raw materials to avoid increasing prices.

Cash flow from operations coupled with cash at the beginning of the 2021 fiscal year was sufficient to fund capital expenditures, debt service, and dividend payments for the first nine months of fiscal 2021.

Additions to property, plant and equipment were approximately $2.1 million for the first nine months of fiscal 2021 and $1.5 million for the first nine months of fiscal 2020 from continuing operations.

Additionally, in the first nine months of 2021 the company received proceeds of $2.0 million from the sale of one of its facilities in Canada.

As of October 2, 2021, there were approximately $0.3 million of outstanding commitments for capital expenditures.

The Company consumed approximately $3.6 million of cash from continuing operations during the first three months of fiscal 2022 compared to generating approximately $1.3 million during the first three months of fiscal 2021.

Cash flow from operations in the first three months of 2022 was lower when compared to the corresponding period last year primarily due to an increase in inventory and accounts receivable partially offset by an increase in accounts payable.

The effects of the COVID-19 pandemic are continuing to impact the supply chain and as a result inventories and accounts payable have increased due to increased shipping time, port congestion, and selective pre-buying of raw materials to ensure availability and mitigate the impact of likely future inflationary price increases.

Cash flow from operations coupled with cash at the beginning of the 2022 fiscal year and the proceeds from the line of credit were sufficient to fund capital expenditures, debt service, and dividend payments for the first three months of 2022.

On April 8, 2022, the Company drew down an additional $5.0 million on its revolving credit facility to support ongoing working capital requirements brought on by current supply chain constraints.

The Company has $10.0 million available on its revolving line of credit.

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

Additions to property, plant and equipment for continuing operations were approximately $0.6 million for the first three months of 2022 and $0.6 million for the first three months of 2021.

Additionally, in the first three months of 2022 the company received proceeds of $1.3 million from the sale of one of its properties compared to $2.0 million from the sale of one of its facilities in Canada during the first three months of 2021.

As of April 2, 2022, there were approximately $0.2 million of outstanding commitments for capital expenditures.

The following table shows key financial ratios at the end of each specified period:

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Net cash (used in) provided by operating activities

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

Net cash provided by (used in) investing activities

Net cash used in financing activities

Inventories of $56.7 million as of October 2, 2021 represent an increase of 31.5% as compared to $43.1 million at the end of fiscal year 2020 and an increase of 46.1% as compared to $38.8 million at the end of the third quarter of fiscal 2020.

Accounts receivable, less allowances, were $41.3 million as of October 2, 2021, as compared to $31.8 million at 2020 fiscal year end and $28.0 million at the end of the third quarter of fiscal 2020.

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

Net cash provided by investing activities

Net cash provided by (used in) financing activities

Inventories of $67.8 million as of April 2, 2022, represent an increase of 7.8% as compared to $62.9 million at the end of fiscal year 2021 and an increase of 56.0% as compared to $43.4 million at the end of the first quarter of fiscal 2021.

Accounts receivable, less allowances, were $47.0 million as of April 2, 2022, as compared to $43.2 million at 2021 fiscal year end and $42.2 million at the end of the first quarter of fiscal 2021.

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.

However, based on current macroeconomic conditions resulting from the uncertainty caused by COVID-19, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available.

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 4.25 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 COVID-19 or the resulting harm to the financial condition of our customers or economic conditions generally, 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.

Off-Balance Sheet Arrangements

As of the end of the fiscal quarter ended October 2, 2021, 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.

As of the end of the fiscal quarter ended April 2, 2022, 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 policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 2021 Form 10-K.

While there have been no material changes to our critical accounting estimates, 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 accounting principles generally accepted in the United States (“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 U.S.

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

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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 they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, 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.

Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, certain one-time costs arising from the impacts of impairment losses, gains/losses on the sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs.

Adjusted Earnings Per Share from Continuing Operations is defined as diluted earnings per share from continuing operations excluding, when incurred, certain per share one-time costs arising from, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs.

We believe that Adjusted Earnings Per 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 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 one-time costs arising from impairment losses, gains/losses on sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring expenses.

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

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

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.

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Reconciliation of Non-GAAP Measures

EPS from Continuing Operations Calculation

For the Three and Nine Months ended October 2, 2021 and October 3, 2020

Adjusted Net Income and EPS from Continuing Operations Calculation

For the Three Months ended April 2, 2022 and April 3, 2021

Three Months Ended

Nine Months Ended

April 2, 2022

April 3, 2021

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

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Gain on sale of Eberhard Hardware Ltd building, net of tax

Factory relocation, net of tax

Transaction expenses

Factory start-up costs, net of tax

Loss on sale of Wheeling, IL building, net of tax

Total adjustments (non-GAAP)

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A) Gain on sale of Eberhard Hardware Ltd building

B) Cost incurred on relocation of Velvac factory in Reynosa, MX

C) Costs incurred on the acquisition of Hallink RSB, Inc.

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

E) Costs incurred on relocation of ILC facility in Wheeling, IL

B) Loss on sale of ILC building in Wheeling, IL

Reconciliation of Non-GAAP Measures

EBITDA from Continuing Operations Calculation

For the Three and Nine Months ended October 2, 2021 and October 3, 2020

Adjusted EBITDA from Continuing Operations Calculation

For the Three Months ended April 2, 2022 and April 3, 2021

Three Months Ended

Nine Months Ended

April 2, 2022

April 3, 2021

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

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Gain on sale of Eberhard Hardware Ltd Building

Factory relocation

Transaction expenses

Factory start-up costs

Loss on sale of Wheeling, IL building

Adjusted EBITDA from continuing operations

A) Gain on sale of Eberhard Hardware Ltd building

B) Cost incurred on relocation of Velvac factory in Reynosa, MX

C) Costs incurred on the acquisition of Hallink RSB, Inc.

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

E) Costs incurred on relocation of ILC facility in Wheeling, IL

B) Loss on sale of ILC building in Wheeling, IL

ITEM 3 – 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-Q

Item 2. Management’s Discussion and Analysis