What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-03-14 compared with 2022-03-17 · 187 added, 116 removed, 190 unchanged (61% of the section changed)

1 unchanged sentence

The Company’s fiscal year ends on the Saturday nearest to December 31.

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 “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.

Fiscal years 2022 and 2021 were each 52 weeks in length.

References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to results for “2022” or “fiscal year 2022” mean the fiscal year ended December 31, 2022, and references to results for “2021” or “fiscal year 2021” mean the fiscal year ended January 1, 2022.

References to the “fourth quarter of 2022” or the “fourth fiscal quarter of 2022” mean the thirteen-week period from October 2, 2022 to December 31, 2022, and 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.

The following analysis excludes discontinued operations.

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During 2022, 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.

The Company’s backlog was $72.5 million on December 31, 2022, compared to $82.8 million on January 1, 2022, primarily due to a decrease of $5.0 million in backlog for locks and hardware at Eberhard, a decrease of $7.1 million in backlog at Big 3 for mold services and returnable packaging, offset by an increase of $1.8 million in backlog related to the launch of new mirror programs for Class 8 trucks being awarded to our Velvac subsidiary.

During 2022 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.

These increases have negatively impacted and could continue to 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.

Impact of COVID-19, Current Political and Economic Conditions and Supply Chain Disruptions

The COVID-19 pandemic has affected our business, including our supply chain, our operations, the labor force, costs and interest rates throughout 2021 and 2022.

We continue to follow CDC guidelines, social distancing, and sanitizing work areas.

During the past two years and continuing into 2023, 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.

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

educating employees to clean their personal workspace at the beginning and the end of every shift;

and providing hand sanitizer and disposable wipes.

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

As a result of these measures, the COVID-19 pandemic had minimal impact on our North American capacity utilization at most of our production facilities.

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

Current global economic conditions, resulting from the COVID-19 pandemic and other factors, are highly volatile.

Many of the markets we serve are facing inflation and rising interest rates, which has led to and may continue to lead to contractions resulting in decreased demand for our products.

Decreased demand has in turn negatively impacted, and may continue to negatively impact, our financial condition and operating results.

Any further or prolonged market contractions or economic slowdowns could materially adversely affect our sales or operating margin, which would in turn reduce earnings.

Volatile global economic conditions may also cause foreign exchange rate fluctuations, which could result in material increases or decreases in earnings and may adversely affect the value of the Company’s assets outside the United States.

Increased pricing in response to fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on demand for the Company’s products, which would affect sales and profits.

Exchange rate fluctuations could also increase pricing pressure and impair the ability of the Company’s products to compete with products imported from regions with favorable exchange rates.

In the second quarter of 2022, we experienced interruptions of our operations and supply base in China as a result of a new variant of COVID-19 and the local 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 flows.

In addition, supply shortages and supply chain disruptions originally triggered by shutdowns and other restrictions imposed to slow the spread and resurgence of COVID-19 have impacted and may continue to impact the prices and availability of certain of the raw materials and components used in the production of our products.

The impact of economic contraction and supply chain disruptions has been exacerbated by the effects of tariffs, trade sanctions and global political instability.

International trade policies, such as tariffs on imports from China and on aluminum imports, have increased our costs.

Sanctions imposed as a result of the Ukraine conflict prohibit importation of a variety of products from Russia, which is a major global supplier of nickel, and have resulted in higher oil and other commodity prices that have increased shipping and transportation costs.

Supply chain constraints and tariffs may result in cost increases that we are not able to offset with price increases, which could have a material adverse effect on our business, financial position, results of operations or cash flows.

Further, trade restrictions and supply chain constraints have affected our ability to meet customer demand.

If such conditions persist and we are unable to acquire necessary raw materials or components in a timely manner or at all, we may be unable to meet production requirements and may need to cancel or decline orders, which could have a material adverse effect on our reputation as well as our business and financial results.

The extent to which our operations will be further affected by COVID-19 and its lasting economic impact, including supply chain disruptions, cost inflation and rising interest rates, in fiscal year 2023 is dependent on future developments including new COVID-19 variants and governmental restrictions, the duration of the Russia–Ukraine conflict and related sanctions, actions taken by the Federal Reserve to stabilize the economy, and other factors outside our control.

With the inherent uncertainty of the COVID-19 pandemic, volatile economic conditions and political instability, it is difficult to predict with any confidence the likely ultimate impact of these conditions on our future operations and the extent of actual and potential effects on our consolidated business, results of operations and financial condition.

For further discussion of these risks, see Part I, Item 1A, Risk Factors , of this Form 10-K.

Critical Accounting Estimates

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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.

Areas of uncertainty that require judgments, estimates and assumptions include items such as the accounting for derivatives;

environmental matters;

Areas of uncertainty that require judgments, estimates and assumptions include items such as the allowance for doubtful accounts;

inventory accounting;

the testing of goodwill and other intangible assets for impairment;

proceeds on assets to be sold;

pensions and other postretirement benefits;

and tax matters.

and pensions and other postretirement benefits.

Management uses historical experience and all available information to make its estimates and assumptions, but actual results will inevitably differ from the estimates and assumptions that are used to prepare the Company’s financial statements at any given time.

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

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

The Company reviews the collectability of its receivables on an ongoing basis, considering a combination of factors that require judgment and estimates, including among others, our customers’ access to capital, customers’ willingness or ability to pay, customer payment patterns, general economic conditions and geopolitical trends, and our ongoing relationship with our customers.

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.

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The Company will write off accounts receivable after reasonable collection efforts have been made and the accounts are deemed uncollectible.

If our estimates and assumptions as to collectability were materially incorrect, or if any of our significant customers were to develop unexpected and immediate financial problems that would prevent payment of amounts due to us, and our allowance for doubtful accounts were inadequate, this could result in an unexpected loss in profitability.

As of December 31, 2022 and January 1, 2022, the Company’s allowance for doubtful accounts total was $677,000 and $515,000, respectively.

As of December 31, 2022, and January 1, 2022, the Company’s bad debt expense was $208,000 and $48,000 respectively.

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

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.

Cost is determined by the last-in, first-out (“LIFO”) method at Eberhard while Big 3 Precision and Velvac are valued using 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, considering deterioration, obsolescence, and other factors.

We review the net realizable value of inventory in detail on an ongoing basis, considering deterioration, obsolescence, estimated future demand, current market conditions, and other factors.

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

The reserve fluctuates with market conditions, design cycles, and other economic factors.

The reserve fluctuates with market conditions, design cycles, and other economic factors and could vary significantly, whether favorably or unfavorably, from actual results due to, among other things, unanticipated changes in economic conditions, customer demand, or the competitive landscape.

The inventory reserve for excess or obsolete inventory reduced the Company’s inventory valuation by $1,926,000 and $1,115,000 as of December 31, 2022 and January 1, 2022, respectively.

Goodwill and Other Intangible Assets

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

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.

The Company will perform annual qualitative assessments in subsequent years as of the end of each fiscal year.

Additionally, the Company will perform an interim analysis whenever conditions warrant.

The Company performs annual qualitative assessments on goodwill and other intangible assets as of the end of each fiscal year by comparing the estimated fair value of each reporting unit with its carrying amount.

Additionally, the Company performs an interim analysis if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

Such events or circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions.

If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions, including (i) macroeconomic conditions, (ii) market and industry conditions, (iii) cost factors, (iv) overall financial performance, (v) other relevant entity-specific events, and (vi) events affecting a reporting unit.

The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources.

The Company performed its annual qualitative assessment as of the end of each of fiscal 2022 and 2021 on the carrying value of goodwill and determined that it is more likely than not that no impairment of goodwill existed as of such dates.

See Note 3 – Accounting Policies – Goodwill , in Item 8, Financial Statements and Supplementary Data of this Form 10-K for more detail.

Pension and Other Postretirement Benefits

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The Company expects to make cash contributions of approximately $800,000 and $50,000 to our pension plans and other postretirement plan, respectively, in 2023.

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.

In connection with our pension and other postretirement benefits, the Company reported income of $3.3 million and $2.1 million (net of tax) on its Consolidated Statement of Comprehensive Income for fiscal years 2022 and 2021, respectively.

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

1 unchanged sentence

Discount rate

2.75% - 2.81%

2.40% - 2.48%

Expected return on plan assets

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Asset gain or (loss)

(22,838,898 ) (781,059 )

Amortization of:

Unrecognized gain or (loss)

1,552,085 1,717,776

Unrecognized prior service cost

70,493 99,380

(1,538,804 ) (3,105,208 )

Comprehensive income, before tax

4,215,764 3,272,306

(941,964 ) (1,208,497 )

Comprehensive income, net of tax

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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.;

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

and (3) Velvac Holdings.

Three Months Ended

December 31, 2022

January 1, 2022

100.0 % 100.0 %

Cost of Products Sold

83.4 % 79.8 %

16.6 % 20.2 %

Product Development Expense

Selling and Administrative Expense

Goodwill Impairment Loss

13.6 % 12.5 %

Restructuring Costs

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Cost of products sold in the fourth quarter of 2022 increased $10.0 million or 21% from the corresponding period in 2021.

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.

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

Gross margin as a percentage of net sales for the fourth quarter of 2022 was 16.6% compared to 20.2% in the prior year fourth quarter.

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.

The decrease reflects the combination of higher material and freight costs and other inventory write-offs.

Product development expenses in the fourth quarter of 2022 of $1.1 million were flat when compared to the fourth quarter of 2021.

As a percentage of net sales, product development costs were 1.5% and 1.7% for the fourth quarter of 2022 and 2021 respectively as part of our investment in new products at Eberhard and Velvac.

Selling and administrative expenses in the fourth quarter of 2022 increased 1.1% compared to the fourth quarter of 2021.

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.

The increase was primarily the result of increased payroll and payroll related expenses, increased travel, and other selling expenses.

Restructuring expenses of $0.7 million were recognized in the fourth quarter of 2022 due to a warehouse consolidation into Eberhard.

Net income for the fourth quarter of 2022 decreased 95% to $0.2 million, or $0.03 per diluted share, from $3.9 million, or $0.62 per diluted share, in 2021.

In the fourth quarter of 2022, net income was negatively impacted by restructuring costs of $0.5 million, net of tax, related to a warehouse consolidation into Eberhard.

Fiscal Year 2022 Compared to Fiscal Year 2021

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Fiscal Year Ended

December 31, 2022

January 1, 2022

100.0 % 100.0 %

Cost of Products Sold

79.0 % 77.0 %

21.0 % 23.0 %

Product Development Expense

Selling and Administrative Expense

Goodwill Impairment Loss

14.1 % 14.3 %

Restructuring Costs

1 unchanged sentence

Net sales for 2022 increased 13% to $279.3 million from $246.5 million in 2021.

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

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

Sales volume of existing products increased by 7% in 2022 compared to 2021 while price increases and new products increased sales in 2022 by 6%.

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Cost of products sold increased by $30.9 million or 16% to $220.6 million in 2022 from $189.8 million in 2021.

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%;

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.

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

Tariffs incurred during 2022 were $3.1 million from China-sourced products as compared to $2.9 million in 2021.

1 unchanged sentence

Gross margin as a percentage of sales was 21% in 2022 compared to 23% in 2021.

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.

The decrease reflects the combination of higher material and freight costs and other inventory write-offs.

Product development expenses as a percentage of sales was 1.5% and 1.6% in 2022 and 2021, respectively, as the Company continues on-going efforts to develop new products to better serve our customers.

Restructuring expenses of $0.7 million were recognized in 2022 due to a warehouse consolidation into Eberhard.

Selling and administrative expenses increased $4.3 million or 12% to $39.5 million in 2022 from $35.2 million in 2021.

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):

The increase relates to increased payroll and payroll related costs, increased travel, and other selling expenses.

Net income for 2022 decreased 32% to $11.1 million, or $1.77 per diluted share, from $16.2 million, or $2.58 per diluted share, in 2021.

In 2022, net income was negatively impacted by restructuring costs of $0.5 million, net of tax, related to a warehouse consolidation into Eberhard, and loss on sale of the Wheeling, IL building in the first quarter of 2022 of $0.2 million, net of tax, partially offset by a gain on sale of the Eastern corporate office building in the third quarter of 2022 of $0.5 million, net of tax.

Net income for 2021 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 factory relocation and start-up costs of $0.5 million, net of tax.

The following table shows the amount of change from the year ended January 1, 2022 to the year ended December 31, 2022 in other items (dollars in thousands):

Interest expense

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 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.

Interest expense increased in 2022 from 2021 due to increased interest rates.

Other income in 2022 decreased $0.9 million over 2021.

Other income in 2022 included a favorable $1.8 million pension cost adjustment and a $0.6 million gain on the sale of the Eastern corporate office building.

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

The effective tax rate for 2022 was 23% compared to the 2021 effective tax rate of 7%.

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.

The effective tax rate for 2022 was increased compared to 2021 due to the impact of foreign subsidiaries on the effective tax rate in 2021 and a greater impact from research and development tax credits in 2021.

Total income taxes paid were $3.7 million in 2022 and $2.3 million in 2021.

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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 maintenance of appropriate inventory levels considering demand has been and may continue to be challenged by supply chain disruptions, which have led in some cases to a deficiency inventory that has required us to pay expedited freight fees on some of our products to timely fulfill customer orders.

Coupled with increased materials costs, this has decreased our margins.

If these disruptions persist and we are unable to maintain sufficient inventory on hand, we may need to cancel or decline orders, and we may be unable to offset increased material and freight costs fully by increasing prices on our products, any of which could have a material adverse impact on our liquidity.

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

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Ratio of working capital to sales

26.1 % 27.2 %

Total debt to shareholders’ equity

50.7 % 62.2 %

The following table shows important liquidity measures as of the fiscal year-end balance sheet date for each of the preceding two years (in millions):

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Net cash (used in) provided by operating activities

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

Change in working capital impact on net cash

used in operating activities

(5.2 ) (22.9 )

Net cash provided by (used in) in investing activities

Net cash used in by financing activities

(11.8 ) (20.3 )

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

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.

Net cash provided by operating activities was $7.4 million in 2022 compared to $7.8 million net cash used in operating activities in 2021.

In 2022, the Company contributed $0.2 million to its defined benefit retirement plan.

1 unchanged sentence

In 2021, cash used to support additional working capital requirements was $22.9 million.

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

The Company provided $5.1 million and $13.6 million for investing activities in 2022 and 2021, respectively.

In 2022, the company sold a business associated with its discontinued operations for $5.8 million and two of its buildings for $2.2 million.

The Company also issued a note receivable of $0.4 million as part of the sale of one of its buildings.

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.

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 Company issued notes receivable of $0.4 million as part of the sale of property.

These transactions are more fully discussed in Note 2 – Discontinued Operations in Item 8, Financial Statements of this Form 10-K.

The Company invested in capital expenditures of $3.4 million and $3.7 million in 2022 and 2021, respectively.

Capital expenditures in fiscal year 2023 are expected to be approximately $6.9 million.

In 2021, the Company made total debt payments of $17.3 million, of which $11.0 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 2021.

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.

In 2022, the Company made total debt payments of $17.5 million, of which $10.0 million was a repayment of the $10.0 million that had been drawn under the revolving credit facility during 2022 and used $2.8 million for payment of dividends.

The Company has $20.0 million available on its revolving line of credit.

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

See Note 6 - Debt in Item 8, Financial Statements for further discussion on the Company’s debt facilities.

In 2021, the Company made total debt payments of $17.3 million, of which $11.0 million was an accelerated principal payment, and used $2.8 million for payment of dividends.

2 unchanged sentences

Rent expense amounted to approximately $2.7 million in 2022 and $2.3 million in 2021.

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.

Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with People’s United Bank, N.A.

On August 30, 2019, the Company entered into the Credit Agreement with Santander Bank, N.A., for itself, M&T Bank, National Association and TD Bank, N.A.

as lenders (the “Credit Agreement”), that included a $100.0 million term portion and a $20.0 million revolving commitment portion.

Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with M&T Bank, N.A.

(approximately $19.0 million) and to acquire Big 3 Precision.

The term portion of the loan requires quarterly principal payments of $1.25 million for an 18-month period beginning December 31, 2019.

The repayment amount then increases to $1.875 million per quarter beginning September 30, 2021 and continues through June 30, 2023.

The term portion of the loan required quarterly principal payments of $1.25 million for an 18-month period beginning December 31, 2019.

The repayment amount then increased to $1.875 million per quarter beginning September 30, 2021, and continues through June 30, 2023.

The repayment amount then increases to $2.5 million per quarter beginning September 30, 2023, and continues through June 30, 2024.

2 unchanged sentences

The revolving commitment portion has a maturity date of August 30, 2024.

During 2021 and 2020, the Company did not borrow any funds on the revolving commitment portion of the facility.

The interest rates on the term and revolving credit portion of the Credit Agreement vary.

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The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1.

In addition, the Company will be required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.

In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50.0 million, which was equal to 50% of the outstanding balance of the term loan on that date.

The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%.

On January 2, 2021, the interest rate for half ($27.8 million) of the term portion was 1.6%, using a one-month LIBOR rate, and 3.19% on the remaining balance ($43.8 million) of the term loan based on a one-month LIBOR rate.

The interest rates on the Credit Agreement, and interest rate swap contract are susceptible to changes to the method that LIBOR rates are determined and to the potential phasing out of LIBOR after 2021.

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

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

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.

On December 31, 2022, the interest rate for half ($24.0 million) of the term portion was 6.1%, using a one-month LIBOR rate, and 3.19% on the remaining balance ($40.0 million) of the term loan based on a one-month LIBOR rate.

The interest rates on the Credit Agreement and interest rate swap contract are susceptible to that the transition from LIBOR to alternative benchmark rates such as SOFR.

Information regarding this transition is provided below.

Central banks around the world, including the FRB, are working to implement the transition from the London Interbank Offered Rate (“LIBOR”) to replacement benchmarks including the Secured Overnight Financing Rate (“SOFR”) in the United States.

The ICE Benchmark Administration (the “IBA”) ceased publication of all settings of non-US dollar LIBOR and 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.

dollar LIBOR settings scheduled to be discontinued after June 30, 2023.

The Adjustable Interest Rate Act (the “LIBOR Act”), which was signed into law on March 15, 2022, provided a replacement framework for outstanding financial contracts tied to LIBOR once LIBOR ceases to be published.

The LIBOR Act provides a statutory mechanism and safe harbor that applies on a nationwide basis to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board based on SOFR, for certain contracts that reference LIBOR and contain no or insufficient fallback provisions.

The LIBOR Act preempts and supersedes any state or local law, statute, rule, regulation, or standard relating to the selection or use of a benchmark replacement or related changes and allows parties that already have effective fallback provisions to opt out of the legislation.

On December 16, 2022, the Federal Reserve adopted a final rule implementing the LIBOR Act that, among other things, identifies the applicable SOFR-based benchmark replacements under the LIBOR Act for various contact types.

The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end.

SOFR is a backward-looking overnight rate which has implications for how interest and other payments are based.

Changes in the method of calculating the replacement of LIBOR with 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.

The change from LIBOR to SOFR may adversely affect interest rates and result in higher borrowing costs.

The effect of this change is still unknown and could materially and adversely affect the Company’s results of operations, cash flows 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 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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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 financial measures, such as net sales, net income from continuing operations, diluted earnings per share from continuing operations, or other measures prescribed by U.S.

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

Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when 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 Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs.

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

Adjusted Earnings Per Share from Continuing Operations is defined as earnings per share from continuing operations excluding, when incurred, certain per share gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs.

We believe that Adjusted Earnings Per Diluted Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis from period to period.

Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses 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.

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

Adjusted Net Income and EPS from Continuing Operations Calculation

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

Adjusted Net Income and Adjusted Earnings per Share from Continuing Operations Calculation

For the Three and Twelve Months ended December 31, 2022 and January 1, 2022

Three Months Ended

Twelve Months Ended

December 31, 2022

January 1, 2022

December 31, 2022

January 1, 2022

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

$ 167 $ 3,913 $ 11,050 $ 16,182

Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP):

Goodwill impairment loss, net of tax

Gain on sale of Eberhard Hardware property, net of tax

0.03 0.62 1.78 2.58

0.03 0.62 1.77 2.58

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

Factory relocation, net of tax

Factory start-up costs, net of tax

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

Gain on sale of Eastern corporate office building, net of tax

Restructuring costs, net of tax

Transaction expenses

Total adjustments (Non-GAAP)

Adjusted net income from continuing operations

Total adjustments

525 161 253 (900)

Adjusted net income from continuing operations (Non-GAAP)

$ 692 $ 4,074 $ 11,303 $ 15,282

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

Goodwill impairment

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 on relocation of ILC facility in Wheeling, IL

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

$ 0.11 $ 0.65 $ 1.82 $ 2.44

$ 0.11 $ 0.65 $ 1.81 $ 2.44

A) Gain on sale of Eberhard Hardware Ltd property

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

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

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

E) Gain on sale of Eastern corporate office building

F) Restructuring costs associated with warehouse consolidation into Eberhard

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

For the Three and Twelve Months ended December 31, 2022 and January 1, 2022

Three Months Ended

Twelve Months Ended

December 31, 2022

January 1, 2022

December 31, 2022

January 1, 2022

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

$ 167 $ 3,913 $ 11,050 $ 16,182

Interest expense

692 359 2,276 1,748

Provision for income taxes

(146 ) (802 ) 3,352 2,771

Depreciation and amortization

Goodwill impairment loss

Gain on sale of Eberhard Hardware property

1,846 2,052 7,235 7,241

Gain on sale of Eberhard Hardware Ltd building

Factory relocation

Factory start-up costs

Loss on sale of Wheeling, IL building

Gain on sale of Eastern corporate office building

Restructuring costs

Transaction expenses

Adjusted EBITDA from continuing operations

Goodwill impairment

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 on relocation of ILC facility in Wheeling, IL

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

Adjusted EBITDA from continuing operations (Non-GAAP)

$ 3,259 $ 5,737 $ 24,258 $ 26,708

A) Gain on sale of Eberhard Hardware Ltd property

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

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

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

E) Gain on sale of Eastern corporate office building

F) Restructuring costs associated with warehouse consolidation into Eberhard

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-K

Item 7. Management’s Discussion and Analysis