What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-11 compared with 2024-03-12 · 72 added, 80 removed, 205 unchanged (43% of the section changed)

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References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to results for “2024” or “fiscal year 2024” mean the fiscal year ended December 28, 2024, and references to results for “2023” or “fiscal year 2023” mean the fiscal year ended December 30, 2023.

References to the “fourth quarter of 2023” or the “fourth fiscal quarter of 2023” mean the thirteen-week period from October 1, 2023 to December 30, 2023, and 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.

References to the “fourth quarter of 2024” or the “fourth fiscal quarter of 2024” mean the thirteen-week period from September 29, 2024 to December 28, 2024, and references to the “fourth quarter of 2023” or the “fourth fiscal quarter of 2023” mean the thirteen-week period from October 1, 2023 to December 30, 2023.

The following analysis excludes discontinued operations.

Sales for 2023 were $273.5 million compared to $279.3 million for 2022.

Net sales for 2024 were $272.8 million compared to $258.9 million for 2023.

Net income for 2024 was $13.2 million, or $2.13 per diluted share, compared to $11.8 million, or $1.88 per diluted share, for 2023.

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Net income for the fourth quarter of 2024 was $1.6 million, or $0.26 per diluted share compared to $3.9 million, or $0.63 per diluted share, for the comparable 2023 period.

The Company’s backlog was $80.1 million on December 30, 2023, compared to $72.5 million on December 31, 2022, primarily due to an increase of $5.7 million in backlog at Big 3 for mold services and returnable packaging and an increase of $6.3 million in backlog related to the launch of new mirror programs for Class 8 trucks being awarded to our Velvac subsidiary, partially offset by a decrease of $4.4 million in backlog for locks and hardware at Eberhard.

The Company’s backlog was $89.2 million on December 28, 2024, compared to $77.1 million on December 30, 2023, primarily due to an increase of $13.7 million in backlog at Velvac related to the launch of new mirror programs for Class 8 trucks, partially offset by a decrease of $1.7 million in backlog for returnable packaging products at Big 3 Products.

Critical Accounting Estimates

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

In the third quarter of 2024, a goodwill impairment of approximately $12.1 million was recognized in discontinued operations when classifying Big 3 Mold as held for sale.

The Company performed its annual qualitative assessment as of the end of each of fiscal 2024 and 2023 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.

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Rate of compensation increase

Assumptions used to determine net periodic other postretirement benefit cost for the fiscal years were as follows:

Assumptions used to determine net periodic other postretirement benefit cost for the fiscal years indicated were as follows:

Discount rate

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Asset gain or (loss)

(22,838,898 )

Amortization of:

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Fourth Quarter 2024 Compared to Fourth Quarter 2023

The following table shows, for the fourth quarter of 2023 and 2022, 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, and Hallink Moulds;

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

and (3) Velvac Holdings.

The following table shows, for the fourth quarter of 2024 and 2023, selected line items from the consolidated statements of income from continuing operations as a percentage of net sales for the Company’s continuing operations.

The Company’s continuing operations include (1) Big 3 Products;

(2) Eberhard;

and (3) Velvac.

Three Months Ended

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Operating Profit

Net sales in the fourth quarter of 2023 decreased 3.0% to $67.0 million from $69.1 million in the fourth quarter of 2022.

Sales decreases were due to lower demand for trucks accessories and returnable transport packaging products.

Net sales of existing products decreased 7.7% while price increases and new products increased net sales by 4.7% in the fourth quarter of 2023 when compared to sales in the fourth quarter of 2022.

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

Sales of new products contributed 1.1% to sales growth in the fourth quarter of 2023 compared to 1.4% sales growth from new products in the fourth quarter of 2022.

New products in the fourth quarter of 2023 included various new truck mirrors and truck latches.

Cost of products sold in the fourth quarter of 2023 decreased $8.5 million or 15% from the corresponding period in 2022.

The decrease in cost of products sold is primarily attributable to lower sales volume, decreases in the cost of materials, lower freight costs, and a favorable adjustment to the LIFO reserve.

Net sales in the fourth quarter of 2024 increased 4.5% to $66.7 million from $63.8 million in the fourth quarter of 2023.

Sales increases were due to higher demand for returnable transport packaging products, partially offset by lower demand for truck accessories and truck mirror assemblies.

Net sales of existing products increased 2.8% while price increases and new products increased net sales by 1.7% in the fourth quarter of 2024 when compared to sales in the fourth quarter of 2023.

New products included various truck mirror assemblies, rotary latches, and handles.

Cost of products sold in the fourth quarter of 2024 increased $4.6 million or 10% from the corresponding period in 2023.

The increase in cost of products sold is primarily attributable to higher sales volume and a favorable adjustment to the LIFO reserve in the fourth quarter of 2023 that did not recur in the fourth quarter of 2024.

Gross margin as a percentage of net sales for the fourth quarter of 2024 was 23.0% compared to 26.8% in the prior year fourth quarter.

The increase is primarily due to lower material and freight costs, improved pricing, and a favorable adjustment to the LIFO reserve in the fourth quarter of 2023 combined with other inventory write-offs in the fourth quarter of 2022.

Product development expenses increased $0.3 million, or 24%, in the fourth quarter of 2023 compared to the corresponding period in 2022 as we continue to invest in new products at Eberhard, Velvac and Big 3.

The decrease is primarily due to higher material costs in the fourth quarter of 2024 and a favorable adjustment to the LIFO reserve in the fourth quarter of 2023 that did not reoccur in the fourth quarter of 2024.

Product development expenses decreased $0.2 million, or 14%, in the fourth quarter of 2024 compared to the corresponding period in 2023 as we continue to invest in new products at Eberhard, Velvac and Big 3 Products.

As a percentage of net sales, product development costs were 1.7% for the fourth quarter of 2024 compared to 2.1% for the corresponding period in 2023.

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As a percentage of net sales, selling and administrative costs were 16.8% for the fourth quarter of 2024 compared to 15.8% for the corresponding period in 2023.

The increase was primarily the result of increased payroll and payroll-related expenses, legal and professional, and selling costs.

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 2023 increased to $3.5 million, or $0.56 per diluted share, from $0.2 million, or $0.03 per diluted share, in 2022.

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.

The increase was primarily the result of increased payroll-related expenses, legal and professional expenses, and selling costs.

Net income for the fourth quarter of 2024 was $1.6 million, or $0.26 per diluted share, from $3.9 million, or $0.63 per diluted share, in 2023.

Fiscal Year 2024 Compared to Fiscal Year 2023

The following table shows, for fiscal year 2024 and fiscal year 2023, 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 Company’s continuing operations include (1) Big 3 Products;

(2) Eberhard;

and (3) Velvac.

Fiscal Year Ended

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Operating Profit

Net sales for 2023 decreased 2% to $273.5 million from $279.3 million in 2022.

The sales decrease was primarily due to lower demand for truck accessories and returnable transport packaging products.

Net sales of existing products decreased by 6% in 2023 compared to 2022 while price increases and new products increased net sales in 2023 by 4%.

Sales of new products contributed 1% to sales growth in 2023 compared to 3% sales growth from new products in 2022.

New products in 2023 included various new truck mirror assemblies, rotary latches, D-rings, and mirror cams.

Cost of products sold decreased $12.4 million or 6% to $208.2 million in 2023 from $220.6 million in 2022.

The decrease in the cost of products sold is primarily attributable to lower sales volumes, decreases in the cost of materials, lower freight costs, and a favorable adjustment to the LIFO reserve.

Net sales for 2024 increased 5% to $272.8 million from $258.9 million in 2023.

The sales increase was primarily due to higher demand for truck mirror assemblies and returnable transport packaging products.

Net sales of existing products were flat in 2024 compared to 2023 while price increases and new products increased net sales in 2024 by 5%.

Sales of new products contributed 4% to sales growth in 2024 and included various new truck mirror assemblies, rotary latches, D-rings, and mirror cams.

Cost of products sold increased $8.4 million or 4% to $205.5 million in 2024 from $197.1 million in 2023.

The increase in the cost of products sold is primarily attributable to higher sales volumes and a favorable adjustment to the LIFO reserve in the fourth quarter of 2023 that did not reoccur in the fourth quarter of 2024.

Tariffs incurred during 2024 were $2.5 million from China-sourced products as compared to $2.2 million in 2023.

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Gross margin as a percentage of sales was 24.7% in 2024 compared to 23.9% in 2023.

The increase primarily reflects the impact of improved pricing and lower material and freight costs.

Product development expenses as a percentage of sales was 2.0% and 1.5% in 2023 and 2022, respectively, as the Company continues to invest in new products at Eberhard, Velvac and Big 3 to better serve our customers.

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

The increase primarily reflects the impact of improved pricing and various cost-savings initiatives.

Product development expenses as a percentage of sales was 1.8% and 2.2% in 2024 and 2023, respectively, as the Company continues to invest in new products at Eberhard, Velvac and Big 3 Products to better serve our customers.

Selling and administrative expenses increased $3.1 million or 7.9% to $42.2 million in 2024 from $39.1 million in 2023.

The increase primarily relates to severance and other accrued compensation expenses of $1.8 million related to the elimination of the chief operating officer position and the departure of our previous chief executive officer during the first quarter of 2023 and legal, professional, and selling costs and payroll-related expenses.

The increase in selling expenses reflects our investments in sales capabilities and changes in management personnel.

Net income for 2023 decreased 22% to $8.6 million, or $1.37 per diluted share, from $11.1 million, or $1.77 per diluted share, in 2022.

In 2023, net income was negatively impacted by unfavorable pension cost adjustments of $1.1 million, $1.4 million expense associated with the closure of Associated Toolmakers Limited in the second quarter of 2023, and an unfavorable working capital adjustment of $0.4 million in the third quarter of 2023 related to the sale of the Greenwald business, partially offset by a $1.6 million favorable adjustment for the final settlement of our swap agreement with Santander in the second quarter of 2023.

In 2022, net income was impacted by favorable pension cost adjustments of $1.8 million, 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.

As a percentage of net sales, selling and administrative expenses were 15.5% for the fiscal year of 2024 compared to 15.1% for the corresponding period in 2023.

The increase was primarily the result of increased payroll-related expenses, legal and professional expenses, and travel related expenses.

Other income and expense decreased $1.2 million to $0.3 million of expense in 2024 from $0.9 million of income in 2023.

The decrease in other income and expense of $1.2 million was due to a $1.6 million favorable adjustment for the final settlement of our swap agreement with Santander in the second quarter of 2023 that did not recur in 2024, partially offset by an unfavorable working capital adjustment of $0.4 million in the third quarter of 2023 related to the sale of the Greenwald business.

Net income for 2024 increased 12% to $13.2 million, or $2.13 per diluted share, from $11.8 million, or $1.88 per diluted share, in 2023.

The following table shows the amount of change from the year ended December 30, 2023 to the year ended December 28, 2024 in other items (dollars in thousands):

Interest expense

Interest expense increased in 2023 from 2022 due to increased interest rates.

Other income and expense in 2023 decreased $3.2 million over 2022.

Other income and expense in 2023 included an unfavorable $1.1 million pension cost adjustment, $1.4 million expense associated with the closure of Associated Toolmakers Limited in the second quarter of 2023, and an unfavorable working capital adjustment of $0.4 million in the third quarter of 2023 related to the sale of the Greenwald business, partially offset by a $1.6 million favorable adjustment for the final settlement of our swap agreement with Santander in the second quarter of 2023 and $0.7 million of other favorable items.

In 2022, other income included a favorable $1.8 million pension cost adjustment, a $0.6 million gain on the sale of the Eastern corporate office building, and $0.4 million of other favorable items, partially offset by a $0.3 million loss on the sale of the Wheeling, IL building.

Interest expense decreased in 2024 from 2023 is primarily due to paydown of principal.

The effective tax rate for 2024 was 22.6% compared to the 2023 effective tax rate of 21.9%.

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The Company serves a broad base of customers and industries with a variety of products.

As a result, any fluctuations in demand or payment from a particular industry or customer should not have a material impact on the Company’s sales and collection of receivables.

As a result, any fluctuations

in demand or payment from a particular industry or customer should not have a material impact on the Company’s sales and collection of receivables.

Management expects that the Company’s foreseeable cash needs for operations, capital expenditures, debt service and dividend payments will continue to be met in the next 12 months from December 28, 2024 and beyond by the Company’s operating cash flows and available credit facility.

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Net cash provided by operating activities

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

Net cash (used in) provided by in investing activities

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

Net cash used in investing activities

Net cash used in by financing activities

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In 2024, the Company contributed $2.1 million to its defined benefit retirement plan.

In 2023, reductions in working capital requirements provided $9.7 million, driven primarily reductions in accounts receivable and inventory.

In 2022, cash used to support additional working capital requirements was $5.2 million.

The Company used $5.4 million for investing activities in 2023, and investing activities provided $5.1 million in 2022.

In 2023, the Company invested $6.4 million in capital expenditures, invested $1.0 million in marketable securities, acquired a business for $0.4 million, and received payments on notes receivable of $2.4 million.

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

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

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 $6.4 million and $3.4 million in 2023 and 2022, respectively.

In 2024, reductions in working capital requirements provided $4.9 million, driven primarily by reductions in inventory and prepaid expenses.

In 2023, reductions in working capital requirements provided $7.8 million, primarily driven by reductions in accounts receivable and inventory, partially offset by decreases in accounts payable and other accrued liabilities.

The Company used $7.9 million and $4.6 million for investing activities in 2024 and 2023, respectively.

In 2024, the Company invested $9.7 million in capital expenditures, invested $1.0 million in marketable securities, received $2.3 million on the sale of one of its buildings, and received payments on notes receivable of $0.5 million.

In 2023, the Company invested $5.5 million in capital expenditures, invested $1.0 million in marketable securities, and received payments on notes receivable of $2.3 million.

Capital expenditures in fiscal year 2025 are expected to be approximately $9.8 million.

In 2023, the Company made total debt payments of $79.7 million, of which $59.3 million was an accelerated principal payment and used $2.8 million for payment of dividends.

In 2024, the Company made total debt payments of $4.8 million, of which $1.8 million were principal payments on the revolving commitment portion of the credit facility and used $2.7 million for payment of dividends.

The Company anticipates dividend payments in fiscal 2025 to be approximately $2.8 million.

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

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.

In 2023, the Company made total debt payments of $79.7 million, of which $59.3 million was an accelerated principal payment and used $2.8 million for payment of dividends.

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

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

The Company was in compliance with all covenants as of December 28, 2024 and December 30, 2023.

A decrease in earnings due to the impact of current economic conditions and inflationary pressures or the resulting harm to the financial condition of our customers, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and our fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and could cause us to fail to comply with the covenants under our Covenant Agreement.

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

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

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

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

Adjusted EBITDA from 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, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources.

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

Loss on sale of Wheeling, IL building

Gain on sale of corporate office building

Restructuring costs

Severance and accrued compensation

Greenwald final sale adjustment

Business closure costs

Non-GAAP tax impact of adjustments (1)

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

Estimate of the tax effect of the items identified to determine a non-GAAP annual effective tax rate applied to the pretax amount in order to calculate the non-GAAP provision for income tax

Loss on sale of ILC building in Wheeling, IL

Gain on sale of Eastern corporate office building

Restructuring costs associated with warehouse consolidation into Eberhard

Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the former Chief Executive Officer

Estimate of the tax effect of the items identified to determine a non-GAAP annual effective tax rate applied to the pretax amount in order to calculate the non-GAAP provision for income taxes

Expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of two former Chief Executive Officers

Final settlement of working capital adjustment associated with Greenwald sale

Associated Toolmakers Limited closure costs

Reconciliation of Non-GAAP Measures

Adjusted EBITDA from Continuing Operations Calculation

Adjusted EBITDA from Operations Calculation

For the Three and Twelve Months ended December 28, 2024 and December 30, 2023

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Depreciation and amortization

Loss on sale of Wheeling, IL building

Gain on sale of Eastern corporate office building

Restructuring costs

Severance and accrued compensation

Greenwald final sale adjustment

Adjusted EBITDA from continuing operations

Net loss from discontinued operations as reported per generally accepted accounting principles (GAAP)

Interest expense

Provision for income taxes

Depreciation and amortization

Business closure costs

Adjusted EBITDA from continuing operations (Non-GAAP)

Loss on sale of ILC building in Wheeling, IL

Gain on sale of Eastern corporate office building

Restructuring costs associated with warehouse consolidation into Eberhard

Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the former Chief Executive Officer

Loss on classification as held for sale

Adjusted EBITDA from discontinued operations

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

Interest expense

Provision for income taxes

Depreciation and amortization

Severance and accrued compensation

Greenwald final sale adjustment

Business closure costs

Loss on classification as held for sale

Total adjusted EBITDA

Expenses associated with accrued compensation and severance related to the elimination of the former Chief Operating Officer position and the departure of two former Chief Executive Officers

Final settlement of working capital adjustment associated with Greenwald sale

Associated Toolmakers Limited closure costs

Associated Toolmakers closure costs

Impact of classifying Big 3 Mold business as held for sale

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