UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| [X] | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year ended December 30, 201728, 2019
OR
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________ to _______________
Commission File Number 001-35383
THE EASTERN COMPANY
(Exact name of registrant as specified in its charter)
Connecticut | 06-0330020 |
| (State or other jurisdiction of | (I.R.S. Employer |
| incorporation or organization) | Identification No.) |
112 Bridge Street, Naugatuck, Connecticut | 06770 |
| (Address of principal executive offices) | (Zip Code) |
Registrant'sRegistrant’s telephone number, including area code: (203) 729-2255
Securities registered pursuant to Section 12(b) of the Act:Common Stock No Par ValueThe NASDAQ Stock Market LLC
(Title of each class) (Name of each exchange
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, No Par Value | EML | NASDAQ Global Market |
on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [X] No [ X ]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X][X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large“large accelerated filer," "accelerated” “accelerated filer," "smaller” “smaller reporting company,"” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [X] X ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [[X ] |
Emerging growth company [ ] | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of July 1, 2017,June 29, 2019, the last day of registrant'sregistrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was $155,324,724$143,544,835 (based on the closing sales price of the registrant'sregistrant’s common stock on the last trading date prior to that date). Shares of the registrant'sregistrant’s common stock held by each officer and director and shares held in trust by the pension plans of the Company have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 27, 2018, 6,263,24515, 2020, 6,240,705 shares of the registrant'sregistrant’s common stock, no par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required for Part IIIII of this report is incorporated herein by reference to the proxy statement for the 2018 annual meetingCompany’s 2020 Annual Meeting of the Company's shareholders,Shareholders, which will be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after December 30, 2017.28, 2019.
The Eastern Company
FOR THE FISCAL YEAR ENDED DECEMBER 30, 201728, 2019
TABLE OF CONTENTS
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
This
Statements contained in this Annual Report on Form 10-K (this "Form 10-K") contains forward-looking statementsthat are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. SuchForward-looking statements reflectmay be identified by the Company's current expectations regardinguse 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 products, its marketsoperations and its future financial and operating performance. These statements, however, are subject to risks and uncertainties that may cause the Company's actual results of operations in future periods to differ materially from those expected. Such risks and uncertaintiescurrently expected or anticipated. These factors include, but are not limited to: risks associated with doing business overseas, including fluctuations in exchange rates and the inability to unanticipated slowdownsrepatriate 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 and epidemics; 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; lower-cost competition; our ability to design, introduce and sell new products and related components; market acceptance of our products; 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 Company's major markets, changing customer preferences, lack of success of new products, loss of customers, competition, increased raw material prices, problemsautomotive, construction, aerospace, energy, oil and gas, transportation, electronic, commercial laundry, mining and general industrial markets; costs and liabilities associated with foreign sourcingenvironmental compliance; the impact of partsclimate change or terrorist threats and products, worldwide conditionsthe possible responses by the U.S. and foreign currency fluctuationsgovernments; failure to protect our intellectual property; cyberattacks; and materially adverse or unanticipated legal judgments, fines, penalties or settlements.; [the relative mix of products which impact margins and operating efficiencies in certain of our businesses; an inability to realize the expected cost savings from restructuring activities including effective completion of plant consolidations, cost reduction efforts including procurement savings and productivity enhancements, capital equipment improvements, and the implementation of lean manufacturing techniques the impact of delays initiated by our customers; our ability to increase manufacturing production to meet demand; potential changes to future pension funding requirements] Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions. Also, the Company makes estimates and assumptions that may materially affect results of operations,reported amounts and disclosures. These relate to valuation allowances for accounts receivable and excess and obsolete inventories, accruals for pensions and other factors discussed in Item 1A of this Form 10-Kpostretirement benefits (including forecasted future cost increases and from time to time, in the Company's filings with the Securitiesreturns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, Exchange Commission.on occasion, accruals for contingent losses. The Company undertakes no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise.
(a) General Development of Business
The Eastern Company (the "Company," "Eastern," "we," "us,"“Company,” “Eastern,” “we,” “us,” or "our"“our”) was incorporated under the laws of the State of Connecticut in October, 1912, succeeding a co-partnership established in October, 1858. The businessbusinesses of the Company isare the design, manufacture and sale of unique engineered solutions for niche industrial hardware, security products and metal products.markets.
Today, the Company maintains sixteen23 physical locations across North America, Europe, and Asia.
RECENT DEVELOPMENTSBUSINESS HIGHLIGHTS
On August 30, 2019, the Company and its newly-formed wholly-owned subsidiary, Eastern Engineered Systems, Inc., a Delaware corporation (“EES”) entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Big 3 Holdings, LLC, a Delaware limited liability company (“Seller”), Big 3 Precision Mold Services, Inc., a Delaware corporation and wholly-owned subsidiary of Seller
(“Big 3 Mold”), Big 3 Precision Products, Inc., a Delaware corporation and wholly owned subsidiary of Seller (“Big 3 Products”), Industrial Design Innovations, LLC, a Delaware limited liability company and wholly-owned subsidiary of Big 3 Products (“Design Innovations”), Sur-Form, LLC, a Delaware limited liability company and wholly-owned subsidiary of Big 3 Products (“Sur-Form”), Associated Toolmakers Limited, a limited company formed under the laws of England and Wales and wholly-owned subsidiary of Big 3 Mold (“Associated” and together with Big 3 Mold, Big 3 Products, Design Innovations and Sur-Form, collectively “Big 3 Precision”), TVV Capital Partners III, L.P., a Delaware limited partnership, TVV Capital Partners III-A, L.P., a Delaware limited partnership, Alan Scheidt, Todd Riley, Clinton Hyde, and Big 3 Holdings, LLC, a Delaware limited liability company, as the initial Seller Representative (the “Seller Representative”). On August 30, 2019, pursuant to the Stock Purchase Agreement, the Company, through EES, acquired all of the outstanding equity interests of Big 3 Precision Products and Big 3 Mold Services, and indirectly through them, all of the outstanding equity interests in Design Innovations, Sur-Form and Associated, for an adjusted purchase cash price of $81.2 million. The Big 3 acquisition was financed with a combination of $2.1 million of cash on hand, a credit agreement (the “Credit Agreement”) with Santander Bank, N.A., for itself and, People’s United Bank, National Association and TD Bank, N.A. as lenders, providing for a $100.0 million term loan and a $20.0 million revolving credit line. In connection with the Credit Agreement, the Company also used its cash to repay the remaining balance (approximately $19.1 million) of its then outstanding term loan with People’s United Bank National Association. Through its two divisions, Big 3 Products and Big 3 Mold, Big 3 Precision serves diverse markets including truck, automotive, plastic packaging products, consumer packaged goods and pharmaceuticals. In particular, Big 3 Precision Products works with leading manufacturers to design and produce custom returnable packaging to integrate with their assembly processes. Big 3 Mold is a global leader in the design and manufacture of blow mold tools.
Effective June 1, 2018 the Company acquired certain assets of Load N Lock Systems, Inc. (“Load N Lock”), including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights, and assumed certain liabilities and rights existing under all sales and purchase agreements. The transaction price was $5 million. The Load N Lock acquisition was financed with a draw down on the Company’s $10 million revolving credit facility. Load N Lock operates as a part of Eastern's Illinois Lock Company ("ILC"), a part of Eastern's Security Products Segment.
On April 3, 2017, the Company completed a Securities Purchase Agreementthe acquisition (the "Securities Purchase Agreement"“Velvac Acquisition”) withof all of the outstanding stock of Velvac Holdings, Inc., a Delaware corporation ("Velvac"), Jeffery R. Porter, W. Greg Bland, John Backovitch, Dave Otto, Bob Otto, Timothy Rintelman, Robert Brester, Dan Mcgrew, Mark Moeller, and Prospect Partners II, L.P. (collectively, the "Sellers"). Pursuant to the Securities Purchase Agreement, the Company acquired 100% of the issued and outstanding stock of Velvac from the Sellers (the "Velvac Acquisition"(“Velvac”) for $39.5 million and an earnout consideration contingent upon Velvac achieving minimum earnings performance levels and based on sales of Velvac'sVelvac’s new proprietary Road-iQ product line (the "Earnout Consideration").line. The Velvac Acquisition was financed with a $31 million term loan from People'sPeople’s United Bank, National Association, ("People's"), a $5 million draw down on the Company's $10 million revolving credit facility with People'sPeople’s United Bank, National Association and $3.5 million in cash. In addition, the Company paid a working capital adjustment of $0.6 million by which working capital exceeded a pre-determined target amount. Please refer to the Company's Current Report on Form 8-K filed on April 7, 2017 and the amendment thereto filed on June 19, 2017 for further details.
(b) Financial Information about Industry Segments
Financial information about industry segments is included in Note 10 to the Company's financial statements, included in Item 8 of this Form 10-K.
(c) Narrative Description of Business
The Eastern Company actively manages niche industrial divisionsbusinesses that focus on the design, manufacture and sale of particular products and industrial services and are leaders in their specific market sector.sell unique engineered solutions to niche markets. We believe Eastern's divisionsEastern’s businesses operate in industries with long-term macroeconomic growth opportunities, have positive and stable cash flows, face minimal threats of technological or competitive obsolescence, and have strong management teams largely in place.
Eastern focuses on proactive financial and operational management of its divisions in order to increase earnings and increase long-term shareholder value. Among other things, Eastern regularly monitors financial and operational performance, instilling consistent financial discipline and assisting management in their analysis and pursuit of prudent organic growth strategies.
Eastern also identifies and works with division management to execute attractive external growth and acquisition opportunities. In addition, Eastern recruits and retains talented managers to operate its divisions.
Eastern continuously reviews acquisitions of businesses that have the potential for significant long-term value creation and periodically evaluates the retention and disposition of its existing divisions and investments. We seeklook to acquire businesses that produce stable and growing earnings and cash flows. Eastern may pursue acquisitions in industries other than those in which its divisionsbusinesses currently operate if an acquisition presents an attractive opportunity.
Eastern focuses on proactive financial, operational, and strategic management of its businesses in order to increase cash generation, operating earnings and long-term shareholder value. Among other things, Eastern monitors financial and operational performance of each of its businesses and instills consistent financial discipline. Eastern’s management analyzes and pursues prudent organic growth strategies and works to execute attractive external growth and acquisition opportunities.
In addition, Eastern recruits and retains talented managers to operate its businesses. We look for leaders who are accountable, maintain cost discipline, act quickly, and build strong followership.
The Company operatesreports in three business segments: Industrial Hardware, Security Products and Metal Products.
Industrial Hardware
The Industrial Hardware business segment consists of Big 3 Precision, including Big 3 Products and Big 3 Mold; Eberhard Manufacturing Company, Eberhard Hardware Manufacturing Ltd., and Eastern Industrial Ltd,Ltd; Velvac Holdings; Canadian Commercial Vehicles Corporation, Composite Panel TechnologiesCorporation; and Sesamee Mexicana, S.A. de C.V.
These divisionsbusinesses design, manufacture and market a diverse product line of custom and standard vehicular and industrial hardware, including turnkey returnable packaging solutions; passenger restraint and vehicular locks, latches, hinges,hinges; mirrors, mirror-cameras,mirror-
cameras; light-weight sleeper boxesboxes; and truck bodies. These products can be found on tractor-trailer trucks, specialty commercial vehicles, recreational vehicles, fire and rescue vehicles, school buses, military vehicles and other vehicles. In addition, theThe segment also designs and manufactures a wide selection of fasteners and other closure devices used to secure access doors on various typestype of industrial equipment such as metal cabinets, machinery housings and electronic instruments. The segment sells directly to original equipment manufacturers and to distributors through in-house salesmen and outside sales representatives. Sales, customer engineering and customer service are provided through in-house sales personnel and engineering staff. We believe that in order to service these markets, our divisions offer competitive engineering design, service, quality and price. In addition,Also we invest in the continued introduction of new or improved product designs and we expand into synergistic product lines in order to maintain and increase market share. Big 3 Products and Big 3 Mold’s turnkey returnable packaging solution s are used in the assembly process of vehicles, aircraft and durable goods and in the production process of plastic packaging products, packaged consumer goods and pharmaceuticals. Big 3 Products works with leading manufacturers to design and produce custom returnable packaging to integrate with their assembly processes. Big 3 Mold is a global leader in the design and manufacture of blow mold tools. Other products are found on tractor-trailer trucks, specialty commercial vehicles, recreational vehicles, fire and rescue vehicles, school buses, military vehicles and other vehicles. In addition, through Big 3 Products and Big 3 Mold, Big 3 Precision serves diverse markets including truck, automotive, plastic packaging products, packaged consumer goods and pharmaceuticals. The segment sells directly to original equipment manufacturers (“OEM’s”) and to distributors. Sales, customer engineering and customer service are primarily provided through in-house sales personnel and engineering staff. We believe that our businesses offer competitive engineering design, service, quality and price to service these markets.
Security Products
The Security Products business segment consists of Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries Ltd.,; Greenwald Industries ("Greenwald"(“Greenwald”),; and Argo EMS (formerly Argo Transdata). Illinois Lock Company/CCL Security Products, known in the market as ILC, is a global leader in the design and manufacture of engineered security and access solutions in the form of mechanical, electronic and wireless products. ILC focuses on the industrial, vehicle accessory, outdoor recreational equipment, medical, and point of sale and vending segments. These products and solutions are specified and sold to OEM’s contract equipment manufacturers, and industrial distributors globally. ILC employs an 80/20 business philosophy to drive focus and efficiency in its end-markets, customers, products and manufacturing processes. Greenwald designs, manufactures and distributes custom engineeredmarkets payment systems and standard closing and locking systems, including vehicular accessory locks, cabinet locks, cam locks, electric switch locks, tubular key locks and combination padlocks. Some of its products are sold under the names SESAMEE®, PRESTOLOCK® andSEARCHALERT™. These products are sold to original equipment manufacturers, distributors, route operators, and locksmiths through in-house salesmen and outside sales representatives. Greenwald manufactures and markets coin acceptors and other coin security products used primarily in the commercial laundry markets. Greenwald'smarket. Greenwald’s products include timers, drop meters, coin chutes, money boxes, meter cases, mobile payment apps, smart cards, value transfer stations, smart card readers, card management software, and access control units. Argo EMS supplies printed circuit boards and other electronic assemblies to original equipment manufacturersOEMs in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial controls, medical and military products. The Security Products segment continuously seeks newevaluates markets, where it can offer competitive engineered solutions that meet manufacturers' security needs.technology and customer requests to develop growth strategies for the future.
Metal Products
The Metal Products Segment consists of Frazer & Jones. The Frazer & Jones Company designs and manufactures high quality ductile and malleable iron castings. Products include valves, torque screws, bean clamps and concrete anchors. These products are sold to a wide range of industrial markets, including the oil, water and gas; truck/automotive rail, and military/aerospace. The Company believes that its Metal Products business segment based at the Company's Frazer & Jones facility, is the largest and most efficient producer of expansion shells for use in supporting the roofs of underground mines. This segment also manufactures specialty malleable and ductile iron castings.mines in North America.
Typical products include mine roof support anchors, couplers for railroad braking systems, support anchoring for construction and couplers/fittings for utility (oil, water and gas) industries. Mine roof support anchors are sold to bolt manufacturers while specialty castings are sold to original equipment manufacturers or machine houses. Frazer & Jones will not be effected by the new metals tariff since all metals are purchased domestically.
General
The Company obtains materials from nonaffiliated domestic, Asian affiliated and Asian nonaffiliated sources. Raw materials and outside services were readily available for all of the Company'sCompany’s segments during 20172019 and are expected to be readily available in 20182020 and the foreseeable future. In 2017, the Company experienced price increases for many of the raw materials used in producing its products, including: scrap iron, zinc, brass and stainless steel. In 2016, the Company experienced a price decline for many of these same materials. At this time, the Company expects raw material prices to continue to increase as demand for raw materials increases
as the global economy grows. These raw material cost 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.
Patent and trademark protection for the various product lines within the Company is limited, but believed by the Company to be sufficient to protect the Company'sCompany’s competitive positions. Patent durations are from 4 to 20 years. No business segment is dependent on any patent nor would the loss of any patent have any material adverse effect on the Company'sCompany’s business.Foreign sales are not significant.
None of the Company's divisionCompany’s segments are seasonal.
Customers for all business segments are broad-based geographically and by markets, and sales are generally not highly concentrated by customer. No one customer exceeded 10% of total consolidatedForeign sales in 2017, 2016 or 2015.
The dollar amount of the backlog of orders received by the Company is believed to be firm as of the fiscal year ended December 30, 2017. Such backlogs was $34,991,000 at December 30, 2017, as compared to $26,993,000 at December 31, 2016. The primary reasons for the change from 2016 to 2017 were the acquisition of Velvac on April 3, 2017 and the timing of orders received from customers.not significant.
The Company encounters competition in all of its business segments. Imports from Asia and Latin America with favorable currency exchange rates and low cost labor have created additional pricing pressure. The Company competes successfully by
offering high quality custom engineered products on a timely basis. To compete, the Company deploys internal engineering resources, maintains cost effective manufacturing capabilities through its wholly-owned Asian subsidiaries, expands its product lines through product development and acquisitions, and maintains sufficient inventory for fast turnaround of customer orders.
Research and development expenditures in 2017 were $3,678,000 and represented 1.8% of gross revenues. In 2016 and 2015, such expenditures were $1,526,000 and $1,219,000, respectively. The research and developments costs are primarily attributable to the Velvac and Eberhard Manufacturing divisions. Velvac performs ongoing research, in both the mechanical and electronic product lines, and in RoadIQ. This research is necessary for the Company to remain competitive and to continue to provide technologically advanced electronic systems. Eberhard Manufacturing develops new products for the various markets it serves based on changing customer requirements to remain competitive. Other research projects include the development of various latches and rotaries and various transportation and industrial hardware products.
The Company does not anticipate that compliance with federal, state or local environmental laws or regulations isare likely to have a material effect on the Company'sCompany’s capital expenditures, earnings or competitive position.
The averageAs of February 1, 2020, the Company’s total number of employees in 2017 was 1,189.is 1,399, all of which are full time employees.
The Company'sCompany’s ratio of working capital to sales improved to 28.1% in 2017 to 33.7%2019 from 47.1%30.3% in 2016 and 41.6% in 2015.2018. The improvement in working capital was the result of a reduction in inventory in the Metal business segmentincreased sales activity and partially the result of the Velvac acquisition.our continued commitment to reducing our working capital. Working capital includes cash held in various foreign subsidiaries. With the passage of recent tax legislation cash previously held in foreign countries can be repatriated back to the United States and used for other business needs thus reducing working capital further. Other factors affecting working capital include our average days'days’ sales in accounts receivable, inventory turnover ratio and payment of vendor accounts payable. In some cases, the company must hold extra inventory due to extended lead time in receiving products ordered from our foreign subsidiaries to ensure product is available for our customers. The Company continues to monitor its working capital needs with the goal of reducing our ratio of working capital to sales to 25%.
(d) Financial Information about Geographic Areassales.
The Company includes six operating divisions located within the United States, two wholly-owned Canadian subsidiaries (one located in Tillsonburg, Ontario, Canada, and one in Kelowna, British Columbia, Canada), a wholly-owned Taiwanese subsidiary located in Taipei, Taiwan, a wholly-owned subsidiary located in Hong Kong, two wholly-owned Chinese subsidiaries (one located in Shanghai, China, and one located in Dongguan, China), a wholly-owned subsidiary located in Reynosa, Mexico, and a wholly-owned subsidiary located in Lerma, Mexico.
Individually, the Canadian, Taiwanese, Hong Kong, Chinese and Mexican subsidiaries' revenues and assets are not significant. Substantially all other revenues are derived from customers located in the United States.
Financial information about foreign and domestic operations' revenues and identifiable assets is included in Note 10 to the Company's financial statements, included in Item 8 of this Form 10-K. Information about risks attendant to the Company's foreign operations is set forth in Item 1A of this Form 10-K.
(e) Available Information
The Company makes available, free of charge through its Internet website at http://www.easterncompany.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"“Exchange Act”), as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the "SEC"“SEC”). The public may read and copy any materials that the Company files with the SEC at the SEC's Public Reference Room, 100 F Street, N.E., Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The Company'sCompany’s reports filed with, or furnished to, the SEC are also available on the SEC'sSEC’s website at www.sec.gov.
In addition to the other information contained in this Form 10-K and the exhibits hereto and the Company'sCompany’s other filings with the SEC, the following risk factors should be considered carefully in evaluating the Company'sCompany’s business. The Company'sCompany’s business, financial condition or results of operation could be materially adversely affected by any of these risks or additional risks not presently known to the Company, or by risks the Company currently deems immaterial.immaterial, which may also adversely affect its business, financial condition or results of operations, such as: changes in the economy, including changes in inflation, tax rates, interest rates and currency exchange rates; risk associated with possible disruption in the Company's operations due to terrorism, cybersecurity threats and other manmade or natural disasters; future regulatory actions, legal issues or environmental matters; loss of, or changes in, executive management; and changes in accounting standards that are adverse to the Company.operations. Additionally, there can be no assurance that the Company has correctly identified and appropriately assessed all factors affecting its business or that information publicly available with respect to these matters is complete and correct.
The Company'sCompany’s business is subject to risks associated with conducting business overseas.
International operations could be adversely affected by changes in political and economic conditions, trade protection measures, restrictions on repatriation of earnings, differing intellectual property rights and changes in regulatory requirements that restrict the sales of products or increase costs. Changes in exchange rates between the U.S. dollar and foreign currencies could result in increases or decreases in earnings and may adversely affect the value of the Company'sCompany’s assets outside the United States. The Company'sCompany’s operations are also subject to the effects of international trade agreements and regulations. These trade agreements could impose requirements that adversely affect the Company'sCompany’s business, such as, but not limited to, setting quotas on products that may be imported from a particular country into the Company'sCompany’s key markets in North America.
The Company'sCompany’s ability to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes, severe weather or increased homeland security requirements in the United States or other countries. These issues could delay importation of products or require the Company to locate alternative ports or warehousing providers to avoid disruption to customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on the Company'sCompany’s business, financial conditions or results of operations.
The Company is also subject to the impacts of political, economic and social instability. For example, the United Kingdom’s withdrawal from the European Union, commonly referred to as “Brexit,” was completed on January 31, 2020, commencing a
standstill transition period that is currently set to last until December 31, 2020. During this transition period, the United Kingdom’s trading relationship with the European Union will remain unchanged while the parties negotiate to agree on and implement a new trading relationship. There remains significant uncertainty about how and when such final agreement will be reached, and the withdrawal could significantly disrupt the free movement of goods, services, and people between the United Kingdom and the European Union, and result in increased legal and regulatory complexities, as well as potential higher costs of conducting business in Europe. Brexit has also contributed to significant volatility and uncertainty in global stock markets and currency exchange rates, and such volatility could continue to occur. The uncertainty surrounding the terms of the United Kingdom’s withdrawal and its consequences, as well as market volatility and any deterioration in economic conditions due to the uncertainty surrounding Brexit, could adversely impact consumer and investor confidence, and the level of consumer purchases of discretionary items and retail products, including our products. Any of these effects, among others, could materially adversely affect our business, results of operations, and financial condition.
Additionally, Brexit has resulted in the immediate strengthening of the U.S. dollar against foreign currencies in which the Company conducts business. Because the Company translates revenue denominated in foreign currency into U.S. dollars for its financial statements, during periods of a strengthening U.S. dollar, the Company’s reported earnings from foreign operations are reduced. As a result of Brexit, there may be further periods of volatility in the currencies in which the Company conducts business.
Our financial and operating performance may be adversely affected by epidemics and other health related issues.
Our business and financial and operating performance could be materially and adversely affected by the outbreak of epidemics including but not limited to the novel coronavirus (2019-nCoV) and other health related issues. As a result of the ongoing novel coronavirus, the Company’s operations in China, Hong Kong and Taiwan are expected to experience a slowdown or temporary suspension in production. Our business could be materially and adversely affected in the event that the slowdown or suspension continues for a long period of time. During such epidemic outbreak, China, Hong Kong or Taiwan may adopt certain hygiene measures, including quarantining visitors from places where any of the contagious diseases were rampant. Those restrictive measures may adversely affect and slow down economic development during that period. Any prolonged restrictive measures in order to control the contagious disease or other adverse public health developments in China, Hong Kong or Taiwan may have a material adverse effect on our business, financial condition and results of operations.
Indebtedness may affect our business and may restrict our operating flexibility.
As of December, 31, 2017,28, 2019, the Company had $35,225,000$98,765,000 in total consolidated indebtedness. Subject to restrictions contained in our credit facility, the Company may incur additional indebtedness in the future, including indebtedness incurred to finance acquisitions. The level of indebtedness and servicing costs associated with that indebtedness could have important effects on our operation and business strategy. For example, the indebtedness could:
· | Place the Company at a competitive disadvantage relative to the Company'sPlace the Company at a competitive disadvantage relative to the Company’s competitors, some of which have lower debt service obligations and greater financial resources; |
· | Limit our ability to borrow additional funds; |
7
Limit our ability to borrow additional funds;Limit our ability to complete future acquisitions;
· | Limit our ability to complete future acquisitions; |
Limit our ability to pay dividends;
· | Limit our ability to pay dividends; |
Limit our ability to make capital expenditures; and
· | Limit our ability to make capital expenditures; and |
Increase the Company’s vulnerability to general adverse economic and industry conditions.
· | Increase the Company's vulnerability to general adverse economic and industry conditions. |
The Company'sCompany’s ability to make scheduled principal payments, to pay interest on, or to refinance our indebtedness and to satisfy other debt obligations will depend upon future operating performance, which may be affected by factors beyond the Company'sCompany’s control. In addition, there can be no assurance that future borrowings or the issuance of equity would be available to the Company on favorable terms for the payment or refinancing of the Company'sCompany’s debt. If the Company is unable to service its indebtedness, the business, financial condition and results of operation would be materially adversely affected.
The Company'sCompany’s credit facility contains covenants requiring the Company to achieve certain financial and operations results and maintain compliance with specified financial ratios. The Company'sCompany’s ability to meet the financial covenants or requirements in its credit facility may be affected by events beyond our control, and the Company may not be able to satisfy such covenants and requirements. A breach of these covenants or the Company'sCompany’s inability to comply with the financial ratios, tests or other restrictions contained in our credit facility could result in an event of default under such credit facility. Upon the occurrence of an event of
default under our credit facility and/or the expiration of any grace periods, the lenders could elect to declare all amounts outstanding under our credit facility, together with accrued interest, to be immediately due and payable. If this were to occur, the Company'sCompany’s assets may not be sufficient to fully repay the amounts due under our credit facility or the Company'sCompany’s other indebtedness. See also "ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK" of this Form 10-K.
In addition, the Company'sCompany’s growth strategy involves expanding sales of its products into foreign markets. There is no guarantee that the Company'sCompany’s products will be accepted by foreign customers or how long it may take to develop sales of the Company'sCompany’s products in these foreign markets.
The phaseout of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest rates.
On July 27, 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. It is unclear whether new methods of calculating LIBOR will be established such that it continues to exist after 2021, or if alternative rates or benchmarks will be adopted. Changes in the method of calculating LIBOR, or the replacement of LIBOR with an alternative rate or benchmark, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect the Company’s results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks. We may need to renegotiate our revolving credit facility or incur other indebtedness, and changes in the method of calculating LIBOR, or the use of an alternative rate or benchmark, may negatively impact the terms of such indebtedness. If changes are made to the method of calculating LIBOR or LIBOR ceases to exist, we may need to amend certain contracts, including our revolving credit facility, and cannot predict what alternative rate or benchmark would be negotiated. This may result in an increase to our interest expense.
Increases in the price or reduced availability of raw materials.materials could increase the cost of raw materials, decrease profit margins or impair the Company’s ability to meet production requirements on time or at all.
Raw materials needed to manufacture products are obtained from numerous suppliers. Under normal market conditions, these raw materials are readily available on the open market from a variety of producers. However, from time to time, the prices and availability of these raw materials fluctuate, which could impair the Company'sCompany’s ability to procure the required raw materials for its operations or increase the cost of manufacturing its products. If the price of raw materials increases, the Company may be unable to pass these increases on to its customers and could experience reductions to its profit margins. Also, any decrease in the availability of raw materials could impair the Company'sCompany’s ability to meet production requirements in a timely manner.manner or at all.
The Company faces active global competition and if it does not compete effectively, its business may suffer.
The Company encounters competition in all of its business segments, and imports from Asia and Latin America with favorable currency exchange rates and low-cost labor have resulted in pricing pressure. The Company competes with other companies that offer similar products or that produce different products appropriate for the same uses. To remain profitable and defend market share, the Company must continue to offer high quality custom engineered products on a timely basis, deploy internal engineering resources, maintain cost-effective manufacturing capabilities through its wholly owned Asian subsidiaries, expand its product lines through product development and acquisitions, and maintain sufficient inventory for fast turnaround of customer orders. The Company may not be able to compete effectively on all of these fronts and with all of its competitors, and the failure to do so could have a material adverse effect on its sales and profit margins.
In addition, the Company may have to reduce prices on its products and services, or make other concessions, to stay competitive and retain market share. Price reductions taken by the Company in response to customer and competitive pressures, as well as price reductions and promotional actions taken to drive demand that may not result in anticipated sales levels, could also negatively impact the Company’s business.
If tariffs on imported steelChinese products are further expanded to include additional products and aluminum, such as those recently proposed by the President of the United States, are implemented,tariff is reinstated to 25%, our cost of raw materials may increase, which could adversely affect our business, results of operations and financial condition.
The Company obtains raw materials including stainless steel used in the production of its products from domestic, Asian affiliated and nonaffiliated sources. On January 15,2020, the U.S. and China signed the U.S.-China Phase One trade deal which, among other things, rolls back tariffs on $120 billion of Chinese products from 15% to 7.5% effective February 14, 2020. The PresidentU.S. agreed not to proceed with the 15% tariffs on $160 billion of consumer goods which were scheduled to take effect December 15, 2019. However, the United States recently announced a proposal25% tariffs on $250 billion of Chinese imports will remain in effect subject to imposefurther reductions depending on the progress of future negotiations. If China does not follow through its agreed upon commitments and tariffs are reinstated on $550 billion of 25 percent on imported steel and 10 percent on imported aluminum throughChinese products at the issuance of an executive order. If implemented, such tariffs may cause an increase in costs for all domestic entities, including the Company, that purchase imported steel or aluminum. Because steel are raw materials used in a wide-range of the Company's products, a broad-based cost increase would result in an increase in the Company's cost of goods sold, which may require us to increase prices for some of our products. However, our inability to pass along such price increases to our customers, or an inability of our suppliers to meet our raw material requirements, may have a material adverse impact on our business, results of operations or financial condition.
Changes in competition in the markets that the Company services could impact revenues and earnings.
Any change in competition may result in lost market share or reduced prices, which25% rate, it could result in a loss of business and possible reduced profits and margins. This may impair the ability to grow or even maintain current levels of revenues and earnings. Whilemargins for the Company, has an extensive customer base, loss of certain customers could adversely affectif the Company's business, financial condition or results of operations until such business is replaced, and no assurances cantariffs cannot be made that the Company would be able to regain or replace any lost customers.
The Company is required to evaluate its internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002.
The Company is an "accelerated filer" as definedrecovered in Rule 12b-2 under the Exchange Act and is thus required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires the Company to include in its report management's assessment of the effectiveness of the Company's internal control over financial reporting as of the end of the fiscal period for which the Company is filing its Annual Report on Form 10-K. This report must also include disclosure of any material weaknesses in internal control over financial reporting that the Company has identified. Additionally, the Company's independent registered public accounting firm is required to issue a report on the Company's internal control over financial reporting and their evaluation of the operating effectiveness of the Company's internal control over financial reporting. The Company's assessment requires it to make subjective judgments, and the independent registered public accounting firm may not agree with the Company's assessment. If the Company or its independent registered public accounting firm were unable to complete the assessments within the period prescribed by Section 404 and thus be unable to conclude that the internal control over financial reporting is effective, investors could lose confidence in the Company's reported financial information, which could have an adverse effect on the market price of the Company's common stock or impact the Company's borrowing ability. In addition, changes in operating conditions and changes in compliance with policies and procedures currently in place may result in inadequate internal control over financial reporting in the future.higher selling prices.
The inability to develop new products could limit growth.
Demand for new products and the inability to develop and introduce new competitive products at favorable profit margins could adversely affect the Company'sCompany’s performance and prospects for future growth, and the Company would not be positioned to maintain current levels of revenues and earnings. The uncertainties associated with developing and introducing new products, such as the market demands and the costs of development and production, may impede the successful development and introduction of new products. Acceptance of the new products may not meet sales expectations due to several factors, such as the Company'sCompany’s potential inability to accurately predict market demand or to resolve technical issues in a timely and cost effective manner. Additionally, the inability to develop new products on a timely basis could result in the loss of business to competitors.
The inability to identify or complete acquisitions could limit growth.
The Company'sCompany’s future growth may partly depend on its ability to acquire and successfully integrate new businesses. The Company intends to seek additional acquisition opportunities, both to expendexpand into new markets and to enhance the Company'sCompany’s position in existing markets. However, there can be no assurances that the Company will be able to successfully identify suitable candidates, negotiate appropriate terms, obtain financing on acceptable terms, complete proposed acquisitions, successfully integrate acquired businesses or expand into new markets. Once acquired, operations may not achieve anticipated levels of revenues or profitability.
Acquisitions involve risk, including difficulties in the integration of the operations, technologies, services and products of the acquired companies and the diversion of management'smanagement’s attention from other business concerns. Although the Company'sCompany’s management will endeavor to evaluate the risks inherent in any particular transaction, there can be no assurances that the Company'sCompany’s management will properly ascertain all such risks. In addition, prior acquisitions have resulted, and future acquisitions could result in the incurrence of substantial debt and other expenses. Future acquisitions may also result in potentially dilutive issuances of equity securities. Difficulties encountered with acquisitions may have a material adverse effect on our business, financial condition and results of operations.
We may be unable to successfully execute or effectively integrate acquisitions, including the Big 3 Precision acquistion and any businesses we may acquire in the future.
We regularly review our portfolio of businesses and pursue growth through acquisitions. We may not be able to complete transactions on favorable terms, on a timely basis, or at all, and the success of any such acquisitions depends on our ability to combine the acquired business with our existing business in a manner that does not disrupt our and the acquired business’s ongoing relationships with customers, suppliers and employees. Our results of operations and cash flows may be adversely impacted by (i) the failure of acquired businesses to meet or exceed expected returns, including risk of impairment; (ii) the failure to integrate multiple acquired businesses into the Company simultaneously and on schedule or to achieve expected synergies and (iii) the discovery of unanticipated liabilities, cybersecurity and compliance issues, labor relations difficulties or other problems in acquired businesses for which we lack contractual protections, or insurance or indemnities.
In particular, the Company may also be adversely impacted if it is unable to successfully combine its businesses with that of Big 3 Precision in a manner that does not materially disrupt the existing relationships of either the Company or Big 3 Precision or adversely affect current revenues and investments in future growth. Additionally, the Company may not be able to successfully achieve the level of cost savings, revenue enhancements and synergies that it expects in connection with the acquisition. If the Company is not able to successfully achieve these objectives, the anticipated benefits of its acquisition of Big 3 Precision may not be realized fully or at all or may take longer to realize than expected.
Changes in competition in the markets that the Company services could impact revenues and earnings.
Any change in competition may result in lost market share or reduced prices, which could result in reduced profits and margins. This may impair the ability to grow or even maintain current levels of revenues and earnings. While the Company has an extensive customer base, loss of certain customers could adversely affect the Company’s business, financial condition or results of operations until such business is replaced, and no assurances can be made that the Company would be able to regain or replace any lost customers.
The Company is required to evaluate its internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002.
The Company is an “accelerated filer” as defined in Rule 12b-2 under the Exchange Act and is thus required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires the Company to include in its report management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of the end of the fiscal period for which the Company is filing its Annual Report on Form 10-K. This report must also include disclosure of any material weaknesses in internal control over financial reporting that the Company has identified. Additionally, the Company’s independent registered public accounting firm is required to issue a report on the Company’s internal control over financial reporting and their evaluation
of the operating effectiveness of the Company’s internal control over financial reporting. The Company’s assessment requires it to make subjective judgments, and the independent registered public accounting firm may not agree with the Company’s assessment. If the Company or its independent registered public accounting firm were unable to complete the assessments within the period prescribed by Section 404 and thus be unable to conclude that the internal control over financial reporting is effective, investors could lose confidence in the Company’s reported financial information, which could have an adverse effect on the market price of the Company’s common stock or impact the Company’s borrowing ability. In addition, changes in operating conditions and changes in compliance with policies and procedures currently in place may result in inadequate internal control over financial reporting in the future.
Environmental compliance costs and liabilities could increase the Company'sCompany’s expenses and adversely affect the Company'sCompany’s financial condition.
The Company'sCompany’s operations and properties are subject to laws and regulations relating to environmental protection, including air emissions, water discharges, waste management and workplace safety. These laws and regulations can result in the imposition of substantial fines and sanctions for violations and could require the installation of pollution control equipment or operational changes to limit pollution emissions and/or decrease the likelihood of accidental hazardous substance releases. The Company must conform its operations and properties to these laws and adapt to regulatory requirements in the countries in which the Company's divisionsCompany’s businesses operate as these requirements change.
The Company uses and generates hazardous substances and wastes in its operations and, as a result, could be subject to potentially material liabilities relating to the investigation and clean-up of contaminated properties and to claims alleging personal injury. The Company has experienced, and expects to continue to experience, costs relating to compliance with environmental laws and regulations. In connection with the Company'sCompany’s acquisitions, the Company may assume significant environmental liabilities, some of which it may not be aware of at the time of acquisition. In addition, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or the imposition of new clean-up requirements could require the Company to incur costs or become the basis for new or increased liabilities that could have a material adverse effect on our business, financial condition and results of operations.
Changes in climate may increase the frequency and intensity of adverse weather patterns and may negatively impact our business.
Natural disasters, changes in climate, and geo-political events could materially adversely affect our financial performance. The occurrence of one or more natural disasters, such as hurricanes, tropical storms, floods, fires, earthquakes, tsunamis, cyclones, typhoons, weather conditions such as major or extended winter storms, droughts and tornadoes, whether as a result of climate change or otherwise, severe changes in climate and geo-political events, such as war, civil unrest or terrorist attacks in a country in which we operate or in which our suppliers are located could adversely affect our operations and financial performance.
Our technology is important to the Company'sCompany’s success and the failure to protect this technology could put the Company at a competitive disadvantage.
Some of the Company'sCompany’s products rely on proprietary technology; therefore, the Company believes that the development and protection of intellectual property rights through patents, copyrights, trade secrets, trademarks, confidentiality agreements and other contractual provisions are important to the future success of its business. Despite the Company'sCompany’s efforts to protect proprietary rights, unauthorized parties or competitors may copy or otherwise obtain and use the Company'sCompany’s products or technology. Actions to enforce these rights may result in substantial costs and diversion of resources and the Company makemakes no assurances that any such actions will be successful.
In addition to the United States, we have applied for intellectual property protection in other jurisdictions with respect to certain innovations and new products, product features, and processes. The laws of certain foreign countries in which we do business, or contemplate doing business in the future, do not recognize intellectual property rights or protect them to the same extent as U.S. law. As a result, these factors could weaken our competitive advantage with respect to our products, services, and brands in foreign jurisdictions, which could adversely affect our financial performance. We may also encounter significant problems in protecting and defending our licensed and owned intellectual property in foreign jurisdictions. For example, China currently affords less protection to a company’s intellectual property than some other jurisdictions. As such, the lack of strong patent and other intellectual property protection in China may significantly increase our vulnerability regarding unauthorized disclosure or use of our intellectual property and undermine our competitive position. Proceedings to enforce our intellectual property rights in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business.
The Company relies on information and technology for many of its business operations, which could fail and cause disruption to the Company'sCompany’s business operations.
The Company'sCompany’s business operations are dependent upon information technology networks and systems to securely transmit, process and store electronic information and to communicate among its locations around the world and with clients and vendors. A shut-down of, or inability to access, one or more of the Company'sCompany’s facilities, a power outage or a failure of one or more of the Company'sCompany’s information technology, telecommunications or other systems could significantly impair the Company'sCompany’s ability to perform such functions on a timely basis. Computer viruses, cyberattacks, other external hazards and human error could result in the misappropriation of assets or sensitive information, corruption of data or operational disruption. If sustained or repeated, such a business interruption, system failure, service denial or data loss and damage could result in a deterioration of the Company'sCompany’s ability to write and process orders, provide customer service or perform other necessary business functions.
A breach in the security of the Company'sCompany’s software could harm its reputation, result in a loss of current and potential customers and subject the Company to material claims, which could materially harm our operating results and financial condition.
If the Company'sCompany’s security measures are breached, an unauthorized party may obtain access to the Company'sCompany’s data or users'users’ or customers'customers’ data. In addition, cyber-attacks and similar acts could lead to interruptions and delays in customer processing or a loss or breach of a customer'scustomer’s data. Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and often are not recognized until launched against a target, the Company may be unable to anticipate these techniques or to implement adequate preventative measures. The risk that these types of events could seriously harm the Company'sCompany’s business is likely to increase as the Company expands the number of web-based products we offer, the services we provide, and our global operations.
Regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection. In addition, the interpretation and application of consumer and data protection laws in the United States and elsewhere are often uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with the Company'sCompany’s data practices. If so, in addition to the possibility of fines, this could result in an order requiring that the Company change its data practices, which could have an adverse effect on its business and results of operations.
Any security breaches for which the Company is, or is perceived to be, responsible, in whole or in part, could subject us to legal claims or legal proceedings, including regulatory investigations, which could harm the Company'sCompany’s reputation and result in significant litigation costs and damage awards or settlement amounts. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could materially harm our operating results and financial condition. Security breaches also could cause the Company to lose current and potential customers, which could have an adverse effect on
our business. Moreover, the Company might be required to expend significant financial and other resources to further protect against security breaches or to rectify problems caused by any security breach.
The Company could be subject to litigation, which could have a material impact on the Company'sCompany’s business, financial condition or results of operations.
From time to time, the Company'sCompany’s operations are parties to or targets of lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, and environmental and employment matters, which are defended and settled in the ordinary course of business. WhileAny litigation to which the Company is unable to predict the outcome of any of these matters, it does not believe, based upon currently available information, that the resolution of any pending matter willmay be subject could have a material adverse effect on its business, financial condition or results of operations. See "ITEM“ITEM 3 – LEGAL PROCEEDINGS"PROCEEDINGS” in this Form 10-K for a discussion of current litigation.
The Company could be subject to additional tax liabilities.
The Company is subject to income tax laws of the United States, its states and municipalities and those of other foreign jurisdictions in which the Company has business operations. These laws are complex and subject to interpretations by the taxpayer and the relevant governmental taxing authorities. Significant judgment and interpretation is required in determining the Company'sCompany’s worldwide provision for income taxes. In the ordinary course of business, transactions arise where the ultimate tax determination is uncertain. Although the Company believes that our tax estimates are reasonable, the final outcome of tax audits and any related litigation could be materially different from that which is reflected in historical income tax provisions and accruals. Based on the status of a given tax audit or related litigation, a material effect on the Company'sCompany’s income tax provision or net income may result during the period or periods from the initial recognition of a particular matter in the Company'sCompany’s reported financial results to the final closure of that tax audit or settlement of related litigation when the ultimate tax and related cash flow is known with certainty.
The Company'sCompany’s goodwill or indefinite-lived intangible assets may become impaired, which could require a significant charge to earnings to be recognized.
Under accounting principles generally accepted in the United States, goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment at least annually. Future operating results used in the assumptions, such as sales or profit forecasts, may not materialize, and the Company could be required to record a significant charge to earnings in the financial statements during the period in which any impairment is determined, resulting in an unfavorable impact on our results of operations. Numerous assumptions are used in the evaluation of impairment, and there is no guarantee that the Company'sCompany’s independent registered public accounting firm would reach the same conclusion as the Company or an independent valuation firm, which could result in a disagreement between management and the Company'sCompany’s independent registered public accounting firm.
The Company may need additional capital in the future, which may not be available on acceptable terms, if at all.
From time-to-time, the Company has historically relied on outside financing to fund expanded operations, capital expenditure programs and acquisitions. The Company may require additional capital in the future to fund operations or strategic opportunities. The Company cannot be assured that additional financing will be available on favorable terms, or at all. In addition, the terms of available financing may place limits on the Company'sCompany’s financial and operating flexibility. If the Company is unable to obtain sufficient capital in the future, the Company may not be able to expand or acquire complementary businesses and may not be able to continue to develop new products or otherwise respond to changing business conditions or competitive pressures.
The Company'sCompany’s stock price may become highly volatile.
The Company'sCompany’s stock price may change dramatically when buyers seeking to purchase shares of the Company'sCompany’s common stock exceed the shares available on the market, or when there are no buyers to purchase shares of the Company'sCompany’s common stock when shareholders are trying to sell their shares.
The Company depends on key management and technical personnel, the loss of whom could harm its businesses.
The Company depends on key management and technical personnel. The loss of one or more key employees could materially and adversely affect the Company.
The Company’s success also depends on its ability to attract and retain highly qualified technical, sales and marketing and management personnel necessary for the maintenance and expansion of its activities. The Company faces strong competition for such personnel and may not be able to attract or retain such personnel. In addition, when the Company experiences periods with little or no profits, a decrease in compensation based on profits may make it difficult to attract and retain highly qualified personnel.
In order to attract and retain executives and other key employees, the Company must provide a competitive compensation package, if the Company’s profits decrease, or if the Company’s total compensation package is not viewed as competitive, the Company’s ability to attract, retain and motivate executives and key employees could be weakened. The failure to successfully hire and retain executives and key employees or the loss of any executives and key employees could have a significant impact on our operations.
The Company may not be able to reach acceptable terms for contracts negotiated with its labor unions and be subject to work stoppages or disruption of production.
During 2018,2020, union contracts covering approximately 9%1% of the Company'sCompany’s total workforce will expire. The Company has been successful in negotiating new contracts over the years, but cannot guarantee that will continue. Failure to negotiate new union contracts could result in the disruption of production, inability to deliver product or a number of unforeseen circumstances, any of which could have an unfavorable material impact on the Company'sCompany’s results of operations or financial condition.
Deterioration in the creditworthiness of several major customers could have a material impact on the Company'sCompany’s business, financial condition or results of operations.
Included as a significant asset on the Company'sCompany’s balance sheet are accounts receivable from our customers. If several large customers become insolvent or are otherwise unable to pay for products, or become unwilling or unable to make payments in a timely manner, it could have an unfavorable material impact on the Company'sCompany’s results of operations or financial condition.
Although the Company is not dependent on any one customer, deterioration in several large customers at the same time could have an unfavorable material impact on the Company'sCompany’s results of operations or financial condition. No oneOne customer exceeded 10% of total accounts receivable for 2017, 2016 or 2015.2019. No customer exceeded 10% of total accounts receivable for 2018.
The Company'sCompany’s operating results may fluctuate, which makes the results of operations difficult to predict and could cause the results to fall short of expectations.
The Company'sCompany’s operating results may fluctuate as a result of a number of factors, many of which are outside of our control. As a result, comparing the Company'sCompany’s operating results on a period-to-period basis may not be meaningful, and past results should not be relied upon as an indication of future performance. Quarterly, year to date and annual costs and expenses as a percentage of revenues may differ significantly from historical or projected levels. Future operating results may fall below expectations. These types of events could cause the price of the Company'sCompany’s stock to fall.
New or existing U.S. or foreign laws could subject the Company to claims or otherwise impact the Company'sCompany’s business, financial condition or results of operations.
The Company is subject to a variety of laws in both the U.S. and foreign countries that are costly to comply with, can result in negative publicity and diversion of management time and effort and can subject the Company to claims or other remedies.
| ITEM 1B | UNRESOLVED STAFF COMMENTS |
None.
The corporate office of the Company is located in Naugatuck, Connecticut in a two-story, 8,000 square foot administrative building on 3.22.1 acres of land.
All of the Company'sCompany’s properties are owned or leased and are adequate to satisfy current requirements. All of the Company'sCompany’s properties have the necessary flexibility to cover any long-term expansion requirements.
The Industrial Hardware Group includes the following:
Big 3 Products in Centralia, Illinois owns 156,160 square feet of administrative and manufacturing space located in an industrial park. The single story building is steel frame with steel siding and roof.
Big 3 Products in Dearborn, Michigan leases 86,250 square feet of building space. The building is made from industrial block. Approximately 6,000 square feet of office space is used for design engineers. The current lease expires on February 4, 2025.
Big 3 Products in Chesterfield, Michigan leases 45,000 square feet for a design and manufacturing facility. This building is industrial block and metal frame. The current lease expires on February 28, 2021.
Big 3 Mold in Holliston, Massachusetts leases 13,800 square feet of building space. The building is industrial block. The current lease expires on December 31, 2020.
Big 3 Mold in Millville, New Jersey owns 54,450 square feet of building space. The building is industrial block.
Big 3 Precision in Pleasant Hill, Missouri leases 1,000 square feet of office space. The building is metal frame. The current lease expires on April 1, 2022.
Big 3 Precision in Kimball, Michigan leases 3,500 square feet of building space. The current lease expires on April 30, 2022 with an option to renew for an additional twelve months.
Associated Tool a wholly-owned subsidiary in Wrexham, Wales leases 5,000 square feet of building space. The building is industrial block and metal frame. The current lease expires on August 10, 2020.
The Eberhard Manufacturing Division in Strongsville, Ohio owns 9.6 acres of land and a building containing 157,580 square feet, located in an industrial park. The building is steel frame, is one-story and has curtain walls of brick, glass and insulated steel panels. The building has two high bays, one of which houses two units of automated warehousing.
Eberhard Hardware Manufacturing, Ltd., a wholly-owned Canadian subsidiary in Tillsonburg, Ontario, owns 4.4 acres of land and a building containing 31,000 square feet in an industrial park. The building is steel frame, is one-story, and has curtain walls of brick, glass and insulated steel panels. It is particularly suited for light fabrication, assembly and warehousing and is adequate for long-term expansion requirements.
Canadian Commercial Vehicles Corporation ("CCV"), a wholly-owned subsidiary in Kelowna, British Columbia, leases 46,385 square feet of building space located in an industrial park. The building is made from brick and concrete, contains approximately 5,400 square feet of office space on two levels and houses a modern paint booth for finishing our products. The building is protected by a F1 rated fire suppression system and alarmed for fire and security. CCV's lease expires on December 31, 2018 and is renewable.
The Composite Panel Technologies Division ("CPT") in Salisbury, North Carolina, leases 70,000 square feet of building space located in an industrial park. The building is made from brick and concrete, contains approximately 6,600 square feet of office space on one level and houses a modern paint booth for finishing our products. The building is protected by a water sprinkler fire suppression system and is alarmed for fire and security. The current lease expires on October 31, 2019 and is renewable.
Eastern Industrial Ltd., a wholly-owned subsidiary in Shanghai, China, leases brick and concrete buildings containing approximately 47,500 square feet of space that are located in both industrial and commercial areas. In 2016, Eastern Industrial, Ltd. entered into a six-year lease, which expires on March 31, 2022 and is renewable.
The Sesamee Mexicana subsidiary leases 42,588 square feet in a facility located in an industrial park in Lerma, Mexico. The current lease expires on November 30, 2020 and is renewable. The building is steel frame with concrete block and glass curtain walls.
Velvac, Inc., a wholly-owned subsidiary in New Berlin, Wisconsin, leases a 98,000 square foot building. The building includes 17,000 square feet of office space and 81,000 square feet of warehousing and distribution operations. The current lease expires on May 31, 2021.
Velvac de Reynosa, S. De R.L De C.V., a maquiladora wholly-owned in Reynosa, Tamaulipas, Mexico, leases 90,000 square feet of building space located in an industrial park identified as Buildings 19, 20 and 21 and on a tract of land with an area of 165,507 square feet. The building is one level and is made from brick and concrete. The building is protected by a 24 hour security system and onsite security. The current lease expires on August 31, 2021.
Velvac, Inc. also leases a 9,300 square foot building in Bellingham, Washington. The premises are used solely for software development and research and development. The lease was terminated in January 2020.
Canadian Commercial Vehicles Corporation (“CCV”), a wholly-owned subsidiary in Kelowna, British Columbia, leases 46,385 square feet of building space located in an industrial park. The building is made from brick and concrete, contains approximately 5,400 square feet of office space on two levels and houses a modern paint booth for finishing our products. The building is protected by a F1 rated fire suppression system and alarmed for fire and security. CCV’s lease expires on December 31, 2018 and is renewable.
The Sesamee Mexicana subsidiary leases 42,588 square feet in a facility located in an industrial park in Lerma, Mexico. The current lease expires on SeptemberNovember 30, 2021.2020 and is renewable. The building is steel frame with concrete block and glass curtain walls.
The Security Products Group includes the following:
The Greenwald Industries Division in Chester, Connecticut owns 26 acres of land and a building containing 120,000 square feet. The building is steel frame, is one-story, and has brick over concrete blocks.
The Illinois Lock Company/CCL Security Products Division owns 2.5 acres of land and a building containing 44,000 square feet in Wheeling, Illinois. The building is brick and is located in an industrial park.
The World Lock Co. Ltd. subsidiary leases 5,285 square feet of space in a building located in Taipei, Taiwan. The building is made from brick and concrete and is protected by a fire alarm and sprinklers. The current lease expires on June 30, 2020 and is renewable for a six-month period.
The Dongguan Reeworld Security Products Company Ltd. subsidiary was established in July 2013 to manufacture locks and hardware and leases 103,800 square feet of space in concrete buildings that are located in an industrial park in Dongguan, China. The current lease expires on May 31, 2022 and is renewable for a three year period.
The Greenwald Industries Division in Chester, Connecticut owns 26 acres of land and a building containing 120,000 square feet. The building is steel frame, is one-story, and has brick over concrete blocks.
The Argo EMS Division leases approximately 17,000 square feet of space in a building located in an industrial park in Clinton, Connecticut. The building is a two-story steel frame structure and is situated on 2.9 acres of land. The current lease expires on March 31, 2019.
The World Lock Co. Ltd. subsidiary leases 5,285 square feet of space in a building located in Taipei, Taiwan. The building is made from brick and concrete and is protected by a fire alarm and sprinklers. A two-year lease was signed in 2016, which expires on July 31, 2018 and is renewable.
The Dongguan Reeworld Security Products Company Ltd. subsidiary was established in July 2013 to manufacture locks and hardware and leases 118,000 square feet of space in concrete buildings that are located in an industrial park in Dongguan, China. A five-year lease was signed in 2013, which expires on June 30, 2018 and is renewable.2022.
The Metal Products Group consists of:
The Frazer and& Jones Division in Solvay, New York owns 17.9 acres of land and buildings containing 205,000 square feet constructed for foundry use. These facilities are well adapted to handle the division'sdivision’s current and future casting requirements.
All owned properties are free and clear of any encumbrances.
The Company is party to various legal proceedings and claimsfrom time to time related to its normal business operations. In the opinion of management,Currently, the Company has substantial and meritorious defenses for these claims and proceedingsis not involved in which it is a defendant, and believes these matters will ultimately be resolved without aany material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. The aggregate provision for losses related to contingencies arising in the ordinary course of business was not material to operating results for any year presented.pending legal proceedings.
In 2010, the Company was contacted by the State of Illinois regarding potential ground contamination at its plant in Wheeling, Illinois. The Company entered into a voluntary remediation program in Illinois and has engaged an environmental clean-up company to perform testing and develop a remediation plan. Since 2010, the environmental company has completed a number of tests and the design of a final remediation system is currently being reviewed and is expected to bewas approved in the firstsecond quarter of 2018. As of the end of the of 2019, the remediation plan was completed. The State of Illinois has received the documentation related to the remediation and is in the process of approving the final documentation. The total estimated cost for the proposed remediation system is anticipated to be approximately $50,000.$50,000, which the Company previously accrued for and expensed in prior years. The Company no longer considers this proceeding to be material.
In 2016, the Company created a plan to remediate a landfill of spent foundry sand maintained at the Company's Metal CastingCompany’s metal casting facility in New York. This plan was presentedagreed to by the New York Department of Environmental Conservation (the "DEC"“DEC”) for approval in the first quarter ofon March 27, 2018. The Company is in final negotiations with the DEC, and, basedBased on estimates provided by the Company'sCompany’s environmental engineers, the anticipated cost to remediate and monitor the landfill is $380,000.was $430,000. The Company accrued for and expensed such estimated costthe entire $430,000 in the secondfirst quarter of 2018 and third quartersfiscal 2017. In the Fall of 2017.2018, detailed construction drawings were prepared by an outside consultant in conjunction with
informal progress reviews by the New York State Department of Environmental Conservation (the “NYSDEC”). Long-term groundwater monitoring commenced in April of 2019. Verbal approval for the closure plan was received from the NYSDEC in May of 2019. Written approval is anticipated in the first quarter of 2020. Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap, is anticipated in the spring of 2020. In the summer of 2020, following the completion of construction work, a closure report and maintenance plan will be prepared for the NYSDEC. This closure report and maintenance plan will document the work done and request acknowledgment of satisfactory completion of the Order on Consent between Frazer and Jones, and the NYSDEC.
There are no other legal proceedings, other than ordinary routine litigation incidental to the Company's business, to which either the Company or any of its subsidiaries is a party or of which any property of the Company or any subsidiary is the subject.
| ITEM 4 | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 5 | MARKET FOR REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The Company'sCompany’s common stock is quoted on the NASDAQ Global Market under the symbol "EML"“EML”. The approximate number of record holders of the Company common stock on December 30, 201728, 2019 was 354.
The following table sets forth the high and low per share sales prices of the Company's common stock, and the per share quarterly dividend declared on the Company's common stock, for each quarter of the immediately preceding two years as reported on the NASDAQ Global Market.
| | | 2017 | | | | | 2016 | |
| | | Market Price | | | | | | | Market Price | | | | |
| Quarter | | High | | | Low | | | Dividend | | Quarter | | High | | | Low | | | Dividend | |
| First | | $ | 21.50 | | | $ | 18.85 | | | $ | 0.11 | | First | | $ | 19.04 | | | $ | 15.01 | | | $ | 0.11 | |
| Second | | | 31.50 | | | | 21.06 | | | | 0.11 | | Second | | | 17.21 | | | | 15.74 | | | | 0.11 | |
| Third | | | 31.15 | | | | 24.35 | | | | 0.11 | | Third | | | 20.12 | | | | 16.39 | | | | 0.11 | |
| Fourth | | | 30.85 | | | | 25.10 | | | | 0.11 | | Fourth | | | 21.50 | | | | 18.90 | | | | 0.11 | |
333.
The Company expects to continue its policy of paying regular cash dividends, although there can be no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial condition. The payment of dividends is subject to the restrictions of the Company's loan agreement if such payment would result in an event of default. See Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 5 to the Company's financial statements included in Item 8 of this Form 10-K.
The following table sets forth information regarding securities authorized for issuance under the Company'sCompany’s equity compensation plans as of December 30, 2017,28, 2019, consisting of the Company'sCompany’s 2010 Executive Stock Incentive Plan (the "2010 Plan"“2010 Plan”).
| Equity Compensation Plan Information | Equity Compensation Plan Information | | Equity Compensation Plan Information |
| Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
| | | (a) | | | (b) | | | (c) | | (a) | | (b) | | (c) |
| Equity compensation plans approved by security holders | | | 56,330 | | | 20.36 | | | | 333,500 | 1 | 96,728 | | 22.30 | | 178,5001 |
| Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | | - | | - | | - |
| Total | | | 56,330 | | | | 20.36 | | | | 333,500 | | 96,728 | | 22.30 | | 178,500 |
1 Includes shares available for future issuance under the 2010 Plan. No new grants may be made under the 2010 Plan, which expired by its terms on February 9, 2020 but continues to govern awards outstanding under the 2010 Plan.
Each director who is not an employee of the Company ("Outside Director") is paid a director's fee for his services at the annual rate of $30,000. Effective August 1, 2017, the chairman of the board will receive an annual fee of $60,000 for his services and all chairs of the varying committees will receive additional compensation. All annual fees paid to non-employee members of the Board of Directors of the Company are paid in common stock of the Company or cash, in accordance with the Directors Fee Program adopted by the shareholders on March 26, 1997 and amended on January 5, 2004. The directors make an annual election, within a reasonable time before their first quarterly payment, to receive their fees in the form of cash, stock or a combination thereof. The election remains in force for one year.
During fiscal years 2017, 2016 or 2015,2019 and 2018, there were no sales by the Company of its securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"“Securities Act”).
On May 2, 2018, the Company announced that its Board of Directors had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act.
The Company did not haverepurchase any share repurchase plans or programs in effectshares during fiscal year 2017.
Stock Performance Graph
The following graph sets forth the Company's cumulative total shareholder return based upon an initial $100 investment made on December 31, 2012 (i.e., stock appreciation plus dividends during the past five fiscal years) compared to the Russell 2000 Index and the S&P Industrial Machinery Index.
The Company manufactures and markets a broad range of locks, latches, fasteners and other security hardware that meets the diverse security and safety needs of industrial and commercial customers. Consequently, while the S&P Industrial Machinery Index used for comparison is the standard index most closely related to the Company, it does not completely represent the Company's products or market applications. The Russell 2000 is a small cap market index of the smallest 2,000 stocks in the Russell 3000 Index.
| | | Dec. 12 | | | Dec. 13 | | | Dec. 14 | | | Dec. 15 | | | Dec. 16 | | | Dec. 17 | |
| The Eastern Company | | $ | 100 | | | $ | 103 | | | $ | 114 | | | $ | 129 | | | $ | 147 | | | $ | 187 | |
| Russell 2000 | | $ | 100 | | | $ | 139 | | | $ | 146 | | | $ | 139 | | | $ | 169 | | | $ | 194 | |
| S&P Industrial Machinery | | $ | 100 | | | $ | 146 | | | $ | 153 | | | $ | 147 | | | $ | 187 | | | $ | 249 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Copyright© 2018 Standard & Poor's, a division of S&P Global. All rights reserved. | | | | | | | | | |
| Copyright© 2018 Russell Investment Group. All rights reserved. | | | | | | | | | | | | | |
2019
ITEM 6 SELECTED FINANCIAL DATA
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| INCOME STATEMENT ITEMS (in thousands) | | | | | | | | | | | | | | | |
| Net sales | | $ | 204,240 | | | $ | 137,608 | | | $ | 144,568 | | | $ | 140,825 | | | $ | 142,458 | |
| Cost of products sold | | | 154,189 | | | | 103,315 | | | | 112,187 | | | | 108,339 | | | | 112,311 | |
| Depreciation and amortization | | | 4,719 | | | | 3,814 | | | | 3,921 | | | | 3,486 | | | | 3,825 | |
| Interest expense | | | 977 | | | | 122 | | | | 185 | | | | 255 | | | | 323 | |
| Income before income taxes | | | 11,455 | | | | 11,223 | | | | 8,021 | | | | 11,529 | | | | 10,114 | |
| Income taxes | | | 6,410 | | | | 3,438 | | | | 2,294 | | | | 3,867 | | | | 3,212 | |
| Net income | | | 5,045 | | | | 7,785 | | | | 5,727 | | | | 7,661 | | | | 6,902 | |
| Dividends # | | | 2,755 | | | | 2,751 | | | | 2,811 | | | | 2,987 | | | | 2,613 | |
| | | | | | | | | | | | | | | | | | | | | |
| BALANCE SHEET ITEMS (in thousands) | | | | | | | | | | | | | | | | | | | | |
| Inventories | | $ | 47,269 | | | $ | 34,030 | | | $ | 36,842 | | | $ | 34,402 | | | $ | 30,658 | |
| Working capital | | | 68,751 | | | | 64,831 | | | | 60,105 | | | | 57,845 | | | | 57,379 | |
| Property, plant and equipment, net | | | 29,192 | | | | 26,166 | | | | 26,801 | | | | 28,051 | | | | 27,392 | |
| Total assets | | | 176,458 | | | | 124,198 | | | | 121,739 | | | | 121,271 | | | | 113,858 | |
| Shareholders' equity | | | 86,931 | | | | 82,468 | | | | 79,405 | | | | 74,975 | | | | 81,505 | |
| Capital expenditures | | | 2,763 | | | | 2,863 | | | | 2,538 | | | | 3,633 | | | | 5,524 | |
| Long-term obligations, less current portion | | | 28,675 | | | | 893 | | | | 1,786 | | | | 3,214 | | | | 4,286 | |
| | | | | | | | | | | | | | | | | | | | | |
| PER SHARE DATA | | | | | | | | | | | | | | | | | | | | |
| Net income per share | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | .81 | | | $ | 1.25 | | | $ | 0.92 | | | $ | 1.23 | | | $ | 1.11 | |
| Diluted | | | 0.80 | | | | 1.25 | | | | 0.92 | | | | 1.23 | | | | 1.11 | |
Dividends # | | | 0.44 | | | | 0.44 | | | | 0.45 | | | | 0.48 | | | | 0.42 | |
| Shareholders' equity (Basic) | | | 13.89 | | | | 13.19 | | | | 12.71 | | | | 12.04 | | | | 13.10 | |
| | | | | | | | | | | | | | | | | | | | | |
| Average shares outstanding: | Basic | | | 6,259,139 | | | | 6,251,535 | | | | 6,245,057 | | | | 6,225,068 | | | | 6,220,928 | |
| Diluted | | | 6,294,773 | | | | 6,251,535 | | | | 6,245,057 | | | | 6,237,914 | | | | 6,237,758 | |
# - Dividends for 2015 includeAs a $0.01 per share redemption for the terminationresult of the 2008 Shareholder Rights Agreement. Dividends for 2014 includeCompany’s status as a one-time extra payment of $0.04 per share distributed on September 15, 2014.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States ("U.S. GAAP") requires managementsmaller reporting company pursuant 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; the testing of goodwill and other intangible assets for impairment; proceeds on assets to be sold; pensions and other postretirement benefits; and tax matters. 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. Despite these inherent limitations, management believes that Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and related footnotes provide a meaningful and fair presentationRule 12b-2 of the Company.
Management believes thatExchange Act, the application of these estimates and assumptions on a consistent basis enables the Company is no longer required to provide the usersinformation under this Item 6, of the financial statements with useful and reliable information about the Company's operating results and financial condition.Form 10-K pursuant to Item 301(c) of Reg. S-K.
