UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended April 1, 2023
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2017
☐ | 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: 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.) |
3 Enterprise Drive, Suite 408, Shelton, Connecticut | 06484 | |
(Address of principal executive offices) | (Zip Code) |
(203)-729-2255 |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, No Par Value | EML | NASDAQ Global Market |
Indicate by check mark whether the registrant: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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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 the 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 | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
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 Exchange Act). Yes [ ]☐ No [X]
As of April 1, 2023, 6,231,612 shares outstanding of each of the issuer's classes ofregistrant’s common stock, as of the latest practicable date.
The Eastern Company
Form 10-Q
FOR THE QUARTERLY PERIOD ENDED APRIL 1, 2023
TABLE OF CONTENTS
Page | |||||
3. | |||||
Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16. | ||||
Quantitative and Qualitative Disclosures | 23. | ||||
23. | |||||
24. | |||||
24. | |||||
24. | |||||
24. | |||||
24. | |||||
24. | |||||
25. | |||||
26. |
2 |
Table of Contents |
PART I1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF INCOME (UNAUDITED)
ASSETS | September 30, 2017 | December 31, 2016 | ||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 21,194,091 | $ | 22,725,376 | ||||
Marketable securities | 366,554 | -- | ||||||
Accounts receivable, less allowances: $507,000 - 2017; $430,000 - 2016 | 28,448,534 | 18,135,792 | ||||||
Inventories | 45,207,813 | 34,030,286 | ||||||
Prepaid expenses and other assets | 4,398,041 | 1,858,471 | ||||||
Total Current Assets | 99,615,033 | 76,749,925 | ||||||
Property, Plant and Equipment | 70,500,848 | 64,911,071 | ||||||
Accumulated depreciation | (41,629,685 | ) | (38,745,557 | ) | ||||
28,871,163 | 26,165,514 | |||||||
Goodwill | 32,395,740 | 14,819,835 | ||||||
Trademarks | 3,680,037 | 166,312 | ||||||
Patents, technology, and other intangibles net of accumulated amortization | 9,621,147 | 1,764,449 | ||||||
Deferred income taxes | 1,180,355 | 4,532,361 | ||||||
46,877,279 | 21,282,957 | |||||||
TOTAL ASSETS | $ | 175,363,475 | $ | 124,198,396 |
LIABILITIES AND SHAREHOLDERS' EQUITY | September 30, 2017 | December 31, 2016 | ||||||
Current Liabilities | ||||||||
Accounts payable | $ | 15,327,476 | $ | 7,048,174 | ||||
Accrued compensation | 3,273,317 | 3,112,404 | ||||||
Other accrued expenses | 6,360,362 | 1,812,647 | ||||||
Current portion of long-term debt | 6,550,000 | 892,857 | ||||||
Total Current Liabilities | 31,511,155 | 12,866,082 | ||||||
Other long-term liabilities | 288,805 | 288,805 | ||||||
Long-term debt, less current portion | 29,062,500 | 892,857 | ||||||
Accrued postretirement benefits | 1,018,815 | 1,051,700 | ||||||
Accrued pension cost | 25,780,522 | 26,631,438 | ||||||
Shareholders' Equity | ||||||||
Voting Preferred Stock, no par value: | ||||||||
Authorized and unissued: 1,000,000 shares | ||||||||
Nonvoting Preferred Stock, no par value: | ||||||||
Authorized and unissued: 1,000,000 shares | ||||||||
Common Stock, no par value: | ||||||||
Authorized: 50,000,000 shares | ||||||||
Issued: 8,956,144 shares in 2017 and 8,950,827 shares in 2016 | ||||||||
Outstanding: 6,261,415 shares in 2017 and 6,256,098 shares in 2016 | 29,277,169 | 29,146,622 | ||||||
Treasury Stock: 2,694,729 shares in 2017 and 2016 | (19,105,723 | ) | (19,105,723 | ) | ||||
Retained earnings | 98,779,632 | 95,631,216 | ||||||
Accumulated other comprehensive income (loss): | ||||||||
Foreign currency translation | (902,749 | ) | (2,165,081 | ) | ||||
Unrealized loss on marketable securities and | ||||||||
derivative, net of tax | (9,479 | ) | -- | |||||
Unrecognized net pension and postretirement benefit costs, net of tax | (20,419,472 | ) | (21,039,520 | ) | ||||
Accumulated other comprehensive loss | (21,331,700 | ) | (23,204,601 | ) | ||||
Total Shareholders' Equity | 87,619,378 | 82,467,514 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 175,363,475 | $ | 124,198,396 |
|
| Three Months Ended |
| |||||
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
Net sales |
| $ | 72,495,367 |
|
| $ | 69,014,648 |
|
Cost of products sold |
|
| (56,997,668 | ) |
|
| (54,438,968 | ) |
Gross margin |
|
| 15,497,699 |
|
|
| 14,575,680 |
|
|
|
|
|
|
|
|
|
|
Product development expense |
|
| (1,401,199 | ) |
|
| (1,197,008 | ) |
Selling and administrative expenses |
|
| (11,937,637 | ) |
|
| (9,865,614 | ) |
Operating profit |
|
| 2,158,863 |
|
|
| 3,513,058 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (726,006 | ) |
|
| (434,335 | ) |
Other (expense) income |
|
| (630,699 | ) |
|
| 488,520 |
|
Income from continuing operations before income taxes |
|
| 802,158 |
|
|
| 3,567,243 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| (194,845 | ) |
|
| (881,125 | ) |
Net income from continuing operations |
|
| 607,313 |
|
|
| 2,686,118 |
|
|
|
|
|
|
|
|
|
|
Discontinued Operations (see note B) |
|
|
|
|
|
|
|
|
Gain from operations of discontinued operations |
|
| - |
|
|
| 471,187 |
|
Income tax expense |
|
| - |
|
|
| (126,867 | ) |
Gain from discontinued operations |
|
| - |
|
|
| 344,320 |
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 607,313 |
|
| $ | 3,030,438 |
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.10 |
|
| $ | 0.43 |
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | 0.10 |
|
| $ | 0.43 |
|
|
|
|
|
|
|
|
|
|
Earnings per share from discontinued operations: |
|
|
|
|
|
|
|
|
Basic |
| $ | - |
|
| $ | 0.06 |
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | - |
|
| $ | 0.05 |
|
|
|
|
|
|
|
|
|
|
Total earnings per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.10 |
|
| $ | 0.49 |
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | 0.10 |
|
| $ | 0.48 |
|
|
|
|
|
|
|
|
|
|
Cash dividends per share: |
| $ | 0.11 |
|
| $ | 0.11 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
|
3 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September30, 2017 | October 1, 2016 | |||||||||||||
Net sales | $ | 150,095,975 | $ | 103,463,316 | $ | 56,007,937 | $ | 33,478,347 | ||||||||
Cost of products sold | (113,888,301 | ) | (77,980,077 | ) | (44,058,406 | ) | (24,105,604 | ) | ||||||||
Gross margin | 36,207,674 | 25,483,239 | 11,949,531 | 9,372,743 | ||||||||||||
Engineering expenses | (4,162,151 | ) | (1,991,260 | ) | (1,848,861 | ) | (663,705 | ) | ||||||||
Selling and administrative expenses | (23,749,219 | ) | (16,161,133 | ) | (6,527,029 | ) | (5,444,924 | ) | ||||||||
Operating profit | 8,296,304 | 7,330,846 | 3,573,641 | 3,264,114 | ||||||||||||
Interest expense | (659,884 | ) | (97,486 | ) | (327,206 | ) | (28,817 | ) | ||||||||
Other income | 69,278 | 54,687 | 13,513 | 28,169 | ||||||||||||
Income before income taxes | 7,705,698 | 7,288,047 | 3,259,948 | 3,263,466 | ||||||||||||
Income taxes | 2,491,674 | 2,152,073 | 1,029,467 | 863,402 | ||||||||||||
Net income | $ | 5,214,024 | $ | 5,135,974 | $ | 2,230,481 | $ | 2,400,064 | ||||||||
Earnings per Share: | ||||||||||||||||
Basic | $ | .83 | $ | .82 | $ | .36 | $ | .38 | ||||||||
Diluted | $ | .83 | $ | .82 | $ | .35 | $ | .38 | ||||||||
Cash dividends per share: | $ | .33 | $ | .33 | $ | .11 | $ | .11 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Nine Months Ended | Three Months Ended | |||||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||||
Net income | $ | 5,214,024 | $ | 5,135,974 | $ | 2,230,481 | $ | 2,400,064 | ||||||||||
Other comprehensive income/(loss): | ||||||||||||||||||
Change in foreign currency translation | 1,262,332 | (311,697 | ) | 378,509 | (231,831 | ) | ||||||||||||
Change in fair value marketable securities, net of tax benefit of: 2017 – $22,688 and $17,135, respectively 2016 - $- | 41,548 | — | 31,379 | — | ||||||||||||||
Change in fair value of derivative financial instrument, net of tax benefit of: 2017 - $31,275 and $(10,406) 2016 - $- | (51,027 | ) | — | 16,978 | — | |||||||||||||
Change in pension and postretirement benefit costs, net of taxes of: 2017 – $338,592 and $112,865 respectively 2016 – $559,542 and $(105,703), respectively | 620,048 | (696,200 | ) | 206,682 | 192,456 | |||||||||||||
Total other comprehensive income | 1,872,901 | (1,007,897 | ) | 633,548 | (39,375 | ) | ||||||||||||
Comprehensive income | $ | 7,086,925 | $ | 4,128,077 | $ | 2,864,029 | $ | 2,630,689 |
|
| Three Months Ended |
| |||||
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
Net income |
| $ | 607,313 |
|
| $ | 3,030,438 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in foreign currency translation |
|
| 336,585 |
|
|
| 202,281 |
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate swap, net of tax (benefit) cost of: 2023 - $(87,691); 2022 - $333,635 |
|
| (277,687 | ) |
|
| 1,056,511 |
|
|
|
|
|
|
|
|
|
|
Change in pension and postretirement benefit costs, net of taxes of: 2023 - $74,360; 2022 - $92,235 |
|
| 252,668 |
|
|
| 313,408 |
|
Total other comprehensive income |
|
| 311,566 |
|
|
| 1,572,200 |
|
Comprehensive income |
| $ | 918,879 |
|
| $ | 4,602,638 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
|
4 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| April 1, 2023 |
|
| December 31, 2022 |
| ||
|
| (unaudited) |
|
|
|
| ||
ASSETS |
|
|
|
|
|
| ||
Current Assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 13,071,017 |
|
| $ | 10,187,522 |
|
Accounts receivable, less allowances: 2023 - $676,000; 2022 - $677,000 |
|
| 44,481,853 |
|
|
| 42,886,250 |
|
Inventories |
|
| 57,652,961 |
|
|
| 64,636,591 |
|
Current portion of notes receivable |
|
| 214,780 |
|
|
| 1,006,421 |
|
Prepaid expenses and other assets |
|
| 6,639,228 |
|
|
| 6,598,774 |
|
Total Current Assets |
|
| 122,059,839 |
|
|
| 125,315,558 |
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment |
|
| 57,318,367 |
|
|
| 56,112,889 |
|
Accumulated depreciation |
|
| (30,877,891 | ) |
|
| (30,000,797 | ) |
Property, Plant and Equipment, Net |
|
| 26,440,476 |
|
|
| 26,112,092 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 70,788,971 |
|
|
| 70,777,459 |
|
Trademarks |
|
| 5,514,888 |
|
|
| 5,514,886 |
|
Patents and other intangibles net of accumulated amortization |
|
| 17,987,968 |
|
|
| 18,819,897 |
|
Long term notes receivable, less current portion |
|
| 905,851 |
|
|
| 2,276,631 |
|
Deferred Income Taxes |
|
| 488,989 |
|
|
| 488,989 |
|
Right of Use Assets |
|
| 11,564,607 |
|
|
| 12,217,521 |
|
Total Other Assets |
|
| 107,251,274 |
|
|
| 110,095,383 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ | 255,751,589 |
|
| $ | 261,523,033 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
|
5 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| April 1, 2023 |
|
| December 31, 2022 |
| ||
|
| (unaudited) |
|
|
|
| ||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
| ||
Current Liabilities |
|
|
|
|
|
| ||
Accounts payable |
| $ | 26,643,423 |
|
| $ | 27,638,317 |
|
Accrued compensation |
|
| 2,233,923 |
|
|
| 3,327,832 |
|
Other accrued expenses |
|
| 3,900,764 |
|
|
| 3,944,964 |
|
Current portion of operating lease liability |
|
| 3,030,116 |
|
|
| 3,059,547 |
|
Current portion of finance lease liability |
|
| 150,773 |
|
|
| - |
|
Current portion of long-term debt |
|
| 9,375,000 |
|
|
| 9,010,793 |
|
Total Current Liabilities |
|
| 45,333,999 |
|
|
| 46,981,453 |
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
| 754,762 |
|
|
| 754,762 |
|
Operating lease liability, less current portion |
|
| 8,556,037 |
|
|
| 9,195,205 |
|
Finance lease liability, less current portion |
|
| 846,547 |
|
|
| - |
|
Long-term debt, less current portion |
|
| 49,661,128 |
|
|
| 55,136,231 |
|
Accrued postretirement benefits |
|
| 664,293 |
|
|
| 666,222 |
|
Accrued pension cost |
|
| 23,134,787 |
|
|
| 22,174,465 |
|
Total Liabilities |
|
| 128,951,553 |
|
|
| 134,908,338 |
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity |
|
|
|
|
|
|
|
|
Voting Preferred Stock, no par value: |
|
| - |
|
|
| - |
|
Authorized and unissued: 1,000,000 shares |
|
|
|
|
|
|
|
|
Nonvoting Preferred Stock, no par value: |
|
| - |
|
|
| - |
|
Authorized and unissued: 1,000,000 shares |
|
|
|
|
|
|
|
|
Common Stock, no par value, Authorized: 50,000,000 shares |
|
| 33,536,918 |
|
|
| 33,586,165 |
|
Issued: 9,066,057 shares in 2023 and 9,056,421 shares in 2022 |
|
|
|
|
|
|
|
|
Outstanding: 6,231,612 shares in 2023 and 6,221,976 shares in 2022 |
|
|
|
|
|
|
|
|
Treasury Stock: 2,834,445 shares in 2023 and 2,834,445 shares in 2022 |
|
| (22,544,684 | ) |
|
| (22,544,684 | ) |
Retained earnings |
|
| 138,908,874 |
|
|
| 138,985,852 |
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
| (804,393 | ) |
|
| (1,140,978 | ) |
Unrealized gain on interest rate swap, net of tax |
|
| 1,172,067 |
|
|
| 1,449,754 |
|
Unrecognized net pension and postretirement benefit costs, net of tax |
|
| (23,468,746 | ) |
|
| (23,721,414 | ) |
Accumulated other comprehensive loss |
|
| (23,101,072 | ) |
|
| (23,412,638 | ) |
Total Shareholders’ Equity |
|
| 126,800,036 |
|
|
| 126,614,695 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 255,751,589 |
|
| $ | 261,523,033 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes. |
|
|
|
|
|
|
|
|
6 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended | ||||||||
September 30, 2017 | October 1, 2016 | |||||||
Operating Activities | ||||||||
Net income | $ | 5,214,024 | $ | 5,135,974 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 3,230,174 | 2,795,699 | ||||||
Unrecognized pension and postretirement benefits | 74,839 | 952,205 | ||||||
Loss on sale of equipment and other assets | 18,585 | 45,313 | ||||||
Provision for doubtful accounts | 52,663 | — | ||||||
Issuance of Common Stock for directors' fees | 130,547 | 112,086 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (3,894,569 | ) | (1,626,625 | ) | ||||
Inventories | 2,267,945 | 2,665,002 | ||||||
Prepaid expenses and other | (2,686,763 | ) | 78,914 | |||||
Other assets | 494,750 | (67,324 | ) | |||||
Accounts payable | 1,466,401 | (366,454 | ) | |||||
Accrued compensation | (172,509 | ) | (215,313 | ) | ||||
Other accrued expenses | 3,978,256 | (526,930 | ) | |||||
Net cash provided by operating activities | 10,174,343 | 8,982,547 | ||||||
Investing Activities | ||||||||
Marketable securities | (366,554 | ) | — | |||||
Business Acquisition, net of cash acquired | (42,148,000 | ) | — | |||||
Purchases of property, plant and equipment | (1,457,641 | ) | (1,819,894 | ) | ||||
Net cash used in investing activities | (43,972,195 | ) | (1,819,894 | ) | ||||
Financing Activities | ||||||||
Proceeds from issuance of long-term debt | 31,000,000 | — | ||||||
Proceeds from short term borrowings | 6,614,611 | — | ||||||
Payments on revolving credit note | (1,614,611 | ) | — | |||||
Principal payments on long-term debt | (2,173,214 | ) | (1,071,428 | ) | ||||
Dividends paid | (2,065,607 | ) | (2,063,085 | ) | ||||
Net cash provided by (used in) financing activities | 31,761,179 | (3,134,513 | ) | |||||
Effect of exchange rate changes on cash | 505,388 | (203,066 | ) | |||||
Net change in cash and cash equivalents | (1,531,285 | ) | 3,825,074 | |||||
Cash and cash equivalents at beginning of period | 22,725,376 | 17,814,986 | ||||||
Cash and cash equivalents at end of period | $ | 21,194,091 | $ | 21,640,060 |
|
| Three Months Ended |
| |||||
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
Operating Activities |
|
|
|
|
|
| ||
Net income |
| $ | 607,313 |
|
| $ | 3,030,438 |
|
Less: gain from discontinued operations |
|
| - |
|
|
| 344,320 |
|
Income from continuing operations |
|
| 607,313 |
|
|
| 2,686,118 |
|
Adjustments to reconcile net income to net cash provided |
|
|
|
|
|
|
|
|
by (used in) operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 1,814,749 |
|
|
| 1,830,427 |
|
Unrecognized pension and postretirement benefits |
|
| 880,421 |
|
|
| 247,133 |
|
Loss on sale of equipment and other assets |
|
| - |
|
|
| 268,770 |
|
Provision for doubtful accounts |
|
| 3,269 |
|
|
| 19,740 |
|
Stock compensation (benefit) expense |
|
| (49,246 | ) |
|
| 221,468 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (1,585,976 | ) |
|
| (3,951,314 | ) |
Inventories |
|
| 7,212,179 |
|
|
| (4,902,631 | ) |
Prepaid expenses and other |
|
| (37,330 | ) |
|
| (1,075,545 | ) |
Other assets |
|
| (155,055 | ) |
|
| (89,366 | ) |
Accounts payable |
|
| (1,031,704 | ) |
|
| 3,526,499 |
|
Accrued compensation |
|
| (1,104,186 | ) |
|
| (1,858,898 | ) |
Other accrued expenses |
|
| 305,824 |
|
|
| (478,878 | ) |
Net cash provided by (used in) operating activities |
|
| 6,860,258 |
|
|
| (3,556,477 | ) |
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Payments received from notes receivable |
|
| 2,233,192 |
|
|
| 175,220 |
|
Proceeds from sale of equipment |
|
| - |
|
|
| 1,371,073 |
|
Purchases of property, plant, and equipment |
|
| (1,151,205 | ) |
|
| (572,047 | ) |
Net cash provided by investing activities |
|
| 1,081,987 |
|
|
| 974,246 |
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from short term borrowings (revolver) |
|
| (268,249 | ) |
|
| 5,000,000 |
|
Principal payments on long-term debt |
|
| (4,858,000 | ) |
|
| (1,852,107 | ) |
Financing leases, net |
|
| 723,254 |
|
|
| (92,111 | ) |
Purchase common stock for treasury |
|
| - |
|
|
| (766,889 | ) |
Dividends paid |
|
| (684,293 | ) |
|
| (687,180 | ) |
Net cash (used in) provided by financing activities |
|
| (5,087,288 | ) |
|
| 1,601,713 |
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
|
|
|
|
|
Cash used in operating activities |
|
| - |
|
|
| (396,936 | ) |
Cash used in discontinued operations |
|
| - |
|
|
| (396,936 | ) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| 28,538 |
|
|
| (22,903 | ) |
Net change in cash and cash equivalents |
|
| 2,883,495 |
|
|
| (1,400,357 | ) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
| 10,187,522 |
|
|
| 6,602,429 |
|
Cash and cash equivalents at end of period ¹ |
| $ | 13,071,017 |
|
| $ | 5,202,072 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest |
| $ | 716,763 |
|
| $ | 463,080 |
|
Income taxes |
|
| (59,681 | ) |
|
| 110,917 |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Right of use asset |
|
| (652,914 | ) |
|
| 292,097 |
|
Lease liability |
|
| (328,721 | ) |
|
| (226,903 | ) |
¹ includes cash from assets held for sale of $0.1 million as of April 2, 2022
See accompanying notes.
7 |
Table of Contents |
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 1, 2023
Note A – Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (the "Company"(together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) and the notes thereto included in the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 20162022, filed with the Securities and Exchange Commission on March 14, 2023 (the “2022 Form 10-K”), for additional information.
The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. All intercompany accounts and transactions are eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.
The condensed consolidated balance sheet as of December 31, 20162022 has been derived from the audited consolidated balance sheet asat that date.
The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2022 or the 2022 fiscal year mean the 52-week period ended on December 31, 2022, and references to 2023 or the 2023 fiscal year mean the 52-week period ending on December 30, 2023. In a 52-week fiscal year, each quarter has 13 weeks. References to the first quarter of that date.
Certain amounts in the 2022 financial statements have been reclassified from cost of products sold to selling and administrative expenses. Engineering expense is not necessarily a cost of product sold. Rather, these expenses are relatedconform with the 2023 presentation with no impact or change to product development.
Note B – Discontinued Operations
In the second quarter of 2021, the Company determined that the companies included in our former Diversified Products segment no longer fit with our long-term strategy and the Company initiated the process of selling the companies within the Diversified Products segment. We believe that selling the companies within this segment will allow management to focus on our core capabilities and offerings.
The former Diversified Products segment met the criteria to be held for sale and furthermore, we determined that the assets held for sale qualify for discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statement of operations as discontinued operations for the prior period presented. The results of the former Diversified Products segment are not reflected in the unaudited condensed consolidated statement of operations for the three months ended April 1, 2023 because dispositions of the businesses that comprised that segment were completed prior to the start of the period.
On October 19, 2022, the Company sold its Argo EMS business (“Argo”). Argo supplies printed circuit boards and other electronic assemblies to original equipment manufacturers in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial control, medical, and military products.
8 |
Table of Contents |
Summarized Financial Information of Discontinued Operations
The following table represents income from discontinued operations, net of tax:
|
| Three Months Ended |
| |||||
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Net sales |
| $ | - |
|
| $ | 2,367,226 |
|
Cost of products sold |
|
| - |
|
|
| (1,603,762 | ) |
Gross margin |
|
| - |
|
|
| 763,464 |
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
| - |
|
|
| (257,060 | ) |
Operating income |
|
| - |
|
|
| 506,404 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| - |
|
|
| (35,217 | ) |
Gain from discontinued operations before income taxes |
|
| - |
|
|
| 471,187 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| - |
|
|
| (126,867 | ) |
Income from discontinued operations, net of tax |
| $ | - |
|
| $ | 344,320 |
|
Note C – Earnings Per Share
The denominators used in theto calculate earnings per share computations are as follows:
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Basic: | ||||||||||||||||
Weighted average shares outstanding | 6,258,278 | 6,250,185 | 6,259,872 | 6,254,287 | ||||||||||||
Diluted: | ||||||||||||||||
Weighted average shares outstanding | 6,258,278 | 6,250,185 | 6,259,872 | 6,254,287 | ||||||||||||
Dilutive stock options | 36,679 | -- | 36,679 | -- | ||||||||||||
Denominator for diluted earnings per share | 6,294,957 | 6,250,185 | 6,296,551 | 6,254,287 |
September 30, 2017 | December 31, 2016 | |||||||
Raw material and component parts | $ | 11,729,271 | $ | 8,829,236 | ||||
Work in process | 9,456,164 | 7,118,149 | ||||||
Finished goods | 24,022,378 | 18,082,901 | ||||||
$ | 45,207,813 | $ | 34,030,286 |
Three Months Ended | ||||||||
April 1, 2023 | April 2, 2022 | |||||||
Basic: | ||||||||
Weighted average shares outstanding | 6,223,027 | 6,247,649 | ||||||
Diluted: | ||||||||
Weighted average shares outstanding | 6,223,027 | 6,247,649 | ||||||
Dilutive stock appreciation rights | 10,962 | 12,055 | ||||||
Denominator for diluted earnings per share | 6,233,989 | 6,259,704 |
Note D – Segment Information
Inventories from continuing operations consist of the following components:
|
| April 1, 2023 |
|
| December 31, 2022 |
| ||
|
|
|
|
|
|
| ||
Raw material and component parts |
| $ | 23,123,674 |
|
| $ | 25,924,696 |
|
Work in process |
|
| 8,315,774 |
|
|
| 9,323,082 |
|
Finished goods |
|
| 26,213,513 |
|
|
| 29,388,813 |
|
Total inventories |
| $ | 57,652,961 |
|
| $ | 64,636,591 |
|
Note E - Goodwill
The aggregate carrying amount of goodwill from continuing operations is approximately $70.8 million as of April 1, 2023. No impairment was recognized in the first quarter of 2023.
9 |
Table of Contents |
The Company tests its reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events and circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. The Company tests reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources.
Note F – Leases
The Company presents right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company accounts for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.
The Company has operating leases for buildings, warehouses, and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability.
Currently, the Company has twenty-one operating leases with a lease liability of $11.6 million and three finance leases with a lease liability of $1.0 million as of April 1, 2023. The terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial informationobligations. There are no related party lease transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.
Approximate total minimum lease payments for each of the next five fiscal years is estimated to be as follows:
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Revenues: | ||||||||||||||||
Sales to unaffiliated customers: | ||||||||||||||||
Industrial Hardware | $ | 83,500,656 | $ | 45,689,104 | $ | 32,959,599 | $ | 15,210,943 | ||||||||
Security Products | 46,232,410 | 43,722,828 | 16,115,356 | 13,648,701 | ||||||||||||
Metal Products | 20,362,909 | 14,051,384 | 6,932,982 | 4,618,703 | ||||||||||||
$ | 150,095,975 | $ | 103,463,316 | $ | 56,007,937 | $ | 33,478,347 | |||||||||
Income before income taxes: | ||||||||||||||||
Industrial Hardware | $ | 2,877,052 | $ | 3,769,045 | $ | 1,813,133 | $ | 1,574,573 | ||||||||
Security Products | 4,290,745 | 4,533,995 | 1,604,950 | 1,613,148 | ||||||||||||
Metal Products | 1,128,507 | (972,194 | ) | 155,558 | 76,393 | |||||||||||
Operating Profit | 8,296,304 | 7,330,846 | 3,573,641 | 3,264,114 | ||||||||||||
Interest expense | (659,884 | ) | (97,486 | ) | (327,206 | ) | (28,817 | ) | ||||||||
Other income | 69,278 | 54,687 | 13,513 | 28,169 | ||||||||||||
$ | 7,705,698 | $ | 7,288,047 | $ | 3,259,948 | $ | 3,263,466 |
Note EG - Debt
On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, M&T Bank, and TD Bank, N.A. as lenders (the “Credit Agreement”), that included a $100 million term portion and a $20 million revolving commitment portion. Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with M&T Bank (approximately $19 million) and to acquire certain subsidiaries of Big 3 Holdings, LLC (collectively “Big 3 Precision”). The term portion of the loan required quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increased to $1,875,000 per quarter beginning September 30, 2021 and continuing through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023 and continuing through June 30, 2024. The term loan is a 5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. As of April 1, 2023, the Company has not borrowed any funds on the revolving commitment portion of the facility. The term loan bears interest at a variable rate based on the LIBOR rate plus an applicable margin of 1.25% to 2.25%, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.25% to 1.25% or the LIBOR rate plus an applicable margin of 1.25% to 2.25%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019, with Santander Bank, N.A., as administrative agent.
The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. The Company was in compliance with all its covenants under the Credit Agreement on April 1, 2023, and through the date of filing this Form 10-Q.
10 |
Table of Contents |
On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On April 1, 2023, the interest rate for approximately half ($20.1 million) of the term portion was 6.38%, using a one-month LIBOR rate, and 3.19% on the remaining balance ($39.1 million) of the term loan based on a one-month LIBOR rate.
The interest rates under the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the phasing out of LIBOR. Information regarding the phasing out of LIBOR is provided below.
The ICE Benchmark Administration (the “IBA”) ceased publication of all settings of non-US dollar LIBOR and the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings scheduled to be discontinued after June 30, 2023. The Adjustable Interest Rate Act (the “LIBOR Act”), which was signed into law on March 15, 2022, provided a replacement framework for outstanding financial contracts tied to LIBOR once LIBOR ceases to be published. The LIBOR Act provides a statutory mechanism and safe harbor that applies on a nationwide basis to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board based on SOFR, for certain contracts that reference LIBOR and contain no or insufficient fallback provisions. The LIBOR Act preempts and supersedes any state or local law, statute, rule, regulation, or standard relating to the selection or use of a benchmark replacement or related changes and allows parties that already have effective fallback provisions to opt out of the legislation. On December 16, 2022, the Federal Reserve adopted a final rule implementing the LIBOR Act that, among other things, identifies the applicable SOFR-based benchmark replacements under the LIBOR Act for various contact types. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate, which has implications for how interest and other payments are based.
Note H - Stock Options and Awards
The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers, other key employees, and non-employee directors expired in February 2020. On February 19, 2020, the Board of Directors of the Company (the “Board”) adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”). On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The 2020 Plan replaced the 2010 Plan. The Company has no other existing plan pursuant to which equity awards may be granted.
Incentive stock options granted under the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Board. Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Board. The Company did not grant any stock awards during the first three months of fiscal 2023. During the first three months of fiscal 2022, the Company granted 36,200 stock awards that were subject to the meeting of performance measurements. For the first three months of fiscal 2022, the Company used fair market value to determine the associated expense with stock awards.
The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During the first three months of fiscal 2023 and 2022 the Company did not issue any SARs.
Stock-based compensation (income) expense in connection with SARs previously granted to employees was approximately $(184,000) and $113,000 in the first quarter of 2023 and the first quarter of 2022, respectively.
As of April 1, 2023, there were 939,398 shares of Company common stock reserved and available for future grant under the 2020 Plan.
11 |
Table of Contents |
The following tables set forth the outstanding SARs for the period specified:
|
| Three Months Ended |
|
| Year Ended |
| ||||||||||
|
| April 1, 2023 |
|
| December 31, 2022 |
| ||||||||||
|
| Units |
|
| Weighted Average Exercise Price |
|
| Units |
|
| Weighted Average Exercise Price |
| ||||
Outstanding at beginning of period |
|
| 146,166 |
|
| $ | 23.22 |
|
|
| 180,833 |
|
| $ | 22.88 |
|
Issued |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Expired |
|
| (42,000 | ) |
|
| 24.90 |
|
|
| - |
|
|
| - |
|
Exercised |
|
| (33,333 | ) |
|
| 21.10 |
|
|
| (16,667 | ) |
|
| 21.20 |
|
Forfeited |
|
| (32,500 | ) |
|
| 21.97 |
|
|
| (18,000 | ) |
|
| 21.74 |
|
Outstanding at end of period |
|
| 38,333 |
|
|
| 23.58 |
|
|
| 146,166 |
|
|
| 23.22 |
|
SARs Outstanding and Exercisable |
|
|
|
|
|
|
|
|
| |||||||||||||||
Range of Exercise Prices |
| Outstanding as of April 1, 2023 |
|
| Weighted Average Remaining Contractual Life |
|
| Weighted Average Exercise Price |
|
| Exercisable as of April 1, 2023 |
|
| Weighted Average Remaining Contractual Life |
|
| Weighted Average Exercise Price |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
$19.44 - $26.30 |
|
| 38,333 |
|
|
| 0.9 |
|
| $ | 23.58 |
|
|
| 38,333 |
|
|
| 0.9 |
|
| $ | 23.58 |
|
The following tables set forth the outstanding stock awards for the period specified:
Three Months Ended | Year Ended | |||||||
April 1, 2023 | December 31, 2022 | |||||||
Shares | Shares | |||||||
Outstanding at beginning of period | 64,500 | 27,300 | ||||||
Issued | - | 43,300 | ||||||
Forfeited | (33,100 | ) | (6,100 | ) | ||||
Outstanding at end of period | 31,400 | 64,500 |
As of April 1, 2023, outstanding SARs and stock awards had an intrinsic value of $611,672.
Note I – Share Repurchase Program
On May 2, 2018, the Company announced that the Board of Directors of the Company 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”). Below is a summary of the Company’s shares repurchased during the first quarter of 2023.
12 |
Table of Contents |
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Maximum Number of Shares that may yet be Purchased Under the Plans or Programs |
| ||||
Balance as of December 31, 2022 |
|
| 139,716 |
|
| $ | 24.61 |
|
|
| 139,716 |
|
|
| 60,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2023 - April 1, 2023 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of April 1, 2023 |
|
| 139,716 |
|
| $ | 24.61 |
|
|
| 139,716 |
|
|
| 60,284 |
|
Note J – Revenue Recognition
The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled. The Company records revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which are delivering goods or services, determines the transaction price, allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.
Customer volume rebates, product returns, discount and allowance are variable considerations and are recorded as a reduction of revenue in the same period that the related sales are recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material.
The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.
Note K - Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2018 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2016.
The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for several reasons, including the closure of federal, state, and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the value of unrecognized tax benefits during the three months ended April 1, 2023. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.
Note L – Retirement Benefit Plans
The Company has four non-contributory defined benefit pension plans covering most U.S. employees. Three of these pension plans are frozen and participants in these three plans have not accrued benefits since the date on which these plans were frozen. A fourth pension plan does not permit new participants but existing participants in this fourth pension plan continue to accrue benefits. Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law.
The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.
13 |
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Significant disclosures relating to these benefit plans for the first quarter of fiscal years 2023 and 2022 are as follows:
|
| Pension Benefits |
| |||||
|
| Three Months Ended |
| |||||
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
Service cost |
| $ | 216,153 |
|
| $ | 269,744 |
|
Interest cost |
|
| 990,054 |
|
|
| 608,189 |
|
Expected return on plan assets |
|
| (1,049,016 | ) |
|
| (1,460,661 | ) |
Amortization of prior service cost |
|
| — |
|
|
| 16,563 |
|
Amortization of the net loss |
|
| 342,865 |
|
|
| 390,075 |
|
Net periodic cost (benefit) |
| $ | 500,056 |
|
| $ | (176,090 | ) |
|
| Other Postretirement Benefits |
| |||||
|
| Three Months Ended |
| |||||
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
Service cost |
|
| 6,486 |
|
|
| 13,323 |
|
Interest cost |
|
| 14,533 |
|
|
| 10,988 |
|
Expected return on plan assets |
|
| (4,849 | ) |
|
| (4,400 | ) |
Gain on significant event |
|
| — |
|
|
| — |
|
Amortization of prior service cost |
|
| 1,060 |
|
|
| 1,060 |
|
Amortization of the net loss |
|
| (16,895 | ) |
|
| (2,054 | ) |
Net periodic benefit |
| $ | 335 |
|
| $ | 18,917 |
|
The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In fiscal year 2023, the Company expects to contribute approximately $800,000 into its pension plans and approximately $50,000 into its postretirement plan. As of April 1, 2023, the Company has not made any contributions to its pension plans, has contributed $12,000 to its postretirement plan, and expects to make the remaining contributions as required during the remainder of the fiscal year.
The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion.
The Company made contributions to the plan as follows:
|
| Three Months Ended |
| |||||
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
Regular matching contribution |
| $ | 252,761 |
|
| $ | 210,939 |
|
Transitional credit contribution |
|
| 34,320 |
|
|
| 51,564 |
|
Non-discretionary contribution |
|
| 431,950 |
|
|
| 343,377 |
|
Total contributions for the period |
| $ | 719,031 |
|
| $ | 605,880 |
|
The non-discretionary contribution of $328,953 made in the three months ended April 1, 2023, was accrued for, and expensed in the prior fiscal year.
Effective January 1, 2023, the non-discretionary contributions are being contributed on a weekly basis.
14 |
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Note M - Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company.
Note F – Debt
Industrial Hardware Segment | Security Products Segment | Metal Products Segment | Total | |||||||||||||
Beginning balance | $ | 1,760,793 | $ | 13,059,042 | $ | — | $ | 14,819,835 | ||||||||
Investment – Velvac | 17,502,024 | — | — | 17,502,024 | ||||||||||||
Foreign exchange | 73,881 | — | — | 73,881 | ||||||||||||
Ending balance | $ | 19,336,698 | $ | 13,059,042 | $ | — | $ | 32,395,740 |
Industrial Hardware Segment | Security Products Segment | Metal Products Segment | Total | Weighted-Average Amortization Period (Years) | ||||||||||||||||
2017 Gross Amount | ||||||||||||||||||||
Patents and developed technology | $ | 7,111,906 | $ | 1,069,594 | $ | -- | $ | 8,181,500 | 12.2 | |||||||||||
Customer relationships | 3,650,000 | 449,706 | -- | 4,099,706 | 9.5 | |||||||||||||||
Non-compete agreements | -- | 407,000 | -- | 407,000 | 5.0 | |||||||||||||||
Intellectual property | -- | 307,370 | -- | 307,370 | 5.0 | |||||||||||||||
Total Gross Intangibles | $ | 10,761,906 | $ | 2,233,670 | $ | -- | $ | 12,995,576 | 10.8 | |||||||||||
2017 Accumulated Amortization | ||||||||||||||||||||
Patents and developed technology | $ | 1,888,433 | $ | 663,254 | $ | -- | $ | 2,551,687 | ||||||||||||
Customer relationships | 182,500 | 247,338 | -- | 429,838 | ||||||||||||||||
Non-compete agreements | -- | 223,850 | -- | 223,850 | ||||||||||||||||
Intellectual property | -- | 169,054 | -- | 169,054 | ||||||||||||||||
Accumulated Amortization | $ | 2,070,933 | $ | 1,303,496 | $ | -- | $ | 3,374,429 | ||||||||||||
Net September 30, 2017 per Balance Sheet | $ | 8,690,973 | $ | 930,174 | $ | -- | $ | 9,621,147 |
2016 Gross Amount | ||||||||||||||||||||
Patents and developed technology | $ | 2,159,060 | $ | 1,035,374 | $ | -- | $ | 3,194,434 | 15.6 | |||||||||||
Customer relationships | -- | 449,706 | -- | 449,706 | 5.0 | |||||||||||||||
Non-compete agreements | -- | 407,000 | -- | 407,000 | 5.0 | |||||||||||||||
Intellectual property | -- | 307,370 | -- | 307,370 | 5.0 | |||||||||||||||
Total Gross Intangibles | $ | 2,159,060 | $ | 2,199,450 | $ | -- | $ | 4,358,510 | 12.3 | |||||||||||
2016 Accumulated Amortization | ||||||||||||||||||||
Patents and developed technology | $ | 1,529,675 | $ | 598,756 | $ | -- | $ | 2,128,431 | ||||||||||||
Customer relationships | -- | 179,882 | -- | 179,882 | ||||||||||||||||
Non-compete agreements | -- | 162,800 | -- | 162,800 | ||||||||||||||||
Intellectual property | -- | 122,948 | -- | 122,948 | ||||||||||||||||
Accumulated Amortization | $ | 1,529,675 | $ | 1,064,386 | $ | -- | $ | 2,594,061 | ||||||||||||
Net December 31, 2016 per Balance Sheet | $ | 629,385 | $ | 1,135,064 | $ | -- | $ | 1,764,449 |
Pension Benefits | ||||||||||||||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Service cost | $ | 952,078 | $ | 1,612,278 | $ | 317,360 | $ | 270,721 | ||||||||
Interest cost | 2,373,167 | 2,541,968 | 791,055 | 767,625 | ||||||||||||
Expected return on plan assets | (3,587,682 | ) | (3,603,483 | ) | (1,195,895 | ) | (1,121,311 | ) | ||||||||
Amortization of prior service cost | 109,312 | 150,427 | 36,438 | 50,143 | ||||||||||||
Amortization of the net loss | 923,614 | 1,319617 | 307,871 | 277,469 | ||||||||||||
Net periodic benefit cost | $ | 770,489 | $ | 2,020,807 | $ | 256,829 | $ | 244,647 |
Postretirement Benefits | ||||||||||||||||
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Service cost | $ | 20,542 | $ | 21,975 | $ | 6,847 | $ | 7,325 | ||||||||
Interest cost | 60,620 | 71,154 | 20,206 | 23,718 | ||||||||||||
Expected return on plan assets | (38,621 | ) | (35,649 | ) | (12,874 | ) | (11,883 | ) | ||||||||
Amortization of prior service cost | (16,083 | ) | (17,918 | ) | (5,361 | ) | (5,973 | ) | ||||||||
Amortization of the net loss | (58,201 | ) | (70,441 | ) | (19,400 | ) | (23,480 | ) | ||||||||
Net periodic benefit cost | $ | (31,743 | ) | $ | (30,879 | ) | $ | (10,582 | ) | $ | (10,293 | ) |
Nine Months Ended | Three Months Ended | |||||||||||||||
September 30, 2017 | October 1, 2016 | September 30, 2017 | October 1, 2016 | |||||||||||||
Regular matching contribution | $ | 346,713 | $ | 226,090 | $ | 111,291 | $ | 94,042 | ||||||||
Transitional credit contribution | 307,597 | 136,416 | 76,526 | 94,868 | ||||||||||||
Non-discretionary contribution | 339,220 | 51,470 | 15,987 | -- | ||||||||||||
Total contributions for the period | $ | 993,530 | $ | 413,976 | $ | 203,804 | $ | 188,910 |
Three Months Ended September 30, 2017 | Year Ended December 31, 2016 | |||||||||||||||
Shares | Weighted - Average Exercise Price | Shares | Weighted - Average Exercise Price | |||||||||||||
Outstanding at beginning of period | 174,500 | $ | 20.39 | -- | $ | -- | ||||||||||
Issued | -- | -- | -- | -- | ||||||||||||
Outstanding at end of period | 174,500 | 20.39 | -- | -- |
SARs and Options Outstanding and Exercisable | ||||||
Range of Exercise Prices | Outstanding as of September 30, 2017 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Exercisable as of September 30, 2017 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price |
$19.10-21.10 | 174,500 | 4.4 | $20.39 | -- | -- | -- |
Credit Risk
Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As September 30, 2017 and December 31, 2016,of April 1, 2023, there were nowas one significant concentrationsconcentration of credit risk. Norisk with a customer, who has receivables representing 15% of our total accounts receivable. One single customer represented more than 10%14% of the Company'sCompany’s net accounts receivable as of September 30, 2017 or at December 31, 2016.2022. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company'sCompany’s accounts receivable.
The Company has deposits that exceed amounts up to $250,000 that are insured by the Federal Deposit Insurance Corporation (FDIC), but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution.
Interest Rate Risk
The Company'sCompany’s exposure to the risk of changes in market interest rates relates primarily to the Company'sCompany’s debt, which bears interest at variable rates based on the LIBOR rate plus a margin spread of 1.75%1.25% to 2.50%2.25%. The Company has an interest rate swap with a notional amount of $15,306,250$39.0 million on September 30, 2017April 1, 2023, to convert a portion of its 2017 Term Loanborrowings under the Credit Agreement from variable to fixed rates. The valuation of this swap is determined using the three monthone-month LIBOR rate index and mitigates the Company'sCompany’s exposure to interest rate risk.
Currency Exchange Rate Risk
The Company’s currency exposure is concentrated in the Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB, Hong Kong dollar and United Kingdom pound sterling. Because of the Company’s limited exposure to any single foreign market, any exchange gains or losses have not been material and are recordednot expected to be material in the future. As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments.
Note O – Subsequent Events
On April 25, 2023, the Board of Directors of The Eastern Company (the “Company”) approved a plan to close the Company’s Associated Tool Makers Ltd. facility located in Farndon, United Kingdom, which specializes in the design and manufacture of molds for the plastic injection molding industry. The plan is intended to address long-standing profitability issues at fair value using market and income valuation approaches and considering the Company's and counterparty's credit risk. Farndon facility. The plan would include approximately 10 job reductions at the Farndon facility.
The Company usesexpects to substantially complete this plan by the market approach and the income approach to value assets and liabilities as appropriate. The assets or liabilities requiring fair value measurements on September 30, 2017 are as follows:
Fair Value | Level 1 | Level 2 | Level 3 | |||||
Financial Liabilities Interest rate swap | $ 82,302 | $ -- | $ 82,302 | $ -- | ||||
Total liabilities | $ 82,302 | $ -- | $ 82,302 | $ -- |
Consideration | ||||
Cash | $ | 4,078,000 | ||
Debt | 36,000,000 | |||
Contingent consideration arrangement | 2,070,000 | |||
$ | 42,148,000 | |||
Recognized amounts of identifiable assets acquired and liabilities assumed | ||||
Accounts receivable | $ | 6,063,429 | ||
Inventory | 12,992,377 | |||
Prepaid and other assets | 494,617 | |||
Property plant and equipment | 3,911,767 | |||
Other noncurrent assets | 366,401 | |||
Other intangible assets | 11,560,000 | |||
Current liabilities | (7,720,591 | ) | ||
Deferred tax liabilities | (3,022,000 | ) | ||
Total identifiable net assets | 24,646,000 | |||
Goodwill | 17,502,000 | |||
$ | 42,148,000 |
15 |
Table of Contents |
ITEM 2 – MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to highlight significant changes in the Company's financial position and results of operations of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the thirteen weeksquarter ended September 30, 2017. The interim financial statements and this Management'sApril 1, 2023. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 31, 20162022 and the related Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company'sCompany’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 ("2016 Annual2022, which was filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2023 (the “2022 Form 10-K”).
The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2022 or the 2022 fiscal year mean the 52-week period ended on December 31, 2022, and references to 2023 or the 2023 fiscal year mean the 52-week period ending on December 30, 2023. In a 52-week fiscal year, each quarter has 13 weeks. References to the first quarter of 2022, the first fiscal quarter of 2022 or the three months ended April 2, 2022, mean the period from January 2, 2022 to April 2, 2022. References to the first quarter of 2023, the first fiscal quarter of 2023 or the three months ended April 1, 2023, mean the 13-week period from January 1, 2023 to April 1, 2023.
Safe Harbor for Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-K").
16 |
Table of Contents |
Overview
General Overview
The following analysis excludes discontinued operations.
Net sales in the first quarter of 2023 increased 5% to $72.5 million from $69.0 million in the corresponding period in 2022. Sales increased in the first quarter of 2023 primarily due to increased demand for truck accessories and automotive returnable transport packaging products as well as increased demand from distributors. Our returnable transport packaging sales benefited from the increase in new automotive product launches, including several electric vehicle launches. Our backlog as of April 3, 2017,1, 2023 was down 16% to $72.0 million from $85.8 million as of April 2, 2022 as we optimize our supply chain to reduce past due orders and transition from old to new programs with our commercial vehicle and automotive customers and increased shipments to customers.
Net sales of existing products increased 3% in the first quarter of 2023 compared to the corresponding period in 2022. Price increases and new products increased net sales by 2% in the first quarter of 2023 compared to the corresponding period in 2022. New products included various truck mirror assemblies, rotary latches, electronic latches and locks, D-rings, and mirror cams. Price increases primarily reflect our efforts to recover an increase in raw material and freight costs.
Cost of products sold increased $2.6 million, or 5%, in the first quarter of 2023 compared to the corresponding period in 2022. The increase is primarily due to higher sales volume. Additionally, the Company completed its acquisitionpaid tariff costs on China-sourced products of Velvac Holdings, Inc.,approximately $0.6 million in the first quarter of 2023, compared to $0.6 million in the first quarter of fiscal 2022. Most tariffs on China-sourced products have been recovered through price increases.
Gross margin as a Delaware corporation including its subsidiaries ("Velvac"), pursuant to a Securities Purchase Agreement (the "Securities Purchase Agreement"), dated April 3, 2017, by and among 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 "Acquisition") for $39.5 million and earnout consideration contingent upon Velvac achieving minimum earnings performance levels with the amount of any such earnout consideration based on a specific percentage (either 7.5% or 15%) of sales of Velvac's new proprietary Road-iQ product line measured over annual calculation periods through April 2022, as set forthwas 21% in the Securities Purchase Agreement (the "Earnout Consideration"), subjectfirst quarter of fiscal 2023 compared to certain customary post-closing adjustments. The Acquisition was financed with a $31 million term loan from People's United Bank, National Association ("People's"), a $5 million draw down on the Company's $10 million revolving credit facility with People's and $3.5 million in cash. Please refer to the Form 8-K filed on April 7, 2017 and the amendment thereto files on June 19, 2017 for further details.
Product development expense increased 67%$0.2 million, or 17% in the first quarter of 2023 when compared to the thirdcorresponding period in 2022 as we continue to invest in new products at Eberhard and Velvac. As a percentage of net sales, product development costs were 1.9% for the first quarter of 2016. Sales2023 and 1.7% for the corresponding period in 2022.
Selling and administrative expense increased $2.1 million, or 21%, in the Industrial Hardware segment by 117% in the thirdfirst quarter of 2017, primarily as a result of sales generated from the Velvac acquisition. Excluding Velvac's sales in the third quarter of 2017, sales in the Industrial Hardware segment would have increased 12%2023 when compared to the thirdcorresponding period in 2022 primarily due to severance and other accrued compensation expenses of $1.8 million related to the elimination of the Chief Operating Officer position and the departure of our previous Chief Executive Officer and other selling costs and payroll-related expenses. The increase in selling expenses reflects both the increase in sales as well as our investments in sales capabilities.
Interest expense increased $0.3 million in the first quarter of 2016.
Other income was down $1.1 million in the Industrial Hardware segment would have increased by 13% whenfirst quarter of 2023 compared to the first nine monthscorresponding period in 2022. The decrease in other income of 2016. Sales volume of existing products, which include the sales of Velvac products, increased by 40%$1.1 million in the first nine monthsquarter was primarily driven by an unfavorable final working capital adjustment of 2017$0.4 million related to the sale of the Greenwald business and pension cost of $0.3 million in the first quarter of 2023, while in the first quarter of 2022 the Company had a favorable pension cost adjustment of $0.4 million, partially offset by a loss on the sale of the Wheeling, IL building of $0.2 million.
Net income from continuing operations for the first quarter of fiscal 2023 was $0.6 million, or $0.10 per diluted share, compared to the first nine monthsnet income from continuing operations of 2016. The results for the nine months ended September 30, 2017 were favorably affected by the introduction of new products which increased sales by 5%. The Industrial Hardware segment sales increased 83%, Metal Products segment increased 45%, and Security Products segment increased by 6% as compared to the first nine months of 2016.
A more detailed analysis of the Company'sCompany’s results of operations and financial condition follows:
17 |
Table of Contents |
Results of Operations
The following table shows, for the periods indicated, selected line items from the condensed consolidated statements of operations as a percentage of net sales, by segment:
Three Months Ended September 30, 2017 | ||||||||||||||||
Industrial | Security | Metal | ||||||||||||||
Hardware | Products | Products | Total | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of products sold | 80.6 | % | 70.5 | % | 88.8 | % | 78.7 | % | ||||||||
Gross margin | 19.4 | % | 29.5 | % | 11.2 | % | 21.3 | % | ||||||||
Engineering expense | 4.1 | % | 3.0 | % | -- | 3.3 | % | |||||||||
Selling and administrative expense | 9.8 | % | 16.5 | % | 9.0 | % | 11.6 | % | ||||||||
Operating profit | 5.5 | % | 10.0 | % | 2.2 | % | 6.4 | % | ||||||||
Three Months Ended October 1, 2016 | ||||||||||||||||
Industrial | Security | Metal | ||||||||||||||
Hardware | Products | Products | Total | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of products sold | 72.7 | % | 65.7 | % | 88.8 | % | 72.0 | % | ||||||||
Gross margin | 27.3 | % | 34.3 | % | 11.2 | % | 28.0 | % | ||||||||
Engineering expense | 0.9 | % | 3.8 | % | -- | 2.0 | % | |||||||||
Selling and administrative expense | 16.1 | % | 18.7 | % | 9.5 | % | 16.3 | % | ||||||||
Operating profit | 10.3 | % | 11.8 | % | 1.7 | % | 9.7 | % |
Three Months Ended | ||||||||
April 1, 2023 | April 2, 2022 | |||||||
Net sales | 100.0 | % | 100.0 | % | ||||
Cost of products sold | 78.6 | % | 78.9 | % | ||||
Gross margin | 21.4 | % | 21.1 | % | ||||
Product development expense | 1.9 | % | 1.7 | % | ||||
Selling and administrative expense | 16.5 | % | 14.3 | % | ||||
Operating Profit | 3.0 | % | 5.1 | % |
The following table shows the amount of change for the third quarter of 2017 compared to the third quarter of 2016 in sales cost of products sold, gross margin, engineering expense, selling and administrative expenses and operating profit by segment (dollars in thousands):
Industrial | Security | Metal | ||||||||||||||
Hardware | Products | Products | Total | |||||||||||||
Net sales | $ | 17,749 | $ | 2,467 | $ | 2,314 | $ | 22,530 | ||||||||
Volume | 110.2 | % | 16.0 | % | 30.3 | % | 60.8 | % | ||||||||
Prices | -0.4 | % | -0.1 | % | 3.0 | % | 0.2 | % | ||||||||
New products | 6.9 | % | 2.2 | % | 16.8 | % | 6.3 | % | ||||||||
116.7 | % | 18.1 | % | 50.1 | % | 67.3 | % | |||||||||
Cost of products sold | $ | 15,495 | $ | 2,393 | $ | 2,051 | $ | 19,939 | ||||||||
140.2 | % | 26.7 | % | 50.0 | % | 82.7 | % | |||||||||
Gross margin | $ | 2,254 | $ | 74 | $ | 263 | $ | 2,591 | ||||||||
54.2 | % | 1.6 | % | 50.9 | % | 27.5 | % | |||||||||
Engineering expense | $ | 1,215 | $ | (30 | ) | -- | $ | 1,185 | ||||||||
845 | % | -5.8 | % | 178.6 | % | |||||||||||
Selling and administrative expenses | $ | 800 | $ | 99 | $ | 184 | $ | 1,083 | ||||||||
32.8 | % | 3.8 | % | 41.8 | % | 19.9 | % | |||||||||
Operating profit | $ | 239 | $ | 5 | $ | 79 | $ | 323 | ||||||||
15.2 | % | 0.3 | % | 103.6 | % | 9.9 | % |
Nine Months Ended September 30, 2017 | ||||||||||||||||
Industrial | Security | Metal | ||||||||||||||
Hardware | Products | Products | Total | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of products sold | 77.1 | % | 69.8 | % | 84.8 | % | 75.9 | % | ||||||||
Gross margin | 22.9 | % | 30.2 | % | 15.2 | % | 24.1 | % | ||||||||
Engineering expense | 3.3 | % | 3.0 | % | -- | 2.8 | % | |||||||||
Selling and administrative expense | 16.2 | % | 17.9 | % | 9.7 | % | 15.8 | % | ||||||||
Operating profit | 3.4 | % | 9.3 | % | 5.5 | % | 5.5 | % | ||||||||
Nine Months Ended October 1, 2016 | ||||||||||||||||
Industrial | Security | Metal | ||||||||||||||
Hardware | Products | Products | Total | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of products sold | 74.7 | % | 69.2 | % | 97.1 | % | 75.4 | % | ||||||||
Gross margin | 25.3 | % | 30.8 | % | 2.9 | % | 24.6 | % | ||||||||
Engineering expense | 0.8 | % | 3.7 | % | -- | 1.9 | % | |||||||||
Selling and administrative expense | 16.3 | % | 16.8 | % | 9.8 | % | 15.6 | % | ||||||||
Operating profit | 8.2 | % | 10.3 | % | -6.9 | % | 7.1 | % |
Industrial | Security | Metal | ||||||||||||||
Hardware | Products | Products | Total | |||||||||||||
Net sales | $ | 37,812 | $ | 2,510 | $ | 6,312 | $ | 46,634 | ||||||||
Volume | 77.4 | % | 4.2 | % | 29.7 | % | 40.0 | % | ||||||||
Prices | -0.3 | % | -0.1 | % | 2.8 | % | 0.2 | % | ||||||||
New products | 5.7 | % | 1.6 | % | 12.4 | % | 4.9 | % | ||||||||
82.8 | % | 5.7 | % | 44.9 | % | 45.1 | % | |||||||||
Cost of products sold | $ | 30,265 | $ | 2,005 | $ | 3,623 | $ | 35,893 | ||||||||
88.7 | % | 6.6 | % | 26.6 | % | 46.0 | % | |||||||||
Gross margin | $ | 7,547 | $ | 505 | $ | 2,689 | $ | 10,741 | ||||||||
65.2 | % | 3.7 | % | 658.3 | % | 42.2 | % | |||||||||
Engineering expense | $ | 2,402 | $ | (230 | ) | -- | $ | 2,172 | ||||||||
626.9 | % | -14.3 | 109.0 | % | ||||||||||||
Selling and administrative expenses | $ | 6,038 | $ | 963 | $ | 588 | $ | 7,589 | ||||||||
81.3 | % | 13.1 | % | 42.6 | % | 47.0 | % | |||||||||
Operating profit | $ | (893 | ) | $ | (228 | ) | $ | 2,101 | $ | 980 | ||||||
-23.7 | % | -5.1 | % | 216.1 | % | 13.4 | % |
|
| Three Months |
| |
|
| Ended |
| |
|
| April 1, 2023 |
| |
|
|
|
| |
Net Sales |
| $ | 3,481 |
|
|
|
|
|
|
Volume |
|
| 3.3 | % |
Price |
|
| 0.8 | % |
New products |
|
| 0.9 | % |
|
|
| 5.0 | % |
|
|
|
|
|
Operating Profit |
| $ | (1,355 | ) |
Liquidity and Sources of Capital
The Company generated approximately $6.9 million of cash from continuing operations during the Industrial Hardware segment were up 117% infirst three months of fiscal 2023 compared to consuming approximately $3.6 million during the third quarterfirst three months of 2017 and 83%fiscal 2022. Cash flow from operations in the first ninethree months of 2017 compared to the respective corresponding prior year periods. The increase in sales in both the third quarter and first nine months of 20172023 was higher when compared to the respective corresponding priorperiod last year periods primarily reflected sales from the Velvac acquisition. Excluding Velvac's sales in the third quarter of 2017, sales in the Industrial Hardware segment would have increased 12% when compared to the third quarter of 2016 and sales in the first nine months of 2017 would have increased by 13% when compared to the first nine months of 2016. Sales of new products included tumbler paddles, latch brackets and panels for the class 8 trucking industry.
Additions to property, plant and equipment for continuing operations were $1.5approximately $1.2 million for the first ninethree months of 20172023 and $1.8$0.6 million for the same period in 2016. Total capital expenditures for allfirst three months of 2017 are expected to be approximately $3.0 million.2022. As of September 30, 2017,April 1, 2023, there was approximately $200,000$1.2 million of outstanding commitments for these capital expenditures.
The following table shows key financial ratios as ofat the end of each specified period:
Third Quarter 2017 | Third Quarter 2016 | Year End 2016 | ||||||||||
Current ratio | 3.1 | 5.7 | 6.0 | |||||||||
Average days' sales in accounts receivable | 53 | 53 | 49 | |||||||||
Inventory turnover | 3.5 | 3.1 | 3.0 | |||||||||
Total debt to shareholders' equity | 40.6 | % | 2.6 | % | 2.2 | % |
|
| First Quarter 2023 |
|
| First Quarter 2022 |
|
| Fiscal Year 2022 |
| |||
Current ratio |
|
| 2.7 |
|
|
| 2.7 |
|
|
| 2.7 |
|
Average days’ sales in accounts receivable |
|
| 57 |
|
|
| 63 |
|
|
| 56 |
|
Inventory turnover |
|
| 4.0 |
|
|
| 3.2 |
|
|
| 3.4 |
|
Total debt to shareholders’ equity |
|
| 46.6 | % |
|
| 63.2 | % |
|
| 50.7 | % |
18 |
Table of Contents |
The following table shows important liquidity measures as of the balance sheet date for each specified period below (in millions):
Third Quarter 2017 | Third Quarter 2016 | Year End 2016 | |||||||
Cash and cash equivalents | |||||||||
- Held in the United States | $ | 7.1 | $ | 9.7 | $ | 11.2 | |||
- Held by a foreign subsidiary | 14.1 | 11.9 | 11.5 | ||||||
21.2 | 21.6 | 22.7 | |||||||
Working capital | 68.0 | 64.1 | 64.8 | ||||||
Net cash provided by operating activities | 10.2 | 9.0 | 12.4 | ||||||
Change in working capital impact on net cash used in operating activities | 1.4 | (0.1 | ) | (0.5 | ) | ||||
Net cash used in investing activities | (43.9 | ) | (1.8 | ) | (2.9 | ) | |||
Net cash used in financing activities | 31.8 | (3.1 | ) | (4.2 | ) |
|
| First |
|
| First |
|
| Fiscal |
| |||
|
| Quarter |
|
| Quarter |
|
| Year |
| |||
|
| 2023 |
|
| 2022 |
|
| 2022 |
| |||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
| |||
- Held in the United States |
| $ | 9.7 |
|
| $ | 2.3 |
|
| $ | 7.4 |
|
- Held by a foreign subsidiary |
|
| 3.4 |
|
|
| 2.9 |
|
|
| 2.8 |
|
|
|
| 13.1 |
|
|
| 5.2 |
|
|
| 10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
| 76.7 |
|
|
| 83.2 |
|
|
| 78.3 |
|
Net cash provided by (used in) operating activities |
|
| 6.9 |
|
|
| (3.6 | ) |
|
| 7.4 |
|
Change in working capital impact on net cash Provided by (used in) operating activities |
|
| 3.6 |
|
|
| (8.8 | ) |
|
| (5.2 | ) |
Net cash provided by investing activities |
|
| 1.1 |
|
|
| 1.0 |
|
|
| 5.1 |
|
Net cash (used in) provided by financing activities |
|
| (5.1 | ) |
|
| 1.6 |
|
|
| (11.8 | ) |
Inventories of Velvac. The cash from financing activities was the result of the execution of the loan with People's and the revolving line of credit facility with People's to provide a significant share of the capital used in the acquisition of Velvac.
Cash, on hand, cash flow from operating activities and funds available under the revolving credit portion of the Company's Restated LoanCredit Agreement are expected to be sufficient to cover future foreseeable working capital requirements subjectrequirements. However, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available. In addition, the interest rate on borrowings under the Credit Agreement varies based on our senior net leverage ratio, and the Credit Agreement requires us to maintain a senior net leverage ratio not to exceed 4.25 to 1 and a fixed charge coverage ratio to be not less than 1.25 to 1. A decrease in earnings due to the risksimpact of COVID-19 or the resulting harm to the financial condition of our customers or economic conditions generally, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and uncertainties outlinedour fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and could cause us to fail to comply with the covenants under our Credit Agreement.
As of the end of the fiscal quarter ended April 1, 2023, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the risk factors disclosedUnited States (“U.S. GAAP”) requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. For a full description of our critical accounting policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 2022 Form 10-K. While there have been no material changes to our critical accounting estimates, we continue to monitor the methodologies and assumptions underlying such critical accounting estimates.
19 |
Table of Contents |
Non-GAAP Financial Measures
The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP.
To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income from continuing operations, diluted earnings per share from continuing operations, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.
Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis across periods by removing the impact of certain items that management believes do not directly reflect our underlying operating performance.
Adjusted Earnings Per Share from Continuing Operations is defined as earnings per share from continuing operations excluding, when incurred, certain per share gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs. We believe that Adjusted Earnings Per Diluted Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis from period to period.
Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses. Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our 2016 Annual Reportbusiness, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, U.S. GAAP financial measures.
We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.
20 |
Table of Contents |
Reconciliation of Non-GAAP Measures
Adjusted Net Income and Adjusted Earnings per Share from Continuing Operations Calculation
For the Three Months ended April 1, 2023 and April 2, 2022
($000's)
|
| Three Months Ended |
| |||||
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 607 |
|
| $ | 2,686 |
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.10 |
|
| $ | 0.43 |
|
Diluted |
| $ | 0.10 |
|
| $ | 0.43 |
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
Loss on sale of Wheeling, IL building, net of tax |
|
| - |
|
|
| 202 | A |
Severance and accrued compensation, net of tax |
|
| 1,349 | B |
|
| - |
|
Greenwald final sale adjustment, net of tax |
|
| 293 | C |
|
| - |
|
Total adjustments (non-GAAP) |
| $ | 1,642 |
|
| $ | 202 |
|
|
|
|
|
|
|
|
|
|
Adjusted net income from continuing operations |
| $ | 2,249 |
|
| $ | 2,888 |
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per share from continuing operations (non-GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.36 |
|
| $ | 0.46 |
|
Diluted |
| $ | 0.36 |
|
| $ | 0.46 |
|
A) Loss on Form 10-K as updated by,sale of ILC building in Wheeling, IL
B) Severance expenses associated with accrued compensation and incorporated by reference,severance related to the elimination of the Chief Operating Officer position and the departure of the Chief Executive Officer
C) Final settlement of working capital adjustment associated with Greenwald sale
21 |
Table of Contents |
Reconciliation of Non-GAAP Measures
Adjusted EBITDA from Continuing Operations Calculation
For the Three Months ended April 1, 2023 and April 2, 2022
($000's)
|
| Three Months Ended |
| |||||
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
|
|
|
|
|
|
| ||
Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 607 |
|
| $ | 2,686 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 726 |
|
|
| 434 |
|
Provision for income taxes |
|
| 195 |
|
|
| 881 |
|
Depreciation and amortization |
|
| 1,815 |
|
|
| 1,830 |
|
Loss on sale of Wheeling, IL building |
|
| - |
|
|
| 269 | A |
Severance and accrued compensation |
|
| 1,799 | B |
|
| - |
|
Greenwald final sale adjustment |
|
| 390 | C |
|
| - |
|
Adjusted EBITDA from continuing operations |
| $ | 5,532 |
|
| $ | 6,100 |
|
A) Loss on sale of ILC building in Item 1AWheeling, IL
B) Severance expenses associated accrued compensation and severance related to the elimination of this Quarterly Report on Form 10-Q.
C) Final settlement of working capital adjustment associated with Greenwald sale
22 |
Table of Contents |
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the third quarterCompany’s status as a smaller reporting company pursuant to Rule 12b-2 of 2017, there were no material changes in market risk from what was reported in the Company's 2016 Annual Report on Form 10-K.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
As of the end of the quarter ended September 30, 2017,April 1, 2023, the Company carried out an evaluation, under the supervision and with the participation of the Company'sCompany’s management, including the Chief Executive Officer (the "CEO"“CEO”) and the Chief Financial Officer (the "CFO"“CFO”), of the effectiveness of the design and operation of the Company'sCompany’s disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-15(e) and 240.15d-15(e)) pursuant to Exchange Act Rule 240.13a-15.13a-15. As defined in Exchange Act Rules 240.13a-15(e) and 240.15d-15(e), "the“the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission'sSEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure." Based upon that evaluation, the CEO and CFO concluded that the Company's current disclosure controls and procedures were effective as of the September 30, 2017 evaluation date.
The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The Company'sCompany’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO have concluded that these controls and procedures are effective at the "reasonable assurance" level.
Changes in Internal ControlsControl Over Financial Reporting:
During the third quarter of 2017,period covered by this Quarterly Report on Form 10-Q, there were no significant changes in the Company's internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the Company'sCompany’s internal control over financial reporting.
23 |
Table of Contents |
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
The Company is in final negotiations witha party to various legal proceedings from time to time related to its normal business operations. As of the DEC, and based on estimates provided byend of the Company's environmental engineers, the cost to remediate and monitor the landfill was $380,000 whichquarter ended April 1, 2023, the Company expensed in the second and third quarters of 2017.
ITEM 1A – RISK FACTORS
The Company'sCompany’s business is subject to a number ofseveral risks, some of which are beyond its control. In addition to the other information set forth in this report,Quarterly Report on Form 10-Q, the Company's stockholdersCompany’s shareholders should carefully consider the risk factors discussed in Part I, Item 1A. - "Risk Factors"1A “Risk Factors” of the Company's 2016 Annual Report on2022 Form 10-K, as filed with the SEC on March 15, 2017, that10-K. These risk factors could have a material adverse effect on the Company'sCompany’s business, results of operations, financial condition and/or liquidity and that could cause itsour operating results to vary significantly from period to period. As of September 30, 2017,April 1, 2023, there have been no material changes to the risk factors disclosed in the Company's most recent Annual Report on2022 Form 10-K. The Company may also disclose changes to such risk factors or disclose additional risk factors from time to time in its future filings with the SEC. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition, or operating results.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 2, 2018, the Company announced that the Board 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 purchasesopen market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. During the first fiscal quarter of registered equity securities by2023, the Company during the period covered by this Quarterly Report on Form 10-Q.
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None
24 |
Table of Contents |
ITEM 6 – EXHIBITS
* Filed herewith.
** Furnished herewith
25 |
Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
THE EASTERN COMPANY | ||
(Registrant) | ||
DATE: May 9, 2023 | /s/Mark Hernandez | |
Mark Hernandez President and Chief Executive Officer | ||
DATE: | /s/ | |
Nicholas Vlahos Vice President and Chief Financial Officer |