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 |
OR | ||
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
for the transition period from |
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) |
(203)-729-2255
Registrant’s telephone number
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 (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 every Interactive Data File required to be submitted 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 such files). Yes [X]☒ No [ ]
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 accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☒ |
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 Act). Yes [ ]☐ No [X]
As of March 28, 2020, 6,230,731April 3, 2021, 6,253,501 shares of the registrant’s common stock, no par value per share, were issued and outstanding.
The Eastern Company
Form 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 2020
TABLE OF CONTENTS
Page | ||||
3. | ||||
17. | ||||
26. | ||||
26. | ||||
27. | ||||
27. | ||||
27. | ||||
27. | ||||
27. | ||||
27. | ||||
28. | ||||
29. |
PART 1 –- FINANCIAL INFORMATION
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Net sales | $ | 65,325,616 | $ | 60,883,148 | ||||
Cost of products sold | (50,663,943 | ) | (47,074,105 | ) | ||||
Gross margin | 14,661,673 | 13,809,043 | ||||||
Product development expense | (775,444 | ) | (2,239,776 | ) | ||||
Selling and administrative expense | (10,024,958 | ) | (8,398,265 | ) | ||||
Restructuring costs | — | (836,694 | ) | |||||
Operating profit | 3,861,271 | 2,334,308 | ||||||
Interest expense | (827,664 | ) | (292,540 | ) | ||||
Other income | 744,793 | 13,925 | ||||||
Income before income taxes | 3,778,400 | 2,055,693 | ||||||
Income taxes | 882,583 | 484,733 | ||||||
Net income | $ | 2,895,817 | $ | 1,570,960 | ||||
Earnings per share: | ||||||||
Basic | $ | .46 | $ | .25 | ||||
Diluted | $ | .46 | $ | .25 | ||||
Cash dividends per share: | $ | .11 | $ | .11 |
|
| Three Months Ended |
| |||||
|
| April 3, 2021 |
|
| March 28, 2020 |
| ||
Net sales |
| $ | 73,097,875 |
|
| $ | 65,325,616 |
|
Cost of products sold |
|
| (55,839,321 | ) |
|
| (50,663,943 | ) |
Gross margin |
|
| 17,258,554 |
|
|
| 14,661,673 |
|
|
|
|
|
|
|
|
|
|
Product development expense |
|
| (838,825 | ) |
|
| (775,444 | ) |
Selling and administrative expenses |
|
| (10,485,520 | ) |
|
| (10,024,958 | ) |
Operating profit |
|
| 5,934,209 |
|
|
| 3,861,271 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (702,859 | ) |
|
| (827,664 | ) |
Other income |
|
| 2,426,741 |
|
|
| 744,793 |
|
Income before income taxes |
|
| 7,658,091 |
|
|
| 3,778,400 |
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
| (1,817,264 | ) |
|
| (882,583 | ) |
Net income |
| $ | 5,840,827 |
|
| $ | 2,895,817 |
|
|
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.93 |
|
| $ | 0.46 |
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | 0.93 |
|
| $ | 0.46 |
|
|
|
|
|
|
|
|
|
|
Cash dividends per share: |
| $ | 0.11 |
|
| $ | 0.11 |
|
See accompanying notes.
3 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Net income | $ | 2,895,817 | $ | 1,570,960 | ||||
Other comprehensive income (loss): | ||||||||
Change in foreign currency translation | (1,304,447 | ) | 412,624 | |||||
Change in pension and postretirement benefit costs, net of tax expense of: 2020 – $81,143 and 2019 - $70,938 | 260,295 | 222,681 | ||||||
Change in fair value of marketable securities, net of tax benefit of: 2020 - $2,897 and 2019 - $3,471 | 8,878 | (10,639 | ) | |||||
Change in fair value of interest rate swap and marketable securities, net of tax benefit of: 2020 – $535,029 and 2019 – $24,619 | (1,697,793 | ) | (77,961 | ) | ||||
Total other comprehensive income (loss) | (2,733,067 | ) | 546,705 | |||||
Comprehensive income | $ | 162,750 | $ | 2,117,665 | ||||
|
| Three Months Ended |
| |||||
|
| April 3, 2021 |
|
| March 28, 2020 |
| ||
Net income |
| $ | 5,840,827 |
|
| $ | 2,895,817 |
|
Other comprehensive income/(loss): |
|
|
|
|
|
|
|
|
Change in foreign currency translation |
|
| (79,054 | ) |
|
| (1,304,447 | ) |
Change in marketable securities, net of taxes of: |
|
|
|
|
|
|
|
|
2021 - $67 and 2020 - $2,897 |
|
| 205 |
|
|
| 8,878 |
|
Change in fair value of interest rate swap, net of tax cost (benefit) of: |
|
|
|
|
|
|
|
|
2021 - $130,434 and 2020 - $(535,029) |
|
| 413,040 |
|
|
| (1,697,793 | ) |
Change in pension and postretirement benefit costs, net of taxes of: |
|
|
|
|
|
|
|
|
2021 - $92,194 and 2020 - $81,143 |
|
| 295,744 |
|
|
| 260,295 |
|
Total other comprehensive income (loss) |
|
| 629,935 |
|
|
| (2,733,067 | ) |
Comprehensive income |
| $ | 6,470,762 |
|
| $ | 162,750 |
|
See accompanying notes.
4 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS | March 28, 2020 | December 28, 2019 | ||||||
(unaudited) | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 16,508,881 | $ | 17,996,505 | ||||
Marketable securities | 23,154 | 34,305 | ||||||
Accounts receivable, less allowances: 2020 - $699,000;2019 - $556,000 | 39,873,177 | 37,941,900 | ||||||
Inventories | 55,274,876 | 54,599,266 | ||||||
Prepaid expenses and other assets | 3,955,872 | 4,343,507 | ||||||
Total Current Assets | 115,635,960 | 114,915,483 | ||||||
Property, Plant and Equipment | 88,409,321 | 88,336,243 | ||||||
Accumulated depreciation | (46,482,754 | ) | (46,313,630 | ) | ||||
41,926,567 | 42,022,613 | |||||||
Goodwill | 79,418,533 | 79,518,012 | ||||||
Trademarks | 5,404,283 | 5,404,283 | ||||||
Patents and other intangibles net of accumulated amortization | 25,699,680 | 26,460,110 | ||||||
Right of Use Assets | 11,852,653 | 12,342,475 | ||||||
122,375,149 | 123,724,880 | |||||||
TOTAL ASSETS | $ | 279,937,676 | $ | 280,662,976 | ||||
ASSETS |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
|
| April 3, 2021 |
|
| January 2, 2021 |
| ||
|
| (unaudited) |
|
|
|
| ||
Current Assets |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 17,464,669 |
|
| $ | 16,101,635 |
|
Marketable securities |
|
| 29,224 |
|
|
| 28,951 |
|
Accounts receivable, less allowances: 2021 - $618,000; 2020 - $545,000 |
|
| 42,228,264 |
|
|
| 37,749,129 |
|
Inventories |
|
| 53,960,426 |
|
|
| 53,112,393 |
|
Current portion of notes receivable |
|
| 459,863 |
|
|
| 398,414 |
|
Prepaid expenses and other assets |
|
| 5,341,214 |
|
|
| 4,345,250 |
|
Total Current Assets |
|
| 119,483,660 |
|
|
| 111,735,772 |
|
| ||||||||
Property, Plant and Equipment |
|
| 86,539,328 |
|
|
| 88,198,093 |
|
Accumulated depreciation |
|
| (47,244,599 | ) |
|
| (48,246,120 | ) |
Property, Plant and Equipment, Net |
|
| 39,294,729 |
|
|
| 39,951,973 |
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 76,921,385 |
|
|
| 76,895,015 |
|
Trademarks |
|
| 5,404,284 |
|
|
| 5,404,284 |
|
Patents and other intangibles, net of accumulated amortization |
|
| 25,958,715 |
|
|
| 27,096,006 |
|
Long term notes receivable, less current portion |
|
| 1,547,503 |
|
|
| 1,677,277 |
|
Right of Use Assets |
|
| 12,882,498 |
|
|
| 12,768,027 |
|
Other Assets |
|
| 122,714,385 |
|
|
| 123,840,609 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ | 281,492,774 |
|
| $ | 275,528,354 |
|
See accompanying notes.
5 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY | March 28, 2020 | December 28, 2019 | ||||||
(unaudited) | ||||||||
Current Liabilities | ||||||||
Accounts payable | $ | 22,629,076 | $ | 19,960,507 | ||||
Accrued compensation | 2,216,765 | 3,815,186 | ||||||
Other accrued expenses | 3,797,178 | 2,967,961 | ||||||
Current portion of long-term debt | 5,187,689 | 5,187,689 | ||||||
Total Current Liabilities | 33,830,708 | 31,931,343 | ||||||
Deferred income taxes | 5,270,465 | 5,270,465 | ||||||
Other long-term liabilities | 2,465,260 | 2,465,261 | ||||||
Lease liability | 11,852,653 | 12,342,475 | ||||||
Long-term debt, less current portion | 92,356,121 | 93,577,544 | ||||||
Accrued postretirement benefits | 1,001,509 | 1,007,146 | ||||||
Accrued pension cost | 28,052,482 | 28,631,485 | ||||||
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 | 30,890,108 | 30,651,815 | ||||||
Issued: 8,980,460 shares in 2020 and 8,975,434 shares in 2019 | ||||||||
Outstanding: 6,230,731 shares in 2020 and 6,240,705 shares in 2019 | ||||||||
Treasury Stock: 2,749,729 shares in 2020 and 2,734,729 shares in 2019 | (20,537,962 | ) | (20,169,098 | ) | ||||
Retained earnings | 122,723,970 | 120,189,111 | ||||||
Accumulated other comprehensive income (loss): | ||||||||
Foreign currency translation | (3,342,399 | ) | (2,037,952 | ) | ||||
Unrealized gain on marketable securities, net of tax | 8,878 | — | ||||||
Unrealized gain (loss) on interest rate swap, net of tax | (1,530,775 | ) | 167,018 | |||||
Unrecognized net pension and postretirement benefit costs, net of tax | (23,103,342 | ) | (23,363,637 | ) | ||||
Accumulated other comprehensive loss | (27,967,638 | ) | (25,234,571 | ) | ||||
Total Shareholders’ Equity | 105,108,478 | 105,437,257 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 279,937,676 | $ | 280,662,976 |
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
| ||||
|
|
|
|
| ||||
|
| April 3, 2021 |
|
| January 2, 2021 |
| ||
|
| (unaudited) |
|
|
| |||
Current Liabilities |
|
|
|
|
|
| ||
Accounts payable |
| $ | 25,357,557 |
|
| $ | 23,507,719 |
|
Accrued compensation |
|
| 2,520,725 |
|
|
| 3,675,223 |
|
Other accrued expenses |
|
| 4,785,793 |
|
|
| 4,121,568 |
|
Current portion of lease liability |
|
| 3,039,689 |
|
|
| 2,923,761 |
|
Current portion of long-term debt |
|
| 7,062,689 |
|
|
| 6,437,689 |
|
Total Current Liabilities |
|
| 42,766,453 |
|
|
| 40,665,960 |
|
|
|
|
|
|
|
|
|
|
Deferred income taxes |
|
| 2,899,074 |
|
|
| 2,899,075 |
|
Other long-term liabilities |
|
| 1,144,127 |
|
|
| 1,144,127 |
|
Lease liability |
|
| 9,871,835 |
|
|
| 9,883,168 |
|
Long-term debt, less current portion |
|
| 80,468,737 |
|
|
| 82,255,803 |
|
Accrued postretirement benefits |
|
| 1,168,262 |
|
|
| 1,185,139 |
|
Accrued pension cost |
|
| 32,443,297 |
|
|
| 33,188,623 |
|
Total Liabilities |
|
| 170,761,785 |
|
|
| 171,221,895 |
|
|
|
|
|
|
|
|
|
|
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:9,003,230 shares in 2021 and 8,996,625 shares in 2020 Outstanding: 6,253,501 shares in 2021 and 6,246,896 shares in 2020 |
|
| 31,779,299 |
|
|
| 31,501,041 |
|
Treasury Stock: 2,749,729 shares in 2021 and 2,749,729 shares in 2020 |
|
| (20,537,962 | ) |
|
| (20,537,962 | ) |
Retained earnings |
|
| 128,356,468 |
|
|
| 122,840,131 |
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
| 874,810 |
|
|
| 953,864 |
|
Unrealized loss on marketable securities, net of tax |
|
| (4,302 | ) |
|
| (4,507 | ) |
Unrealized loss on interest rate swap, net of tax |
|
| (974,045 | ) |
|
| (1,387,085 | ) |
Unrecognized net pension and postretirement benefit costs, net of tax |
|
| (28,763,279 | ) |
|
| (29,059,023 | ) |
Accumulated other comprehensive loss |
|
| (28,866,816 | ) |
|
| (29,496,751 | ) |
Total Shareholders’ Equity |
|
| 110,730,989 |
|
|
| 104,306,459 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 281,492,774 |
|
| $ | 275,528,354 |
|
See accompanying notes.
6 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Operating Activities | ||||||||
Net income | $ | 2,895,817 | $ | 1,570,960 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 2,055,782 | 1,438,799 | ||||||
Unrecognized pension and postretirement benefits | (678,305 | ) | 207,816 | |||||
(Gain)/loss on sale of equipment and other assets | (437,446 | ) | 671,138 | |||||
Provision for doubtful accounts | 156,286 | 25,711 | ||||||
Stock compensation expense | 238,293 | 104,992 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (2,273,864 | ) | (2,123,227 | ) | ||||
Inventories | (994,546 | ) | 1,313,875 | |||||
Prepaid expenses and other | 341,582 | (81,231 | ) | |||||
Other assets | (415,415 | ) | 101,919 | |||||
Accounts payable | 2,766,829 | (27,186 | ) | |||||
Accrued compensation | (1,585,976 | ) | (1,724,968 | ) | ||||
Other accrued expenses | (564,572 | ) | 11,718 | |||||
Net cash provided by operating activities | 1,504,465 | 1,490,316 | ||||||
Investing Activities | ||||||||
Marketable securities | 11,151 | (91,400 | ) | |||||
Capitalized software | — | (104,484 | ) | |||||
Proceeds from sale of equipment | 445,212 | — | ||||||
Purchases of property, plant and equipment | (828,115 | ) | (743,622 | ) | ||||
Net cash used in investing activities | (371,752 | ) | (939,506 | ) | ||||
Financing Activities | ||||||||
Principal payments on long-term debt | (1,221,423 | ) | (387,500 | ) | ||||
Purchase common stock for treasury | (368,864 | ) | — | |||||
Dividends paid | (686,614 | ) | (686,740 | ) | ||||
Net cash used in financing activities | (2,276,901 | ) | (1,074,240 | ) | ||||
Effect of exchange rate changes on cash | (343,436 | ) | 144,954 | |||||
Net change in cash and cash equivalents | (1,487,624 | ) | (378,476 | ) | ||||
Cash and cash equivalents at beginning of period | 17,996,505 | 13,925,765 | ||||||
Cash and cash equivalents at end of period | $ | 16,508,881 | $ | 13,547,289 | ||||
Non-cash investing and financing activities | (489,822 | ) | ||||||
Right of use asset | 489,822 | |||||||
Lease liability |
|
| Three Months Ended |
| |||||
|
| April 3, 2021 |
|
| March 28, 2020 |
| ||
Operating Activities |
|
|
|
|
|
| ||
Net income |
| $ | 5,840,827 |
|
| $ | 2,895,817 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 2,192,622 |
|
|
| 2,055,782 |
|
Unrecognized pension and postretirement benefits |
|
| (674,262 | ) |
|
| (678,305 | ) |
(Gain) loss on sale of equipment and other assets |
|
| (1,600,288 | ) |
|
| (437,446 | ) |
Provision for doubtful accounts |
|
| 73,097 |
|
|
| 156,286 |
|
Stock compensation expense |
|
| 278,258 |
|
|
| 238,293 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (4,551,399 | ) |
|
| (2,273,864 | ) |
Inventories |
|
| (1,015,663 | ) |
|
| (994,546 | ) |
Prepaid expenses and other |
|
| (744,138 | ) |
|
| 341,582 |
|
Other assets |
|
| (156,726 | ) |
|
| (415,415 | ) |
Accounts payable |
|
| 2,063,182 |
|
|
| 2,766,829 |
|
Accrued compensation |
|
| (1,159,489 | ) |
|
| (1,585,976 | ) |
Other accrued expenses |
|
| 1,554,036 |
|
|
| (564,572 | ) |
Net cash provided by operating activities |
|
| 2,100,057 |
|
|
| 1,504,465 |
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
Marketable securities |
|
| (273 | ) |
|
| 11,151 |
|
Payments received from notes receivable |
|
| 68,325 |
|
|
| 0 |
|
Proceeds from sale of equipment |
|
| 1,994,017 |
|
|
| 445,212 |
|
Purchases of property, plant and equipment |
|
| (919,589 | ) |
|
| (828,115 | ) |
Net cash provided by/used in investing activities |
|
| 1,142,480 |
|
|
| (371,752 | ) |
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
Principal payments on long-term debt |
|
| (1,162,045 | ) |
|
| (1,221,423 | ) |
Lease payments |
|
| (9,875 | ) |
|
| 0 |
|
Purchase common stock for treasury |
|
| 0 |
|
|
| (368,864 | ) |
Dividends paid |
|
| (684,702 | ) |
|
| (686,614 | ) |
Net cash used in financing activities |
|
| (1,856,622 | ) |
|
| (2,276,901 | ) |
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
| (22,881 | ) |
|
| (343,436 | ) |
Net change in cash and cash equivalents |
|
| 1,363,034 |
|
|
| (1,487,624 | ) |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
| 16,101,635 |
|
|
| 17,996,505 |
|
Cash and cash equivalents at end of period |
| $ | 17,464,669 |
|
| $ | 16,508,881 |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest |
| $ | 685,520 |
|
| $ | 827,664 |
|
Income taxes |
|
| 21,100 |
|
|
| 21,000 |
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
Right of use asset |
|
| 114,471 |
|
|
| (489,822 | ) |
Lease liability |
|
| (104,595 | ) |
|
| 489,822 |
|
See accompanying notes.
7 |
Table of Contents |
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 3, 2021
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 10-01 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 (together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2019,January 2, 2021, filed with the Securities and Exchange Commission on March 5, 202016, 2021 (the “2019“2020 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 28, 2019January 2, 2021 has been derived from the audited consolidated balance sheet at that date.
The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to fiscal 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to fiscal 2020 or the 2020 fiscal year mean the 53-week period ended on January 2, 2021 and references to 2021 or the 2021 fiscal year mean the 52-week period ending on January 2, 2021.1, 2022. In a 52-week fiscal year, each quarter is 13 weeks long. In a 53 week53-week fiscal year, each of the first threetwo fiscal quarters is aand the fourth quarter are 13 weeks long, and the fourththird fiscal quarter is 14 weeks long. References to the first quarter of fiscal 2019, the first quarter of 2020 or the three months ended March 30, 2019 mean the period from December 30, 2018 to March 30, 2019. References to the first quarter of fiscal 2020, the first fiscal quarter of 2020 or the three months ended March 28, 2020 mean the 13-week period from December 29, 2019 to March 28, 2020.
Certain amounts in the 2020 financial statements have been reclassified to conform with the 2021 presentation with no impact or change to previously reported net income or shareholder’s equity.
Note B –- Earnings Per Share
The denominators used to calculate earnings per share are as follow:
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Basic: | ||||||||
Weighted average shares outstanding | 6,237,921 | 6,231,713 | ||||||
Diluted: | ||||||||
Weighted average shares outstanding | 6,237,921 | 6,231,713 | ||||||
Dilutive stock appreciation rights | 3,131 | 33,116 | ||||||
Denominator for diluted earnings per share | 6,241,052 | 6,264,829 |
Three Months Ended | ||||||||
April 3, 2021 | March 28, 2020 | |||||||
Basic: | ||||||||
Weighted average shares outstanding | 6,248,339 | 6,237,921 | ||||||
Diluted: | ||||||||
Weighted average shares outstanding | 6,248,339 | 6,237,921 | ||||||
Dilutive stock appreciation rights | 30,998 | 3,131 | ||||||
Denominator for diluted earnings per share | 6,279,337 | 6,241,052 |
8 |
Table of Contents |
Inventories consist of the following components:
March 28, 2020 | December 28, 2019 | |||||||
Raw material and component parts | $ | 17,438,617 | $ | 17,225,469 | ||||
Work in process | 11,145,881 | 11,009,648 | ||||||
Finished goods | 26,690,378 | 26,364,149 | ||||||
Total inventories | $ | 55,274,876 | $ | 54,599,266 |
|
| April 3, 2021 |
|
| January 2, 2021 |
| ||
|
|
|
|
|
|
| ||
Raw material and component parts |
| $ | 20,333,551 |
|
| $ | 20,013,992 |
|
Work in process |
|
| 11,891,191 |
|
|
| 11,704,311 |
|
Finished goods |
|
| 21,735,684 |
|
|
| 21,394,090 |
|
Total inventories |
| $ | 53,960,426 |
|
| $ | 53,112,393 |
|
Note D –- Goodwill
The Company maintains 11 reporting units, five of which comprise the goodwill balance. These six units have an aggregate carrying amount of goodwill of approximately $76.9 million as of April 3, 2021.
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 E - 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 elected the transition method thereby not restating comparable periods. The Company elected to account 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, warehousewarehouses 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 of 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. The Company’s option to extend certain leases ranges from 12 – 1201 - 116 months. 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 4232 operating leases and onetwo finance leaseleases with an ROU asset anda lease liability of $11,852,653$12.9 million as of March 28, 2020.April 3, 2021. The finance lease arrangement isarrangements are immaterial. The basis, 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 that could cause the Company to incur additional financial obligations. We rent or sublease a part of one real estate property to a third party. There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.
Total lease expense for each of the next five fiscal years is estimated to be as follows: remainder of 2021 - $2.3 million; 2022 - $2.4 million; 2023 - $2.0 million; 2024 - $1.6 million; 2025 - $0.9 million; and $3.7 million thereafter. The weighted average remaining lease term is 6.7 years. The interest rate used was 5.0%.
9 |
Table of Contents |
Note EF - Debt
On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association 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 People’s United Bank, N.A. (approximately $19 million) and to acquire certain subsidiaries of Big 3 Holdings, LLC (collectively “Big 3 Precision”). The term portion of the loan requires quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increases to $1,875,000 per quarter beginning September 30, 2021 and continues through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023 and continues 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 March 28, 2020,April 3, 2021, 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 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.
On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notationalnotional 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 March 28, 2020,April 3, 2021, the interest rate for half ($49.441.3 million) of the term portion was 3.35%2.36%, using a one monthone-month LIBOR rate, and 3.19%3.69% on the remaining balance ($49.446.3 million) of the term loan based on a one monthone-month LIBOR rate.
The interest rates onunder the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the potential phasing out of LIBOR after 2021. Information regarding the potential phasing out of LIBOR is provided below.
On July 27, 2017, the U.K. Financial Conduct Authority (the “FCA”) (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. In December 2020, the ICE Benchmark Administration (the “IBA”) announced a market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023 which the FCA supports. On March 5, 2021, the IBA released its feedback statement reporting the results of the market consultation. Pursuant to its feedback statement, the IBA intends to stop persuading or compelling banks to submitcease publication of all settings of non-US dollar LIBOR ratesand only the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings being discontinued after 2021. In the United States, efforts to identify a set of alternative U.S. Dollar reference interest rates have been initiated by theJune 30, 2023. The Alternative Reference Rates Committee of(ARRC), a financial industry group convened by the Federal Reserve Board, has recommended the use of SOFR to replace LIBOR. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the Federal Reserve Bankinterest rate is set at the beginning of New York. At this time, itthe period with payment due at the end. SOFR is not possible to predict whether any such changes will occur, whether LIBOR will be phased out or any such alternative reference rates ora backward-looking overnight rate which has implications for how interest and other reforms to LIBOR will be enactedpayments are based. Changes in the United Kingdom,method of calculating the United Statesreplacement of LIBOR with an alternative rate or elsewhere or the effect that any such changes, phase-out, alternative reference rates or other reforms, if they occur, would have on the amount of interest paid on the Company’s LIBOR-based borrowings. Uncertainty as to the nature of such potential changes, phase-out, alternative reference rates or other reformsbenchmark are still in flux, and once an alternate rate is adopted, may materially adversely affect interest rates paid by the Company on its borrowings. Reform of, or the replacement or phasing out of, LIBOR and proposed regulation of LIBORresult in higher borrowing costs. This could materially and other “benchmarks” may materially adversely affect the amount of interest paid on the Company’s LIBOR-based borrowings and could have a material adverse effect on the Company’s business, financial condition and results of operations.
10 |
Table of Contents |
Note FG - 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 adopted subject to shareholder approval at the 2020 Annual Meeting of Shareholders, The Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”), which is intended to replace. 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 exitingexisting plan pursuant to which equity awards may be granted.
Incentive stock options granted under the 20102020 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 20102020 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. Under the 20102020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors. During the first quarterthree months of 2020 and 2019, nofiscal 2021, the company issued 24,600 stock options or restricted stockthat were granted that were subject to the meeting of performance measurements. The Company did not issue any stock options or restricted stock in the first 3 months of fiscal 2020. For the first quarterthree months of 2019,fiscal 2021, the Company used several assumptions which included an expected term of 3.54.0 years, volatility deviation of 28.88%between 47.25% to 47.54% and a risk freerisk-free rate between 0.18% to 0.20% for the purposes of 2.48%.
The 20102020 Plan also permitspermit 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 2021 and the first three months of fiscal 2020, the Company did not issue any SARs, and during 2019 36,000 SARs were issued.
Stock-based compensation expense in connection with SARs previously granted to employees was approximately $113,000 and $110,000 in the first quarter of 2021 and 2020, was $110,000, and for 2019 was $80,000.
As of March 28, 2020,April 3, 2021, there were no788,358 shares of Company common stock reserved and available for future grant under the 2010 Plan, as it has expired.
The following tables set forth the outstanding SARs for the period specified:
Three Months Ended March 28, 2020 | Year Ended December 28, 2019 | |||||||||||||||
Units | Weighted - Average Exercise Price | Units | Weighted - Average Exercise Price | |||||||||||||
Outstanding at beginning of period | 276,000 | $ | 22.30 | 189,167 | $ | 21.46 | ||||||||||
Issued | -- | -- | 96,000 | 23.65 | ||||||||||||
Exercised | -- | -- | (1,667 | ) | 19.10 | |||||||||||
Forfeited | (6,999 | ) | 19.10 | (7,500 | ) | 21.20 | ||||||||||
Outstanding at end of period | 269,001 | 22.39 | 276,000 | 22.30 | ||||||||||||
SARs Outstanding and Exercisable | ||||||||||||||||||||||||||
Range of Exercise Prices | Outstanding as of March 28, 2020 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Exercisable as of March 28, 2020 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | ||||||||||||||||||||
$ | 19.10-26.30 | 269,001 | 3.0 | $ | 22.39 | 50,001 | 2.0 | 19.10 |
|
| Three Months Ended April 3, 2021 |
|
| Year Ended January 2, 2021 |
| ||||||||||
|
| Units |
|
| Weighted - Average Exercise Price |
|
| Units |
|
| Weighted - Average Exercise Price |
| ||||
Outstanding at beginning of period |
|
| 244,001 |
|
| $ | 21.87 |
|
|
| 276,000 |
|
| $ | 22.30 |
|
Issued |
|
| -- |
|
|
| -- |
|
|
| 44,000 |
|
|
| 20.20 |
|
Exercised |
|
| (10,000 | ) |
|
| 19.10 |
|
|
| -- |
|
|
| -- |
|
Forfeited |
|
| (6,000 | ) |
|
| 21.20 |
|
|
| (75,999 | ) |
|
| 22.00 |
|
Outstanding at end of period |
|
| 228,001 |
|
|
| 22.17 |
|
|
| 244,001 |
|
|
| 21.87 |
|
SARs Outstanding and Exercisable | ||||||||||||||||||||||||||
Range of Exercise Prices |
|
| Outstanding as of April 3, 2021 |
|
| Weighted- Average Remaining Contractual Life |
|
| Weighted- Average Exercise Price |
|
| Exercisable as of April 3, 2021 |
|
| Weighted- Average Remaining Contractual Life |
|
| Weighted- Average Exercise Price |
| |||||||
$ | 19.10-26.30 |
|
|
| 228,001 |
|
|
| 2.1 |
|
| $ | 22.17 |
|
|
| 115,172 |
|
|
| 1.3 |
|
|
| 21.64 |
|
11 |
Table of Contents |
The following tables set forth the outstanding stock grants for the period specified:
Three Months Ended March 28, 2020 | Year Ended December 28, 2019 | |||||||||||||||
Shares | Weighted - Average Exercise Price | Shares | Weighted - Average Exercise Price | |||||||||||||
Outstanding at beginning of period | 25,000 | $ | — | 25,000 | $ | — | ||||||||||
Issued | — | — | — | — | ||||||||||||
Forfeited | — | — | — | — | ||||||||||||
Outstanding at end of period | 25,000 | — | 25,000 | — |
Stock Grants Outstanding and Exercisable | ||||||||||||||||||||||||||
Range of Exercise Prices | Outstanding as of March 28, 2020 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Exercisable as of March 28, 2020 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | ||||||||||||||||||||
$ | 0.00 | 25,000 | 2.0 | — | — | — | — |
Three Months Ended April 3, 2021 | Year Ended January 2, 2021 | |||||||||||||||
Shares | Weighted - Average Exercise Price | Shares | Weighted - Average Exercise Price | |||||||||||||
Outstanding at beginning of period | 25,000 | $ | - | 25,000 | $ | - | ||||||||||
Issued | 24,600 | - | - | - | ||||||||||||
Forfeited | - | - | - | - | ||||||||||||
Outstanding at end of period | 49,600 | - | 25,000 | - |
Stock Grants Outstanding and Exercisable | ||||||||||||||||||||||||||
Range of Exercise Prices |
|
| Outstanding as of April 3, 2021 |
|
| Weighted- Average Remaining Contractual Life |
|
| Weighted- Average Exercise Price |
|
| Exercisable as of April 3, 2021 |
|
| Weighted- Average Remaining Contractual Life |
|
| Weighted- Average Exercise Price |
| |||||||
$ | 0.00 |
|
|
| 49,600 |
|
|
| 3.1 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
As of March 28, 2020,April 3, 2021, outstanding SARs and grants had an intrinsic value of $561,000.
Note G –H - Share Repurchase Program
On May 3,2, 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. During the first quarter of 2020, the Company repurchased 15,000 shares of its common stock in connection with the share repurchase program. 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”).
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 28, 2019 | 40,000 | $ | 26.58 | 40,000 | 160,000 | |||||||||||
December 29, 2019 – March 28, 2020 | 15,000 | 24.59 | 15,000 | 145,000 | ||||||||||||
Balance as of March 28, 2020 | 55,000 | $ | 26.04 | 55,000 | 145,000 |
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 January 2, 2021 |
|
| 55,000 |
|
| $ | 26.04 |
|
|
| 55,000 |
|
|
| 145,000 |
|
January 3, 2021 - April 3, 2021 |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
Balance as of April 3, 2021 |
|
| 55,000 |
|
| $ | 26.04 |
|
|
| 55,000 |
|
|
| 145,000 |
|
Note H –I - 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 based on a five-step model in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers."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 isare delivering goods or services, determiningdetermines the transaction price, allocatingallocates 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 consideration 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.
Refer to Note KL for revenues reported by segment. The Company has not experienced any impairment losses, has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.
12 |
Table of Contents |
Note IJ - 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 20152016 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2013.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The changes implemented in ASU 2019-12 include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to employee stock ownership plans. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company will adoptadopted ASU 2019-12 in the first quarter of 2021.
On March 27, 2020, President Trump signed into law the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“Thethe CARES Act”) became law). TheFor additional information on the Company’s CARES Act includes a variety of economic and tax relief measures intended to stimulate the economy, including loans for small businesses, payroll tax credits/deferrals, and corporate
The Company will also continue to assess the effect of state level tax relief provisions as enacted, such as state net operating loss rule changes and conformity to the federal interest, depreciation and charitable contribution deduction changes.
The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for a number of 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 amount of unrecognized tax benefits during the three months ended March 28, 2020.April 3, 2021. 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 JK - 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.
Significant disclosures relating to these benefit plans for the first quarterthree months of fiscal years 20202021 and 20192020 are as follows:
Pension Benefits | Postretirement Benefits | |||||||||||||||
Three Months Ended | Three Months Ended | |||||||||||||||
March 28, 2020 | March 30, 2019 | March 28, 2020 | March 30, 2019 | |||||||||||||
Service cost | $ | 266,436 | $ | 263,852 | $ | 10,855 | $ | 8,216 | ||||||||
Interest cost | 714,143 | 879,080 | 11,667 | 20,346 | ||||||||||||
Expected return on plan assets | (1,365,261 | ) | (1,190,330 | ) | (5,589 | ) | (14,481 | ) | ||||||||
Amortization of prior service cost | 24,845 | 24,845 | (2,063 | ) | (1,268 | ) | ||||||||||
Amortization of the net loss | 325,034 | 290,549 | (6,377 | ) | (20,507 | ) | ||||||||||
Net periodic benefit cost (benefit) | $ | (34,803 | ) | $ | 267,996 | $ | 8,493 | $ | (7,694 | ) |
|
| Pension Benefits |
| |||||
|
| Three Months Ended |
| |||||
|
| April 3, 2021 |
|
| March 28, 2020 |
| ||
Service cost |
| $ | 271,833 |
|
| $ | 266,436 |
|
Interest cost |
|
| 504,255 |
|
|
| 714,143 |
|
Expected return on plan assets |
|
| (1,448,674 | ) |
|
| (1,365,261 | ) |
Amortization of prior service cost |
|
| 24,845 |
|
|
| 24,845 |
|
Amortization of the net loss |
|
| 432,539 |
|
|
| 325,034 |
|
Net periodic benefit |
| $ | (215,202 | ) |
| $ | (34,803 | ) |
13 |
Table of Contents |
|
| Postretirement Benefits |
| |||||
|
| Three Months Ended |
| |||||
|
| April 3, 2021 |
|
| March 28, 2020 |
| ||
Service cost |
| $ | 13,626 |
|
| $ | 10,855 |
|
Interest cost |
|
| 9,842 |
|
|
| 11,667 |
|
Expected return on plan assets |
|
| (6,420 | ) |
|
| (5,589 | ) |
Gain on significant event |
|
| 0 |
|
|
| 0 |
|
Amortization of prior service cost |
|
| 0 |
|
|
| (2,063 | ) |
Amortization of the net loss |
|
| (3,094 | ) |
|
| (6,377 | ) |
Net periodic benefit cost |
| $ | 13,954 |
|
| $ | 8,493 |
|
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 2020,2021, the Company expects to contribute $2,690,000$3,100,000 into its pension plans and $50,000 into its postretirement plan. The Company is currently reviewing the American Rescue Plan Act for applicable pension funding relief for the minimum required contributions and will adjust accordingly. As of March 20, 2020,April 3, 2021, the Company has made contributions of approximately $400,000$521,000 into its pension plans, has contributed $11,000$5,000 to its postretirement plan and willexpects to make the remaining contributions as required during the remainder of the fiscal the 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:
For the Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Regular matching contribution | $ | 204,992 | $ | 156,267 | ||||
Transitional credit contribution | 82,127 | 103,524 | ||||||
Non-discretionary contribution | 567,657 | 587,041 | ||||||
Total contributions made for the period | $ | 854,776 | $ | 846,832 |
|
| Three Months Ended |
| |||||
|
| April 3, 2021 |
|
| March 28, 2020 |
| ||
Regular matching contribution |
| $ | 191,808 |
|
| $ | 204,992 |
|
Transitional credit contribution |
|
| 66,929 |
|
|
| 82,127 |
|
Non-discretionary contribution |
|
| 534,675 |
|
|
| 567,657 |
|
Total contributions for the period |
| $ | 793,412 |
|
| $ | 854,776 |
|
The non-discretionary contribution of $550,286$519,177 made in the three months ended March 28, 2020April 3, 2021 was accrued for and expensed in the prior fiscal year.
14 |
Table of Contents |
Note K –L - Segment Information
For the first quarter of 2021, financial information by segment is as follows:
Three Months Ended | ||||||||
March 28, 2020 | March 30, 2019 | |||||||
Revenues: | ||||||||
Sales to unaffiliated customers: | ||||||||
Industrial Hardware | $ | 47,236,605 | $ | 38,403,343 | ||||
Security Products | 12,384,484 | 14,683,004 | ||||||
Metal Products | 5,704,527 | 7,796,801 | ||||||
$ | 65,325,616 | $ | 60,883,148 | |||||
Income before income taxes: | ||||||||
Industrial Hardware | $ | 3,458,893 | $ | 1,268,140 | ||||
Security Products | 817,401 | 972,887 | ||||||
Metal Products | (415,023 | ) | 93,281 | |||||
Operating Profit | 3,861,271 | 2,334,308 | ||||||
Interest expense | (827,664 | ) | (292,540 | ) | ||||
Other income | 744,793 | 13,925 | ||||||
$ | 3,778,400 | $ | 2,055,693 |
|
| Three Months Ended |
| |||||
|
| April 3, 2021 |
|
| March 28, 2020 |
| ||
Revenues: |
|
|
|
|
|
| ||
Sales to unaffiliated customers: |
|
|
|
|
|
| ||
Engineered Solutions |
| $ | 61,773,432 |
|
| $ | 51,846,102 |
|
Diversified Products |
|
| 11,324,443 |
|
|
| 13,479,514 |
|
|
| $ | 73,097,875 |
|
| $ | 65,325,616 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes: |
|
|
|
|
|
|
|
|
Engineered Solutions |
| $ | 6,118,508 |
|
| $ | 3,789,504 |
|
Diversified Products |
|
| (98,199 | ) |
|
| 71,767 |
|
Operating Profit (loss) |
|
| 6,020,309 |
|
|
| 3,861,271 |
|
Interest expense |
|
| (702,859 | ) |
|
| (827,664 | ) |
Other income |
|
| 2,340,641 |
|
|
| 744,793 |
|
Income before income taxes |
| $ | 7,658,091 |
|
| $ | 3,778,400 |
|
Segment income (loss) before income taxes include the allocation of corporate expenses to the Engineered Solutions and Diversified Products segments.
Note LM - Recent Accounting Pronouncements
Adopted
In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Tax. The changes implemented in ASU 2019-12 include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to employee stock ownership plans. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company will adoptadopted ASU 2019-12 inas of January 3, 2021. The adoption of this guidance isdid not expected to have a material impact on the consolidated financial statements of the Company.
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 MN - Concentration of risk
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 of March 28, 2020,April 3, 2021, there was one significant concentration of credit risk with a customer, thatwho has receivables due of $4,205,000 representing 11%12% of our total accounts receivable. As of December 28, 2019, there were no significant concentrations of credit risk. NoOne single customer represented more than 10% of the Company’s net accounts receivable as of December 28, 2019.January 2, 2021. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.
15 |
Table of Contents |
Interest Rate Risk
The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based on the LIBOR rate plus a margin spread of 1.25% to 2.25%. The Company has an interest rate swap with a notional amount of $49,375,000$46.3 million on March 28, 2020,April 3, 2021, to convert a portion of the borrowing under the Credit Agreement from variable to fixed rates. The valuation of this swap is determined using the one monthone-month LIBOR rate index and mitigates the Company's exposure to interest rate risk. Additionally, interest rates on the Company's debt are susceptible to changes to the method that LIBOR rates are determined and to the potential phasing out of LIBOR after 2021. The potential phasing out of LIBOR is discussed in greater detail in Note E—F - Debt hereof and under the heading “The phase out of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest rates” in Part I, Item 1A of the 2019 Annual Report.
Currency Exchange Rate Risk
The Company’s currency exposure is concentrated in the British pound, Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB and the Hong Kong dollar. Because of the Company’s limited exposure to any single foreign market, any currency gains or losses have not been material and are not 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 - Business Acquisition
Effective August 10, 2020 the Company acquired certain assets, including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights and rights existing under all sales and purchase agreements, and assumed certain liabilities, of Hallink, RSB Inc. These assets are held in our subsidiary, Hallink Moulds, Inc. (“Hallink Moulds”). Hallink Moulds produces injection blow mold tooling and is a supplier of blow molds and change parts to the food, beverage, healthcare and chemical industry. Hallink Moulds specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry offering integrated turnkey solutions to its customers worldwide.
Hallink Moulds is included in the Engineered Solutions segment of the Company from the date of the acquisition. The cost of the acquisition of Hallink Moulds was approximately $7,173,000.
The above acquisition was accounted for under ASU 2014-18, Business Combinations (Topic 805). The acquired business is included in the consolidated operating results of the Company from the effective date of the acquisition. The excess of the cost of Hallink Moulds over the fair market value of the net assets acquired of $2,302,000 has been recorded as goodwill. An independent third party was utilized to establish the fair market value of net assets acquired.
In connection with the above acquisition, the Company recorded the following intangible assets:
Asset Class/Description |
| Amount |
|
| Weighted-Average Period in Years |
| ||
Customer relationships |
| $ | 2,345,000 |
|
|
| 6 |
|
Intellectual property |
|
| 591,000 |
|
|
| 6 |
|
Non-compete agreements |
|
| 1,001,000 |
|
|
| 5 |
|
|
| $ | 3,937,000 |
|
|
|
|
|
There is no anticipated residual value relating to these intangible assets.
Neither the actual results nor the pro forma effects of the acquisition of Hallink are material to the Company's financial statements.
Note P - Subsequent Events
The Company evaluated its April 3, 2021 unaudited condensed consolidated financial statements for subsequent events through the date the financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements.
16 |
Table of Contents |
ITEM 2 –- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to highlight significant changes in the financial position and results of operations of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the quarter ended March 28, 2020.April 3, 2021. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 28, 2019January 2, 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s 2019Annual Report on Form 10-K for the fiscal year ended January 2, 2021, which was filed with the SECSecurities and Exchange Commission (the “SEC”) on March 5, 202016, 2021 (the “2019“2020 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 fiscal 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to fiscal 2020 or the 2020 fiscal year mean the 53-week period ended on January 2, 2021 and references to 2021 or the 2021 fiscal year mean the 52-week period ending on January 2, 2021.1, 2022. In a 52-week fiscal year, each quarter is 13 weeks long. In a 53 week53-week fiscal year, each of the first two fiscal quarters and the fourth quarter are 13 weeks long, and the third fiscal quarter is 14 weeks long. References to the first quarter of fiscal 2019, the first fiscal quarter of 2020 or the three months ended March 30, 2019 mean the 13-week period from December 30, 2018 to March 30, 2019. References to the first quarter of fiscal 2020, the first fiscal quarter of 2020 or the three months ended March 28, 2020 mean the 13-week period from December 29, 2019 to March 28, 2020.
Safe Harbor for Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These factors include, but are not limited to: effects of the COVID-19 pandemic and the measures being taken to limit the spread and resurgence of COVID-19, including supply chain disruptions, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, and the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, and risks associated with employees working remotely or operating with reduced workforce; the Credit Agreement;scope and duration of the COVID-19 pandemic, including the extent of resurgences and how quickly and to what extent normal economic activity can resume; the timing of the development and distribution of effective vaccine or treatment of COVID-19; risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability; restrictions on operating flexibility imposed by the agreement governing our credit facility; the inability to achieve the savings expected from global sourcing of materials; the impact of higher raw material and component costs, particularly steel, plastics, scrap iron, zinc, copper and electronic components; 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 automotive, construction, aerospace, energy, oil and gas, transportation, electronic, commercial laundry, mining and general industrial markets; costs and liabilities associated with environmental compliance; the impact of climate change or terrorist threats and the possible responses by the U.S. and foreign governments; failure to protect our intellectual property; cyberattacks; and materially adverse or unanticipated legal judgments, fines, penalties or settlements.settlements; and other risks identified and discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the 2020 Form 10-K and that may be identified from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the SEC. 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 reported amounts and disclosures. These relate to valuation allowances for accounts receivable and excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, 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.
17 |
Table of Contents |
Overview
COVID-19 update
The direct impact of March 2020, there have been significant impacts to the Company’s operations due to the COVID-19 pandemic has been minimal at most of our operations through the first quarter of 2021. We continue to follow CDC guidelines, including the use of proper personal protection equipment, social distancing and actions takensanitizing work areas. All of these measures allowed the majority of our facilities to slowoperate at full capacity where possible barring supply chain issues, port congestion, and labor shortages. Many of the spread ofCompany’s employees have received their first COVID-19 vaccination, and we expect those impactswill continue to encourage our workforce to continue for some time.
During 2020 and continuing into 2021 the Company we have implemented a broad range of policies and procedures to ensure that employees at all of our locations remain healthy. We listened to and learned a great deal from our colleagues in China, who began feeling the impact of COVID-19 in late 2019, and took early-on decisive action across our North American operations, accordingly. Steps that we have taken to reduce the risk of COVID-19 risk to our employees include, among others: implementingprotecting employee health by instructing employees stay home if they exhibit symptoms of COVID-19; requiring employees to wear masks upon entry into the workplace; providing standard surgical masks, unless this conflicts with OSHA requirements; and educating employees on hand hygiene to help stop the spread. We maintain a clean work environment by frequently cleaning all touch points with products that meet EPA criteria for use against COVID-19; educating employees to clean their personal workspace at the beginning and the end of every shift; and providing hand sanitizer and disposable wipes. We have minimized in-person contact between employees and with visitors; required essential employees who are able to work effectively from home, to work from home; developed and implemented practices for social distancing measures, staggering staffin our facilities; and reduced the number and size of in-person meetings. We have eliminated all non-essential workplace travel, discouraged carpooling, and where we have multiple shifts, enabling work from home for as many employees asstaggered shift start and stop times, break times, and lunchtimes to minimize congregations at the time clocks or break areas. Where possible, we have closed or restricted break rooms and implementing an enhanced cleaning program across all sites. We are advising our employees on the importance of wearing facemaskscafeterias or used extra rotations to reduce the spread COVID-19. As government authorities implement restrictions on commercial operations, we continuenumber of employees in the break rooms or cafeterias at one time to ensure compliance with these directives in order to maintaining business continuity for our essential operations.achieve social distancing norms. We continue to seek and implement additional methods to further reduce the risk of COVID-19 risk to our employees.
Although we have ordered have been delayed by approximately four to six weeks, which has resulted in and is likely to continue to result in a comparable delay in our product shipments to our customers through May 2020. By mid-March 2020, COVID-19 had begun to spread across the United States, which precipitated the closure by government authorities of non-essential businesses. The majority of our businesses are deemed essential and have accordingly remained open, albeit at reduced levels. Many of our customers operating in both automotive/transportation and non-automotive/transportation markets experienced varying degrees of shutdowns beginning in the last week of March, and are, on a case-by-case basis, tentatively expected to begin reopening as soon as May 4, 2020. We estimate the adverse financial impact of COVID-19 on our first quarter operating profit to be an approximate $0.6 million reduction net of tax. The broader economic fallout caused by COVID-19 may result in unfavorable operating earnings and cash flow generation in the months to follow.
General Overview
Net sales
in the first quarter ofNet sales of supply contracts for
18 |
Table of Contents |
Cost of 2019. Sales of mining products decreased 21%, and sales of industrial casting products decreased 35%sold increased $5.2 million, or 10%, in the first quarter of 20202021 primarily due to increased sales volume and increases in material costs. Raw material costs have increased year-over-year: hot-rolled steel increased 147%, cold-rolled steel increased 103%, nickel increased 38%, scrap iron increased 168% while copper and zinc increased 51% and 29% respectively, in the first quarter of 2021 compared to the first quarter of 2019. Mining sales in2020. Additionally, the first quarter were impacted by a combination of growing renewable energy capacity, extremely low natural gas prices and unusually warm weather in the first quarter, which led utilities to cut back on coal usage. Sales of industrial castings in the first quarter were negatively impacted by the loss of a customer who temporarily sourced products from us due to a fire at its facility in 2018, which temporarily shut down production of products that would otherwise have been sourced internally. In addition, sales were negatively impacted due to the completion of contract from a customer serving the transit industry.
Gross margin
as a percent of sales was 24% in the first quarter of 2021 compared to 22% in the first quarter ofProduct development expense of $0.8 million increased $0.1 million, or 8% in the first quarter of 2019.
Selling and administrative expense
increasedInterest expense of $0.3 million.
Other income of $2.3 million in the first quarter of 2019 as a2021 was the result of increased debt related to our acquisitiona gain on sale of Big 3 Precision in Augustthe Eberhard Hardware Ltd. building of 2019.
Net income
for the first quarter ofA more detailed analysis of the Company’s results of operations and financial condition follows:
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 for the period indicated:
Three Months Ended March 28, 2020 | ||||||||||||||||
Industrial | Security | Metal | ||||||||||||||
Hardware | Products | Products | Total | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of products sold | 77.4 | % | 68.9 | % | 97.6 | % | 77.6 | % | ||||||||
Gross margin | 22.6 | % | 31.1 | % | 2.4 | % | 22.4 | % | ||||||||
Product development expense | 0.2 | % | 5.5 | % | — | 1.2 | % | |||||||||
Selling and administrative expense | 15.1 | % | 19.0 | % | 9.7 | % | 15.3 | % | ||||||||
Restructuring cost | — | — | — | — | ||||||||||||
Operating profit | 7.3 | % | 6.6 | % | -7.3 | % | 5.9 | % | ||||||||
Three Months Ended March 30, 2019 | ||||||||||||||||
Industrial | Security | Metal | ||||||||||||||
Hardware | Products | Products | Total | |||||||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of products sold | 76.9 | % | 70.9 | % | 91.3 | % | 78.7 | % | ||||||||
Gross margin | 23.1 | % | 29.1 | % | 8.7 | % | 22.7 | % | ||||||||
Product development expense | 4.2 | % | 4.3 | % | — | 3.7 | % | |||||||||
Selling and administrative expense | 13.4 | % | 18.1 | % | 7.5 | % | 13.8 | % | ||||||||
Restructuring cost | 2.2 | % | 1.4 | % | ||||||||||||
Operating profit | 3.3 | % | 6.7 | % | 1.2 | % | 3.8 | % |
|
| 2021 First Quarter |
| |||||||||
|
| Engineered |
|
| Diversified |
|
|
|
| |||
|
| Solutions |
|
| Products |
|
| Total |
| |||
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of Products Sold |
|
| 74.7 | % |
|
| 85.7 | % |
|
| 76.4 | % |
Gross Margin |
|
| 25.3 | % |
|
| 14.3 | % |
|
| 23.6 | % |
Product Development Expense |
|
| 0.8 | % |
|
| 2.9 | % |
|
| 1.1 | % |
Selling and Administrative Expense |
|
| 14.7 | % |
|
| 12.3 | % |
|
| 14.3 | % |
Operating Profit |
|
| 9.8 | % |
|
| (0.9 | )% |
|
| 8.2 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2020 First Quarter |
| |||||||||
|
| Engineered |
|
| Diversified |
|
|
|
|
| ||
|
| Solutions |
|
| Products |
|
| Total |
| |||
Net Sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of Products Sold |
|
| 75.7 | % |
|
| 84.6 | % |
|
| 77.6 | % |
Gross Margin |
|
| 24.3 | % |
|
| 15.4 | % |
|
| 22.4 | % |
Product Development Expense |
|
| 0.8 | % |
|
| 2.7 | % |
|
| 1.2 | % |
Selling and Administrative Expense |
|
| 16.2 | % |
|
| 12.2 | % |
|
| 15.3 | % |
Operating Profit |
|
| 7.3 | % |
|
| 0.5 | % |
|
| 5.9 | % |
19 |
Table of Contents |
The following table shows the change in sales and operating profit by segment for the first quarter of 2020fiscal 2021 compared to the first quarter of 2019fiscal 2020 (dollars in thousands):
Industrial | Security | Metal | ||||||||||||||
Hardware | Products | Products | Total | |||||||||||||
Net sales | $ | 8,833 | $ | (2,299 | ) | $ | (2,092 | ) | $ | 4,442 | ||||||
Volume | 20.9 | % | -17.0 | % | -30.2 | % | 5.2 | % | ||||||||
Prices | 1.1 | % | 1.0 | % | 0.7 | % | 1.0 | % | ||||||||
New products | 1.0 | % | 0.4 | % | 2.6 | % | 1.1 | % | ||||||||
23.0 | % | -15.6 | % | -26.9 | % | 7.3 | % | |||||||||
Operating profit | $ | 2,191 | $ | (156 | ) | $ | (508 | ) | $ | 1,527 | ||||||
172.7 | % | -16.0 | % | -544.9 | % | 65.4 | % |
|
| Engineered |
|
| Diversified |
|
|
| ||||
|
| Solutions |
|
| Products |
|
| Total |
| |||
Net sales |
| $ | 9,927 |
|
| $ | (2,155) |
| $ | 7,772 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Volume |
|
| 11.2% |
|
| (16.9)% |
|
| 5.4% | |||
Price |
|
| 0.4% |
|
| 0.9% |
|
| 0.5% | |||
New products |
|
| 7.6% |
|
| 0.0% |
|
| 6.0% | |||
|
|
| 19.2% |
|
| (16.0)% |
|
| 11.9% | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit (loss) |
| $ | 2,329 |
|
| $ | (170) |
| $ | 2,159 |
| |
|
|
| 2.6% |
|
| (1.4)% |
|
| 2.3% |
Engineered Solutions
Net sales
in theSales of new products contributed 8% in the first quarter of fiscal 2021. New products include numerous mirror assemblies, compression latches, a cable lock, and a mirror cam.
Cost of products sold increased $6.9 million or 18% in the first quarter of 2021 compared to the corresponding period of 2020. Material costs in the first quarter of 2021 increased 15% or $4.1 million to $31.4 million from $27.3 million in the first quarter of 2020, comparedprimarily due to increased sales volume and higher material costs. Also impacting the first quarter of 2019. Sales increased due to the inclusion of Big 3 Precision in the 2020 period. Excluding Big 3 Precision, sales would have decreased 11%. Increased sales in the specialty vehicle, military, and off-highway markets2021 were not sufficient to offset sales reduction in the distribution, Class 8 truck, recreational vehicle, and aftermarket truck parts markets in the second half of March when certain of our customers closed operations due to actions taken to help stop the spread of COVID-19. Excluding Big 3 Precision, net sales decreased 13%,higher freight costs, which was offset by price increases and sales of new products contributing 2% in the 2020 period. New products include a handle and finger pull assembly, emergency door latch and a mount plate latch.
Finally, we paid tariffs on China-sourced products of the components sourced during the first quarter of 2019 were at higher than normal material costs. As of the first quarter of 2020, all components have been sourced to more favorable suppliers and costs have normalized. Also impacting the first quarter were more favorable freight costs, which were downapproximately $0.6 million in the first quarter of 20202021 compared to the first quarter of 2019 due to non-recurring expedited shipping costs. Payroll and payroll-related costs decreased $0.3 million offset by $0.3 million due to the under absorption of operating costs. Finally, we experienced tariff costs on China-sourced products of approximately $0.8 million compared to $0.2 million in the first quarter of 2019.
Gross margin
as a percentage of net sales in the first quarter ofProduct development expense increased $0.1 million first quarter of 2019 of 23%.
Selling and administrative expense
increasedDiversified Products Segment
Net sales
in the20 |
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Cost of products sold decreased $1.7 million or 15% in the first quarter of 2019,2021 compared to the corresponding period of 2020, primarily as a result of lower sales volume reduced payroll and payroll-related costs of $0.2 million, or 8%, and the mix of products sold.
We paid minimal tariffs on China-sourced products in the first quarter of 2021 compared to $0.6 million in the first quarter of 2020, all of which have been recovered through price increases.
Gross margin
as a percentage of net sales wasProduct development expense
as a percentage of net sales wasSelling and administrative expenses
decreasedLiquidity and Sources of Capital
The Company generated approximately $1.5$2.1 million of cash from operations during the first quarterthree months of 2020fiscal 2021 compared to approximately $1.5 million during the first quarterthree months of 2019. The cash flows in the first quarter of 2020 period were comparable to the first quarter of 2019 period.fiscal 2020. Cash flow from operations coupled with cash at the beginning of the 20202021 fiscal year was sufficient to fund capital expenditures, debt service, and dividend payments.
Additions to property, plant and equipment were approximately $0.9 million for the first three months of fiscal 2021 and $0.8 million for the first quarterthree months of 2020 and $0.7 million forfiscal 2020. Additionally, in the first quarterthree months of 2019.2021 the company received proceeds of $2.0 million from the sale of one of its facilities in Canada. As of March 28, 2020,April 3, 2021, there waswere approximately $0.1$0.3 million of outstanding commitments for capital expenditures.
The following table shows key financial ratios at the end of each specified period:
First Quarter 2020 | First Quarter 2019 | Year End 2019 | ||||||||||
Current ratio | 3.4 | 3.6 | 3.6 | |||||||||
Average days’ sales in accounts receivable | 57 | 49 | 51 | |||||||||
Inventory turnover | 3.6 | 3.7 | 4.2 | |||||||||
Total debt to shareholders’ equity | 92.8 | % | 28.8 | % | 93.7 | % |
|
| First Quarter 2021 |
|
| First Quarter 2020 |
|
| Year End 2020 |
| |||
Current ratio |
|
| 2.8 |
|
|
| 3.4 |
|
|
| 2.8 |
|
Average days’ sales in accounts receivable |
|
| 53 |
|
|
| 57 |
|
|
| 56 |
|
Inventory turnover |
|
| 4.2 |
|
|
| 3.6 |
|
|
| 3.6 |
|
Total debt to shareholders’ equity |
|
| 79.0% |
|
| 92.8% |
|
| 85.1% |
21 |
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The following table shows important liquidity measures as of the balance sheet date for each specified period (in millions):
First | First | Year | ||||||||||
Quarter | Quarter | End | ||||||||||
2020 | 2019 | 2019 | ||||||||||
Cash and cash equivalents | ||||||||||||
- Held in the United States | $ | 9.6 | $ | 4.1 | $ | 9.0 | ||||||
- Held by a foreign subsidiary | 6.9 | 9.5 | 9.0 | |||||||||
16.5 | 13.6 | 18.0 | ||||||||||
Working capital | 81.8 | 72.8 | 83.0 | |||||||||
Net cash provided by operating activities | 1.5 | 1.5 | 23.0 | |||||||||
Change in working capital impact on net cash (used) in operating activities | (2.7 | ) | (2.5 | ) | (0.3 | ) | ||||||
Net cash (used) in investing activities | (0.4 | ) | (0.9 | ) | (85.8 | ) | ||||||
Net cash (used) in financing activities | (2.3 | ) | (1.1 | ) | (67.0 | ) |
|
| First |
|
| First |
|
| Year |
| |||
|
| Quarter |
|
| Quarter |
|
| End |
| |||
|
| 2021 |
|
| 2020 |
|
| 2020 |
| |||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
| |||
- Held in the United States |
| $ | 8.0 |
|
| $ | 9.6 |
|
| $ | 10.0 |
|
- Held by a foreign subsidiary |
|
| 9.5 |
|
|
| 6.9 |
|
|
| 6.1 |
|
|
|
| 17.5 |
|
|
| 16.5 |
|
|
| 16.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
| 76.7 |
|
|
| 81.8 |
|
|
| 71.1 |
|
Net cash provided by operating activities |
|
| 2.1 |
|
|
| 1.5 |
|
|
| 20.7 |
|
Change in working capital impact on net cash provided by (used in) operating activities |
|
| (4.0 | ) |
|
| (2.7 | ) |
|
| 2.0 |
|
Net cash provided by (used in) investing activities |
|
| 1.1 |
|
|
| (0.4 | ) |
|
| (9.1 | ) |
Net cash used in financing activities |
|
| (1.9 | ) |
|
| (2.3 | ) |
|
| (13.2 | ) |
Inventories of $55.3$54.0 million represent an increase of 1% at March 28, 20201.6% as of April 3, 2021 as compared to $54.6$53.1 million at the end of fiscal year 2019.2020. Inventories increased 7%decreased 2.3% in the first quarterthree months of 2020,fiscal 2021, as compared to $51.6 at the end of the first fiscal quarter of 2019. Accounts receivable, less allowances were $39.9 million at March 28, 2020, as compared to $37.9 million at 2019 fiscal year end and $32.4$55.3 million at the end of the first fiscal quarter of 2019.
Cash, cash flow from operating activities and funds available under the revolving credit portion of the Credit Agreement are expected to be sufficient to cover future foreseeable working capital requirements. However, based on current macroeconomic conditions resulting from the uncertainty caused by COVID-19, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available. 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 responses to contain the spread of COVID-19 or the resulting harm to the financial condition of our customers or economic conditions generally, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and our fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and tocould cause us to fail to comply with the covenants under our Credit Agreement.
22 |
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Off-Balance Sheet Arrangements
As of the end of the fiscal quarter ended March 28, 2020,April 3, 2021, the Company does not have any material transactions,off-balance sheet arrangements obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, as described by Item 303(a)(4) of Regulation S-K, that have or are reasonably likely to have a material current or future impacteffect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resourcesresources.
Non-GAAP Financial Measures
The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income, Adjusted EPS and Adjusted EBITDA, 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 GAAP financial measures, such as net sales, net income, diluted earnings per common share, or significant componentsother measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.
Adjusted Net Income is defined as net income excluding, when they occur, the impacts of revenuesimpairment losses, losses on sale of subsidiaries, transaction expenses, factory relocation expenses and restructuring costs. Adjusted Net Income is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Adjusted Earnings Per Share is defined as diluted earnings per share excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, factory relocation expenses and restructuring costs. We believe that Adjusted EPS provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis.
Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, and depreciation and amortization and excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, factory relocation expenses and restructuring expenses. Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business including our business segments, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or expenses.
We believe that presenting non-GAAP financial measures in addition to 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.
23 |
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Reconciliation of Net Income to Adjusted Net Income - EPS Calculation
For the Three Months ended April 3, 2021 and March 28, 2020
($000's)
|
| April 3, 2021 |
|
| March 28, 2020 |
| ||
|
|
|
|
|
|
| ||
Net Income as reported per generally accepted accounting principles (GAAP) |
| $ | 5,841 |
|
| $ | 2,896 |
|
|
|
|
|
|
|
|
|
|
Earnings Per Share as reported under generally accepted accounting principles (GAAP): |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.93 |
|
| $ | 0.46 |
|
Diluted |
| $ | 0.93 |
|
| $ | 0.46 |
|
|
|
|
|
|
|
|
|
|
Adjustments for one-time items: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of Eberhard Hardware Ltd building, net of tax |
|
| (1,353 | )A |
|
| - |
|
|
|
|
|
|
|
|
|
|
Total adjustments for one-time items (Non-GAAP) |
|
| (1,353 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
Adjusted Net Income (related for one-time items); |
| $ | 4,488 |
|
| $ | 2,896 |
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per share (related to one-time items); (Non-GAAP) |
|
|
|
|
|
|
|
|
Basic |
| $ | 0.72 |
|
| $ | 0.46 |
|
Diluted |
| $ | 0.71 |
|
| $ | 0.46 |
|
_________
A) Gain on sale of Eberhard Hardware Ltd building
24 |
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Reconciliation of one-time items from GAAP to Non-GAAP EBITDA calculation
For the Three Months ended April 3, 2021 and March 28, 2020
($000's)
|
| April 3, 2021 |
|
| March 28, 2020 |
| ||
|
|
|
|
|
|
| ||
Net Income/(loss) as reported per generally accepted accounting principles (GAAP) |
| $ | 5,841 |
|
| $ | 2,896 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 703 |
|
|
| 828 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
| 1,817 |
|
|
| 883 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 2,193 |
|
|
| 2,056 |
|
|
|
|
|
|
|
|
|
|
Gain on sale of Eberhard Hardware Ltd Building |
|
| (1,841 | )A |
|
| - |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
| $ | 8,713 |
|
| $ | 6,663 |
|
___________
A) Gain on sale of Eberhard Hardware Ltd building
25 |
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ITEM 3 –- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the Company’s status as a smaller reporting company pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information under this Item 3, of Form 10-Q pursuant to Item 305 of Regulation S-K.
Evaluation of Disclosure Controls and Procedures:
As of March 28, 2020,April 3, 2021, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’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 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.”
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’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 as of March 28, 2020.
Changes in Internal Control Over Financial Reporting
:During the period covered by this Quarterly Report on Form 10-Q, there have beenwere no changes in the Company's internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
26 |
Table of Contents |
PART II –- OTHER INFORMATION
The Company is a party to various legal proceedings from time to time related to its normal business operations. As of the end of the quarter ended March 28, 2020,April 3, 2021, the Company does not have any material pending legal proceedings.
In 2016, the Company created a plan to remediate a landfill of spent foundry sand maintained at the Company’s metal casting facility in New York. This plan was agreed to by the New York State Department of Environmental Conservation (the “DEC”“NYSDEC”) on March 27, 2018. Based on estimates provided by the Company’s environmental engineers, the anticipated cost to remediate and monitor the landfill was $430,000. The Company accrued for and expensed the entire $430,000 in the first quarter of 2018 and fiscal 2017. In the fall of 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”).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 anticipatedwas received in the first quarter ofOctober 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.May 2021. In the summerthird fiscal quarter of 2020,2021, following the completion of construction work, a closure report and maintenance plan is expected to 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.
The Company’s business is subject to a number of risks, some of which are beyond its control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the Company’s shareholders should carefully consider the risk factors discussed in Part I, Item 1A.1A “Risk Factors” of the Company’s 20192020 Form 10-K. These risk factors could have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity and could cause our operating results to vary significantly from period to period. In lightAs of recent developments relatingApril 3, 2021, there have been no material changes to the COVID-19 pandemic, the Company is supplementing the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in our 2019the 2020 Form 10-K to include the following risk factor:
None
None
Not applicable.
None
101) | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 3, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations (Unaudited) for the three months ended April 3, 2021 and March 28, 2020; (ii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended April 3, 2021, and March 28, 2020; (iii) Condensed Consolidated Balance Sheets (Unaudited) as of April 3, 2021 and January 2, 2021; (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended April 3, 2021 and March 28, 2020; and (iv) Notes to the Condensed Consolidated Financial Statements (Unaudited).** | |
104) | Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101). ** |
_______
* Filed herewith.
**Furnished herewith
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 | /s/August M. Vlak | ||
August M. Vlak President and Chief Executive Officer | |||
DATE: May | /s/John L. Sullivan III | ||
John L. Sullivan III Vice President and Chief Financial Officer |
29 |