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 | |
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for the quarterly period ended April | ||
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OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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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, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, No Par Value | EML | NASDAQ Global Market |
Indicate by check mark whether the registrant (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 ☒ 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 ☒ 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 | ☒ |
Non-accelerated filer | ☐ | Smaller reporting company | ☒ |
|
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 3, 2021, 6,253,5012, 2022, 6,239,824 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 APRIL 3, 20212, 2022
TABLE OF CONTENTS
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2 |
Table of Contents |
PART 1 -– FINANCIAL INFORMATION
ITEM 1 -– FINANCIAL STATEMENTS
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
|
| Three Months Ended |
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| Three Months Ended |
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| April 3, 2021 |
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| March 28, 2020 |
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| April 2, 2022 |
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| April 3, 2021 |
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Net sales |
| $ | 73,097,875 |
| $ | 65,325,616 |
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| $ | 69,014,648 |
| $ | 61,773,433 |
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Cost of products sold |
|
| (55,839,321 | ) |
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| (50,663,943 | ) |
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| (54,438,968 | ) |
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| (46,264,163 | ) |
Gross margin |
| 17,258,554 |
| 14,661,673 |
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| 14,575,680 |
| 15,509,270 |
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Product development expense |
| (838,825 | ) |
| (775,444 | ) |
| (1,197,008 | ) |
| (1,017,563 | ) | ||||
Selling and administrative expenses |
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| (10,485,520 | ) |
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| (10,024,958 | ) |
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| (9,865,614 | ) |
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| (8,944,393 | ) |
Operating profit |
| 5,934,209 |
| 3,861,271 |
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| 3,513,058 |
| 5,547,314 |
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Interest expense |
| (702,859 | ) |
| (827,664 | ) |
| (434,335 | ) |
| (527,144 | ) | ||||
Other income |
|
| 2,426,741 |
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| 744,793 |
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| 488,520 |
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| 2,426,740 |
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Income before income taxes |
| 7,658,091 |
| 3,778,400 |
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Income from continuing operations before income taxes |
| 3,567,243 |
| 7,446,910 |
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Income taxes |
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| (1,817,264 | ) |
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| (882,583 | ) | ||||||||
Income tax expense |
|
| (881,125 | ) |
|
| (1,767,552 | ) | ||||||||
Net income from continuing operations |
| 2,686,118 |
| 5,679,358 |
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Discontinued Operations (see note B ) |
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Income from operations of discontinued operations |
| 471,187 |
| 211,181 |
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Income tax expense |
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| (126,867 | ) |
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| (49,712 | ) | ||||||||
Income from discontinued operations |
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| 344,320 |
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| 161,469 |
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Net income |
| $ | 5,840,827 |
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| $ | 2,895,817 |
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| $ | 3,030,438 |
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| $ | 5,840,827 |
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Earnings per share: |
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Earnings per share from continuing operations: |
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Basic |
| $ | 0.43 |
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| $ | 0.90 |
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Diluted |
| $ | 0.43 |
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| $ | 0.90 |
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Earnings per share from discontinued operations: |
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Basic |
| $ | 0.06 |
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| $ | 0.03 |
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Diluted |
| $ | 0.05 |
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| $ | 0.03 |
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Total earnings per share: |
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Basic |
| $ | 0.93 |
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| $ | 0.46 |
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| $ | 0.49 |
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| $ | 0.93 |
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Diluted |
| $ | 0.93 |
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| $ | 0.46 |
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| $ | 0.48 |
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| $ | 0.93 |
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Cash dividends per share: |
| $ | 0.11 |
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| $ | 0.11 |
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| $ | 0.11 |
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| $ | 0.11 |
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See accompanying notes.
3 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| Three Months Ended |
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|
| April 3, 2021 |
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| March 28, 2020 |
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Net income |
| $ | 5,840,827 |
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| $ | 2,895,817 |
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Other comprehensive income/(loss): |
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Change in foreign currency translation |
|
| (79,054 | ) |
|
| (1,304,447 | ) |
Change in marketable securities, net of taxes of: |
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2021 - $67 and 2020 - $2,897 |
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| 205 |
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| 8,878 |
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Change in fair value of interest rate swap, net of tax cost (benefit) of: |
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2021 - $130,434 and 2020 - $(535,029) |
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| 413,040 |
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| (1,697,793 | ) |
Change in pension and postretirement benefit costs, net of taxes of: |
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2021 - $92,194 and 2020 - $81,143 |
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| 295,744 |
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| 260,295 |
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Total other comprehensive income (loss) |
|
| 629,935 |
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| (2,733,067 | ) |
Comprehensive income |
| $ | 6,470,762 |
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| $ | 162,750 |
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| Three Months Ended |
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| April 2, 2022 |
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| April 3, 2021 |
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Net income |
| $ | 3,030,438 |
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| $ | 5,840,827 |
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Other comprehensive income (loss): |
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Change in foreign currency translation |
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| 202,281 |
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| (79,054 | ) |
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Change in fair value of interest rate swap, net of tax cost of: |
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2022 - $333,635; 2021 - $130,501 |
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| 1,056,511 |
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| 413,245 |
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Change in pension and postretirement benefit costs, net of taxes of: |
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2022 - $92,235; 2021 - $92,194 |
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| 313,408 |
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| 295,744 |
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Total other comprehensive income |
|
| 1,572,200 |
|
|
| 629,935 |
|
Comprehensive income |
| $ | 4,602,638 |
|
| $ | 6,470,762 |
|
See accompanying notes.
4 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS |
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| April 2, 2022 |
|
| January 1, 2022 |
| |||||
|
| April 3, 2021 |
|
| January 2, 2021 |
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| (unaudited) |
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| (unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
| $ | 17,464,669 |
| $ | 16,101,635 |
|
| $ | 5,073,524 |
| $ | 6,168,304 |
| ||
Marketable securities |
| 29,224 |
| 28,951 |
| |||||||||||
Accounts receivable, less allowances: 2021 - $618,000; 2020 - $545,000 |
| 42,228,264 |
| 37,749,129 |
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Accounts receivable, less allowances: 2022 - $532,000; 2021 - $515,000 |
| 46,965,504 |
| 43,151,500 |
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Inventories |
| 53,960,426 |
| 53,112,393 |
|
| 67,777,718 |
| 62,862,342 |
| ||||||
Current portion of notes receivable |
| 459,863 |
| 398,414 |
|
| 1,027,125 |
| 1,027,125 |
| ||||||
Prepaid expenses and other assets |
|
| 5,341,214 |
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|
| 4,345,250 |
|
| 7,831,437 |
| 6,943,691 |
| |||
Current assets held for sale |
|
| 4,671,915 |
|
|
| 3,521,899 |
| ||||||||
Total Current Assets |
|
| 119,483,660 |
|
|
| 111,735,772 |
|
|
| 133,347,223 |
|
|
| 123,674,861 |
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Property, Plant and Equipment |
| 86,539,328 |
| 88,198,093 |
|
| 55,234,222 |
| 56,935,080 |
| ||||||
Accumulated depreciation |
|
| (47,244,599 | ) |
|
| (48,246,120 | ) |
|
| (28,641,459 | ) |
|
| (28,631,329 | ) |
Property, Plant and Equipment, Net |
|
| 39,294,729 |
|
|
| 39,951,973 |
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| 26,592,763 |
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| 28,303,751 |
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| ||||||
Goodwill |
| 76,921,385 |
| 76,895,015 |
|
| 72,225,885 |
| 72,211,873 |
| ||||||
Trademarks |
| 5,404,284 |
| 5,404,284 |
|
| 5,484,923 |
| 5,409,720 |
| ||||||
Patents and other intangibles, net of accumulated amortization |
| 25,958,715 |
| 27,096,006 |
| |||||||||||
Patents and other intangibles net of accumulated amortization |
| 21,865,328 |
| 22,863,497 |
| |||||||||||
Long term notes receivable, less current portion |
| 1,547,503 |
| 1,677,277 |
|
| 2,551,478 |
| 2,726,698 |
| ||||||
Right of Use Assets |
|
| 12,882,498 |
|
|
| 12,768,027 |
|
|
| 11,430,632 |
|
|
| 11,138,535 |
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Other Assets |
|
| 122,714,385 |
|
|
| 123,840,609 |
| ||||||||
Total Other Assets |
|
| 113,558,246 |
|
|
| 114,350,323 |
| ||||||||
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TOTAL ASSETS |
| $ | 281,492,774 |
|
| $ | 275,528,354 |
|
| $ | 273,498,232 |
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| $ | 266,328,935 |
|
See accompanying notes.
5 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY |
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|
| April 2, 2022 |
|
| January 1, 2022 |
| |||||||
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| April 3, 2021 |
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| January 2, 2021 |
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| (unaudited) |
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| (unaudited) |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities |
|
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Accounts payable |
| $ | 25,357,557 |
| $ | 23,507,719 |
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| $ | 33,654,638 |
| $ | 29,633,974 |
| ||
Accrued compensation |
| 2,520,725 |
| 3,675,223 |
|
| 2,584,565 |
| 4,375,867 |
| ||||||
Other accrued expenses |
| 4,785,793 |
| 4,121,568 |
|
| 2,481,396 |
| 4,808,000 |
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Current portion of lease liability |
| 3,039,689 |
| 2,923,761 |
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| 2,715,550 |
| 2,664,895 |
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Current portion of long-term debt |
|
| 7,062,689 |
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| 6,437,689 |
|
| 7,500,000 |
| 7,500,000 |
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Current liabilities held for sale |
|
| 1,226,417 |
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|
| 580,990 |
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Total Current Liabilities |
| 42,766,453 |
| 40,665,960 |
|
| 50,162,566 |
| 49,563,726 |
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Deferred income taxes |
| 2,899,074 |
| 2,899,075 |
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| 1,151,759 |
| 1,151,759 |
| ||||||
Other long-term liabilities |
| 1,144,127 |
| 1,144,127 |
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| 668,354 |
| 668,354 |
| ||||||
Lease liability |
| 9,871,835 |
| 9,883,168 |
|
| 8,815,587 |
| 8,639,339 |
| ||||||
Long-term debt, less current portion |
| 80,468,737 |
| 82,255,803 |
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| 66,960,231 |
| 63,813,522 |
| ||||||
Accrued postretirement benefits |
| 1,168,262 |
| 1,185,139 |
| |||||||||||
Accrued other postretirement benefits |
| 1,299,767 |
| 1,284,589 |
| |||||||||||
Accrued pension cost |
|
| 32,443,297 |
|
|
| 33,188,623 |
|
|
| 26,580,732 |
|
|
| 26,605,382 |
|
Total Liabilities |
| 170,761,785 |
| 171,221,895 |
|
| 155,638,996 |
| 151,726,671 |
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Shareholders’ Equity |
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Voting Preferred Stock, no par value: Authorized and unissued: 1,000,000 shares |
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Nonvoting Preferred Stock, no par value:Authorized and unissued: 1,000,000 shares |
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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 | ) | ||||||||||
Voting Preferred Stock, no par value: |
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Authorized and unissued: 1,000,000 shares |
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Nonvoting Preferred Stock, no par value: |
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Authorized and unissued: 1,000,000 shares |
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Common Stock, no par value, Authorized: 50,000,000 shares |
| 32,841,476 |
| 32,620,008 |
| |||||||||||
Issued: 9,034,387 shares in 2022 and 9,029,852 shares in 2021 |
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Outstanding: 6,239,824 shares in 2022 and 6,265,527 shares in 2021 |
|
|
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| |||||||||||
Treasury Stock: 2,794,563 shares in 2022 and 2,764,325 shares in 2021 |
| (21,674,502 | ) |
| (20,907,613 | ) | ||||||||||
Retained earnings |
| 128,356,468 |
| 122,840,131 |
|
| 131,652,818 |
| 129,422,625 |
| ||||||
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
| ||||||
Foreign currency translation |
| 874,810 |
| 953,864 |
|
| 1,020,727 |
| 818,446 |
| ||||||
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 | ) | ||||||||||
Unrealized gain (loss) on interest rate swap, net of tax |
| 700,523 |
| (355,988 | ) | |||||||||||
Unrecognized net pension and postretirement benefit costs, net of tax |
|
| (28,763,279 | ) |
|
| (29,059,023 | ) |
|
| (26,681,806 | ) |
|
| (26,995,214 | ) |
Accumulated other comprehensive loss |
|
| (28,866,816 | ) |
|
| (29,496,751 | ) |
|
| (24,960,556 | ) |
|
| (26,532,756 | ) |
Total Shareholders’ Equity |
|
| 110,730,989 |
|
|
| 104,306,459 |
|
|
| 117,859,236 |
|
|
| 114,602,264 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 281,492,774 |
|
| $ | 275,528,354 |
|
| $ | 273,498,232 |
|
| $ | 266,328,935 |
|
See accompanying notes.
6 |
Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| April 3, 2021 |
|
| March 28, 2020 |
|
| April 2, 2022 |
|
| April 3, 2021 |
| ||||
Operating Activities |
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 5,840,827 |
| $ | 2,895,817 |
|
| $ | 3,030,438 |
| $ | 5,840,827 |
| ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| |||||||||||
Less: income from discontinued operations |
|
| 344,320 |
|
|
| 161,469 |
| ||||||||
Income from continuing operations |
| $ | 2,686,118 |
| $ | 5,679,358 |
| |||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
| |||||||||||
Depreciation and amortization |
| 2,192,622 |
| 2,055,782 |
|
| 1,830,427 |
| 1,809,609 |
| ||||||
Unrecognized pension and postretirement benefits |
| (674,262 | ) |
| (678,305 | ) |
| 247,133 |
| (674,262 | ) | |||||
(Gain) loss on sale of equipment and other assets |
| (1,600,288 | ) |
| (437,446 | ) | ||||||||||
Loss (gain) on sale of equipment and other assets |
| 268,770 |
| (1,601,812 | ) | |||||||||||
Provision for doubtful accounts |
| 73,097 |
| 156,286 |
|
| 19,740 |
| 73,097 |
| ||||||
Stock compensation expense |
| 278,258 |
| 238,293 |
|
| 221,468 |
| 278,258 |
| ||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable |
| (4,551,399 | ) |
| (2,273,864 | ) |
| (3,951,314 | ) |
| (3,942,502 | ) | ||||
Inventories |
| (1,015,663 | ) |
| (994,546 | ) |
| (4,902,631 | ) |
| (513,863 | ) | ||||
Prepaid expenses and other |
| (744,138 | ) |
| 341,582 |
|
| (1,075,545 | ) |
| (798,273 | ) | ||||
Other assets |
| (156,726 | ) |
| (415,415 | ) |
| (89,366 | ) |
| (156,726 | ) | ||||
Accounts payable |
| 2,063,182 |
| 2,766,829 |
|
| 3,526,499 |
| 1,075,130 |
| ||||||
Accrued compensation |
| (1,159,489 | ) |
| (1,585,976 | ) |
| (1,858,898 | ) |
| (1,116,703 | ) | ||||
Other accrued expenses |
|
| 1,554,036 |
|
|
| (564,572 | ) |
|
| (478,878 | ) |
|
| 1,140,223 |
|
Net cash provided by operating activities |
| 2,100,057 |
| 1,504,465 |
| |||||||||||
Net cash (used in) provided by operating activities |
| (3,556,477 | ) |
| 1,251,534 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Investing Activities |
|
|
|
|
|
|
|
|
|
| ||||||
Marketable securities |
| (273 | ) |
| 11,151 |
| ||||||||||
Payments received from notes receivable |
| 68,325 |
| 0 |
|
| 175,220 |
| 68,325 |
| ||||||
Proceeds from sale of equipment |
| 1,994,017 |
| 445,212 |
|
| 1,371,073 |
| 1,993,744 |
| ||||||
Purchases of property, plant and equipment |
|
| (919,589 | ) |
|
| (828,115 | ) |
|
| (572,047 | ) |
|
| (671,964 | ) |
Net cash provided by/used in investing activities |
| 1,142,480 |
| (371,752 | ) | |||||||||||
Net cash provided by investing activities |
| 974,246 |
| 1,390,105 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Financing Activities |
|
|
|
|
|
|
|
|
|
| ||||||
Proceeds from short term borrowings (revolver) |
| 5,000,000 |
| 0 |
| |||||||||||
Principal payments on long-term debt |
| (1,162,045 | ) |
| (1,221,423 | ) |
| (1,852,107 | ) |
| (1,162,045 | ) | ||||
Lease payments |
| (9,875 | ) |
| 0 |
| ||||||||||
Financing leases, net |
| (92,111 | ) |
| (9,875 | ) | ||||||||||
Purchase common stock for treasury |
| 0 |
| (368,864 | ) |
| (766,889 | ) |
| 0 |
| |||||
Dividends paid |
|
| (684,702 | ) |
|
| (686,614 | ) |
|
| (687,180 | ) |
|
| (684,702 | ) |
Net cash used in financing activities |
| (1,856,622 | ) |
| (2,276,901 | ) | ||||||||||
Net cash provided by (used in) financing activities |
| 1,601,713 |
| (1,856,622 | ) | |||||||||||
|
|
|
|
|
| |||||||||||
Discontinued Operations |
|
|
|
|
| |||||||||||
Cash (used in) provided by operating activities |
| (396,936 | ) |
| 848,523 |
| ||||||||||
Cash used in investing activities |
|
| 0 |
|
|
| (247,625 | ) | ||||||||
Cash (used in) provided by discontinued operations |
| (396,936 | ) |
| 600,898 |
| ||||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Effect of exchange rate changes on cash |
|
| (22,881 | ) |
|
| (343,436 | ) |
|
| (22,903 | ) |
|
| (22,881 | ) |
Net change in cash and cash equivalents |
| 1,363,034 |
| (1,487,624 | ) |
| (1,400,357 | ) |
| 1,363,034 |
| |||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents at beginning of period |
|
| 16,101,635 |
|
|
| 17,996,505 |
|
|
| 6,602,429 |
|
|
| 16,101,635 |
|
Cash and cash equivalents at end of period |
| $ | 17,464,669 |
|
| $ | 16,508,881 |
| ||||||||
Cash and cash equivalents at end of period ¹ |
| $ | 5,202,072 |
|
| $ | 17,464,669 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
| ||||||
Interest |
| $ | 685,520 |
| $ | 827,664 |
|
| $ | 463,080 |
| $ | 685,520 |
| ||
Income taxes |
| 21,100 |
| 21,000 |
|
| 110,917 |
| 21,100 |
| ||||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
|
| ||||||
Right of use asset |
| 114,471 |
| (489,822 | ) |
| 292,097 |
| 114,471 |
| ||||||
Lease liability |
| (104,595 | ) |
| 489,822 |
|
| (226,903 | ) |
| (104,595 | ) |
¹See accompanying notes includes cash from assets held for sale of $0.1 million as of April 2, 2022 and $1.5 million as of April 3, 2021
7 |
Table of Contents |
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
April 3, 20212, 2022
Note A -– Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (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 January 2, 2021,1, 2022, filed with the Securities and Exchange Commission on March 16, 202117, 2022 (the “2020“2021 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. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. All intercompany accounts and transactions are eliminated.
The condensed consolidated balance sheet as of January 2, 20211, 2022 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 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 endingended on January 1, 2022, and references to 2022 or the 2022 fiscal year mean the 52-week period ending on December 31, 2022. In a 52-week fiscal year, each quarter ishas 13 weeks long. In a 53-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 2020, the first fiscal quarter of 2020 or the three months ended March 28, 2020 mean the period from December 29, 2019 to March 28, 2020.weeks. References to the first quarter of 2021, the first fiscal quarter of 2021 or the three months ended April 3, 2021 mean the 13-week period from January 3, 2021 to April 3, 2021. References to the first quarter of 2022, the first fiscal quarter of 2022 or the three months ended April 2, 2022, mean the 13-week period from January 2, 2022 to April 2, 2022.
Certain amounts in the 20202021 financial statements have been reclassified to conform with the 20212022 presentation with no impact or change to previously reported net income or shareholder’s equity.
Note B -– Discontinued Operations
In the second quarter of 2021, the Company determined that the companies included in our former Diversified Products segment no longer fit with our long-term strategy and the Company initiated the process of selling the companies within the Diversified Products segment. Selling the companies within this segment will allow management to focus on our core capabilities and offerings.
The former Diversified Products segment met the criteria to be held for sale and furthermore, we determined that the assets held for sale qualify for discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.
On November 3, 2021, the Company sold its Greenwald Industries, Inc. division (“Greenwald”). Greenwald, located in Chester, CT, is an OEM manufacturer offering a range of payment solutions from coin-vending products to smart card systems and payment applications.
On November 22, 2021, the Company sold its Frazer & Jones Company division (“Frazer & Jones”). Frazer & Jones is a ductile and malleable iron foundry located in Syracuse, NY. Eastern has exited the mining business to focus on our three core businesses.
8 |
Table of Contents |
Summarized Financial Information of Discontinued Operations
The following table represents income from discontinued operations, net of tax:
|
| Three Months Ended |
| |||||
|
| April 2, 2022 |
|
| April 3, 2021 |
| ||
|
| (unaudited) |
|
| (unaudited) |
| ||
Net sales |
| $ | 2,367,226 |
|
| $ | 11,324,442 |
|
Cost of products sold |
|
| (1,603,762 | ) |
|
| (9,904,720 | ) |
Gross margin |
|
| 763,464 |
|
|
| 1,419,722 |
|
|
|
|
|
|
|
|
|
|
Selling and administrative expenses |
|
| (257,060 | ) |
|
| (1,032,827 | ) |
Operating income |
|
| 506,404 |
|
|
| 386,895 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (35,217 | ) |
|
| (175,714 | ) |
Income from discontinued operations before income taxes |
|
| 471,187 |
|
|
| 211,181 |
|
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| (126,867 | ) |
|
| (49,712 | ) |
Income from discontinued operations, net of tax |
| $ | 344,320 |
|
| $ | 161,469 |
|
The following table represents the assets and liabilities from discontinued operations:
|
| April 2, 2022 |
|
| January 1, 2022 |
| ||
|
| (unaudited) |
|
|
|
| ||
Cash |
| $ | 128,548 |
|
| $ | 434,126 |
|
Accounts receivable |
|
| 1,112,294 |
|
|
| 1,153,274 |
|
Inventory |
|
| 2,539,551 |
|
|
| 1,258,032 |
|
Prepaid expenses |
|
| 43,293 |
|
|
| 59,850 |
|
Property, plant and equipment, net |
|
| 571,260 |
|
|
| 591,920 |
|
Right of use assets |
|
| 276,969 |
|
|
| 24,697 |
|
Total assets of discontinued operations¹ |
| $ | 4,671,915 |
|
| $ | 3,521,899 |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ | 566,653 |
|
| $ | 167,794 |
|
Accrued compensation and other accrued expenses |
|
| 382,795 |
|
|
| 388,499 |
|
Current portion of lease liability |
|
| 92,323 |
|
|
| 24,697 |
|
Other long-term liabilities |
|
| 184,646 |
|
|
| 0 |
|
Total liabilities of discontinued operations¹ |
| $ | 1,226,417 |
|
| $ | 580,990 |
|
¹ The total assets and liabilities of discontinued operations are classified as current in the April 2, 2022 and
January 1, 2022 balance sheets, as we expect to sell the discontinued operations and collect proceeds within one year.
9 |
Table of Contents |
Note C – Earnings Per Share
The denominators used to calculate earnings per share are as follow:follows:
|
| Three Months Ended |
| |||||
|
| April
|
|
|
|
| ||
Basic: |
|
|
|
|
|
| ||
Weighted average shares outstanding |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
| ||
Dilutive stock appreciation rights |
|
|
|
|
|
| ||
Denominator for diluted earnings per share |
|
|
|
|
|
|
Inventories from continuing operations consist of the following components:
|
| April 3, 2021 |
| January 2, 2021 |
|
| April 2, 2022 |
|
| January 1, 2022 |
| |||||
|
|
|
|
|
|
|
|
|
|
| ||||||
Raw material and component parts |
| $ | 20,333,551 |
| $ | 20,013,992 |
|
| $ | 27,077,178 |
| $ | 25,113,487 |
| ||
Work in process |
| 11,891,191 |
| 11,704,311 |
|
| 10,389,475 |
| 9,636,009 |
| ||||||
Finished goods |
|
| 21,735,684 |
|
| 21,394,090 |
|
|
| 30,311,065 |
|
|
| 28,112,846 |
| |
Total inventories |
| $ | 53,960,426 |
| $ | 53,112,393 |
|
| $ | 67,777,718 |
|
| $ | 62,862,342 |
|
Note DE - Goodwill
The Company maintains 11 reporting units, five of which comprise the goodwill balance. These six units have an aggregate carrying amount of goodwill offrom continuing operations is approximately $76.9$72.2 million as of April 3, 2021. 2, 2022. NaN impairment was recognized in the first quarter of 2022.
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 -F – Leases
The Company presents right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company elected to accountaccounts for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.
The Company has operating leases for buildings, warehouses, and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all 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 1 - 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.
10 |
Table of Contents |
Currently, the Company has 3225 operating leases and twothree finance leases with a lease liability of $12.9$11.8 million as of April 3, 2021.2, 2022. The finance lease arrangements are immaterial. The terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. We rent or sublease a part of one real estate property to a third party. There are no related party lease transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.
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$2.2 million; 2023 - $2.0$2.6 million; 2024 - $1.6$2.1 million; 2025 - $0.9$1.2 million; 2026 - $0.8 million; and $3.7$2.9 million thereafter. The weighted average remaining lease term is 6.76.0 years. The implicit interest rate used was 5.0%.
Note FG - 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 requiresrequired quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increasesincreased to $1,875,000 per quarter beginning September 30, 2021 and continuescontinuing through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023 and continuescontinuing through June 30, 2024. The term loan is a 5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. As of April 3, 2021,2, 2022, the Company has not borrowed any funds$5,000,000 on the revolving commitment portion of the facility.facility at an interest rate of 1.71%. The term loan bears interest at a variable rate based on the LIBOR rate plus an applicable margin of 1.25% to 2.25%, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.25% to 1.25% or the LIBOR rate plus an applicable margin of 1.25% to 2.25%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019, with Santander Bank, N.A., as administrative agent.
The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. The Company was in compliance with all of its covenants under the Credit Agreement aton April 3, 20212, 2022, and through the date of filing this Form 10-Q.
On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On April 3, 2021,2, 2022, the interest rate for approximately half ($41.326.8 million) of the term portion was 2.36%1.71%, using a one-month LIBOR rate, and 3.69%2.94% on the remaining balance ($46.342.8 million) of the term loan based on a one-month LIBOR rate.
The interest rates under the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the potential phasing out of LIBOR after 2021.LIBOR. Information regarding the potential phasing out of LIBOR is provided below.
On July 27, 2017, the Financial Conduct Authority (the “FCA”) (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. In December 2020, the ICE Benchmark Administration (the “IBA”) announced a market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023, which the FCA supports. On March 5, 2021, the IBA released its feedback statement reporting the results of the market consultation. Pursuant to its feedback statement, the IBA intends to ceaseceased publication of all settings of non-US dollar LIBOR and 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 beingscheduled to be discontinued after June 30, 2023. The Alternative Reference Rates Committee (ARRC), a financial industry group convened by the Federal Reserve Board, has recommended the use of SOFR to replace LIBOR. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate which has implications for how interest and other payments are based. Changes in the method of calculating the replacement of LIBOR with an alternative rate or benchmark are still in flux, and once an alternate rate is adopted, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect the Company’s results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks at this time. We are working with our senior lender and may need to renegotiate our credit facilities as LIBOR phases out in June 2023.
Table of Contents |
Note GH - Stock Options and Awards
The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers, other key employees, and non-employee Directorsdirectors expired in February 2020. On February 19, 2020, the boardBoard of directorsDirectors of the Company (the “Board”) adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”). On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The 2020 Plan replaced the 2010 Plan. The Company has no other existing plan pursuant to which equity awards may be granted.
Incentive stock options granted under the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors.Board. Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors.Board. During the first three months of fiscal 2021,2022, the company issued 24,600Company granted 36,200 stock options that were grantedawards that were subject to the meeting of performance measurements. The Company did not issue anygranted 27,300 stock options or restricted stockawards in the first 3three months of fiscal 2020.2021. For the first three months of fiscal 2022, the Company used an assumption which included an expected term of 4.0 years, volatility deviation of 47.15% and a risk-free rate 2.04% for the purposes of measuring compensation under the Black Scholes Method. For the first three months of fiscal 2021, the Company used several assumptions which included an expected term of 4.0 years, volatility deviation between 47.25% to 47.54% and a risk-free rate between 0.18% to 0.20% for the purposes of measuring compensation under the Black Scholes Method.
The 2020 Plan also permitpermits 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 20212022 and the first three months of fiscal 2020,2021 the Company did not issue any SARs.
Stock-based compensation expense in connection with SARs previously granted to employees was approximately $113,000 and $110,000$113,000 in the first quarter of 20212022 and 2020, respectively. the first quarter of 2021.
As of April 3, 2021,2, 2022, there were 788,358763,968 shares of Company common stock reserved and available for future grant under the 2020 Plan.
The following tables set forth the outstanding SARs for the period specified:
|
| 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 |
|
|
| Three Months Ended |
|
| Year Ended |
| ||||||||||
|
| April 2, 2022 |
|
| January 1, 2022 |
| ||||||||||
|
| Units |
|
| Weighted Average Exercise Price |
|
| Units |
|
| Weighted Average Exercise Price |
| ||||
Outstanding at beginning of period |
|
| 180,833 |
|
| $ | 22.88 |
|
|
| 244,001 |
|
| $ | 21.87 |
|
Issued |
|
| - |
|
|
| 0 |
|
|
| - |
|
|
| 0 |
|
Exercised |
|
| - |
|
|
| 0 |
|
|
| (55,668 | ) |
|
| 19.31 |
|
Forfeited |
|
| - |
|
|
| 0 |
|
|
| (7,500 | ) |
|
| 21.20 |
|
Outstanding at end of period |
|
| 180,833 |
|
|
| 22.88 |
|
|
| 180,833 |
|
|
| 22.88 |
|
Table of Contents |
SARs Outstanding and Exercisable |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Range of Exercise Prices |
| Outstanding as of April 2, 2022 |
|
| Weighted Average Remaining Contractual Life |
|
| Weighted Average Exercise Price |
|
| Exercisable as of April 2, 2022 |
|
| Weighted Average Remaining Contractual Life |
|
| Weighted Average Exercise Price |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
$ | 20.20 - $26.30 |
|
| 180,333 |
|
|
| 1.9 |
|
| $ | 22.88 |
|
|
| 118,335 |
|
|
| 1.4 |
|
| $ | 23.30 |
|
The following tables set forth the outstanding stock grantsawards for the period specified:
|
| Three Months Ended
|
|
| Year Ended | |||||||||||
April 2, 2022 | January |
| ||||||||||||||
|
| Shares |
|
|
| Shares |
|
| ||||||||
Outstanding at beginning of period |
|
|
|
|
| 25,000 |
| |||||||||
Issued |
|
|
|
|
|
| ||||||||||
Exercised |
|
| - |
|
|
| - |
| ||||||||
Forfeited |
|
| - |
|
|
| ) | |||||||||
Outstanding at end of period |
|
|
|
|
|
|
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 April 3, 2021,2, 2022, outstanding SARs and grantsstock awards had an intrinsic value of $1,776,000.$1,722,000.
Note H -I – Share Repurchase Program
On May 2, 2018, the Company announced that itsthe Board of Directors of the Company had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company did not repurchase any shares under itsBelow is a summary of the Company’s share repurchase programrepurchases during the first quarter of 2021.2022.
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 |
|
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 1, 2022 |
|
| 69,596 |
|
| $ | 25.89 |
|
|
| 69,596 |
|
|
| 130,404 |
|
January 2, 2022 - April 2, 2022 |
|
| 30,238 |
|
|
| 25.36 |
|
|
| 30,238 |
|
|
| (30,238 | ) |
Balance as of April 2, 2022 |
|
| 99,834 |
|
| $ | 25.73 |
|
|
| 99,834 |
|
|
| 100,166 |
|
Note I -J – Revenue Recognition
The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled. The Company records revenues based on a five-step model in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which are delivering goods or services, determines the transaction price, allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.
13 |
Table of Contents |
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 L for revenues reported by segment. The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.
Note JK - 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 20162017 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2014.
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 adopted ASU 2019-12 in the first quarter of 2021.
On March 27, 2020, the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“the CARES Act” became law). For additional information on the Company’s CARES ACT impact see Note 8 - Income Taxes in the 2020 Form 10-K.
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.2015.
The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for a number ofseveral 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 amountvalue of unrecognized tax benefits during the three months ended April 3, 2021.2, 2022. 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 KL - 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 three monthsquarter of fiscal years 20212022 and 20202021 are as follows:
|
| Pension Benefits |
|
| Pension Benefits |
| ||||||||||
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| April 3, 2021 |
|
| March 28, 2020 |
|
| April 2, 2022 |
|
| April 3, 2021 |
| ||||
Service cost |
| $ | 271,833 |
| $ | 266,436 |
|
| $ | 269,744 |
| $ | 271,833 |
| ||
Interest cost |
| 504,255 |
| 714,143 |
|
| 608,189 |
| 504,255 |
| ||||||
Expected return on plan assets |
| (1,448,674 | ) |
| (1,365,261 | ) |
| (1,460,661 | ) |
| (1,448,674 | ) | ||||
Amortization of prior service cost |
| 24,845 |
| 24,845 |
|
| 16,563 |
| 24,845 |
| ||||||
Amortization of the net loss |
|
| 432,539 |
|
|
| 325,034 |
|
|
| 390,075 |
|
|
| 432,539 |
|
Net periodic benefit |
| $ | (215,202 | ) |
| $ | (34,803 | ) |
| $ | (176,090 | ) |
| $ | (215,202 | ) |
|
| Postretirement Benefits |
|
| Other Postretirement Benefits |
| ||||||||||
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| April 3, 2021 |
|
| March 28, 2020 |
|
| April 2, 2022 |
|
| April 3, 2021 |
| ||||
Service cost |
| $ | 13,626 |
| $ | 10,855 |
|
| 13,323 |
| 13,626 |
| ||||
Interest cost |
| 9,842 |
| 11,667 |
|
| 10,988 |
| 9,842 |
| ||||||
Expected return on plan assets |
| (6,420 | ) |
| (5,589 | ) |
| (4,400 | ) |
| (6,420 | ) | ||||
Gain on significant event |
| 0 |
| 0 |
|
| 0 |
| 0 |
| ||||||
Amortization of prior service cost |
| 0 |
| (2,063 | ) |
| 1,060 |
| 0 |
| ||||||
Amortization of the net loss |
|
| (3,094 | ) |
|
| (6,377 | ) |
|
| (2,054 | ) |
|
| (3,094 | ) |
Net periodic benefit cost |
| $ | 13,954 |
|
| $ | 8,493 |
|
| $ | 18,917 |
|
| $ | 13,954 |
|
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 2021,2022, the Company expects to contribute $3,100,000$300,000 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 April 3, 2021,2, 2022, the Company has not made any contributions of approximately $521,000 into its pension plans, has contributed $5,000$3,000 to its postretirement plan, and expects to make the remaining contributions as required during the remainder of the fiscal year.
The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion.
The Company made contributions to the plan as follows:
|
| Three Months Ended |
|
| Three Months Ended |
| ||||||||||
|
| April 3, 2021 |
|
| March 28, 2020 |
|
| April 2, 2022 |
|
| April 3, 2021 |
| ||||
Regular matching contribution |
| $ | 191,808 |
| $ | 204,992 |
|
| $ | 210,939 |
| $ | 191,808 |
| ||
Transitional credit contribution |
| 66,929 |
| 82,127 |
|
| 51,564 |
| 66,929 |
| ||||||
Non-discretionary contribution |
|
| 534,675 |
|
|
| 567,657 |
|
|
| 343,377 |
|
|
| 534,675 |
|
Total contributions for the period |
| $ | 793,412 |
|
| $ | 854,776 |
|
| $ | 605,880 |
|
| $ | 793,412 |
|
The non-discretionary contribution of $519,177$323,082 made in the three months ended April 3, 20212, 2022, was accrued for and expensed in the prior fiscal year.
14 |
Table of Contents |
Note L - Segment Information
For the first quarter of 2021, financial information by segment is as follows:
|
| 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 M - 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 adopted ASU 2019-12 as of January 3, 2021. The adoption of this guidance did not 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 N - 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 April 3, 2021,2, 2022, there was one significant concentration of credit risk with a customer, who has receivables representing 12%10% of our total accounts receivable. One single customer represented more than 10%11% of the Company’s net accounts receivable as of January 2, 2021.1, 2022. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.
The Company has deposits that exceed amounts up to $250,000 that are insured by the Federal Deposit Insurance Corporation (FDIC), but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution. |
Interest Rate Risk
The Company’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 $46.3$42.8 million on April 3, 2021,2, 2022, 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-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 F -G — Debt hereof and under the heading “The phase outphaseout 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,II, Item 1A8 of the 20202021 Form 10-K.
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.
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 April 3, 2021. The interim financial statements and this2, 2022. 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 January 2, 20211, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2021,1, 2022, which was filed with the Securities and Exchange Commission (the “SEC”) on March 16, 202117, 2022 (the “2020“2021 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 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 endingended on January 1, 2022, and references to 2022 or the 2022 fiscal year mean the 52-week period ending on December 31, 2022. In a 52-week fiscal year, each quarter ishas 13 weeks long. In a 53-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 2020, the first fiscal quarter of 2020 or the three months ended March 28, 2020 mean the period from December 29, 2019 to March 28, 2020.weeks. References to the first quarter of 2021, the first fiscal quarter of 2021 or the three months ended April 3, 2021, mean the 13-week period from January 3, 2021 to April 3, 2021. References to the first quarter of 2022, the first fiscal quarter of 2022 or the three months ended April 2, 2022, mean the 13-week period from January 2, 2022 to April 2, 2022.
Safe Harbor for Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q of the Company 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:the scope and duration of the COVID-19 pandemic, including timing of the distribution of COVID-19 vaccines and rates of vaccination, the extent of resurgences,, the emergence of additional virus variants and how quickly and to what extent normal economic activity can resume, and economic effects of the COVID-19 pandemic, and the measures being taken to limit the spread and resurgence of COVID-19, including supply chain disruptions, cost inflation, 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, 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 scope and duration of the COVID-19 pandemic, including the extent of resurgences and how quickly andworkforce. Other factors include, but are not limited 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, including the impact of supply chain shortages and inflation, 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; materially adverse or unanticipated legal judgments, fines, penalties or 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 20202021 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, except as required by law.
Table of Contents |
Overview
COVID-19 Update
The direct impact of the COVID-19 pandemic has been minimal at most ofaffected our businesses, including our supply chain, our operations, through the first quarter of 2021.labor force, and rising costs throughout 2021 and into 2022. We continue to follow CDC guidelines, including the use of proper personal protection equipment, social distancing, and sanitizing work areas. AllAs a result of these measures, allowed the majorityCOVID pandemic had minimal impact on our capacity utilization at most of our production facilities to operate at full capacity where possible barring supply chain issues, port congestion, and labor shortages.in the first quarter of 2022. Many of the Company’s employees have received their first COVID-19 vaccination,vaccinations, and we will continue to encourage our workforce to continue to get vaccinated. We do not anticipate further significant interruptionIn the second quarter of 2022, we are experiencing interruptions in China of our operations unlessand supply base as a result of another variant of COVID-19 and the response to minimize its spread. A more significant resurgence of the COVID-19 pandemic occurs. A significant resurgenceor development of the COVID-19 pandemicadditional severe or highly contagious variants could cause further disruptions in our business and could adversely affect our financial condition, results of operations and cash flow.
During 2020the past two years and continuing into 20212022, the Company implemented a broad range of policies and procedures to ensure that employees at all of our locations remain healthy. Steps that we have taken to reduce the risk of COVID-19 to our employees include, among others: protecting employee health by instructing employees to stay home if they exhibit symptoms of COVID-19; 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 forencourage social distancing, in our facilities; and reduced the number and size oflimit in-person meetings. We havemeetings, eliminated all non-essential workplace travel discouraged carpooling, and where we have multiple shifts, staggered 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 cafeterias or used extra rotations to reduce the number of employees in the break rooms or cafeterias at one time to achieve social distancing norms. We continue to seek and implement additional methods to further reduce the risk of COVID-19 to our employees.
Although we sustained delaysTo the extent our operations will be further affected by COVID-19 in 2022 is dependent on future developments including new COVID variants, effectiveness of vaccines, new medication, and disruptionsgovernment restrictions. All these factors could result in 2020 to ourfurther supply chain shortages and operations, the majority of our facilities have returned to normal operations. Currently, we do not anticipate further disruptionresulting cost inflation, increased operating cost, difficulty in our operations unless a resurgence of the COVID-19 pandemic occurs, which could cause further disruptions in our businessfinding workers, continued port congestion, and could adversely affect our financial condition, results of operations and cash flow. The future extent of the effect of the COVID-19 pandemic on our operational and financial performance will depend in large part on the effectiveness of the vaccines, continued mask wearing, social distancing and other developments, that cannot be predicted with confidence at this time.higher shipping costs. With the inherent uncertainty of the COVID-19 pandemic it is difficult to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations and the extent of the effects it could have on our consolidated business, results of operations and financial condition. For a discussion of certain COVID-19-related risks, see Part I, Item 1A, “Risk Factors”, of Part II of thisthe 2021 Form 10-Q.10-K.
General Overview
The following analysis excludes discontinued operations.
Net sales in the first quarter of 20212022 increased 12% to $73.1$69.0 million from $65.3$61.8 million in the corresponding period in 2020.2021. Sales increased in the Engineered Solutions segment in the first quarter of 2021 by 19% to $61.8 million from $51.8 million in the first quarter of 2020 due to increased demand for truck accessories and automotive returnable transport packaging blow mold tooling, and distribution products. First quarter 2021products as well as from distributors. Our returnable transport packaging sales benefit from the increase in the Diversified Products segmentnew automotive product launches, including several electric vehicle launches. Our backlog as of $11.3April 2, 2022 was up 23% to $85.8 million decreased 16% when compared to the first quarterfrom $69.7 million as of 2020 sales of $13.5 million primarily due to the sale of Canadian Commercial Vehicles and Sesamee Mexicana in June and November 2020 respectively, and lower demand for commercial laundry products, partially offset by increased demand for mining products and industrial castings. April 3, 2021.
Net sales of existing products increased 5%4% in the first quarter of 20212022 compared to the corresponding period in 2020.2021. Price increases and new products increased net sales by 7%8% in the first quarter of 2022 compared to the corresponding period in 2021. New products included various truck mirror assemblies, truck compressionrotary latches, D-rings, and mirror cams. Price increases primarily reflect our efforts to recover an increase in raw material and freight costs.
Cost of products sold increased $8.2 million, or 18%, in the first quarter of 2022 compared to the corresponding period in 2021. The increase is primarily due to higher sales volume, as well as increases in the cost of materials and freight rates. The cost of several frequently used raw materials have increased significantly, year-over-year. For example, the cost of most common forms of cold-rolled steel increased 21% between the first quarter of 2021 and the first quarter of 2022; nickel increased 41%; and copper and zinc increased 22% and 33% respectively. Additionally, our freight costs increased $0.4 million, or 18%, in the first quarter of 2022 when compared to the corresponding period in 2021. This increase is due to increased sales volume as shipping demand has exceeded available carriers’ capacity. Price increases to our customers recovered a cable lock,portion of the increase in raw material costs and a mirror cam. freight rates. Finally, the Company paid tariff costs on China-sourced products of approximately $0.6 million in the first quarter of 2022, compared to $0.6 million in the first quarter of fiscal 2021. Most tariffs on China-sourced products have been recovered through price increases.
Table of Contents |
Cost of products sold increased $5.2 million, or 10%, in the first quarter of 2021 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 2020. Additionally, the Company paid tariff costs on China-sourced products of approximately $0.7 million in the first quarter of 2021 compared to $1.4 million incurred in the first quarter of 2020, all of which have been recovered through price increases.
Gross margin as a percent of sales was 24%21% in the first quarter of 2021fiscal 2022 compared to 22%25% in the first quarter of 2020.fiscal 2021. Our gross margin in the first quarter of fiscal 2022 reflects the rapid increase in raw material prices.
Product development expense of $0.8 million increased $0.1$0.2 million, or 8%18% in the first quarter of 20212022 when compared to the first quarter of 2020.corresponding period in 2021. As a percentage of net sales, product development costs were 1.1% and 1.2%1.7% for the first quarter of 20212022 and 2020 respectively.1.6% for the corresponding period in 2021.
Selling and administrative expense increased 5%$0.9 million, or 10%, in the first quarter of 20212022 when compared to the corresponding period in 20202021 primarily due to increased amortization expense, and increased incentive costs, which were suspended in the first quarter of fiscal 2020, offset by reduced travelcommissions and other payroll related expenses.selling costs, payroll-related expenses, and travel costs. This increase in selling expenses reflect both the increase in sales as well as our investments in sales capabilities.
Interest expense of $0.7 million decreased $0.1 million in the first quarter of 20212022 compared to the samecorresponding period in 2020.2021.
Other income of $2.3was down $1.9 million in the first quarter of 20212022 compared to the corresponding period in 2021. The decrease in other income of $1.9 million in the first quarter was the result ofprimarily driven by a gain on the sale of the Eberhard Hardware Ltd. building of $1.8 million and a $0.5 million favorable return on pension plan assets. Other income of $0.7 million in the first quarter of 2020 was comprised of a favorable return on our pension plan assets and a one-time sale-leaseback transaction gain in the first quarter of fiscal 2020. 2021.
Net income from continuing operations for the first quarter of fiscal 20212022 was $5.8$2.7 million, or $0.93$0.43 per diluted share compared to net income of $2.9$5.7 million, or $0.46$0.90 per diluted share for the comparable period in 2020. 2021.
A 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:sales:
|
| 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 | % |
Three Months Ended | ||||||||
April 2, 2022 | April 3, 2021 | |||||||
Net sales | 100.0 | % | 100.0 | % | ||||
Cost of | 78.9 | % | 74.9 | % | ||||
Gross margin | 21.1 | % | 25.1 | % | ||||
Product development expense | 1.7 | % | 1.6 | % | ||||
Selling and administrative expense | 14.3 | % | 14.5 | % | ||||
Operating Profit | 5.1 | % | 9.0 | % |
The following table shows the change in sales and operating profit by segment for the first quarter of fiscal 20212022 compared to the first quarter of fiscal 20202021 (dollars in thousands):
|
| 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 the Engineered Solutions segment of $61.8 million increased $9.9 million or 19% in the first quarter of 2021 compared to the corresponding period of 2020 primarily due to increased demand for truck accessories, automotive returnable packaging, blow mold tooling, and distribution of industrial hardware products.
Sales 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, primarily due to increased sales volume and higher material costs. Also impacting the first quarter of 2021 were higher freight costs, which were up 44% or $1.4 million in the first quarter of 2021 compared to the corresponding period of 2020 due to increased volume and non-recurring expedited shipping costs related to port congestion at all U.S. ports.
Finally, we paid tariffs on China-sourced products of approximately $0.6 million in the first quarter of 2021 compared to $0.8 million in the first quarter of 2020, all of which have been recovered through price increases.
Gross margin as a percentage of net sales in the first quarter of 2021 was 25% as compared to the corresponding period of 2020 of 24%.
Product development expense increased $0.1 million first quarter of 2021 compared to the corresponding period of 2020.
Selling and administrative expense increased $0.7 million or 9% in the first quarter of 2021 compared to the corresponding period of fiscal 2020 due primarily to increased amortization expense, increased incentive costs, which were suspended in the first quarter of fiscal 2020, offset by reduced travel and other payroll related expenses.
Diversified Products
Net sales in the Diversified Products segment decreased $2.2 million or 16% in the first quarter of 2021 compared to the corresponding period in 2020. The sales decline was due to the sale of the Canadian Commercial Vehicles Corporation and Sesamee Mexicana in June and November 2020 respectively, and lower demand for commercial laundry products, partially offset by increased demand for mining products and industrial castings. Net sales of existing products decreased 17%, while price increases contributed 1% in the first quarter of fiscal 2021.
Net Sales |
| $ | 7,241 |
|
|
|
|
|
|
Volume |
|
| 3.4 | % |
Price |
|
| 2.9 | % |
New products |
|
| 5.4 | % |
|
|
| 11.7 | % |
|
|
|
|
|
Operating Profit |
| $ | (2,034 | ) |
Table of Contents |
Cost of products sold decreased $1.7 million or 15% in the first quarter of 2021 compared to the corresponding period of 2020, primarily as a result of lower sales volume and the mix of products sold. Raw materials decreased $1.6 million or 32% in the first quarter of 2021 compared to the corresponding period of 2020. Payroll and payroll related expenses decreased $0.2 million or 7% in the first quarter of fiscal 2021 compared to the corresponding period of fiscal 2020.
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 was 14% in the first quarter of 2021 compared to 15% in the first quarter of fiscal 2020.
Product development expense as a percentage of net sales was 3% in the first quarter of fiscal 2021 compared to 3% in the corresponding period of fiscal 2020. This increase reflects a continuation in the development of GPay, a multi-pay reader and an electronic drop.
Selling and administrative expenses decreased $0.3 million or 16% in the first quarter of 2021 compared to the corresponding period of 2020, primarily due to lower payroll and payroll related expenses and reduced travel expenses.
Liquidity and Sources of Capital
The Company generatedconsumed approximately $2.1$3.6 million of cash from continuing operations during the first three months of fiscal 20212022 compared to generating approximately $1.5$1.3 million during the first three months of fiscal 2020.2021. Cash flow from operations in the first three months of 2022 was lower when compared to the corresponding period last year primarily due to an increase in inventory and accounts receivable partially offset by an increase in accounts payable. The effects of the COVID-19 pandemic are continuing to impact the supply chain and as a result inventories and accounts payable have increased due to increased shipping time, port congestion, and selective pre-buying of raw materials to ensure availability and mitigate the impact of likely future inflationary price increases. Cash flow from operations coupled with cash at the beginning of the 20212022 fiscal year wasand the proceeds from the line of credit were sufficient to fund capital expenditures, debt service, and dividend payments for the first quarterthree months of fiscal 2021.2022. On April 8, 2022, the Company drew down an additional $5.0 million on its revolving credit facility to support ongoing working capital requirements brought on by current supply chain constraints. The Company has $10.0 million available on its revolving line of credit. See Note G - Debt for further discussion on the Company’s debt facilities.
Additions to property, plant and equipment for continuing operations were approximately $0.9$0.6 million for the first three months of fiscal 20212022 and $0.8$0.6 million for the first three months of fiscal 2020.2021. Additionally, in the first three months of 20212022 the company received proceeds of $1.3 million from the sale of one of its properties compared to $2.0 million from the sale of one of its facilities in Canada.Canada during the first three months of 2021. As of April 3, 2021,2, 2022, there were approximately $0.3$0.2 million of outstanding commitments for capital expenditures.
The following table shows key financial ratios at the end of each specified period:
|
| 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% |
|
| First Quarter 2022 |
|
| First Quarter 2021 |
|
| Fiscal Year 2021 |
| |||
Current ratio |
|
| 2.7 |
|
|
| 2.6 |
|
|
| 2.5 |
|
Average days’ sales in accounts receivable |
|
| 63 |
|
|
| 63 |
|
|
| 64 |
|
Inventory turnover |
|
| 3.2 |
|
|
| 4.3 |
|
|
| 3.0 |
|
Total debt to shareholders’ equity |
|
| 63.2 | % |
|
| 79.0 | % |
|
| 62.2 | % |
The following table shows important liquidity measures as of the balance sheet date for each specified period (in millions):
|
| First |
| First |
| Year |
|
| First |
| First |
| Fiscal |
| ||||||||||
|
| Quarter |
| Quarter |
| End |
|
| Quarter |
| Quarter |
| Year |
| ||||||||||
|
| 2021 |
|
| 2020 |
| 2020 |
|
| 2022 |
|
| 2021 |
| 2021 |
| ||||||||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
- Held in the United States |
| $ | 8.0 |
| $ | 9.6 |
| $ | 10.0 |
|
| $ | 2.3 |
| $ | 8.0 |
| $ | 4.3 |
| ||||
- Held by a foreign subsidiary |
|
| 9.5 |
|
|
| 6.9 |
|
|
| 6.1 |
|
|
| 2.9 |
|
|
| 9.5 |
|
|
| 2.3 |
|
|
|
| 17.5 |
|
|
| 16.5 |
|
|
| 16.1 |
|
|
| 5.2 |
|
|
| 17.5 |
|
|
| 6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||
Working capital |
| 76.7 |
| 81.8 |
| 71.1 |
|
| 83.2 |
| 61.5 |
| 74.1 |
| ||||||||||
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 | ) | |||||||||||||||
Net cash (used in) provided by operating activities |
| (3.6 | ) |
| 1.3 |
| (7.8 | ) | ||||||||||||||||
Change in working capital impact on net cash used in operating activities |
| (8.8 | ) |
| (4.3 | ) |
| (22.9 | ) | |||||||||||||||
Net cash provided by investing activities |
| 1.0 |
| 1.3 |
| 13.6 |
| |||||||||||||||||
Net cash provided by (used in) financing activities |
| 1.6 |
| (1.9 | ) |
| (20.3 | ) |
19 |
Table of Contents |
Inventories of $54.0$67.8 million as of April 2, 2022, represent an increase of 1.6% as of April 3, 20217.8% as compared to $53.1$62.9 million at the end of fiscal year 2020. Inventories decreased 2.3% in the first three months2021 and an increase of fiscal 2021,56.0% as compared to $55.3$43.4 million at the end of the first quarter of fiscal 2020.2021. Accounts receivable, less allowances, were $42.2$47.0 million as of April 3, 2021,2, 2022, as compared to $37.7$43.2 million at 20202021 fiscal year end and $39.9$42.2 million at the end of the first quarter of fiscal 2020.2021.
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 spreadimpact 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 could cause us to fail to comply with the covenants under our Credit Agreement.
Off-Balance Sheet Arrangements
As of the end of the fiscal quarter ended April 3, 2021,2, 2022, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. For a full description of our critical accounting policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 2021 Form 10-K. While there have been no material changes to our critical accounting estimates, we continue to monitor the methodologies and assumptions underlying such critical accounting estimates.
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”).GAAP.
To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted EPSEarnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income, diluted earnings per common share, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.
20 |
Table of Contents |
Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when they occur,incurred, certain one-time costs arising from the impacts of impairment losses, gains/losses on the sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.operating performance.
Adjusted Earnings Per Share from Continuing Operations is defined as diluted earnings per share from continuing operations excluding, when they occur,incurred, certain per share one-time costs arising from, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs. We believe that Adjusted EPSEarnings Per Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis.
Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when they occur,incurred, the impacts of certain one-time costs arising from impairment losses, gains/losses on sale of subsidiaries and facilities, transaction expenses gain on sale of building,primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring expenses. Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Management uses such measures to evaluate performance period over period,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 as a replacement for, U.S. GAAP financial measures.
We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.
Table of Contents |
Reconciliation of Net Income to Non-GAAP Measures
Adjusted Net Income -and EPS from Continuing Operations Calculation
For the Three Months ended April 2, 2022 and April 3, 2021 and March 28, 2020
($000's)
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| April 3, 2021 |
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| March 28, 2020 |
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Net Income as reported per generally accepted accounting principles (GAAP) |
| $ | 5,841 |
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| $ | 2,896 |
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Earnings Per Share as reported under generally accepted accounting principles (GAAP): |
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Basic |
| $ | 0.93 |
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| $ | 0.46 |
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Diluted |
| $ | 0.93 |
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| $ | 0.46 |
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Adjustments for one-time items: |
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Gain on sale of Eberhard Hardware Ltd building, net of tax |
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| (1,353 | )A |
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| - |
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Total adjustments for one-time items (Non-GAAP) |
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| (1,353 | ) |
|
| - |
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Adjusted Net Income (related for one-time items); |
| $ | 4,488 |
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| $ | 2,896 |
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Adjusted earnings per share (related to one-time items); (Non-GAAP) |
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Basic |
| $ | 0.72 |
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| $ | 0.46 |
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Diluted |
| $ | 0.71 |
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| $ | 0.46 |
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| Three Months Ended |
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| April 2, 2022 |
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| April 3, 2021 |
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Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 2,686 |
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| $ | 5,679 |
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Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP): |
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Basic |
| $ | 0.43 |
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| $ | 0.91 |
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Diluted |
| $ | 0.43 |
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| $ | 0.90 |
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Adjustments: |
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Gain on sale of Eberhard Hardware Ltd building, net of tax |
|
| - |
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|
| (1,353 | )A |
Loss on sale of Wheeling, IL building, net of tax |
|
| 202 | B |
|
| - |
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Total adjustments (non-GAAP) |
| $ | 202 |
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| $ | (1,353 | ) |
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Adjusted net income from continuing operations |
| $ | 2,888 |
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| $ | 4,326 |
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Adjusted earnings per share from continuing operations (non-GAAP): |
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Basic |
| $ | 0.46 |
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| $ | 0.69 |
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Diluted |
| $ | 0.46 |
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| $ | 0.69 |
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_________
A) Gain on sale of Eberhard Hardware Ltd building
B) Loss on sale of ILC building in Wheeling, IL
Table of Contents |
Reconciliation of one-time itemsNon-GAAP Measures
Adjusted EBITDA from GAAP to Non-GAAP EBITDA calculationContinuing Operations Calculation
For the Three Months ended April 2, 2022 and April 3, 2021 and March 28, 2020
($000's)
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| April 3, 2021 |
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| March 28, 2020 |
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| Three Months Ended |
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| April 2, 2022 |
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| April 3, 2021 |
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Net Income/(loss) as reported per generally accepted accounting principles (GAAP) |
| $ | 5,841 |
| $ | 2,896 |
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Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 2,686 |
| $ | 5,679 |
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Interest expense |
| 703 |
| 828 |
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| 434 |
| 527 | |||||||
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Provision for income taxes |
| 1,817 |
| 883 |
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| 881 |
| 1,768 |
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Depreciation and amortization |
| 2,193 |
| 2,056 |
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| 1,830 |
| 1,810 |
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Gain on sale of Eberhard Hardware Ltd Building |
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| (1,841 | )A |
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| - |
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| - |
| (1,841 | )A | |||
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Adjusted EBITDA |
| $ | 8,713 |
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| $ | 6,663 |
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Loss on sale of Wheeling, IL building |
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| 269 | B |
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| - |
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Adjusted EBITDA from continuing operations |
| $ | 6,100 |
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| $ | 7,943 |
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___________
A) Gain on sale of Eberhard Hardware Ltd building
B) Loss on sale of ILC building in Wheeling, IL
Table of Contents |
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 information under this Item 3.
ITEM 4 -– CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
As of April 3, 2021,2, 2022, 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 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 SEC’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 April 3, 2021.2, 2022.
Changes in Internal Control Over Financial Reporting:
During the period covered by this Quarterly Report on Form 10-Q, there were 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.
Table of Contents |
PART II -– OTHER INFORMATION
ITEM 1 -– LEGAL PROCEEDINGS
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 April 3, 2021,2, 2022, the Company does not have any material pending legal proceedings, other than as set forth below,in Part I, Item 3 of the 2021 Form 10-K, or any material legal proceedings known to be contemplated by governmental authorities.
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 “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 NYSDEC. Long-term groundwater monitoring commenced in April 2019. Verbal approval for the closure plan was received from the NYSDEC in May 2019. Written approval was received in October 2020. Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap, is anticipated in May 2021. In the third fiscal quarter of 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 & Jones, and the NYSDEC.
ITEM 1A -– RISK FACTORS
The Company’s business is subject to a number ofseveral risks, some of which are beyond its control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the Company’s shareholders should carefully consider the risk factors discussed in Part I, Item 1A “Risk Factors” of the 20202021 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. As of April 3, 2021,2, 2022, there have been no material changes to the risk factors disclosed in the 20202021 Form 10-K. The Company may disclose changes to such risk factors or disclose additional risk factors from time to time in its future filings with the SEC. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition, or operating results.
ITEM 2 -– UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
NoneOn May 2, 2018, the Company announced that the Board had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. Below is a summary of the Company’s share repurchases during the first fiscal quarter of 2022.
Period |
| Total Number of Shares Purchased |
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| Average Price Paid Per Share |
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| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
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| Maximum Number of Shares that may yet be Purchased Under the Plans or Programs |
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January 2, 2022 – January 29, 2022 |
|
| 10,000 |
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| 26.33 |
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| 10,000 |
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| 120,404 |
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January 30, 2022 – February 26, 2022 |
|
| 10,000 |
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| 25.13 |
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|
| 10,000 |
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| 110,404 |
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February 27, 2022 – April 2, 2022 |
|
| 10,238 |
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| 24.64 |
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| 10,238 |
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| 100,166 |
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Total |
|
| 30,238 |
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| $ | 25.36 |
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| 30,238 |
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| 100,166 |
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ITEM 3 -– DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 -– MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 -– OTHER INFORMATION
None
Table of Contents |
ITEM 6 -– EXHIBITS
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Offer Letter, dated as of March 16, 2022, between the Company and Peter O’Hara.* | ||
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101) | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended April | |
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104) | Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101). ** |
_______
* Filed herewith.
** Furnished herewith
†Management contract, compensatory plan or arrangement.
Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| THE EASTERN COMPANY |
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| (Registrant) |
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DATE: May |
| /s/August M. Vlak |
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| August M. Vlak President and Chief Executive Officer |
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DATE: May |
| /s/John L. Sullivan III |
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| John L. Sullivan III Vice President and Chief Financial Officer |
|