SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED SEPTEMBER 27, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM to .
Commission File Number 0-599
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
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(Address of principal executive offices) (Zip Code)
(203) 729-2255
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No-- .
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes-- No X .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of September 27, 2003
----- ------------------------------------
Common Stock, No par value 3,613,914
-1-
PART I
FINANCIAL INFORMATION
THE EASTERN COMPANY AND SUBSIDIARIES
ITEM I CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS
September 27, 2003 December 28, 2002
------------------ -----------------
CURRENT ASSETS
Cash and cash equivalents $ 5,303,433 $ 5,939,232
Investment in common stock, at market - 807,438
Accounts receivable, less allowances:
2003 - $463,000; 2002 - $304,000 11,899,352 10,824,807
Inventories 16,603,119 16,534,657
Prepaid expenses and other 1,540,184 1,336,383
Deferred income taxes 564,000 564,000
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Total Current Assets 35,910,088 36,006,517
--------------------
Property, plant and equipment 42,448,565 40,442,628
Accumulated depreciation (17,803,235) (15,392,659)
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24,645,330 25,049,969
Goodwill and trademarks 10,489,943 10,514,047
Patents, technology and licenses, less accumulated amortization 2,096,935 2,111,865
Intangible pension asset 1,112,129 1,112,129
Prepaid pension cost 683,089 1,338,010
============= =============
TOTAL ASSETS $ 74,937,514 $ 76,132,537
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,726,462 $ 3,838,412
Accrued compensation 1,737,608 1,923,463
Other accrued expenses 1,492,371 2,015,979
Current portion of long-term debt 2,619,418 2,628,664
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Total Current Liabilities 10,575,859 10,406,518
-------------------------
Deferred federal income taxes 853,787 737,987
Long-term debt, less current portion 16,465,512 18,920,747
Accrued postretirement benefits 2,435,853 2,578,156
Accrued rate swap obligation 790,275 1,138,086
Accrued pension obligation 3,629,664 4,448,197
Shareholders' Equity
Preferred Stock, no par value
Authorized shares - 2,000,000
(No shares issued)
Common Stock, no par value:
Authorized Shares - 25,000,000
Issued and outstanding shares:
2003-3,613,914; 2002-3,631,869
excluding 1,680,342 in 2003 and
1,657,320 in 2002 shares held in treasury 632,650 883,695
Accumulated other comprehensive (loss)/income:
Foreign currency translation (173,529) (898,137)
Additional minimum pension liability, net of taxes (4,073,870) (4,073,870)
Derivative financial instruments, net of taxes (474,275) (683,086)
Unrealized holding gain on investment in common stock, net of - 35,893
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(4,721,674) (5,619,200)
Retained earnings 44,275,588 42,638,351
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TOTAL SHAREHOLDERS' EQUITY 40,186,564 37,902,846
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,937,514 $ 76,132,537
============= =============
See accompanying notes.
-2-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months Ended Three Months Ended
Sept. 27, 2003 Sept. 28, 2002 Sept. 27, 2003 Sept. 28, 2002
----------------- -------------- -------------- --------------
Net sales $65,045,930 $61,652,944 $ 21,864,105 $20,040,682
Cost of products sold 48,986,266 46,153,532 16,576,641 14,464,027
----------- ----------- ------------ -----------
16,059,664 15,499,412 5,287,464 5,576,655
Selling and administrative expenses (10,924,323) (10,966,287) (3,631,127) (4,054,823)
Interest expense (979,437) (1,322,108) (310,346) (437,526)
Other income 198,701 53,803 172,883 13,403
----------- ----------- ------------ -----------
INCOME BEFORE INCOME TAXES 4,354,605 3,264,820 1,518,874 1,097,709
Income taxes
1,521,781 1,151,152 576,115 419,666
----------- ----------- ------------ -----------
NET INCOME $ 2,832,824 $ 2,113,668 $ 942,759 $ 678,043
=========== =========== ============ ===========
Net income per share:
Basic $ 0.78 $ 0.58 $ 0.26 $ 0.19
Diluted $ 0.78 $ 0.57 $ 0.26 $ 0.19
Cash dividends per share $ 0.33 $ 0.33 $ 0.11 $ 0.11
-3-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended
Sept. 27, 2003 Sept. 28, 2002
-------------- --------------
OPERATING ACTIVITIES:
Net income $ 2,832,824 $ 2,113,668
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,727,814 2,699,443
Postretirement benefits other than pensions (142,303) 56,250
Provision for losses on accounts receivable 156,291 (93,065)
Gain on Sale of Common Stock Held as Investment (166,788)
Issuance of Common Stock for directors' fees 66,682 71,608
Changes in operating assets and liabilities:
Accounts receivable (1,070,982) (619,603)
Inventories (421,909) 2,615,100
Prepaid expenses 180,967 (72,230)
Prepaid pension 93,901 222,513
Accounts payable 59,976 642,565
Accrued expenses (37,375) 1,281,753
Other assets (121,679) (323,338)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 4,157,419 8,594,664
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (1,732,042) (1,091,775)
Proceeds from Sale of Common Stock Held As Investment 915,133 -
Other (4,461) (2,241)
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NET CASH USED BY INVESTING ACTIVITIES (821,370) (1,094,016)
FINANCING ACTIVITIES:
Principal payments on long-term debt (2,462,470) (2,413,399)
Purchases of Common Stock for treasury (317,726) -
Dividends paid (1,195,587) (1,198,090)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (3,975,783) (3,611,489)
Effect of exchange rate changes on cash 3,935 (3,896)
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NET CHANGE IN CASH AND CASH EQUIVALENTS (635,799) 3,885,263
Cash and Cash Equivalents at Beginning of Period 5,939,232 4,955,020
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,303,433 $ 8,840,283
=========== ===========
-4-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Nine Months Ended Three Months Ended
Sept. 27, 2003 Sept. 28, 2002 Sept. 27, 2003 Sept. 28, 2002
-------------- -------------- -------------- --------------
Net income $ 2,832,824 $ 2,113,668 $ 942,759 $ 678,043
Other comprehensive income items --
Foreign currency translation 724,608 360,574 16,006 (25,487)
Change in fair value of derivative financial
instruments, net of income tax (expense)/benefit:
2003 - ($139,000) and ($61,000) respectively; 208,811 92,415
2002 - $63,000 and $76,000 respectively (95,245) (113,549)
Unrealized holding (loss)on investment in
common stock, net of income tax benefit of
2003 - $23,200 and $48,900 respectively; (35,893) (74,964)
2002 - $48,500 and $53,000 respectively (72,784) (79,122)
----------- ----------- --------- ----------
Comprehensive income $ 3,730,350 $ 2,306,213 $ 976,216 $ 459,885
=========== =========== ========= ==========
-5-
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 27, 2003
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 do not include all
of the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements. Refer to the
Company's consolidated financial statements and notes thereto included in its
Form 10-K for the year ended December 28, 2002 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.
Certain prior year amounts have been reclassified to conform to the 2003
presentation.
The condensed balance sheet as of December 28, 2002 has been derived from the
audited consolidated balance sheet at that date.
Note B - Earnings Per Share
- ---------------------------
The denominators used in the earnings per share computations follow:
Nine Months Ended Three Months Ended
Sept. 27, 2003 Sept. 28, 2002 Sept. 27, 2003 Sept. 28, 2002
-------------- -------------- -------------- --------------
Basic:
Denominator for basic earnings per share 3,622,791 3,630,644 3,612,748 3,632,046
========= ========= ========= =========
Diluted:
Weighted average shares outstanding 3,622,791 3,630,644 3,612,748 3,632,046
Dilutive stock options 26,821 66,407 75,260 --
--------- --------- --------- ---------
Denominator for diluted earnings per share 3,649,612 3,697,051 3,688,008 3,632,046
========= ========= ========= =========
Note C - Inventories
- --------------------
The components of inventories follow:
September 27, 2003 December 28, 2002
------------------ -----------------
Raw materials and component parts $ 7,687,244 $ 7,658,722
Work in process 4,250,399 4,226,858
Finished goods 4,665,476 4,649,077
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$ 16,603,119 $ 16,534,657
============ ============
-6-
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 27, 2003
Note D - Segment Information
- ----------------------------
Segment financial information follows:
NINE MONTHS ENDED THREE MONTHS ENDED
Sept. 27, 2003 Sept. 28, 2002 Sept. 27, 2003 Sept. 28, 2002
-------------- -------------- -------------- --------------
Revenues:
Sales to unaffiliated customers:
Industrial Hardware $ 26,054,463 $ 21,844,325 $ 8,987,949 $ 6,941,910
Security Products 28,848,739 27,920,380 9,987,630 9,426,059
Metal Products 10,142,728 11,888,239 2,888,526 3,672,713
------------ ------------ ------------ ------------
65,045,930 61,652,944 21,864,105 20,040,682
General corporate 198,701 53,803 172,883 13,403
------------ ------------ ------------ ------------
$ 65,244,631 $ 61,706,747 $ 22,036,988 $ 20,054,085
============ ============ ============ ============
Income Before Income Taxes:
Industrial Hardware $ 3,179,441 $ 2,775,821 $ 982,066 $ 976,348
Security Products 3,508,853 3,184,933 1,348,586 1,211,838
Metal Products 118,759 (188,489) (152,083) (400,323)
------------ ------------ ------------ ------------
Operating Profit 6,807,053 5,772,265 2,178,569 1,787,863
General corporate expenses (1,473,011) (1,190,440) (349,349) (257,731)
Interest expense (979,437) (1,317,005) (310,346) (432,423)
------------ ------------ ------------ ------------
$ 4,354,605 $ 3,264,820 $ 1,518,874 $ 1,097,709
============ ============ ============ ============
Note E - Stock-Based Compensation
- ---------------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which addressed financial accounting
and reporting for recording expenses for the fair value of stock options. SFAS
148 provides alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation as
originally provided by SFAS No. 123, "Accounting for Stock-Based Compensation."
Additionally, SFAS 148 amends the disclosure requirements of SFAS No.123 in both
annual and interim financial statements. The interim disclosure provisions are
effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002.
The Company has elected to continue to account for stock options in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. As such, it does not recognize compensation expense for
stock options granted under its stock option plans if the exercise price is at
least equal to the fair market value of the Company's common stock on the date
granted. Stock-based compensation costs for stock awards are reflected in net
income over the awards' vesting period.
Pro forma information regarding net income and earnings per share, as required
by Statement No. 123 "Accounting for Stock-Based Compensation", has been
determined as if the Company had accounted for its employee stock options under
the fair value method. The fair value of the stock options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
-7-
Sept. 27, 2003 Sept. 28, 2002
-------------- --------------
Risk free interest rate 4.60 4.81
Expected volatility 3.04 3.06
Expected option life 5 years 5 years
Weighted-average dividend yield 3.1% 3.1%
THREE MONTHS ENDED NINE MONTHS ENDED
Sept. 27, 2003 Sept. 28, 2002 Sept. 27, 2003 Sept. 28, 2002
-------------- -------------- -------------- --------------
Net income, as reported $942,759 $678,043 $2,832,824 $2,113,668
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards granted since July 19, 2000,
net of related tax effects (39,076) (84,210) (65,008) (113,328)
-------- -------- ---------- ----------
Pro forma net income $903,683 $593,883 $2,767,816 $2,000,340
======== ======== ========== ==========
Earnings per share:
Basic-as reported $0.26 $0.19 $0.78 $0.58
Basic-pro forma $0.25 $0.16 $0.76 $0.55
Diluted-as reported $0.26 $0.19 $0.78 $0.57
Diluted-pro forma $0.25 $0.16 $0.76 $0.54
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the stock options' vesting period ranging
from 1 to 5 years. The pro forma effect on net income and related earnings per
share may not be representative of future years' impact since the terms and
conditions of new grants may vary from the current terms.
Note F - Recent Accounting Pronouncements
- -----------------------------------------
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" which addresses when a company should include in its
financial statements the assets and liabilities of unconsolidated variable
interest entities ("VIEs"). It defines VIEs as those entities in which equity
investors do not have the characteristics of a controlling financial interest or
in which equity investors do not bear the residual economic risks. FIN No. 46
was originally effective for fiscal years or interim periods beginning after
June 15, 2003 but has been deferred until the end of the current fiscal year for
the Company. The Company is currently evaluating the effect, if any, that FIN
No. 46 may have on its financial statements.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company makes estimates and assumptions that may materially affect reported
amounts and disclosures. These relate to valuation allowances for the
collectibility of accounts receivable and for 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), and, on occasion, accruals for contingent losses. The
Company is also subject to various risks and uncertainties that may cause actual
results to differ from estimated results, such as changes within our industry
segments, in the overall economy, competition, litigation and legislation.
-8-
Results of Operations
Net income per share for the third quarter of 2003 was $943,000 or $.26 per
diluted share on sales of $21.9 million compared to $678,000 or $.19 per
diluted share on sales of $20.0 million in the third quarter of 2002. Net
income for the first nine months of 2003 was $2.8 million or $.78 per diluted
share on sales of $65.1 million as compared to the first nine months of 2002
of $2.1 million or $.57 per diluted share on sales of $61.7 million.
Sales for the third quarter 2003 were up 9% compared to the same period a year
ago. New product sales contributed 10% while volume of existing products
decreased 1%. Sales for the first nine months of 2003 were up 6% compared to
the same period a year ago. Volume of existing products were down 4% while new
product sales were up 9% and prices were up 1%.
The Industrial Hardware segment's third quarter sales were up 30% compared to
the third quarter of 2002. New product sales increased 27%, volume of existing
products increased 4% and prices were down 1%. Sales for the first nine months
of 2003 were up 19% compared to the same period a year ago. New product sales
increased 23%, sales volume of existing products was down 3% and prices were
down 1%. New products include pushbutton locking systems for use on utility
truck bodies, rotary locks for the truck accessories market and "sleeper
boxes" for use on class 8 trucks. Without the additional sales of "sleeper
boxes" resulting from the 2002 acquisition of Canadian Commercial Vehicles
Corporation, sales would have increased by 10% in the three month period and
would have increased 3% for the nine month period compared to the same periods
in the prior year. Sales of heavy hardware to the tractor-trailer industry
increased 23% in the third quarter of 2003 compared to the prior year period
and were up 16% for the first nine months of 2003 as compared to the same
period a year ago. Sales of our school and courtesy bus products increased 45%
in the third quarter 2003 over the prior year period and were up 18% for the
first nine months of the year as compared to the first nine months of 2002.
Sales of industrial hardware are up 4% for nine months of 2003 from prior year
levels. Sales of automotive accessories decreased 15% for nine months compared
to the same period in 2002. The Company anticipates continued sales
improvement in the Industrial Hardware segment throughout 2003.
Our presence in China has recently been expanded with the establishment of
Eastern Industrial (Shanghai) Ltd., a manufacturing facility located in
Shanghai, China. This subsidiary will be instrumental in helping us remain
price competitive in North America and will open up the possibility to more
effectively pursue markets in Asia and elsewhere. In addition to producing
fabricated metal products, it will include plastic injection molding
capability. It will also serve as a sourcing center for products which do not
compete directly against our North American based operations.
The Security Products segment's sales were up 6% in the third quarter 2003 as
compared to the third quarter of 2002. New product sales increased 1% and
sales volume of existing products increased 5%. Sales for the first nine
months of 2003 were up 3% compared to the first nine months of 2002. Volume of
existing products was up 2% and new product sales increased 1%. Sales of new
products consisted of electronic drop meters for commercial laundry
applications, PrestoSeals for the travel industry and a remote keyless entry
system for the automotive accessory market. Sales of locks to the computer
industry decreased 16% in the third quarter of 2003 as compared to the
comparable quarter of 2002 while sales for the first nine months of 2003 and
2002 were comparable. Sales of locks to the electronic industries increased
13% in the third quarter of 2003 compared to the prior year period and also
were up 17% for the first nine months of 2003 as compared to the first nine
months of 2002. Sales of locks to the travel industry continue to be below
prior year levels.
While the TSA (Transportation Security Administration) has announced not to
lock baggage, the Company has introduced the PrestoSeal product line to
prevent surreptitious entry into baggage. In addition, the Company has
developed a new lock which meets all the requirements established by Travel
Sentry TM, standard setting group created to work closely with the TSA and the
travel goods industry. This lock, which will allow airport passengers to lock
their bags and not have the lock destroyed if the bag is inspected by the TSA,
is expected to be released to the market during the fourth quarter of 2003.
-9-
Sales of security products to the commercial laundry industry increased 2% in
2003 compared to both the third quarter and first nine months of 2002. The
Company continues to pursue new business opportunities through aggressive
pricing, improved customer service, intense marketing and a commitment to new
product development.
The Metal Products segment's sales were down 21% in the third quarter 2003 as
compared to the third quarter of 2002. Volume of existing products was down
24%, sales of new products increased 2% and prices increased 1%. Sales for the
first nine months were down 15% compared to the first nine months of 2002.
Volume of existing products was down 19%, new product sales increased 1% and
prices increased 3%. New products sales consisted of a ductile iron dome nut
for the underground mining industry. Sales of our contract casting products
for use in the commercial and industrial construction industry decreased 34%
for the first nine months of 2003 as compared to the first nine months of
2002. Foreign competition from China and Mexico with low labor rates and
favorable foreign exchange rates has created pricing pressure and reduced
demand for our contract casting products. Sales of our mine roof anchors were
down 1% for the first nine months of 2003 as compared to 2002. The Company
continues to look at new manufacturing methods, alternative products and new
markets to offset the continued erosion in market demand for roof support
anchors for the mining industry to remain competitive. Sales for the fourth
quarter of 2003 are expected to be lower than those reported in 2002 as the
Company continues to move away from the production and sale of low margin
contract castings.
Gross margin as a percentage of sales for the three and nine months ended
September 27, 2003 were approximately 24% and 25% compared to 28% and 25% in
the comparable periods a year ago. The decrease in gross margin in the three
month period is primarily the result of product mix, decreased sales volume in
the metal products segment which resulted in lower plant utilization and price
reductions in the Industrial Hardware segment required to remain competitive
with off-shore competition.
Selling and administrative expenses were down 10% or $424,000 and 0.4% or
$42,000 respectively for the three and nine months ended September 27, 2003
compared to the same periods a year ago. The decrease in selling and
administrative expenses for both the three and nine month periods are due to
lower expenditures on advertising, travel and utilities offset by the
acquisition of Canadian Commercial Vehicles and favorable insurance premium
refunds received in the second quarter of 2002.
Interest expense decreased by $127,000 or 29% for the third quarter of 2003
and $343,000 or 26% for nine months as compared to the same periods in 2002.
This decrease in interest expense was due to lower debt and lower interest
rates.
Other income increased by $159,480 in the third quarter of 2003 and $144,898
for nine months as compared to the same periods in 2002. This increase was due
to a gain of $166,788 on the sale of common stock of Prudential Financial
Inc., which was received in 2001 following Prudential's conversion from a
mutual insurance company to a stockholder-owned company, and was partially
offset by lower interest income resulting from lower cash balances in 2003 as
compared to the same periods in 2002.
Earnings before income taxes for the three months ended September 27, 2003
were up $421,000 or 38% and for nine months ended September 27, 2003 were up
33% or $1,090,000 as compared to the same periods of 2002. The Industrial
Hardware segment was up 1% or $6,000 compared to the prior year for the three
month period and up 15% or $403,000 for the nine month period as compared to
the same periods a year ago. The increase in the nine months was primarily the
result of increased sales over the prior year period, which included the
additional sales generated in 2003 from the acquisition of Canadian Commercial
Vehicles in October 2002. The Security Products segment earnings before income
taxes for the three and nine month periods ended September 27, 2003 were up
11% or $137,000 and up 10% or $324,000 respectively compared to the comparable
periods a year ago. The increase in both the three and nine month periods was
the result of increased sales volume and efficiency gains achieved through the
consolidation of the manufacturing operations of CCL Security Products into
the Illinois Lock facility in Wheeling Illinois during 2002. The Metal
Products segment loss
-10-
in the third quarter decreased 62% or $248,000 compared to the 2002 third
quarter and earnings increased 163% or $307,000 for the first nine months of
2003 over the same period a year ago. The decrease in the loss for the third
quarter period and the increase in earnings in the nine month period were due
to higher selling prices and elimination of some lower margin contract casting
products.
The effective tax rate of 38% for the three months ended September 27, 2003
was comparable to the same period in 2002.
Liquidity and Sources of Capital
Cash flows from operations were $4.3 million for the first nine months of 2003
versus $8.6 million for the same period in 2002. The reduction in cash flow in
2003 was mainly the result of a general reduction in inventories across all
business segments in 2002. In addition, the decrease in cash flows was
impacted by changes in the level of sales at all locations and the associated
timing differences for collections of accounts receivable and payments of
liabilities and changes in inventories. Cash flow from operations coupled with
cash on hand at the beginning of the year was sufficient to fund capital
expenditures, debt service, contributions to the Company's pension plans,
purchases of Common Stock for the treasury, dividend payments and the
establishment of Eastern Industrial (Shanghai) Ltd.
Additions to property, plant and equipment were $1.7 million during the first
nine months of 2003 versus $1.1 million for the comparable period a year ago.
Total capital expenditures for 2003 are expected to be in the range of $2.0
million to $2.5 million.
Total inventories as of September 27, 2003 were $16.6 million or $68,000
higher than year end 2002. The inventory turnover ratio of 3.9 turns at the
end of the third quarter was comparable to both the prior year third quarter
of 3.9 turns and the year end ratio of 3.7 turns. Accounts receivable
increased by $1.1 million from year end 2002, primarily due to increased sales
volume compared to 2002. The average days sales in accounts receivable for the
third quarter of 2003 was 50 days compared to 52 days in the third quarter of
2002 and 48 days at year end 2002.
Cash flow from operating activities and funds available under the revolving
credit portion of the Company's loan agreement are expected to be sufficient
to cover future foreseeable working capital requirements.
Note: The preceding information contains forward looking statements which
reflect the Company's current expectations regarding its future operating
performance and achievements and is subject to certain risks and uncertainties
that could cause actual results to differ materially from those set forth in
such statements. Such risks and uncertainties include changing customer
preferences, lack of success of new products, loss of customers, competition,
increased raw material prices and problems associated with foreign sourcing of
parts and products. The Company is not obligated to update or revise the
aforementioned statements for new developments.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------ ----------------------------------------------------------
There have been no material changes in market risk from what was reported in the
2003 Annual Report on Form 10-K.
-11-
ITEM 4 CONTROLS AND PROCEDURES
- ------ -----------------------
As of the end of the fiscal quarter ended September 27, 2003, 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 Chief Financial Officer (the "CFO"), of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 240.13a-15. Based upon that evaluation, the CEO and CFO
concluded that the Company's current disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company's and its subsidiaries required to be included in the Company's
periodic SEC filings. There were no significant changes in the Company's
internal control over financial reporting during the period covered by this
report that materially affected, or are reasonably likely to materially affect
the Company's internal control over financial reporting.
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.
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS -
- ------ -------------------
There are no significant pending legal proceedings, other than
ordinary routine litigation incidental to the Company's
business, to which either the Registrant or any of its
subsidiaries is a party or of which any of their property is
the subject.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
- ------ -----------------------------------------
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
See the information set forth in Part II, Item 4 of the Form
10-Q of the Company for the quarterly period ended March 29,
2003.
ITEM 5 OTHER INFORMATION
- ------ -----------------
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) 31 Certifications required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications pursuant to Rule 13a-14(b) and 18 USC
1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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99(1) The Registrant's Annual Report on Form 10-K for the
fiscal year ended December 28, 2002 is incorporated
herein by reference.
99(2) The Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended March 29, 2003 is incorporated
herein by reference.
99(3) The Registrant's Quarterly Report on Form 10-Q for
the quarterly period ended June 28, 2003 is incorporated
herein by reference.
(b) 99(4) Form 8-K filed on April 23, 2003 setting forth the
press release reporting the Company's earnings for the
quarter ended March 29, 2003.
99(5) Form 8-K filed on July 30, 2003 setting forth the
press release reporting the Company's earnings for the
quarter ended June 28, 2003.
99(6) Form 8-K filed on October 29, 2003 setting forth
the press release reporting the Company's earnings for
the quarter ended September 27, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE EASTERN COMPANY
(Registrant)
DATE: October 31, 2003 /s/Leonard F. Leganza
---------------- ---------------------
Leonard F. Leganza
President and Chief Executive Officer
DATE: October 31, 2003 /s/John L. Sullivan III
---------------- ------------------------
John L. Sullivan III
Vice President, Secretary and Treasurer
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