10-Q 1 tenq1st03.txt FIRST QUARTER 10-Q 2003 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 MARCH 29, 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 ----------------------------------------- ----- (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 March 29, 2003 ----- -------------------------------- Common Stock, No par value 3,629,360 -1- PART I FINANCIAL INFORMATION THE EASTERN COMPANY AND SUBSIDIARIES ITEM I CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ------ ------------------------------------------------- ASSETS
March 29, 2003 December 28, 2002 -------------- ----------------- CURRENT ASSETS Cash and cash equivalents $ 6,010,106 $ 5,939,232 Investment in common stock, at market 771,570 807,438 Accounts receivable, less allowances: 2003 - $333,000; 2002 - $304,000 11,112,527 10,824,807 Inventories 16,169,244 16,534,657 Prepaid expenses and other 1,657,888 1,336,383 Deferred income taxes 564,000 564,000 ------------- ------------- Total Current Assets 36,285,335 36,006,517 -------------------- Property, plant and equipment 40,854,676 40,442,628 Accumulated depreciation (16,197,779) (15,392,659) ------------- ------------- 24,656,897 25,049,969 Goodwill and trademarks 10,560,149 10,514,047 Patents, technology and licences, less accumulated amortization 2,064,026 2,111,865 Intangible pension asset 1,112,129 1,112,129 Prepaid pension cost 1,310,540 1,338,010 ============= ============= TOTAL ASSETS $ 75,989,076 $ 76,132,537 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 4,757,756 $ 3,838,412 Accrued compensation 1,136,154 1,923,463 Other accrued expenses 1,712,322 2,015,979 Current portion of long-term debt 2,629,762 2,628,664 ------------- ------------- Total Current Liabilities 10,235,994 10,406,518 ------------------------- Deferred federal income taxes 763,687 737,987 Long-term debt, less current portion 18,265,314 18,920,747 Accrued postretirement benefits 2,596,552 2,578,156 Accrued rate swap obligation 1,037,519 1,138,086 Accrued pension obligation 4,448,197 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: 2003-3,629,360; 2002-3,631,869 excluding 1,662,320 In 2003 and 1,657,320 shares held in treasury 852,534 883,695 Accumulated other comprehensive (loss)/income: Foreign currency translation (720,879) (898,137) Additional minimum pension liability, net of taxes (4,073,870) (4,073,870) Derivative financial instruments, net of taxes (622,519) (683,086) Unrealized holding gain on investment in common stock, net of taxes 14,325 35,893 ------------- ------------- (5,402,943) (5,619,200) Retained earnings 43,192,222 42,638,351 ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 38,641,813 37,902,846 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 75,989,076 $ 76,132,537 ============= =============
See accompanying notes. -2- THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended March 29, 2003 March 30, 2002 -------------- -------------- Net sales $ 21,590,714 $ 20,320,517 Interest income 12,569 13,215 ------------- ------------- 21,603,283 20,333,732 Cost of products sold 16,091,179 15,210,958 ------------- ------------- 5,512,104 5,122,774 Selling and administrative expenses 3,819,453 3,641,780 Interest expense 346,519 446,715 ------------- ------------- INCOME BEFORE INCOME TAXES 1,346,132 1,034,279 Income taxes 392,755 357,172 ------------- ------------- NET INCOME $ 953,377 $ 677,107 ============= ============= Earnings per share: Basic $ 0.26 $ 0.19 Diluted $ 0.26 $ 0.18 Cash dividends per share $ 0.11 $ 0.11
See accompanying notes. -3- THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 29, 2003 March 30, 2002 -------------- -------------- OPERATING ACTIVITIES: Net income $ 953,377 $ 677,107 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 908,383 859,137 Postretirement benefits other than pensions 18,396 - Provision for Doubtful Accounts 27,799 3,919 Issuance of Common Stock for directors' fees 28,894 20,284 Changes in operating assets and liabilities: Accounts receivable (571,406) (748,438) Inventories (93,250) 792,056 Prepaid expenses and other 79,824 (177,216) Prepaid pension cost 207,470 74,186 Accounts payable 161,887 147,153 Other Accrued expenses (194,126) 537,196 Other assets (39,479) (216,293) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,487,769 1,969,091 INVESTING ACTIVITIES: Purchases of property, plant, and equipment (311,957) (122,400) Business acquisitions, net of cash acquired - (264,027) ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (311,957) (386,427) FINANCING ACTIVITIES: Principal payments on long-term debt (656,530) (803,775) Purchases of Common Stock for treasury (60,055) - Dividends paid (399,506) (399,210) ----------- ----------- NET CASH USED BY FINANCING ACTIVITIES (1,116,091) (1,202,985) Effect of exchange rate changes on cash 11,153 (9,554) ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS 70,874 370,125 Cash and Cash Equivalents at Beginning of Period 5,939,232 4,955,020 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,010,106 $ 5,325,145 =========== ===========
-4- THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended March 29, 2003 March 30, 2002 -------------- -------------- Net income $ 953,377 $ 677,107 Other comprehensive income (loss) Currency translation 177,258 248,344 Change in fair value of derivative financial instruments, net of income tax benefit: 2003 - ($40,000) 2002 - ($74,000) 60,567 110,578 Unrealized holding loss on investment in common stock, net of income tax benefit of $14,300 and $19,500 respectively (21,568) (29,272) ---------- ---------- Comprehensive income $1,169,634 $1,006,757 ========== ==========
-5- THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 29, 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 accounting principles generally accepted 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:
THREE MONTHS ENDED March 29, 2003 March 30, 2002 -------------- -------------- Basic: Weighted average shares outstanding 3,630,303 3,629,258 Contingent shares outstanding -- -- --------- --------- Denominator for basic earnings per share 3,630,303 3,629,258 ========= ========= Diluted: Weighted average shares outstanding 3,630,303 3,629,258 Dilutive stock options -- 112,777 --------- --------- Denominator for diluted earnings per share 3,630,303 3,742,035 ========= =========
Note C - Inventories -------------------- The components of inventories follow:
March 29, 2003 December 28, 2002 -------------- ----------------- Raw materials and component parts $ 7,486,360 $ 7,658,722 Work in process 4,139,326 4,226,858 Finished goods 4,543,558 4,649,077 ------------ ------------ $ 16,169,244 $ 16,534,657 ============ ============
-6- THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 29, 2003 Note D - Segment Information ---------------------------- Segment financial information follows:
THREE MONTHS ENDED March 29, 2003 March 30, 2002 -------------- -------------- Revenues: Sales to unaffiliated customers: Industrial Hardware $ 8,605,204 $ 6,897,070 Security Products 9,481,688 9,055,813 Metal Products 3,503,822 4,367,634 ------------ ------------ 21,590,714 20,320,517 General corporate 12,569 13,215 ------------ ------------ $ 21,603,283 $ 20,333,732 ============ ============ Income Before Income Taxes: Industrial Hardware $ 1,123,869 $ 809,469 Security Products 1,069,774 911,167 Metal Products 144,575 248,579 ------------ ------------ Operating Profit 2,338,218 1,969,215 General corporate expenses (645,567) (488,221) Interest expense (346,519) (446,715) ------------ ------------ $ 1,346,132 $ 1,034,279 ============ ============
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-
March 29, 2003 March 30, 2002 -------------- -------------- Risk free interest rate 2.78% 4.74% Expected volatility 0.306 0.310 Expected option life 5 years 5 years Weighted-average dividend yield 3.1% 3.1% THREE MONTHS ENDED March 29, 2003 March 30, 2002 Net income, as reported $953,377 $677,107 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 (12,873) (14,505) Pro forma net income $940,504 $662,602 Earnings per share: Basic-as reported $0.26 $0.19 Basic-pro forma $0.26 $0.18 Diluted-as reported $0.26 $0.18 Diluted-pro forma $0.26 $0.18
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. 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. Results of Operations Net income for the first quarter of 2003 was $953,000 or $.26 per share (diluted) on sales of $21.6 million compared to $677,000 or $.18 per share (diluted) on sales of $20.3 million in the first quarter of 2002. Sales for the first quarter 2003 increased 6% as compared to the same period a year ago. New product introductions were up 8%, while volume of existing products decreased 2%. New product sales include sleeper boxes for Class 8 trailer trucks, rotary locks, luggage tags, drawer slides and cable heads for the mining industry. -8- The Industrial Hardware segment sales increased 25% as compared to the first quarter of 2002. Sales volume of existing products increased 3%, while new product sales increased sales by 22%. New product sales include the sleeper boxes for Class 8 trailer trucks and various other locking and latching hardware for the utility truck and vehicular accessory markets. Without the sales of Canadian Commercial Vehicle Corporation, which sells the sleeper boxes for Class 8 trailer trucks, acquired in October 2002, sales in the Industrial Hardware Segment would have increased 10% as compared to the first quarter of 2002. Heavy hardware sales to the tractor-trailer market increased 58% from 2002 levels. There has been improved activity in this market, which resulted in some increased production in 2002. Management believes sales of heavy hardware to the trailer industry will continue to improve throughout 2003. Sales of industrial hardware, such as rotary locks, slam latches and multi-point paddle handles to original equipment manufacturers and distributors was up approximately 3% as compared to the first quarter of 2002. Sales of automotive accessories, such as toolbox locks, push-button locks and rotary latches increased 5% and is expected to show continued improvement through 2003. Sales of school bus door closures increased 20% as compared to the same period a year ago. The Company anticipates continued sales improvement in the Industrial Hardware segment throughout the year 2003. The Security Products segment's sales increased 5% in the first quarter 2003 as compared to the first quarter of 2002. Sales of new products were up 2% and volume of existing products was up 3%. The volume increase was primarily due to gains in market share from competitors and improved activities in the computer industry. Sales of locks to the travel industries were down 50% as compared to the first quarter of 2002. The travel industry continues to be adversely affected in the wake of September 11th terrorist attack and by general economic conditions. Sales of new products included the new luggage tags and drawer slides. Sales of security products to the commercial laundry industry increased 3% as compared to the first quarter of 2002. Sales of Smart Card products continue to increase over prior year levels offsetting declines in some of the more mature product lines. The Company expects sales in the Security Products segment to continue to improve throughout 2003. In the Metal Products segment, sales were down 20% from the previous year. Volume of existing products dropped 21%, while new product sales increased sales 1%. Current year sales for contract castings were down 38% from the comparable period in 2002. The decrease in the contract casting business was the result of the Company's decision to de-emphasize this line of business beginning in the third quarter of 2002. Sales of mine roof support anchors were down 7% compared to the same period a year ago. Competition from suppliers of alternative products contributed to the reduced level of sales in the first quarter of 2003. The Company continues to look at new manufacturing methods and alternative products to remain competitive in this industry. Sales in 2003 will be less than that 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 months ended March 29, 2003 was 25% which is comparable to the same period a year ago. Selling and administrative expenses were up 5% or $178 thousand for the first quarter of 2003 as compared to the same period a year ago. The higher selling and administrative expenses are due to increased pension expenses. Interest expense for the first quarter of 2003 was down 22% or $100 thousand as compared to the first quarter of 2002. The decrease in interest expense was due to the lower debt and lower interest rates. Earnings before income taxes for the first quarter of 2003 increased 30% or $312 thousand as compared to the first quarter of 2002. The Industrial Hardware segment earnings increased 39% or $314 thousand for 3 months as compared to the same period a year ago. The increase was the direct result of the additional earnings derived from the Canadian Commercial Vehicles Corporation, a company acquired in October 2002. Increased sales volume of industrial and transportation hardware reflecting greater utilization of production facilities also contributed to the increase. The Security Products segment earnings before income taxes for the three months ended March 29, 2003 were up 17% or $160 thousand as compared to the first quarter of 2002. This increase was the result of -9- increased sales volume from our various lock products. The Metal Products segment earnings were down 42% or $104 thousand compared to the first quarter of 2002. The decrease was due to lower sales of mine roof expansion anchors as well as reduced contract casting sales. Liquidity and Sources of Capital Cash flows from operations were $1.5 million for the first quarter of 2003 as compared to $2.0 million for the same period in 2002. The change in cash flows resulted from the associated timing differences for collections of accounts receivable, payments of liabilities and changes in inventories. Cash flow from operations coupled with cash on hand at the beginning of the first quarter of 2003 was sufficient to fund capital expenditures, debt service and dividend payments. Additions to property, plant and equipment were $311 thousand during the first quarter of 2003 versus $386 thousand for the comparable period a year ago. Total 2003 capital expenditures are expected to approximate $1.5 million to $2.5 million. Total inventories as of March 29, 2003 were $16.2 million as compared to the $16.5 million level as of fiscal year-end December 28, 2002. The inventory turnover ratio of 4.0 turns at the end of the first quarter was better than the year end ratio of 3.7 turns and the 3.4 turns experienced in the first quarter of 2002. Accounts receivable increased by $571 thousand from year-end 2002, primarily due to increased sales volume compared to the fourth quarter of 2002. The average day's sales in accounts receivable for the first quarter of 2003 was 47 days compared to year-end 2002 of 48 days and the first quarter of 2002 of 52 days. Cash flow from operating activities and funds available under the revolving credit portion of the Company's loan agreement should be sufficient to cover future foreseeable working capital requirements. Forward-Looking Information 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 2002 Annual Report on Form 10-K. ITEM 4 CONTROLS AND PROCEDURES ------ ----------------------- Evaluation of Disclosure Controls and Procedures Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its periodic SEC filings is recorded, processed and reported within the time periods specified in the SEC's rules and forms. -10- Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. Changes in Internal Controls There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 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 ------ --------------------------------------------------- The Registrant held its Annual Meeting of the Stockholders at The Eastern Company, Naugatuck, Connecticut on Wednesday, the twenty-third day of April 2003. The matters voted on and the voting results were:
FOR AGAINST ABSTENTION 1) Election of two directors for a three-year term expiring in the year 2006. David C. Robinson 3,061,375 45,456 Donald S. Tuttle III 3,061,316 45,515 Continuing Directors: John W. Everets Leonard F. Leganza Charles W. Henry 2) Appointment of Ernst & Young LLP as independent auditors: 3,075,975 13,491 17,362
ITEM 5 OTHER INFORMATION ------ ----------------- None -11- ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K ------- -------------------------------- (a) 99(1) The Registrants' Annual Report on Form 10-K for the fiscal year ended December 28, 2002 is incorporated herein by reference. 99(2) Certifications pursuant to Rule 13a-14 or Rule 15d-14 and 18 USC 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002. (b) None 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: May 13, 2003 /s/Leonard F. Leganza ------------ --------------------- Leonard F. Leganza President and Chief Executive Officer DATE: May 13, 2003 /s/John L. Sullivan, III ------------ ------------------------ John L. Sullivan III Vice President, Secretary and Treasurer -12-