-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q+6Mp/Q13ZlEjMRZVLmHGNYrp5H4yuz4e0IoRYkGRX7tn6In1/Fwub/+WbFpa3bZ KAH13s5EOKKHinYz8/w8YQ== 0000031107-04-000049.txt : 20040804 0000031107-04-000049.hdr.sgml : 20040804 20040804160030 ACCESSION NUMBER: 0000031107-04-000049 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040703 FILED AS OF DATE: 20040804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EASTERN CO CENTRAL INDEX KEY: 0000031107 STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420] IRS NUMBER: 060330020 STATE OF INCORPORATION: CT FISCAL YEAR END: 0102 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00599 FILM NUMBER: 04951798 BUSINESS ADDRESS: STREET 1: 112 BRIDGE ST STREET 2: P O BOX 460 CITY: NAUGATUCK STATE: CT ZIP: 06770 BUSINESS PHONE: 2037292255 MAIL ADDRESS: STREET 1: 112 BRIDGE STREET STREET 2: P O BOX 460 CITY: NAUGATUCK STATE: CT ZIP: 06770 10-Q 1 second10q2004.txt SECOND QUARTER 10-Q 2004 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 July 3, 2004 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 July 3, 2004 ----- ------------------------------ Common Stock, No par value 3,630,958 -1- PART I FINANCIAL INFORMATION THE EASTERN COMPANY AND SUBSIDIARIES ITEM I CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS July 3, 2004 January 3, 2004 ------------ --------------- CURRENT ASSETS Cash and cash equivalents $ 4,209,841 $ 4,896,816 Accounts receivable, less allowances: 2004 - $311,000; 2003 - $302,000 13,490,143 11,036,760 Inventories 17,260,369 16,926,548 Prepaid expenses and other 1,618,047 1,642,513 Deferred income taxes 362,700 462,700 ------------- ------------- Total Current Assets 36,941,100 34,965,337 -------------------- Property, plant and equipment 43,872,825 42,819,165 Accumulated depreciation (19,487,193) (17,888,740) ------------- ------------- 24,385,632 24,930,425 Goodwill and trademarks 10,492,026 10,687,373 Patents, technology and licenses, less accumulated amortization 1,922,434 1,877,408 Intangible pension asset 964,592 964,592 Prepaid pension cost 1,158,716 1,192,281 ------------- ------------- TOTAL ASSETS $ 75,864,500 $ 74,617,416 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 6,711,069 $ 4,246,633 Accrued compensation 1,658,704 1,782,408 Other accrued expenses 1,314,056 2,034,918 Current portion of long-term debt 3,904,653 2,007,273 ------------- ------------- Total Current Liabilities 13,588,482 10,071,232 ------------------------- Deferred federal income taxes 1,243,264 1,243,264 Long-term debt, less current portion 12,611,070 15,814,669 Accrued postretirement benefits 2,302,295 2,384,770 Accrued rate swap obligation 330,688 580,055 Accrued pension obligation 4,015,858 4,015,858 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: 2004-3,630,958; 2003-3,616,039 excluding 1,680,342 in 2004 and 1,680,342 in 2003 shares held in treasury 876,258 664,949 Accumulated other comprehensive (loss): Foreign currency translation (301,759) (166,295) Additional minimum pension liability, net of taxes (4,049,886) (4,049,886) Derivative financial instruments, net of taxes (198,688) (348,055) ------------- ------------- (4,550,333) (4,564,236) Retained earnings 45,446,918 44,406,855 ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 41,772,843 40,507,568 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 75,864,500 $ 74,617,416 ============= =============
See accompanying notes. -2- THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended Three Months Ended 7/3/04 6/28/03 7/3/04 6/28/03 --------- --------- --------- --------- Net sales $49,863,172 $43,181,825 $25,297,964 $21,591,111 Cost of products sold 37,678,125 32,409,625 19,248,063 16,318,446 ----------- ----------- ----------- ----------- 12,185,047 10,772,200 6,049,901 5,272,665 Selling and administrative expenses 8,719,356 7,293,196 4,547,870 3,473,743 Interest expense 545,568 669,091 269,171 322,572 Other income (9,860) (25,818) (2,048) (13,249) ----------- ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 2,929,983 2,835,731 1,234,908 1,489,599 Income taxes 1,092,884 945,666 474,182 552,911 ----------- ----------- ----------- ----------- NET INCOME $ 1,837,099 $ 1,890,065 $ 760,726 $ 936,688 =========== =========== =========== =========== Net income per share: Basic $ 0.51 $ 0.52 $ 0.21 $ 0.26 Diluted $ 0.49 $ 0.52 $ 0.20 $ 0.26 Cash dividends per share $ 0.22 $ 0.22 $ 0.11 $ 0.11
See accompanying notes. -3- THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended July 3, 2004 June 28, 2003 ------------ ------------- OPERATING ACTIVITIES: Net income $ 1,837,099 $ 1,890,065 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,796,237 1,840,656 Gain on sales of equipment and other assets (3,487) - Postretirement benefits other than pensions (82,475) 36,792 Provision for doubtful accounts 5,438 66,315 Issuance of Common Stock for directors' fees 39,010 49,189 Changes in operating assets and liabilities: Accounts receivable (2,664,889) (391,352) Inventories (396,463) (752,313) Prepaid expenses and other 10,563 471,293 Prepaid pension cost 223,825 (24,062) Accounts payable 2,301,548 (413,884) Other accrued expenses (647,530) (460,712) Other assets (49,651) (72,502) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,369,225 2,239,485 INVESTING ACTIVITIES: Purchases of property, plant, and equipment (1,129,434) (742,674) Proceeds from sale of equipment 3,487 - Other - 33,307 ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (1,125,947) (709,367) FINANCING ACTIVITIES: Principal payments on long-term debt (1,306,028) (1,307,505) Proceeds from sale of Common Stock 172,300 - Purchases of Common Stock for treasury - (317,395) Dividends paid (797,036) (798,185) ----------- ----------- NET CASH USED BY FINANCING ACTIVITIES (1,930,764) (2,423,085) Effect of exchange rate changes on cash 511 12,463 ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS (686,975) (880,504) Cash and Cash Equivalents at Beginning of Period 4,896,816 5,939,232 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,209,841 $ 5,058,728 =========== ===========
4 THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Six Months Ended Three Months Ended July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003 ------------ ------------- ------------ ------------- Net income $ 1,837,099 $ 1,890,065 $ 760,726 $ 936,688 Other comprehensive income -- Foreign currency translation (135,464) 708,602 (166,194) 531,344 Change in fair value of derivative financial instruments, net of income tax expense: 2004 - ($100,000) and ($59,000) respectively; 149,367 88,924 2003 - ($78,000) and $(38,000) respectively; 116,396 55,829 Unrealized holding gain on investment in common stock, net of income tax expense 2003 - ($25,700) and ($40,000) respectively; - 39,071 - 60,639 ----------- ----------- --------- ----------- Comprehensive income $ 1,851,002 $ 2,754,134 $ 683,456 $ 1,584,500 =========== =========== ========= ===========
See accompanying notes. -5- THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 3, 2004 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 January 3, 2004 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 current year presentation. These reclassifications had no effect on previously reported net income. The condensed balance sheet as of January 3, 2004 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:
Six Months Ended Three Months Ended July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003 ------------ ------------- ------------ -------------- Basic: Denominator for basic earnings per share 3,622,926 3,627,807 3,628,818 3,625,310 ========= ========= ========= ========= Diluted: Weighted average shares outstanding 3,622,926 3,627,807 3,628,818 3,625,310 Dilutive stock options 103,095 2,602 109,488 5,204 --------- --------- --------- --------- Denominator for diluted earnings per share 3,726,021 3,630,409 3,738,306 3,630,514 ========= ========= ========= =========
Note C - Inventories The components of inventories follow:
July 3, 2004 January 3, 2004 ------------ --------------- Raw materials and component parts $ 8,854,569 $ 8,687,003 Work in process 4,194,270 4,112,625 Finished goods 4,211,530 4,126,920 ------------ ------------ $ 17,260,369 $ 16,926,548 ============ ============
-6- THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 3, 2004 Note D - Segment Information Segment financial information follows:
SIX MONTHS ENDED THREE MONTHS ENDED July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003 ------------ ------------- ------------ ------------- Revenues: Sales to unaffiliated customers: Industrial Hardware $22,155,810 $17,066,514 $11,243,606 $ 8,461,310 Security Products 21,098,894 18,861,109 10,633,178 9,379,421 Metal Products 6,608,468 7,254,202 3,421,180 3,750,380 ----------- ----------- ----------- ----------- $49,863,172 $43,181,825 $25,297,964 $21,591,111 =========== =========== =========== =========== Income Before Income Taxes: Industrial Hardware $ 2,651,398 $ 2,197,375 $ 1,141,816 $ 1,073,507 Security Products 2,102,682 2,160,267 741,181 1,090,493 Metal Products 170,402 270,842 201,032 126,267 ----------- ----------- ----------- ----------- Operating Profit 4,924,482 4,628,484 2,084,029 2,290,267 General corporate expenses (1,448,931) (1,123,662) (579,950) (478,096) Interest expense (545,568) (669,091) (269,171) (322,572) ----------- ----------- ----------- ----------- $ 2,929,983 $ 2,835,731 $ 1,234,908 $ 1,489,599 =========== =========== =========== ===========
Note E - Stock-Based Compensation The Company measures compensation expense related to stock-based compensation using the intrinsic value method. Accordingly, no stock-based employee compensation cost is reflected in net income if the exercise price of the option equals or exceeds the fair value of the stock on the date of grant. 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: July 3, 2004 June 28, 2003 ------------ ------------- Risk free interest rate N/A 2.27 Expected volatility N/A 3.07 Expected option life N/A 5 years Weighted-average dividend yield N/A 3.1% Assumptions are not applicable (N/A) because no options were granted in 2004. -7- THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 3, 2004 Note E - Stock-Based Compensation - continued
SIX MONTHS ENDED THREE MONTHS ENDED July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003 ------------ ------------- ------------ ------------- Net income, as reported $1,837,099 $1,890,065 $760,726 $936,688 Deduct: Total stock-based employee ------- compensation expense determined under fair value based method for all awards granted, net of related tax effects (8,952) (25,746) (4,476) (12,873) ---------- ---------- -------- -------- Pro forma net income $1,828,147 $1,864,319 $756,250 $923,815 ========== ========== ======== ======== Earnings per share: Basic-as reported $ 0.51 $ 0.52 $ 0.21 $ 0.26 Basic-pro forma $ 0.50 $ 0.51 $ 0.21 $ 0.25 Diluted-as reported $ 0.49 $ 0.52 $ 0.20 $ 0.26 Diluted-pro forma $ 0.49 $ 0.51 $ 0.20 $ 0.25
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 was revised in December 2003 ("FIN No. 46-R"). This new rule requires that companies consolidate a variable interest entity if the company is subject to a majority of the risk of loss from the variable interest entity's activities and/or is entitled to receive a majority of the entity's residual returns. The provisions of FIN No. 46-R currently were required to be applied as of the end of the first reporting period after March 15, 2004 for the variable interest entities in which the company holds a variable interest that it acquired on or before January 31, 2003. The adoption of FIN No. 46-R did not have any impact to the financial position or results of operations of the Company. Note G - Legal Proceedings The Company is currently a party to a patent infringement suit. Although management has determined this suit is without merit, the Company incurred approximately $115,000 of legal expenses in 2003, and $164,000 and $329,000 of legal expenses in the second quarter and first six months of 2004, respectively, and expects to incur additional expenses until this matter is resolved. Subsequent to the close of the 2004 second quarter, the Company reached a mediated potential settlement of $400,000, which was recorded as a charge to earnings in the second quarter 2004. The legal expenses combined with the potential settlement resulted in charges to earnings net of taxes of $348,000 or $0.09 per diluted share in the second quarter and $457,000 or $0.12 per diluted share in the six month period. There are no other legal proceedings, other than ordinary routine litigation incidental to the Company's business, to which either the Company or any of its subsidiaries is a party or to which any of their property is the subject. -8- THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 3, 2004 Note H - Debt Effective January 4, 2004 the Company received approval from its financial institution to modify the basis of calculating its debt service covenant ratios from a rolling four-quarter test to a cumulative quarter test. The debt service covenant test will return to a rolling four-quarter test for the fiscal years beginning in 2005. Note I - Retirement Benefit Plans The Company has non-contributory defined benefit pension plans covering certain U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for its salaried plan, the level of compensation. The Company also sponsors unfunded nonqualified supplemental retirement plans that provide certain current and former officers with benefits in excess of limits imposed by federal tax law. The measurement date for the obligations disclosed below is September 30 of each year. 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 second quarter and first six months of Fiscal 2004 and 2003 follow:
Pension Benefits Six Months Ended Three Months Ended July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003 ------------ ------------- ------------ ------------- Service cost $ 590,160 $ 451,840 $ 295,905 $ 249,486 Interest cost 1,142,757 834,044 571,168 450,288 Expected return on plan assets (1,299,371) (875,456) (649,360) (477,908) Transition obligation (102,197) (80,342) (51,098) (42,742) Prior service cost 98,490 86,556 49,245 45,052 Losses recognized 176,224 135,732 87,028 74,357 ---------- ---------- ---------- ---------- Net periodic benefit cost $ 606,063 $ 552,374 $ 302,888 $ 298,533 ========== ========== ========== ==========
Postretirement Benefits Six Months Ended Three Months Ended July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003 ------------ ------------- ------------ ------------- Service cost $ 58,031 $ 162,568 $ 13,945 $ 70,173 Interest cost 88,496 165,815 17,480 (14,353) Expected return on plan assets (51,920) (83,649) (10,797) 7,238 Transition obligation 0 0 0 0 Prior service cost (20,924) (25,501) (9,491) 2,207 Losses recognized (34,876) (75,612) (5,514) 6,543 ---------- ---------- ---------- ---------- Net periodic benefit cost $ 38,807 $ 143,621 $ 5,623 $ 71,808 ========== ========== ========== ==========
-9- THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 3, 2004 Note I - Retirement Benefit Plans - continued 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. The Company was required to contribute $1,007,929 into its salaried plan and $194,123 into one of its hourly plans. The Company has paid all of the required contributions into the salaried plan as of March 15, 2004 and will make the minimum contribution into its hourly plan prior to filing its federal income tax return on September 15, 2004. On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. As of July 3, 2004, in accordance with FASB Staff Position No. FAS 106-1 any measures of the Accumulated Postretirement Benefit Obligation (APBO) or net periodic postretirement benefit cost in the financial statements do not reflect the effects of the Act on the plan. More specific authoritative guidance on the accounting of the federal subsidy is pending and, when issued, could require the company to change previously reported information. The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code covering substantially all U.S. non-union employees. The plan allows participants to make voluntary contributions of up to 100% of their annual compensation on a pretax basis, subject to IRS limitations. The plan provides for contributions by the Company at its discretion. The Company made contributions of $38,578 and $75,692 in the second quarter and first six months of 2004 respectively, and $36,897 and $71,405 in the second quarter and first six months of 2003, respectively. -10- 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 Company's financial position and results of operations for the twenty-six weeks ended July 3, 2004. The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended January 3, 2004 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 3, 2004. Certain statements set forth in this discussion and analysis of financial condition and results of operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They use such words as "may," "will," "expect," "believe," "plan" and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this release. These forward-looking statements involve a number of risks and uncertainties and actual future results and trends may differ materially depending on a variety of factors including changing customer preferences, lack of success of new products, loss of customers, competition, increased raw material prices, problems associated with foreign sourcing of parts and products, changes within our industry segments and in the overall economy, litigation and legislation. In addition, terrorist threats and the possible responses by the U.S. government, the effects on consumer demand, the financial markets, the travel industry, the trucking industry, the mining industry and other conditions increase the uncertainty inherent in forward-looking statements. Forward-looking statements reflect the expectations of the Company at the time they are made, and investors should rely on them only as expressions of opinion about what may happen in the future and only at the time they are made. The Company undertakes no obligation to update any forward-looking statement. 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. In addition, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for 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. Overview During the second quarter of 2004 the Company experienced a 17.2% increase in sales as compared to the second quarter of 2003. The Industrial Hardware and the Security Products segments experienced a 32.9% and 13.4%, respectively, increase in sales during the period while the sales of the Metal Products segment declined 8.8% from the comparable quarter of 2003. Sales for the first half of 2004 were up 15.5% compared to the same period a year ago. The Industrial Hardware and the Security Products segments experienced increases in sales of 29.8% and 11.9%, respectively, while the sales of the Metal Products segment declined 8.9% as compared to the first half of 2003. The Industrial Hardware sales increase came from our distributor network and original equipment manufacturers (OEM's), as the result of a general improvement in the manufacturing sector of the economy. Sales increased to our service body OEM's, due to increased sales of our stainless steel paddles and our new PowerUp(TM) system; to subcontractors for military vehicles for retrofitting the Humvee, 1 ton and 3/4 ton trucks, with heavy duty rotary and paddle latches as the Army increases the armor on these vehicles; and to the class 8 truck market which is experiencing significant growth and which has increased the requirements for our hardware and sleeper boxes, particularly for Freightliner's Western Star tractor-trailer line of trucks. -11- The sales increase in the Security Products segment came as a result of increased sales of locks to computer manufacturers such as IBM, Dell and Sun Micro Systems as we gain more market share from our competitors; increased sales to the travel industry as the result of the introduction of our new SearchAlert(TM) lock which was recently introduced into the Transportation Security Administration's program for locking checked baggage at airports; industrial enclosures; smart card systems serving the commercial laundry market; and increasing market share from competitors. Sales in the Metals Products segment were lower in mine roof products and up in contract casting products for both the second quarter and first half of 2004 compared to the 2003 periods. Our proprietary mine roof anchors declined as the result of mining techniques where fewer of our proprietary mine roof anchors are required, and sales of contract casting products were up as the result of increased orders from one customer. The Company has signed a technical development contract with China University of Mining and Technology. The contract calls for the testing and appraisal of our proprietary mine roof anchors for use in underground coal mining in China. The project is currently in the testing phase. The Company is experiencing or has been notified of cost increases affecting the majority of material it uses such as steel, zinc and brass, with cost increases ranging from 20% to 50%, amounting to $356,000 or $0.10 per diluted share in the second quarter of 2004 and $550,000 or $0.15 per diluted in the six month period. The Company intends to pass these increases on to our customers where possible. Currently, there is no indication that the Company will not be able to obtain all the materials that it requires. Cash flow in the second quarter of 2004 was improved over the first quarter and comparable to the second quarter of 2003. The Company's line of credit, along with controlling discretionary expenditures, should provide sufficient cash flow to meet all existing obligations. A more detailed analysis of the Company's results of operations and financial condition follows: Results of Operations The following table sets forth, for the periods indicated, selected Company statement of operations data expressed as a percentage of net sales.
Six Months Ended Three Months Ended ---------------- ------------------ July 3, 2004 June 28, 2003 July 3, 2004 June 28, 2003 ------------ ------------- ------------ ------------- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 75.6% 75.1% 76.1% 75.6% ----- ----- ----- ----- Gross margin 24.4% 24.9% 23.9% 24.4% Selling and administrative expense 17.4% 16.9% 17.9% 16.1% Interest expense 1.1% 1.5% 1.1% 1.5% Other (income) expense 0.0% (0.1%) (0.0%) (0.1%) ---- ------ ------ ------ Income before income taxes 5.9% 6.6% 4.9% 6.9% Income taxes 2.2% 2.2% 1.9% 2.6% ---- ---- ---- ---- Net Income 3.7% 4.4% 3.0% 4.3% ==== ==== ==== ====
Net income for the second quarter of 2004 was $760,726 or $.20 per diluted share on sales of $25.3 million compared to net income of $936,688 or $.26 per diluted share on sales of $21.6 million in the second quarter of 2003. Net income for the first six months of 2004 was $1,837,099 or $.49 per diluted share on sales of $49.9 million compared to net income of $1,890,065 or $.52 per diluted share on sales of $43.2 million in the 2003 period. -12- Sales for the second quarter 2004 were up 17.2% compared to the same period a year ago. New product sales contributed 3.4%, sales volume of existing products increased 13.2% and prices increased 0.6% in the second quarter. The Company instituted selective price increases in the second quarter in order to recover the increasing cost of material the Company is experiencing. Sales for the first half of 2004 were up 15.5% compared to the same period a year ago. Sales volume of existing products was up 11.7% and new product sales were up 3.7%, while prices increased 0.1%. The Industrial Hardware segment's second quarter sales were up 32.9% compared to the second quarter of 2003. New product sales increased 0.9%, sales volume of existing products increased 30.5% and prices were up 1.5%. New products include a slam latch assembly and rotary lock with a hard case, both of which are used in the truck accessory market. Sales of "sleeper boxes" for the class 8 truck market were up 44.7%. For the first half of 2004, sales were up 29.8% compared to the same period in 2003. New product sales increased 3.4%, sales volume of existing products increased 26.6% and prices were down 0.2%. The Company anticipates continued sales improvement in the Industrial Hardware segment throughout 2004. Our Eastern Industrial (Shanghai) Ltd., manufacturing facility located in Shanghai, China has been very active fulfilling quotation requests from the Company's sales networks. In addition, we have begun production of a variety of metal and plastic products for our U.S. and Canadian affiliates. This subsidiary will be instrumental in helping us to remain price competitive in North America and will open up the possibility to more effectively pursue global markets, including marketing the Company's products directly in China. The Security Products segment's sales were up 13.4% in the second quarter of 2004 as compared to the second quarter of 2003. New product sales increased 7.1% and sales volume of existing products increased 6.3%. Sales of new products included the SearchAlert(TM) luggage lock and a remote keyless entry system and a snap-in lock for the automotive accessory market. For the first half of 2004, sales were up 11.9% compared to the same period in 2003. New product sales increased 5.3% and sales volume of existing products increased 6.5%. The Company anticipates continued sales improvement in the Security Products segment throughout 2004. The Metal Products segment's sales were down 8.8% in the second quarter of 2004 as compared to the second quarter of 2003, due to lower sales volume of existing products. Sales of our contract casting products for use in the commercial and industrial construction industry increased 9.0% and sales of our proprietary mine roof support anchors were down 17.1% for the second quarter of 2004 as compared to the second quarter of 2003. The increase in sales of contract castings during the second quarter was due to increased orders from one customer, while sales of mine roof support anchors continue to be negatively affected by the changes in mining techniques and surface mining requiring fewer roof support anchors. However, the demand for steel has created an increase in demand for metallurgical coal, which is mined underground and which may result in increased demand for our roof support anchors. For the first half of 2004, sales were down 8.9% compared to the same period in 2003. Sales volume of existing products decreased by 9.7% and prices increased by 0.8%. Sales of our contract casting products for use in the commercial and industrial construction industry increased 1.0% and sales of our proprietary mine roof support anchors were down 13.4% for the first six months of 2004 as compared to the first six months of 2003. Sales are expected to remain below prior year levels throughout 2004. Gross margin as a percentage of sales for the three and six month periods ended July 3, 2004 was 23.9% and 24.4%, respectively, compared to 24.4% and 24.9% in the comparable periods a year ago. The decrease in gross margin in the second quarter is primarily the result of product mix, decreased sales volume in the metal products segment which resulted in lower plant utilization, higher raw material prices and operating inefficiencies experienced with the training of new workers in the Industrial Hardware segment as it prepared for increased production activities. -13- Selling and administrative expenses were up 30.9% or $1.1 million for the second quarter of 2004 and up 19.6% or $1.4 million for the first six months of 2004 as compared to the same periods a year ago. The increase was due in large part to our new manufacturing facility in Shanghai which required start-up expenses of $166,000 and $350,000 in the three and six month periods, respectively, and a patent infringement suit which in the three and six month periods increased the Company's legal expenses by $164,000 and $329,000, respectively, plus a $400,000 provision to settle this suit through mediation. Interest expense decreased by $53,400 or 16.6% for the second quarter of 2004 and decreased by $123,500 or 18.5% for the first half of 2004 as compared to the same periods in 2003. This decrease in interest expense was due to the lower levels of debt in the current periods. Earnings before income taxes for the three months ended July 3, 2004 was down $254,700 or 17.1% and for the six months ended July 3, 2004 was up $94,300 or 3.3% as compared to the same periods of 2003. The Industrial Hardware segment was up 6.4% or $68,300, the Security Products segment was down $349,300 or 32.0% and the Metal Products segment was up $74,800 or 59.2% as compared to the second quarter of 2003. For the first half of 2004, the Industrial Hardware segment was up 20.7% or $454,000, the Security Products segment was down $57,600 or 2.7% and the Metal Products segment was down $100,400 or 37.1% as compared to the same period of 2003. The increases in the Industrial Hardware segment reflect the general overall improvement in the economy in 2004, increased market share and the introduction of new products. The overall decrease in the Security Products segment was mainly due to legal fees and the proposed settlement of a patent infringement suit mentioned above, offset by increases created by the general overall improvement in the economy in 2004, increased market share and the introduction of new products. The Metal Products segment decrease is the result of the continued decline in the use of our proprietary mine roof anchors in the North American mining industry as new mining technology continues to reduce the need for that product. The effective tax rate of 37.3% for the first six months is higher than the 33.3% for the same period in 2003. The increase in the effective tax rate is the result of the Company deriving a higher percentage of its earnings from countries with higher effective tax rates. Liquidity and Sources of Capital The Company provided $2,369,200 from operations for the first six months of 2004 compared to $2,239,500 provided from operations for the same period in 2003. These amounts reflect the net income earned by the Company during those periods adjusted for non-cash charges and changes in working capital which relate, primarily, to the timing of payments or receipts of current assets and current liabilities. 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, and dividend payments. Additions to property, plant and equipment were $1,129,400 during the first six months of 2004 versus $742,700 for the comparable period in 2003. Total capital expenditures for 2004 are expected to be in the range of $2.0 million to $3.0 million. Total inventories as of July 3, 2004 were $17.3 million or $334,000 higher than at the end of Fiscal 2003. The inventory turnover ratio of 4.4 turns at the end of the second quarter was higher than both the prior year second quarter of 3.8 turns and the year end 2003 ratio of 4.1 turns. Accounts receivable increased by $2.5 million from year end 2003, primarily due to increased sales volume. The average days sales in accounts receivable for the second quarter of 2004 was 49 days compared to 48 days in the second quarter of 2003 and 48 days at the end of Fiscal 2003. 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. -14- The Company requested and received approval from its financial institution to modify the basis of calculating its debt service covenant ratios from a rolling four-quarter test to a cumulative quarter test effective for the periods beginning January 4, 2004. The debt service covenant test will return to a rolling four-quarter test for the fiscal years beginning in 2005. This modification to the debt service covenants will provide the Company more flexibility within its capital expenditure programs. 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. ITEM 4 CONTROLS AND PROCEDURES - ------ ----------------------- Evaluation of Disclosure Controls and Procedures An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this report based on such evaluation. The Company believes that a system of controls, 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. Changes in Internal Controls During the period covered by this report, there have been no significant changes in the Company's internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company's internal controls. PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS - ------ ----------------- The Company is currently a party to a patent infringement suit. Although management has determined this suit is without merit, the Company incurred approximately $115,000 of legal expenses in 2003, and $329,000 in the first half of 2004, $164,000 of which was in the second quarter of 2004, and may incur additional expenses in 2004. Subsequent to the close of the second quarter, the Company went to mediation and reached a potential settlement of $400,000, which was recorded as a charge to earnings in the second quarter 2004. The legal expenses combined with the potential settlement resulted in charges to earnings net of taxes of $348,000 or $0.09 per diluted share in the second quarter and $457,000 or $0.12 per diluted share in the six month period. There are no other legal proceedings, other than ordinary routine litigation incidental to the Company's business, to which either the Company or any of its subsidiaries is a party or to which any of their property is the subject. ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS - ------ ----------------------------------------- None -15- ITEM 3 DEFAULTS UPON SENIOR SECURITIES - ------ ------------------------------- None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- See the information set forth in Item 4 of the Form 10-Q of the Company for the quarterly period ended April 3, 2004. 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. 99(1) The Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 2004 is incorporated herein by reference. (b) 99(2) Form 8-K filed on April 28, 2004 setting forth the press release reporting the Company's earnings for the quarter ended April 3, 2004 is incorporated herein by reference. 99(3) Form 8-K filed on July 28, 2004 setting forth the press release reporting the Company's earnings for the quarter ended July 3, 2004 is incorporated herein by reference. 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: August 4, 2004 /s/Leonard F. Leganza -------------- --------------------- Leonard F. Leganza President and Chief Executive Officer DATE: August 4, 2004 /s/John L. Sullivan III -------------- ------------------------ John L. Sullivan III Vice President, Secretary and Treasurer -16- EX-31 2 exhibit31.txt CERTIFICATIONS EXHIBIT 31 CERTIFICATIONS I, Leonard F. Leganza, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Eastern Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: August 4, 2004 /s/ Leonard F. Leganza ---------------------- Leonard F. Leganza CEO EXHIBIT 31 CERTIFICATIONS I, John L. Sullivan III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of The Eastern Company; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) [Paragraph omitted in accordance with SEC transition instructions contained in SEC Release 34-47986] c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: August 4, 2004 /s/ John L. Sullivan III ------------------------ John L. Sullivan III CFO EX-32 3 exhibit32.txt CERTIFICATIONS EXHIBIT 32 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER Pursuant to 18 United States Code ss. 1350, as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Leonard F. Leganza, the Chief Executive Officer of The Eastern Company (the "Company") and John L. Sullivan III, the Chief Financial Officer of the Company, hereby certify that, to the best of their knowledge: 1) The Company's Quarterly Report on Form 10-Q for the Period ended July 3, 2004, and to which this certification is attached as Exhibit 32 (the "Periodic Report") fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and 2) The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. In Witness Whereof, the undersigned have set their hands hereto as of the 4th day of August, 2004. /s/ Leonard F. Leganza ---------------------- Leonard F. Leganza CEO /s/ John L. Sullivan III ------------------------ John L. Sullivan III CFO A signed original of this written statement required by Section 906 has been provided to The Eastern Company and will be retained by The Eastern Company and furnished to the Securities and Exchange Commission or its staff upon request. This certification "accompanies" the Form 10-Q to which it relates, is not deemed filed with the SEC and is not to be incorporated by reference into any filing of the Company under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q, irrespective of any general incorporation language contained in such filing.) -----END PRIVACY-ENHANCED MESSAGE-----