-----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, IVxCJ+8WzAJrHbMs/ZPQMF9h4LkApmv9Z70klvZ/dT62UeKBGXqGL9Frlz/P9xm2 Kn759w/HWVxv5zK2a09zDw== 0000031107-05-000040.txt : 20050503 0000031107-05-000040.hdr.sgml : 20050503 20050503134417 ACCESSION NUMBER: 0000031107-05-000040 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20050402 FILED AS OF DATE: 20050503 DATE AS OF CHANGE: 20050503 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: 05794200 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 first10q2005.txt 1ST QUARTER 10-Q 2005 UNITED STATES 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 April 2, 2005 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 April 2, 2005 ----- ------------------------------- Common Stock, No par value 3,635,995 -1- PART I FINANCIAL INFORMATION THE EASTERN COMPANY AND SUBSIDIARIES ITEM I CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ------ -------------------------------------------------
ASSETS April 2, 2005 January 1, 2005 ------ ------------- --------------- CURRENT ASSETS Cash and cash equivalents $ 4,443,245 $ 4,420,506 Accounts receivable, less allowances: 2005 - $336,000; 2004 - $310,000 13,978,785 12,528,189 Inventories 20,482,821 20,477,604 Prepaid expenses and other assets 1,775,314 2,258,642 Deferred income taxes 834,400 739,500 ------------- ------------- Total Current Assets 41,514,565 40,424,441 Property, plant and equipment 42,438,946 42,031,257 Accumulated depreciation (18,908,006) (18,124,710) ------------- ------------- 23,530,940 23,906,547 Goodwill 10,595,300 10,604,286 Trademarks 174,527 174,527 Patents, technology and licenses, less accumulated amortization 1,735,076 1,743,266 Intangible pension asset 870,064 870,064 Prepaid pension cost 97,057 348,634 ------------- ------------- TOTAL ASSETS 78,517,529 78,071,765 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES Accounts payable $ 5,810,554 $ 5,010,271 Accrued compensation 1,153,893 2,472,944 Other accrued expenses 2,417,236 2,239,668 Current portion of long-term debt 6,412,439 4,009,811 ------------- ------------- Total Current Liabilities 15,794,122 13,732,694 Deferred income taxes 1,780,473 1,452,134 Long-term debt, less current portion 10,950,755 11,804,861 Accrued post-retirement benefits 2,178,571 2,219,821 Accrued pension cost 3,604,874 4,885,160 Interest rate swap obligation 58,469 160,417 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: 3,635,995 shares in 2005 and 3,625,339 shares in 2004 17,608,048 17,583,561 Treasury Stock: 1,688,726 shares in 2005 and 1,680,342 in 2004 (16,655,041) (16,655,041) Retained earnings 47,858,803 47,568,571 Accumulated other comprehensive (loss)/income: Foreign currency translation 421,724 463,804 Additional minimum pension liability, net of taxes (5,047,800) (5,047,800) Derivative financial instruments, net of taxes (35,469) (96,417) ------------- ------------- Accumulated other comprehensive loss (4,661,545) (4,680,413) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 44,150,265 43,816,678 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 78,517,529 $ 78,071,765 ============= =============
See accompanying notes. -2- THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended April 2, 2005 April 3, 2004 ------------- ------------- Net sales $ 26,267,584 $ 24,565,208 Cost of products sold (20,797,690) (18,430,062) ------------ ------------ Gross margin 5,469,894 6,135,146 Selling and administrative expenses (4,053,994) (4,171,486) ------------ ------------ Operating profit 1,415,900 1,963,660 Interest expense (246,942) (276,397) Other income 7,502 7,812 ------------ ------------ INCOME BEFORE INCOME TAXES 1,176,460 1,695,075 Income taxes 445,878 618,702 ------------ ------------ NET INCOME $ 730,582 $ 1,076,373 ============ ============ Earnings per share: Basic $ 0.20 $ 0.30 Diluted $ 0.19 $ 0.29 Cash dividends per share $ 0.11 $ 0.11
See accompanying notes. THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended April 2, 2005 April 3, 2004 ------------- ------------- Net income $ 730,582 $ 1,076,373 Other comprehensive income (loss) Currency translation (42,080) 30,730 Change in fair value of derivative financial instruments, net of income tax benefit: 2005 - ($41,000) 60,948 - 2004 - ($41,000) - 60,443 --------- ------------ Comprehensive income $ 749,450 $ 1,167,546 ========= ============
See accompanying notes. -3- THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended April 2, 2005 April 3, 2004 ------------- ------------- OPERATING ACTIVITIES: Net income $ 730,582 $ 1,076,373 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,094,056 892,152 Provision for doubtful accounts 1,017 4,215 Deferred income taxes 192,439 - Issuance of Common Stock for directors' fees 24,487 19,018 Gain on sale of equipment & other assets - (3,516) Changes in operating assets and liabilities: Accounts receivable (1,458,138) (2,405,487) Inventories (28,776) 180,825 Prepaid expenses and other 476,689 (159,550) Prepaid pension cost (1,028,709) (215,543) Accounts payable 801,161 652,821 Accrued compensation (1,085,011) (363,103) Other accrued expenses (54,085) (67,145) Other assets (48,254) (40,378) ----------- ------------ NET CASH USED IN OPERATING ACTIVITIES (382,542) (429,318) INVESTING ACTIVITIES: Proceeds from sale of equipment - 3,516 Purchases of property, plant, and equipment (741,805) (638,309) ----------- ------------ NET CASH USED IN INVESTING ACTIVITIES (741,805) (634,793) FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 3,000,000 - Principal payments on long-term debt (1,451,478) (656,438) Proceeds from sale of Common Stock - 115,425 Dividends paid (399,835) (397,764) ----------- ------------ NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,148,687 (938,777) Effect of exchange rate changes on cash (1,601) 6,447 ----------- ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 22,739 (1,996,441) Cash and Cash Equivalents at Beginning of Period 4,420,506 4,896,816 ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,443,245 $ 2,900,375 =========== ============
-4- THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) APRIL 2, 2005 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 1, 2005 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 period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income. The condensed balance sheet as of January 1, 2005 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 April 2, 2005 April 3, 2004 ------------- ------------- Basic: Denominator for basic earnings per share 3,634,991 3,617,034 ========= ========= Diluted: Weighted average shares outstanding 3,634,991 3,617,034 Dilutive stock options 232,422 96,702 --------- --------- Denominator for diluted earnings per share 3,867,413 3,713,736 ========= =========
Note C - Inventories The components of inventories follow:
April 2, 2005 January 1, 2005 ------------- --------------- Raw materials and component parts $11,286,034 $11,279,981 Work in process 3,666,425 3,670,812 Finished goods 5,530,362 5,526,811 ----------- ----------- $20,482,821 $20,477,604 =========== ===========
-5- Note D - Segment Information Segment financial information follows:
THREE MONTHS ENDED April 2, 2005 April 3, 2004 ------------- ------------- Revenues: Sales to unaffiliated customers: Industrial Hardware $13,020,270 $10,912,204 Security Products 10,021,576 10,465,716 Metal Products 3,225,738 3,187,288 ----------- ----------- $26,267,584 $24,565,208 Income Before Income Taxes: Industrial Hardware $ 1,305,660 $ 1,057,318 Security Products 880,404 1,052,989 Metal Products (770,164) (146,647) ----------- ----------- Operating Profit 1,415,900 1,963,660 Interest expense (246,942) (276,397) Other income 7,502 7,812 ----------- ----------- $ 1,176,460 $ 1,695,075
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: April 2, 2005 April 3, 2004 ------------- ------------ Risk free interest rate N/A N/A Expected volatility N/A N/A Expected option life N/A N/A Weighted-average dividend yield N/A N/A Assumptions are not applicable (N/A) because no options were granted in the first quarter of 2005 or 2004. -6- Note E - Stock-Based Compensation - continued
THREE MONTHS ENDED April 2, 2005 April 3, 2004 ------------- ------------- Net income, as reported $730,582 $1,076,373 Deduct: Total stock-based employee ------- compensation expense determined under fair value based method for all awards granted, net of related tax effects (438) (4,476) -------- ---------- Pro forma net income $730,144 $1,071,897 ======== ========== Earnings per share: Basic-as reported $0.20 $0.30 Basic-pro forma $0.20 $0.30 Diluted-as reported $0.19 $0.29 Diluted-pro forma $0.19 $0.29
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 Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, Consolidation of Variable Interest Entities, which was revised in December 2003 ("FIN No. 46-R"). This 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 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 a 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 on the financial position or results of operations of the Company. In November 2004, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. It is not believed that the adoption of SFAS No. 151 will have a material impact on the consolidated financial position, results of operations or cash flows of the Company. In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based Payment. SFAS No. 123(R) will require that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS No. 123(R) replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123, as originally issued in 1995, established as preferable a fair value-based method of accounting for share-based payment transactions with employees. However, -7- Note F - Recent Accounting Pronouncements - continued that Statement permitted entities the option of continuing to apply the guidance in APB Opinion No. 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair value-based method been used. Public entities will be required to apply SFAS No. 123(R) as of their next fiscal year that begins after June 15, 2005. SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods: 1) A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. 2) A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amount previously recognized under SFAS No. 123 for purpose of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. The impact of the adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had the Company adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income (loss) and net income (loss) per share in the stock based compensation accounting policy note included in Note E to the consolidated financial statements. In December 2004, the FASB issued FSP No. FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 ("AJCA"). The AJCA provides a one-time 85% dividends received deduction for certain foreign earnings that are repatriated under a plan for reinvestment in the United States, provided certain criteria are met. FSP No. 109-2 is effective immediately and provides accounting and disclosure guidance for the repatriation provision. FSP No. 109-2 allows companies additional time to evaluate the effects of the law on its unremitted earnings for the purpose of applying the "indefinite reversal criteria" under APB Opinion No. 23, Accounting for Income Taxes - Special Areas, and requires explanatory disclosures from companies that have not yet completed the evaluation. The Company is currently evaluating the effects of the repatriation provision and its impact on the consolidated financial statements. The Company does not expect to complete this evaluation before the end of 2005. The range of possible amounts of unremitted earnings that is being considered for repatriation under this provision is between zero and $500,000. The related potential range of income tax is between zero and $84,000. Note G - Goodwill The following is a roll-forward of goodwill from year-end 2004 to the end of the first quarter: Beginning balance $ 10,604,286 Foreign exchange (8,986) ------------ Ending balance $ 10,595,300 ============ 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 returned to a rolling four-quarter test for the fiscal years beginning in 2005. -8- 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 first quarter of 2005 and 2004 follows:
Pension Benefits Postretirement Benefits ------------------------------ ----------------------------- 2005 2004 2005 2004 ---- ---- ---- ---- Service cost $ 336,840 $ 294,255 $ 21,679 $ 44,086 Interest cost 556,605 571,589 29,484 71,016 Expected return on plan assets (679,006) (650,011) (20,073) (41,123) Net amortization and deferral 96,843 87,342 (19,737) (40,795) --------- --------- -------- -------- Net periodic benefit cost $ 311,282 $ 303,175 $ 11,353 $ 33,184 ========= ========= ======== ========
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 $1,280,286 into its salaried plan and $208,159 into one of its hourly plans. The Company has paid all of the required contributions into the salaried plan as of March 31, 2005 and will make the minimum contribution into its hourly plan prior to filing its federal income tax return on September 15, 2005. 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 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. In the second quarter of 2004, a FASB Staff Position (FSP FAS 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003) was issued providing guidance on the accounting for the effects of the Act for employers that sponsor postretirement health care plans that provide prescription drug benefits. This FSP superceded FSP FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003. The FSP is effective for the first interim or annual period beginning after June 15, 2004. The guidance in this FSP applies only to the sponsor of a single-employer defined benefit postretirement health plan for which the employer has concluded that prescription drug benefits available under the plan are actuarially equivalent and, thus, qualify for the subsidy under the Act and the expected subsidy will offset or reduce the employer's share of the costs of postretirement prescription drug coverage by the plan. The Company's actuary has estimated the impact of the Medicare Prescription Drug Improvement and Modernization Act of 2003, which resulted in a reduction in the December 31, 2004 accumulated postretirement benefit obligation ("APBO") by $52,668. This reduction has been reflected as an actuarial experience gain as of December 31, 2004, and the December 31, 2004 APBO has been reduced accordingly. 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 $40,400 in the first quarter of 2005, and $37,115 in the first quarter of 2004. -9- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ITEM 2 OF OPERATIONS - ------ ------------- The following discussion is intended to highlight significant changes in the Company's financial position and results of operations for the thirteen weeks ended April 2, 2005. 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 1, 2005 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 1, 2005. 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, 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 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 first quarter of 2005, the Company experienced a 6.9% increase in sales as compared to the first quarter of 2004. The Industrial Hardware and the Metal Products segments experienced a 19.3% and 1.2%, respectively, increase in sales during the period while the sales of the Security Products segment declined 4.2% from the comparable quarter of 2004. -10- The following table shows the changes in the first quarter of 2005 compared to the first quarter of 2004 in selected results, by segment (dollars in thousands):
Industrial Security Metal Hardware Products Products Total -------- -------- -------- ----- Sales $ 2,108 $ (444) $ 38 $ 1,702 Volume 15.0% -5.6% 3.3% 4.7% Prices 3.6% 0.0% -2.1% 1.3% New Products 0.7% 1.4% 0.0% 0.9% ---- ---- ---- ---- 19.3% -4.2% 1.2% 6.9% Gross margin $ 337 $ (400) $ (602) $ (665) 11.5% -12.9% -581.1% -10.8% Operating profit $ 248 $ (172) $ (624) $ (548) 23.5% -16.4% -425.2% -27.9%
The Industrial Hardware sales increase came from both distributors and original equipment manufacturers (OEM's) as the result of continued improvement in the economy, particularly in the manufacturing sector. Sales increased to our subcontractors for military vehicles as a result of 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 class-8 truck market as this industry continues to experience growth requiring our hardware; and sleeper boxes for Freightliner's Western Star tractor-trailer truck line. The sales decrease in the Security Products segment came as a result of a 6.5% decrease in sales of our products sold to the commercial laundry industry and a decrease of approximately 50% in sales of locks to computer manufacturers such as IBM and Sun Micro Systems. The decrease in commercial laundry was mainly in the mature product lines such as timers, money boxes and coin metering systems. The decrease in locks to the computer industry is the result of major computer manufacturers phasing locks out of their products. This segment did experience increased sales in several markets: the travel industry as the result of the SearchAlert(TM) lock; locks used for industrial enclosures; and smart card systems used in a retrofit program serving the commercial laundry market. Sales in the Metals Products segment were up 1.2%; mining was up 6.5% and contract casting products were down 10.6%. Our proprietary mine roof anchors increased as the result of sales to Canada, Norway and Australia. Sales of contract casting products were down as the result of increased price competition from China. During 2004, we entered into a technical agreement with the China University of Mining and Technology for the field-testing and eventual marketing of the Company's mechanical anchor systems, which are used to secure the roofs in underground mines. Now that these tests have been substantially and successfully completed, we are actively marketing our mine roof support products to penetrate the mining market in China. Raw material prices have leveled off for the most part and the Company was successful in passing on to our customers, where possible, these increases. Currently, there is no indication that the Company will not be able to obtain all the materials that it requires. Cash flow in the first quarter of 2005 has tightened as the Company experienced an increase in sales resulting in the need for additional working capital, primarily due to timing of accounts receivable collections. The Company's line of credit, along with controlling discretionary expenditures, should provide sufficient cash flow to meet all existing obligations. -11- 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.
Three Months Ended April 5, 2005 April 3, 2004 ----------------- ------------- Net sales 100.0% 100.0% Cost of products sold 79.2% 75.0% ----- ----- Gross margin 20.8% 25.0% Selling and administrative expense 15.4% 17.0% ----- ----- Operating profit 5.4% 8.0% Interest expense 0.9% 1.1% Other income 0.0% 0.0% ---- ---- Income before income taxes 4.5% 6.9% Income taxes 1.7% 2.5% ---- ---- Net Income 2.8% 4.4% ==== ====
Net income for the first quarter of 2005 was $730,600 or $.19 per diluted share on sales of $26.3 million compared to net income of $1,076,400 or $.29 per diluted share on sales of $24.6 million in the first quarter of 2004. Sales for the first quarter 2005 were up 6.9% compared to the same period a year ago. New product sales contributed 0.9% and price increases added 1.3%, while the volume of existing products increased 4.7%. The Industrial Hardware segment's first quarter sales were up 19.3% compared to the first quarter of 2004. New product sales increased 0.7%, volume of existing products increased 15.0% and prices were up 3.6%. New products include various latches and handles, a non-folding footstep and a recreational vehicle ramp door. Sales of "sleeper boxes" for the class-8 truck market were up 35.8%. The Company anticipates continued sales improvement in the Industrial Hardware segment throughout 2005. Our Eastern Industrial (Shanghai) Ltd., manufacturing facility located in Shanghai, China continues to produce 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. In addition to producing fabricated metal and plastic injection molding products, Eastern Industrial will be adding zinc die-casting capabilities in 2005. It will also serve as a sourcing center for products that do not compete directly against our North American based operations. The Security Products segment's sales were down 4.2% in the first quarter 2005 as compared to the first quarter of 2004. New product sales increased 1.4%, while sales volume of existing products decreased 5.6%. New products included a push-button toolbox lock, brackets, funnel sets and a sliding cover handle. Sales in this segment are projected to improve as the year progresses. The decrease in sales was primarily in the commercial laundry mechanical product lines such as timers, money boxes and coin metering systems. Smart Card systems saw a modest gain, but not sufficient to offset the decline in the more mature product lines. Our new SearchAlertTM saw a 67% sales gain, however this was more than offset with a 50% decline in locks sold to the computer industry resulting from a phase-out by computer manufacturers of locks for computers. -12- The Metal Products segment's sales were up 1.2% in the first quarter of 2005 as compared to the first quarter of 2004. Volume of existing products increased by 3.3% offset by a decrease of 2.1% in prices. Sales of our contract casting products for use in the commercial and industrial construction industry decreased 10.6% mainly due to price competition from China, while sales of our proprietary mine roof support anchors were up 6.5% for the first quarter of 2005 as compared to the first quarter of 2004. Mining sales were down in the U.S. but improved in Canada, Australia and Norway. The Company is continuing its efforts to penetrate the China mining market with its mechanical anchors used in mine roof support. Several large government mines in China, where our mine roof supports have been tested successfully, have shown an interest in products and are currently evaluating their use within these mines. Sales in the Metal Products segment are expected to improve throughout 2005 over prior year levels. Gross margin as a percentage of sales for the three months ended April 2, 2005 was 20.8% compared to 25.0% in the comparable period a year ago. The decrease in gross margin in the first quarter of 2005 is the result of product mix, some price erosion due to competitive pressures, higher raw material costs that could not be passed along to customers, higher utility costs, and higher payroll and payroll related charges. Selling and administrative expenses were down 2.8% or $117,500 for the first quarter of 2005 as compared to the same period a year ago. The decrease was due in large part to a patent infringement suit which added an additional $165,000 of legal expenses to the first quarter of 2004 offset by higher deferred compensation expenses of $41,700 in the 2005 period. Operating profit for the three months ended April 2, 2005 was down $547,800 or 27.9% as compared to the same period of 2004. The Industrial Hardware segment was up 23.5% or $248,300, the Security Products segment was down $172,600 or 16.4% and the Metal Products segment was down $623,500 or 425.2% as compared to the first quarter of 2004. The increases in the Industrial Hardware segment reflect the continued overall improvement in the economy in the first quarter of 2005, increased market share and the introduction of new products. The Security Products segment decline is due to lower sales volume versus the prior year period and the higher raw material costs that the Company received during 2004. The Metal Products segments operating loss was primarily the result of operating the foundry at reduced production levels relative to the high fixed operating costs of the foundry. The Company is working on several projects to increase sales in the Metal Products segment and improve profitability. Interest expense decreased by $29,500 or 10.7% for the first quarter of 2005 as compared to the same period in 2004. This decrease in interest expense was due to the lower average level of debt in the current period. Other income in the first quarter of 2005 was $7,500, which was comparable to the prior year period of $7,800. The effective tax rate of 37.9% for the first quarter is higher compared to the 36.5% for the first quarter of 2004. 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 used $382,500 in operations for the first three months of 2005 compared to $429,300 used by operations for the same period in 2004. The change in cash flows was the result of changes in the level of sales 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 and a draw down of $3.0 million on the Company's revolving loan were sufficient to fund capital expenditures, debt service, incentive payments, contributions to the Company's pension plans, and dividend payments. -13- Additions to property, plant and equipment were $741,800 during the first three months of 2005 versus $638,300 for the comparable period in the prior year. Total capital expenditures for 2005 are expected to be in the range of $2.0 million to $3.0 million. Total inventories as of April 2, 2005 were $20.5 million, comparable to year-end 2004. The inventory turnover ratio of 4.1 turns at the end of the first quarter was higher than the prior year first quarter of 3.7 turns and slightly lower than the year-end 2004 ratio of 4.4 turns. Accounts receivable increased by $1.5 million from year end 2004, primarily due to increased sales volume. The average days sales in accounts receivable for the first quarter of 2005 was 48 days compared to 49 days in the first quarter of 2004 and 47 days at year end 2004. 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. 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 returned to a rolling four-quarter test for the fiscal year beginning in 2005. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------ ---------------------------------------------------------- There have been no material changes in market risk from what was reported in the 2004 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 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. 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 - - ------ ------------------- There are no 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. -14- ITEM 2 UNREGISTERED SALES OF EQUITY 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-seventh day of April, 2005. The matters voted on and the voting results were:
FOR WITHHELD 1) Election of John W. Everets as a director for a three-year term expiring in the year 2008: 3,375,720 12,642 Election of Leonard F. Leganza as a director for a three-year term expiring in the year 2008: 2,960,830 427,532 Continuing Directors: Charles W. Henry David C. Robinson Donald S. Tuttle III FOR AGAINST ABSTENTION 2) Appointment of Ernst & Young LLP as independent registered public accounting firm: 3,371,410 10,467 6,485
ITEM 5 OTHER INFORMATION - ------ ----------------- None ITEM 6 EXHIBITS - ------ -------- 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 1, 2005 is incorporated herein by reference. 99(2)) Form 8-K filed on April 27, 2005 setting forth the press release reporting the Company's earnings for the quarter ended April 2, 2005 is incorporated herein by reference. -15- 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 3, 2005 /s/Leonard F. Leganza ----------- --------------------- Leonard F. Leganza President and Chief Executive Officer DATE: May 3, 2005 /s/John L. Sullivan, III ----------- ------------------------ John L. Sullivan, III Vice President, Secretary and Treasurer -16- EX-31 2 first10q2005ex31.txt CERTIFICATION 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: May 3, 2005 /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: May 3, 2005 /s/ John L. Sullivan III ------------------------ John L. Sullivan III CFO EX-32 3 first10q2005ex32.txt CERTIFICATION EXHIBIT 32 CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER Pursuant to 18 United States Code Section 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 April 2, 2005, 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 3rd day of May, 2005. /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-----