-----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, RCw9XuGoLAfpjoAlaegCp1ynKnLl9DH382XFeda0mRENNi2M8p6ipBuYGS+gXLzQ RC6efCR7ZO2TVrne6VDfgg== 0000031107-06-000061.txt : 20060728 0000031107-06-000061.hdr.sgml : 20060728 20060728153743 ACCESSION NUMBER: 0000031107-06-000061 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060701 FILED AS OF DATE: 20060728 DATE AS OF CHANGE: 20060728 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: 06987983 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 second10q2006.txt 2ND QTR 10-Q 2006 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED July 1, 2006 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) Not applicable -------------- (Former name, former address and former fiscal year, if changed since last report) 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (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 1, 2006 ----- ------------------------------- Common Stock, No par value 3,651,499 -1- PART 1 - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS July 1, 2006 December 31, 2005 - ------ ------------ ----------------- Current Assets Cash and cash equivalents $ 2,739,441 $ 6,345,947 Accounts receivable, less allowances: $294,000 - 2006; $295,000 - 2005 16,111,181 14,825,014 Inventories 23,613,634 20,767,749 Prepaid expenses and other assets 2,171,782 2,391,125 Deferred income taxes 715,321 715,321 ------------- ------------- Total Current Assets 45,351,359 45,045,156 Property, Plant and Equipment 45,024,413 42,468,773 Accumulated depreciation (21,765,757) (20,072,087) ------------- ------------- 23,258,656 22,396,686 Goodwill 10,691,280 10,641,532 Trademarks 126,392 103,498 Patents, technology, and licenses, less accumulated amortization 1,952,362 1,946,502 Interest rate swap asset 167,725 32,081 Intangible pension asset 732,554 732,554 Prepaid pension cost 744,928 723,826 ------------- ------------- 14,415,241 14,179,993 ------------- ------------- TOTAL ASSETS $ 83,025,256 $ 81,621,835 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Accounts payable $ 6,744,299 $ 5,599,260 Accrued compensation 1,293,321 1,527,640 Other accrued expenses 3,310,520 3,275,159 Current portion of long-term debt 3,449,066 3,420,523 ------------- ------------- Total Current Liabilities 14,797,206 13,822,582 Deferred income taxes 944,106 895,019 Long-term debt, less current portion 10,713,824 12,384,338 Accrued post-retirement benefits 1,980,971 2,078,056 Accrued pension cost 6,369,834 6,270,075 Shareholders' Equity Preferred Stock, no par value: Authorized and unissued 2,000,000 shares Common Stock, no par value: Authorized: 25,000,000 shares Issued: 5,340,225 shares in 2006 and 5,328,417 shares in 2005 17,937,001 17,694,851 Treasury Stock: 1,688,726 shares (16,655,041) (16,655,041) Retained earnings 51,853,544 50,335,658 Accumulated other comprehensive income (loss): Foreign currency translation 1,019,523 818,566 Additional minimum pension liability, net of taxes (6,042,553) (6,042,553) Derivative financial instruments, net of taxes 106,841 20,284 ------------- ------------- Accumulated other comprehensive loss (4,916,189) (5,203,703) ------------- ------------- Total Shareholders' Equity 48,219,315 46,171,765 ------------- ------------- TOTAL LIBILITIES AND SHAREHOLDERS' EQUITY $ 83,025,256 $ 81,621,835 ============= =============
See accompanying notes. -2- THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended Three Months Ended July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005 ------------ ------------ ------------ ------------ Net sales $ 57,529,342 $ 53,688,878 $ 29,669,159 $ 27,421,294 Cost of products sold (44,570,597) (41,766,852) (23,194,158) (20,969,162) -------------- -------------- -------------- -------------- Gross margin 12,958,745 11,922,026 6,475,001 6,452,132 Selling and administrative expenses (8,722,668) (8,547,685) (4,261,200) (4,493,691) -------------- -------------- -------------- -------------- Operating profit 4,236,077 3,374,341 2,213,801 1,958,441 Interest expense (471,101) (523,257) (231,525) (276,315) Other income 47,630 23,672 17,707 16,170 -------------- -------------- -------------- -------------- Income before income taxes 3,812,606 2,874,756 1,999,983 1,698,296 Income taxes 1,456,284 1,060,785 787,426 614,907 -------------- -------------- -------------- -------------- Net income $ 2,356,322 $ 1,813,971 $ 1,212,557 $ 1,083,389 ============== ============== ============== ============== Earnings per Share: Basic $ .65 $ .50 $ .33 $ .30 ======= ======= ======= ======= Diluted $ .61 $ .47 $ .31 $ .28 ======= ======= ======= ======= Cash dividends per share: $ .23 $ .22 $ .12 $ .11
See accompanying notes. THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Six Months Ended Three Months Ended July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005 ------------ ------------ ------------ ------------ Net income $ 2,356,322 $ 1,813,971 $ 1,212,557 $ 1,083,389 Other comprehensive income/(loss) - Change in foreign currency translation 200,957 (34,320) 122,476 7,760 Change in fair value of derivative financial instruments, net of income taxes of: 2006 - ($49,087) and ($17,925) respectively 86,557 - 33,379 - 2005 - ($64,000) and ($23,000) respectively - 96,417 - 60,948 ------------- ------------- ------------- ------------- 287,514 62,097 155,855 68,708 ------------- ------------- ------------- ------------- Comprehensive income $ 2,643,836 $ 1,876,068 $ 1,368,412 $ 1,152,097 ============= ============= ============= =============
See accompanying notes. -3- THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended July 1, 2006 July 2, 2005 ------------ ------------- Operating Activities Net income $ 2,356,322 $ 1,813,971 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,736,285 1,782,112 Provision for doubtful accounts 3,464 5,022 Deferred income taxes - 192,439 Issuance of Common Stock for directors' fees 38,451 51,417 Changes in operating assets and liabilities: Accounts receivable (1,289,683) (1,815,594) Inventories (2,870,071) 92,969 Prepaid expenses and other 213,018 208,669 Prepaid pension cost 78,656 (698,422) Other assets (84,492) (111,545) Accounts payable 1,434,903 752,789 Accrued compensation (161,194) (1,198,515) Other accrued expenses (347,850) (440,349) ------------ ------------ Net cash provided by operating activities 1,107,809 634,963 Investing Activities Purchases of property, plant and equipment (2,364,583) (920,031) Proceeds from sale of equipment 15,035 - ------------ ------------ Net cash used in investing activities (2,349,548) (920,031) Financing Activities Principal payments on long-term debt (1,710,919) (2,203,599) Proceeds from revolving credit loan - 3,000,000 Proceeds from sales of Common Stock 203,700 - Dividends paid (838,436) (799,795) ------------ ------------ Net cash used in financing activities (2,345,655) (3,394) Effect of exchange rate changes on cash (19,112) 6,298 ------------ ------------ Net change in cash and cash equivalents (3,606,506) (282,164) Cash and cash equivalents at beginning of period 6,345,947 4,420,506 ------------ ------------ Cash and cash equivalents at end of period $ 2,739,441 $ 4,138,342 ============ ============
See accompanying notes. -4- THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 1, 2006 Note A - Basis of Presentation - ------------------------------ The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. Refer to the Company's consolidated financial statements and notes thereto included in its Form 10-K for the year ended December 31, 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. All intercompany accounts and transactions are eliminated. 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 consolidated balance sheet as of December 31, 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:
Six Months Ended Three Months Ended July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005 ------------ ------------ ------------ ------------ Basic: Denominator for basic earnings per share 3,646,915 3,635,546 3,650,703 3,636,100 Diluted: Weighted average shares outstanding 3,646,915 3,635,546 3,650,703 3,636,100 Dilutive stock options 223,587 240,690 230,925 248,959 --------- --------- --------- --------- Denominator for diluted earnings per share 3,870,502 3,876,236 3,881,628 3,885,059 ========= ========= ========= =========
Note C - Inventories - -------------------- The components of inventories follow:
July 1, 2006 December 31, 2005 ------------ ----------------- Raw materials and component parts $11,287,317 $ 9,917,792 Work in process 5,313,068 4,681,623 Finished Goods 7,013,249 6,168,334 ----------- ----------- $23,613,634 $20,767,749 =========== ===========
-5- Note D - Segment Information - ---------------------------- Segment financial information follows:
SIX MONTHS ENDED THREE MONTHS ENDED July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005 ------------ ------------ ------------ ------------ Revenues: Sales to unaffiliated customers: Industrial Hardware $ 27,348,308 $ 26,837,746 $ 14,468,868 $ 13,817,476 Security Products 23,505,178 21,233,164 11,895,829 11,211,588 Metal Products 6,675,856 5,617,968 3,304,462 2,392,230 ------------ ------------ ------------ ------------ $ 57,529,342 $ 53,688,878 $ 29,669,159 $ 27,421,294 ============ ============ ============ ============ Income Before Income Taxes: Industrial Hardware $ 2,198,731 $ 2,646,857 $ 1,187,819 $ 1,341,197 Security Products 2,421,964 1,885,274 1,270,298 1,004,870 Metal Products (384,618) (1,157,790) (244,316) (387,626) ------------ ------------ ------------ ------------ Operating Profit 4,236,077 3,374,341 2,213,801 1,958,441 Interest expense (471,101) (523,257) (231,525) (276,315) Other income 47,630 23,672 17,707 16,170 ------------ ------------ ------------ ------------ $ 3,812,606 $ 2,874,756 $ 1,999,983 $ 1,698,296 ============ ============ ============ ============
Note E - Recent Accounting Pronouncements - ----------------------------------------- The Company adopted FASB Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), Share-Based Payment, using the modified prospective method effective January 1, 2006. No stock options were granted in the first six months of 2006 and, as all stock options outstanding at December 31, 2005 were fully vested, the adoption of SFAS No. 123(R) had no impact on the Company's consolidated financial statements. The following table approximates the effect on net income and earnings per share if the Company had applied SFAS No. 123(R) for the periods ended July 2, 2005 and had adopted this statement on January 2, 2005:
SIX MONTHS THREE MONTHS ENDED ENDED July 2, 2005 July 2, 2005 ------------ ------------ Net income, as reported $1,813,971 $1,083,389 Deduct: Total stock-based employee ------- compensation expense determined under fair value based method for all awards granted, net of related tax effects (876) (438) ---------- ---------- Pro forma net income $1,813,095 $1,082,951 ========== ========== Earnings per share: Basic-as reported $0.50 $0.30 Basic-pro forma $0.50 $0.30 Diluted-as reported $0.47 $0.28 Diluted-pro forma $0.47 $0.28
-6- 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. The Company adopted SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, effective January 1, 2006. 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 adoption of SFAS No. 151 did not have a material impact on the consolidated financial statements of the Company. The Company adopted SFAS No. 154, Accounting Changes and Error Corrections--a replacement of APB Opinion No. 20 (Accounting Changes) and FASB Statement No. 3 (Reporting Accounting Changes in Interim Financial Statements), effective January 1, 2006. SFAS No. 154 provides guidance on accounting for and reporting of accounting changes and error corrections. It requires retrospective application to prior periods' financial statements, unless it is impracticable to determine either the specific period effects or the cumulative effect of the change. The adoption of SFAS No. 154 did not have a material impact on the Company's consolidated financial statements. Note F - Debt - ------------- On March 8, 2006, the Company signed a capital lease in the amount of $68,948 with Citicorp Vendor Finance for the purchase of new lighting equipment at its Greenwald facility in Chester, Connecticut. The lease has a three year term at 0% interest rate. Payments under the lease are $1,915 per month. Note G - Goodwill - ----------------- The following is a roll-forward of goodwill from year-end 2005 to the end of the second quarter 2006: Beginning balance - December 31, 2005 $ 10,641,532 Foreign exchange 49,748 ------------ Ending balance - July 1, 2006 $ 10,691,280 ============ Note H - 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. -7- Significant disclosures relating to these benefit plans for the second quarter and first six months of Fiscal 2006 and 2005 follow:
Pension Benefits ---------------- Six Months Ended Three Months Ended -------------------------------- -------------------------------- July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005 ------------ ------------ ------------ ------------ Service cost $ 800,332 $ 673,680 $ 398,875 $ 336,840 Interest cost 1,166,466 1,113,211 545,892 566,606 Expected return on plan assets (1,512,097) (1,358,011) (756,048) (679,005) Net amortization and deferral 299,288 193,686 149,643 96,843 ---------- ---------- ---------- ---------- Net periodic benefit cost $ 753,989 $ 622,566 $ 338,362 $ 321,284 ========== ========== ========== ==========
Post-retirement Benefits ------------------------ Six Months Ended Three Months Ended -------------------------------- -------------------------------- July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005 ------------ ------------ ------------ ------------ Service cost $ 43,282 $ 43,358 $ 21,641 $ 21,679 Interest cost 52,112 59,204 26,056 29,720 Expected return on plan assets (43,252) (39,594) (21,626) (19,521) Net amortization and deferral (41,758) (38,801) (20,879) (19,064) ---------- ---------- ---------- ---------- Net periodic benefit cost $ 10,384 $ 24,167 $ 5,192 $ 12,814 ========== ========== ========== ==========
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. For 2005, the Company was required to contribute $1,403,000 into its salaried plan ($600,000 contributed as of July 1, 2006) and $266,000 into one of its hourly plans ($208,000 contributed as of July 1, 2006). The Company will make the remaining contributions prior to filing its federal income tax return on September 15, 2006. The required contributions for 2006 have not yet been determined by the Company's actuaries. Any required contribution will be paid prior to filing its federal tax return on September 15, 2007. 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 $43,910 and $86,153 in the second quarter and first six months of 2006, respectively, and $42,313 and $82,713 in the second quarter and first six months of 2005, respectively. 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 1, 2006. 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 December 31, 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 December 31, 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 -8- 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 Net sales for the second quarter of 2006 increased 8% to $29.7 million from $27.4 million in the second quarter of 2005. Second quarter net income increased 12% to $1.2 million, or $0.31 per diluted share, from $1.1 million, or $0.28 per diluted share. Net sales for the first six months of 2006 increased 7% to $57.5 million from $53.7 million in the first six months of 2005. Net income increased 30% to $2.4 million, or $0.61 per diluted share, from $1.8 million, or $0.47 per diluted share. Raw material prices have increased sharply during the first half of 2006, mainly in zinc, brass and stainless steel. The Company is recovering these increases from our customers, wherever possible. Currently, there is no indication that the Company will not be able to obtain supplies of all the materials that it requires. Cash flow from operations in the first six months of 2006 has improved compared to the same period in 2005. The Company's line of credit, along with controlling discretionary expenditures, should provide sufficient cash flow to enable the Company to meet all its existing obligations. A more detailed analysis of the Company's results of operations and financial condition follows: RESULTS OF OPERATIONS The following table shows, for the second quarter of 2006 and 2005, selected line items from the condensed consolidated statements of income as a percentage of net sales, by segment:
Three Months Ended July 1, 2006 ------------------------------- Industrial Security Metal Hardware Products Products Total ---------- -------- -------- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 78.3% 72.6% 97.6% 78.2% Gross margin 21.7% 27.4% 2.4% 21.8% Selling and administrative expense 13.4% 16.8% 9.8% 14.3% Operating profit 8.3% 10.6% -7.4% 7.5%
Three Months Ended July 2, 2005 ------------------------------- Industrial Security Metal Hardware Products Products Total ---------- -------- -------- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 75.2% 72.1% 104.1% 76.5% Gross margin 24.8% 27.9% -4.1% 23.5% Selling and administrative expense 15.0% 19.0% 12.1% 16.4% Operating profit 9.8% 8.9% -16.2% 7.1%
-9- The following table shows the amount of change from the second quarter of 2005 to the second quarter of 2006 in sales, cost of products sold, gross margin, selling and administrative expenses and operating profit, by segment (dollars in thousands):
Industrial Security Metal Hardware Products Products Total ---------- -------- -------- ----- Net sales $ 651 $ 685 $ 912 $ 2,248 Volume 2.9% 5.4% 28.1% 6.1% Prices 0.0% 0.3% 0.0% 0.1% New Products 1.8% 0.4% 10.0% 2.0% --- --- ---- --- 4.7% 6.1% 38.1% 8.2% Cost of products sold $ 938 $ 551 $ 736 $ 2,225 9.0% 6.8% 29.6% 10.6% Gross margin $ (287) $ 134 $ 176 $ 23 -8.4% 4.3% 179.8% 0.4% Selling and administrative expenses $ (134) $ (131) $ 33 $ (232) -6.4% -6.2% 11.4% -5.2% Operating profit $ (153) $ 265 $ 143 $ 255 -11.4% 26.4% 37.0% 13.0%
The following table shows, for the first six months of 2006 and 2005, selected line items from the condensed consolidated statements of income as a percentage of net sales, by segment:
Six Months Ended July 1, 2006 ----------------------------- Industrial Security Metal Hardware Products Products Total ---------- -------- -------- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 77.2% 72.5% 96.0% 77.5% Gross margin 22.8% 27.5% 4.0% 22.5% Selling and administrative expense 14.8% 17.1% 9.7% 15.2% Operating profit 8.0% 10.4% -5.7% 7.3%
Six Months Ended July 2, 2005 ----------------------------- Industrial Security Metal Hardware Products Products Total ---------- -------- -------- ----- Net sales 100.0% 100.0% 100.0% 100.0% Cost of products sold 75.1% 72.5% 110.6% 77.8% Gross margin 24.9% 27.5% -10.6% 22.2% Selling and administrative expense 15.1% 18.6% 10.0% 15.9% Operating profit 9.8% 8.9% -20.6% 6.3%
-10- The following table shows the amount of change from the first six months of 2006 compared to the first six months of 2005 in sales, cost of products sold, gross margin, selling and administrative expenses and operating profit, by segment (dollars in thousands):
Industrial Security Metal Hardware Products Products Total ---------- -------- -------- ----- Net sales $ 510 $ 2,272 $ 1,058 $ 3,840 Volume -2.1% 9.7% 12.6% 4.1% Prices 0.0% 0.2% 0.6% 0.2% New Products 4.0% 0.7% 5.6% 2.9% --- --- --- --- 1.9% 10.7% 18.8% 7.2% Cost of products sold $ 957 $ 1,651 $ 195 $ 2,803 4.8% 10.7% 3.1% 6.7% Gross margin $ (447) $ 621 $ 863 $ 1,037 -6.7% 10.7% 144.5% 8.7% Selling and administrative expenses $ 2 $ 84 $ 89 $ 175 0.0% 2.1% 15.9% 2.0% Operating profit $ (449) $ 537 $ 774 $ 862 -16.9% 28.5% 66.8% 25.5%
INDUSTRIAL HARDWARE SEGMENT Net sales in the Industrial Hardware segment were up 5% in the second quarter and 2% in the first half of 2006 compared to the prior year periods. The sales increase was mainly the result of increased sales of hardware to the truck accessories and service body markets and new products, which more than offset decreased sales of "sleeper boxes" for the Class 8 trailer truck market compared to the same period in 2005. The Company expects the sales volume of "sleeper boxes" to improve as the year progresses. In addition, new products developed using our lightweight honeycomb composites included a mobile pickup mounted camper shell for emergency vehicle use and a mobile building door for military use. Other new products included a retro-fit kit for the military Humvee, a 3 point t-handle assembly and a star wheel rotary assembly for the truck accessory market, a hidden hinge and a remote magnet alarm for the service body market and an assortment of handles and latches used in many of the markets we sell to. All of the new products were developed internally for the variety of markets we serve. Our Eastern Industrial (Shanghai) Ltd., manufacturing facility located in Shanghai, China continues to produce products for our U.S. affiliates and in the first half of 2006 also continued ramping up for shipments of products to non-associated customers. This subsidiary will be instrumental in helping us to remain price competitive in North America and will open up the possibility to effectively pursue global markets. Cost of products sold for the Industrial Hardware segment increased 9% in the second quarter and 5% in the first half of 2006 compared to the prior year periods. The increase in the cost of products sold is primarily the result of increases in sales volume, costs of raw materials, payroll and payroll related charges and utilities that were experienced during the periods. Gross margin as a percent of net sales decreased from 25% to 22% in the second quarter and from 25% to 23% in the first half of 2006 compared to the prior year periods due to the higher manufacturing costs and changes in the mix of products sold. Selling and administrative expenses for the second quarter decreased 6% compared to the prior year period due to decreases in advertising expenses, travel costs and payroll and payroll related charges. Selling and administrative expenses for the first half of 2006 were comparable to the prior year period. -11- SECURITY PRODUCTS SEGMENT Net sales in the Security Products segment increased 6% in the second quarter and 11% in the first half of 2006 compared to 2005 periods. Sales volume in the second quarter of 2006 was up in all of the segments' operating units except for commercial laundry compared to the 2005 second quarter. Sales volume increases were experienced at all of the segment's operating units during the first six months of 2006 and in many of the markets we service including: automotive accessories, coin operated machines, gaming, electronics, enclosures and commercial laundry. Sales of new products focused on lock products such as the Super SesameeTM padlock, an electric car lock set, a remote keyless lock, and cash drawer bill hold down and till assemblies as well as various other items for the many markets we service. Cost of products sold for the Security Products segment was up 7% in the second quarter and 11% in the first half of 2006 compared to the 2005 periods. Most of the increase in cost of products sold was the result of increased sales volume. Additional factors affecting this segment were increases in raw material costs, freight costs, payroll and payroll related charges and utilities. Gross margin as a percentage of sales in the second quarter of 2006 decreased to 27% from 28% in the 2005 period due to higher manufacturing costs in the 2006 quarter. Gross margin as a percentage of sales was comparable at 27.5% for the first half of both 2006 and 2005. Selling and administrative expenses decreased 6% in the second quarter and increased 2% in the first half of 2006 from 2005 levels. The decrease in the second quarter was due to lower travel and trade show expenses compared to the same period in 2005. The increase in the first half was due to higher payroll and payroll related charges and advertising expenses which exceeded reductions in travel and trade show expenses resulting in the overall increase in 2006. METAL PRODUCTS SEGMENT Net sales in the Metal Products segment were up 38% in the second quarter and 19% in the first half of 2006 as compared to the prior year periods. Sales of mining products were up 48% in the second quarter of 2006 compared to the second quarter of 2005 and sales of contract castings increased 7% from the prior year levels. Sales of mining products were up 21% in the first half of 2006 compared to the first six months of 2005 and sales of contract castings increased 12% from the comparable period in 2005. New product sales were primarily a new mine roof anchor for the Canadian mining market and a large flange nut. The Company expects the installation of the new automatic pouring system for ductile iron which was completed in July to increase efficiency in producing ductile iron castings and is continuing its marketing efforts for mine roof anchors in the China mining industry. Cost of products sold increased 30% in the second quarter and 3% in the first half of 2006 compared to the same periods in 2005. The increase was mainly due to increases in sales volume, raw materials and payroll and payroll related charges. Gross margin as a percentage of net sales increased from -4% to 2% in the second quarter of 2006 compared to the 2005 period and improved from -11% in the first half of 2005 to 4% for the first half of 2006. The improvement is primarily due to the increased sales volume and the mix of products produced. Selling and administrative expenses were up 11% in the second quarter and up 16% the first half of 2006 compared to the same periods in 2005. The increases were related to increases in payroll and payroll related charges, advertising costs and travel expenses. -12- OTHER ITEMS Interest expense decreased 16% in the second quarter and 10% in the first six months of 2006 compared to the prior year periods mainly due to the new swap contract associated with the loan agreement which was amended in August 2005 and lower debt balances. Other income increased 10% in the second quarter and 101% from the first six months of 2005 to 2006 due to higher cash balances in the Company's cash management program, which resulted in higher interest income. Income taxes increased in line with the higher earnings level. The effective tax rate in the second quarter of 2006 increased to 39% from the 2005 rate of 36%. The effective tax rate in the first six months of 2006 was 38% compared to 37% in the first six months of 2005. The increase in the effective tax rates in 2006 are 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 generated $1.1 million from operations for the first six months of 2006 compared to $635,000 for the same period in 2005. The change in cash flows was the result of improved earnings, the 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 were sufficient to fund capital expenditures, debt service, incentive payments, contributions to the Company's pension plans, and dividend payments. Additions to property, plant and equipment were $2.4 million during the first six months of 2006 versus $920,000 for the comparable period in the prior year. Total capital expenditures for 2006 are expected to be in the range of $3.0 million to $4.0 million. Total inventories as of July 1, 2006 were $23.6 million, compared to $20.8 million at year-end 2005. The inventory turnover ratio of 3.8 turns at the end of the second quarter was slightly lower than both the prior year second quarter and year-end 2005 ratio of 4.1 turns. The increase in inventory is a result of increased business in the United States, an increase in the level of ductile iron inventory in anticipation of the installation of the new auto-pour system in the Metal Products segment, and the ramping up of production at our facility in Shanghai, China. Accounts receivable increased by $1.3 million from year end 2005, primarily due to increased sales volume. The average days sales in accounts receivable for the second quarter of 2006 was 49 days compared to 48 days in the second quarter of 2005 and 49 days at year end 2005. 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. ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk from what was reported in the 2005 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. -13- 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 material pending 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 1A - RISK FACTORS There have been no material changes in risk factors from what was reported in the 2005 Annual Report on Form 10-K. ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS There have been no sales of unregistered securities by the Company or purchases of registered equity securities by the Company during the period covered by this report. 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 1, 2006. ITEM 5 - OTHER INFORMATION None -14- 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 December 31, 2005 is incorporated herein by reference. 99(2)) Form 8-K filed on April 26, 2006 setting forth the press release reporting the Company's earnings for the quarter ended April 1, 2006 is incorporated herein by reference. 99(3)) Form 8-K filed on July 26, 2006 setting forth the press release reporting the Company's earnings for the quarter ended July 1, 2006 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: July 28, 2006 /s/Leonard F. Leganza ------------- --------------------- Leonard F. Leganza President and Chief Executive Officer DATE: July 28, 2006 /s/John L. Sullivan III ------------- ----------------------- John L. Sullivan III Vice President, Secretary and Treasurer -15- EX-31 2 exhibit31qtr2.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: July 28, 2006 ------------- /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: July 28, 2006 ------------- /s/ John L. Sullivan III ------------------------ John L. Sullivan III CFO EX-32 3 exhibit32qtr2.txt SECTION 1350 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 July 1, 2006, 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 28th day of July, 2006. /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-----