SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED MARCH 29, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM to .
Commission File Number 0-599
THE EASTERN COMPANY
(Exact Name of Registrant as specified in its charter)
Connecticut 06-0330020
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
112 Bridge Street, Naugatuck, Connecticut 06770
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(Address of principal executive offices) (Zip Code)
(203) 729-2255
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(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of March 29, 2003
----- --------------------------------
Common Stock, No par value 3,629,360
-1-
PART I
FINANCIAL INFORMATION
THE EASTERN COMPANY AND SUBSIDIARIES
ITEM I CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
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ASSETS
March 29, 2003 December 28, 2002
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CURRENT ASSETS
Cash and cash equivalents $ 6,010,106 $ 5,939,232
Investment in common stock, at market 771,570 807,438
Accounts receivable, less allowances:
2003 - $333,000; 2002 - $304,000 11,112,527 10,824,807
Inventories 16,169,244 16,534,657
Prepaid expenses and other 1,657,888 1,336,383
Deferred income taxes 564,000 564,000
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Total Current Assets 36,285,335 36,006,517
--------------------
Property, plant and equipment 40,854,676 40,442,628
Accumulated depreciation (16,197,779) (15,392,659)
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24,656,897 25,049,969
Goodwill and trademarks 10,560,149 10,514,047
Patents, technology and licences, less accumulated amortization 2,064,026 2,111,865
Intangible pension asset 1,112,129 1,112,129
Prepaid pension cost 1,310,540 1,338,010
============= =============
TOTAL ASSETS $ 75,989,076 $ 76,132,537
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 4,757,756 $ 3,838,412
Accrued compensation 1,136,154 1,923,463
Other accrued expenses 1,712,322 2,015,979
Current portion of long-term debt 2,629,762 2,628,664
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Total Current Liabilities 10,235,994 10,406,518
-------------------------
Deferred federal income taxes 763,687 737,987
Long-term debt, less current portion 18,265,314 18,920,747
Accrued postretirement benefits 2,596,552 2,578,156
Accrued rate swap obligation 1,037,519 1,138,086
Accrued pension obligation 4,448,197 4,448,197
Shareholders' Equity
Preferred Stock, no par value
Authorized shares - 2,000,000
(No shares issued)
Common Stock, no par value:
Authorized Shares - 25,000,000
Issued and outstanding shares:
2003-3,629,360; 2002-3,631,869
excluding 1,662,320 In 2003 and 1,657,320 shares held in treasury 852,534 883,695
Accumulated other comprehensive (loss)/income:
Foreign currency translation (720,879) (898,137)
Additional minimum pension liability, net of taxes (4,073,870) (4,073,870)
Derivative financial instruments, net of taxes (622,519) (683,086)
Unrealized holding gain on investment in common stock, net of taxes 14,325 35,893
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(5,402,943) (5,619,200)
Retained earnings 43,192,222 42,638,351
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TOTAL SHAREHOLDERS' EQUITY 38,641,813 37,902,846
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 75,989,076 $ 76,132,537
============= =============
See accompanying notes.
-2-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
March 29, 2003 March 30, 2002
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Net sales $ 21,590,714 $ 20,320,517
Interest income 12,569 13,215
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21,603,283 20,333,732
Cost of products sold 16,091,179 15,210,958
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5,512,104 5,122,774
Selling and administrative expenses 3,819,453 3,641,780
Interest expense 346,519 446,715
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INCOME BEFORE INCOME TAXES 1,346,132 1,034,279
Income taxes 392,755 357,172
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NET INCOME $ 953,377 $ 677,107
============= =============
Earnings per share:
Basic $ 0.26 $ 0.19
Diluted $ 0.26 $ 0.18
Cash dividends per share $ 0.11 $ 0.11
See accompanying notes.
-3-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
March 29, 2003 March 30, 2002
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OPERATING ACTIVITIES:
Net income $ 953,377 $ 677,107
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 908,383 859,137
Postretirement benefits other than pensions 18,396 -
Provision for Doubtful Accounts 27,799 3,919
Issuance of Common Stock for directors' fees 28,894 20,284
Changes in operating assets and liabilities:
Accounts receivable (571,406) (748,438)
Inventories (93,250) 792,056
Prepaid expenses and other 79,824 (177,216)
Prepaid pension cost 207,470 74,186
Accounts payable 161,887 147,153
Other Accrued expenses (194,126) 537,196
Other assets (39,479) (216,293)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,487,769 1,969,091
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (311,957) (122,400)
Business acquisitions, net of cash acquired - (264,027)
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NET CASH USED BY INVESTING ACTIVITIES (311,957) (386,427)
FINANCING ACTIVITIES:
Principal payments on long-term debt (656,530) (803,775)
Purchases of Common Stock for treasury (60,055) -
Dividends paid (399,506) (399,210)
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NET CASH USED BY FINANCING ACTIVITIES (1,116,091) (1,202,985)
Effect of exchange rate changes on cash 11,153 (9,554)
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NET CHANGE IN CASH AND CASH EQUIVALENTS 70,874 370,125
Cash and Cash Equivalents at Beginning of Period 5,939,232 4,955,020
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,010,106 $ 5,325,145
=========== ===========
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THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
March 29, 2003 March 30, 2002
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Net income $ 953,377 $ 677,107
Other comprehensive income (loss)
Currency translation 177,258 248,344
Change in fair value of derivative financial
instruments, net of income tax benefit:
2003 - ($40,000)
2002 - ($74,000) 60,567 110,578
Unrealized holding loss on investment in common
stock, net of income tax benefit of
$14,300 and $19,500 respectively (21,568) (29,272)
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Comprehensive income $1,169,634 $1,006,757
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THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 29, 2003
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. Refer to the
Company's consolidated financial statements and notes thereto included in its
Form 10-K for the year ended December 28, 2002 for additional information.
The accompanying condensed consolidated financial statements are unaudited.
However, in the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for interim periods have been reflected therein. Operating results
for interim periods are not necessarily indicative of the results that may be
expected for the full year.
Certain prior year amounts have been reclassified to conform to the 2003
presentation.
The condensed balance sheet as of December 28, 2002 has been derived from the
audited consolidated balance sheet at that date.
Note B - Earnings Per Share
- ---------------------------
The denominators used in the earnings per share computations follow:
THREE MONTHS ENDED
March 29, 2003 March 30, 2002
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Basic:
Weighted average shares outstanding 3,630,303 3,629,258
Contingent shares outstanding -- --
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Denominator for basic earnings per share 3,630,303 3,629,258
========= =========
Diluted:
Weighted average shares outstanding 3,630,303 3,629,258
Dilutive stock options -- 112,777
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Denominator for diluted earnings per share 3,630,303 3,742,035
========= =========
Note C - Inventories
- --------------------
The components of inventories follow:
March 29, 2003 December 28, 2002
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Raw materials and component parts $ 7,486,360 $ 7,658,722
Work in process 4,139,326 4,226,858
Finished goods 4,543,558 4,649,077
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$ 16,169,244 $ 16,534,657
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THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 29, 2003
Note D - Segment Information
- ----------------------------
Segment financial information follows:
THREE MONTHS ENDED
March 29, 2003 March 30, 2002
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Revenues:
Sales to unaffiliated customers:
Industrial Hardware $ 8,605,204 $ 6,897,070
Security Products 9,481,688 9,055,813
Metal Products 3,503,822 4,367,634
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21,590,714 20,320,517
General corporate 12,569 13,215
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$ 21,603,283 $ 20,333,732
============ ============
Income Before Income Taxes:
Industrial Hardware $ 1,123,869 $ 809,469
Security Products 1,069,774 911,167
Metal Products 144,575 248,579
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Operating Profit 2,338,218 1,969,215
General corporate expenses (645,567) (488,221)
Interest expense (346,519) (446,715)
------------ ------------
$ 1,346,132 $ 1,034,279
============ ============
Note E - Stock-Based Compensation
- ---------------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" which addressed financial accounting
and reporting for recording expenses for the fair value of stock options. SFAS
148 provides alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation as
originally provided by SFAS No. 123, "Accounting for Stock-Based Compensation."
Additionally, SFAS 148 amends the disclosure requirements of SFAS No.123 in
both annual and interim financial statements. The interim disclosure provisions
are effective for financial reports containing financial statements for interim
periods beginning after December 15, 2002.
The Company has elected to continue to account for stock options in accordance
with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees. As such, it does not recognize compensation expense for
stock options granted under its stock option plans if the exercise price is at
least equal to the fair market value of the Company's common stock on the date
granted. Stock-based compensation costs for stock awards are reflected in net
income over the awards' vesting period.
Pro forma information regarding net income and earnings per share, as required
by Statement No. 123 "Accounting for Stock-Based Compensation", has been
determined as if the Company had accounted for its employee stock options under
the fair value method. The fair value of the stock options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
-7-
March 29, 2003 March 30, 2002
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Risk free interest rate 2.78% 4.74%
Expected volatility 0.306 0.310
Expected option life 5 years 5 years
Weighted-average dividend yield 3.1% 3.1%
THREE MONTHS ENDED
March 29, 2003 March 30, 2002
Net income, as reported $953,377 $677,107
Deduct: Total stock-based employee
-------
compensation expense determined
under fair value based method for all
awards granted since July 19, 2000,
net of related tax effects (12,873) (14,505)
Pro forma net income $940,504 $662,602
Earnings per share:
Basic-as reported $0.26 $0.19
Basic-pro forma $0.26 $0.18
Diluted-as reported $0.26 $0.18
Diluted-pro forma $0.26 $0.18
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the stock options' vesting period ranging
from 1 to 5 years. The pro forma effect on net income and related earnings per
share may not be representative of future years' impact since the terms and
conditions of new grants may vary from the current terms.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
- ------ FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company makes estimates and assumptions that may materially affect reported
amounts and disclosures. These relate to valuation allowances for the
collectibility of accounts receivable and for excess and obsolete inventories,
accruals for pensions and other postretirement benefits (including forecasted
future cost increases and returns on plan assets), provisions for depreciation
(estimating useful lives), and, on occasion, accruals for contingent losses. The
Company is also subject to various risks and uncertainties that may cause actual
results to differ from estimated results, such as changes within our industry
segments, in the overall economy, competition, litigation and legislation.
Results of Operations
Net income for the first quarter of 2003 was $953,000 or $.26 per share
(diluted) on sales of $21.6 million compared to $677,000 or $.18 per share
(diluted) on sales of $20.3 million in the first quarter of 2002.
Sales for the first quarter 2003 increased 6% as compared to the same period a
year ago. New product introductions were up 8%, while volume of existing
products decreased 2%. New product sales include sleeper boxes for Class 8
trailer trucks, rotary locks, luggage tags, drawer slides and cable heads for
the mining industry.
-8-
The Industrial Hardware segment sales increased 25% as compared to the first
quarter of 2002. Sales volume of existing products increased 3%, while new
product sales increased sales by 22%. New product sales include the sleeper
boxes for Class 8 trailer trucks and various other locking and latching hardware
for the utility truck and vehicular accessory markets. Without the sales of
Canadian Commercial Vehicle Corporation, which sells the sleeper boxes for Class
8 trailer trucks, acquired in October 2002, sales in the Industrial Hardware
Segment would have increased 10% as compared to the first quarter of 2002. Heavy
hardware sales to the tractor-trailer market increased 58% from 2002 levels.
There has been improved activity in this market, which resulted in some
increased production in 2002. Management believes sales of heavy hardware to the
trailer industry will continue to improve throughout 2003. Sales of industrial
hardware, such as rotary locks, slam latches and multi-point paddle handles to
original equipment manufacturers and distributors was up approximately 3% as
compared to the first quarter of 2002. Sales of automotive accessories, such as
toolbox locks, push-button locks and rotary latches increased 5% and is expected
to show continued improvement through 2003. Sales of school bus door closures
increased 20% as compared to the same period a year ago. The Company anticipates
continued sales improvement in the Industrial Hardware segment throughout the
year 2003.
The Security Products segment's sales increased 5% in the first quarter 2003 as
compared to the first quarter of 2002. Sales of new products were up 2% and
volume of existing products was up 3%. The volume increase was primarily due to
gains in market share from competitors and improved activities in the computer
industry. Sales of locks to the travel industries were down 50% as compared to
the first quarter of 2002. The travel industry continues to be adversely
affected in the wake of September 11th terrorist attack and by general economic
conditions. Sales of new products included the new luggage tags and drawer
slides. Sales of security products to the commercial laundry industry increased
3% as compared to the first quarter of 2002. Sales of Smart Card products
continue to increase over prior year levels offsetting declines in some of the
more mature product lines. The Company expects sales in the Security Products
segment to continue to improve throughout 2003.
In the Metal Products segment, sales were down 20% from the previous year.
Volume of existing products dropped 21%, while new product sales increased sales
1%. Current year sales for contract castings were down 38% from the comparable
period in 2002. The decrease in the contract casting business was the result of
the Company's decision to de-emphasize this line of business beginning in the
third quarter of 2002. Sales of mine roof support anchors were down 7% compared
to the same period a year ago. Competition from suppliers of alternative
products contributed to the reduced level of sales in the first quarter of 2003.
The Company continues to look at new manufacturing methods and alternative
products to remain competitive in this industry. Sales in 2003 will be less than
that reported in 2002 as the Company continues to move away from the production
and sale of low margin contract castings.
Gross margin as a percentage of sales for the three months ended March 29,
2003 was 25% which is comparable to the same period a year ago.
Selling and administrative expenses were up 5% or $178 thousand for the first
quarter of 2003 as compared to the same period a year ago. The higher selling
and administrative expenses are due to increased pension expenses.
Interest expense for the first quarter of 2003 was down 22% or $100 thousand
as compared to the first quarter of 2002. The decrease in interest expense was
due to the lower debt and lower interest rates.
Earnings before income taxes for the first quarter of 2003 increased 30% or
$312 thousand as compared to the first quarter of 2002. The Industrial
Hardware segment earnings increased 39% or $314 thousand for 3 months as
compared to the same period a year ago. The increase was the direct result of
the additional earnings derived from the Canadian Commercial Vehicles
Corporation, a company acquired in October 2002. Increased sales volume of
industrial and transportation hardware reflecting greater utilization of
production facilities also contributed to the increase. The Security Products
segment earnings before income taxes for the three months ended March 29, 2003
were up 17% or $160 thousand as compared to the first quarter of 2002. This
increase was the result of
-9-
increased sales volume from our various lock products. The Metal Products
segment earnings were down 42% or $104 thousand compared to the first quarter
of 2002. The decrease was due to lower sales of mine roof expansion anchors as
well as reduced contract casting sales.
Liquidity and Sources of Capital
Cash flows from operations were $1.5 million for the first quarter of 2003 as
compared to $2.0 million for the same period in 2002. The change in cash flows
resulted from the associated timing differences for collections of accounts
receivable, payments of liabilities and changes in inventories. Cash flow from
operations coupled with cash on hand at the beginning of the first quarter of
2003 was sufficient to fund capital expenditures, debt service and dividend
payments.
Additions to property, plant and equipment were $311 thousand during the first
quarter of 2003 versus $386 thousand for the comparable period a year ago.
Total 2003 capital expenditures are expected to approximate $1.5 million to
$2.5 million.
Total inventories as of March 29, 2003 were $16.2 million as compared to the
$16.5 million level as of fiscal year-end December 28, 2002. The inventory
turnover ratio of 4.0 turns at the end of the first quarter was better than
the year end ratio of 3.7 turns and the 3.4 turns experienced in the first
quarter of 2002. Accounts receivable increased by $571 thousand from year-end
2002, primarily due to increased sales volume compared to the fourth quarter
of 2002. The average day's sales in accounts receivable for the first quarter
of 2003 was 47 days compared to year-end 2002 of 48 days and the first quarter
of 2002 of 52 days.
Cash flow from operating activities and funds available under the revolving
credit portion of the Company's loan agreement should be sufficient to cover
future foreseeable working capital requirements.
Forward-Looking Information
The preceding information contains forward looking statements which
reflect the Company's current expectations regarding its future operating
performance and achievements and is subject to certain risks and uncertainties
that could cause actual results to differ materially from those set forth in
such statements. Such risks and uncertainties include changing customer
preferences, lack of success of new products, loss of customers, competition,
increased raw material prices and problems associated with foreign sourcing of
parts and products. The Company is not obligated to update or revise the
aforementioned statements for new developments
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------ ----------------------------------------------------------
There have been no material changes in market risk from what was reported in
the 2002 Annual Report on Form 10-K.
ITEM 4 CONTROLS AND PROCEDURES
- ------ -----------------------
Evaluation of Disclosure Controls and Procedures
Within the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. The Company's disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in its periodic SEC filings is recorded, processed and reported
within the time periods specified in the SEC's rules and forms.
-10-
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in the
Company's periodic SEC filings.
Changes in Internal Controls
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
- ------ -----------------
There are no significant pending legal proceedings, other than
ordinary routine litigation incidental to the Company's business, to which
either the Registrant or any of its subsidiaries is a party or of which any of
their property is the subject.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
- ------ -----------------------------------------
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
The Registrant held its Annual Meeting of the Stockholders at
The Eastern Company, Naugatuck, Connecticut on Wednesday, the twenty-third day
of April 2003. The matters voted on and the voting results were:
FOR AGAINST ABSTENTION
1) Election of two directors
for a three-year term
expiring in the year 2006.
David C. Robinson 3,061,375 45,456
Donald S. Tuttle III 3,061,316 45,515
Continuing Directors:
John W. Everets
Leonard F. Leganza
Charles W. Henry
2) Appointment of Ernst &
Young LLP as
independent auditors: 3,075,975 13,491 17,362
ITEM 5 OTHER INFORMATION
- ------ -----------------
None
-11-
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) 99(1) The Registrants' Annual Report on Form 10-K for the
fiscal year ended December 28, 2002 is incorporated herein
by reference.
99(2) Certifications pursuant to Rule 13a-14 or Rule
15d-14 and 18 USC 1350 as adopted pursuant to the
Sarbanes-Oxley Act of 2002.
(b) None
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE EASTERN COMPANY
(Registrant)
DATE: May 13, 2003 /s/Leonard F. Leganza
------------ ---------------------
Leonard F. Leganza
President and Chief Executive Officer
DATE: May 13, 2003 /s/John L. Sullivan, III
------------ ------------------------
John L. Sullivan III
Vice President, Secretary and Treasurer
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