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 3, 2004
OR[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR
THE TRANSITION PERIOD FROM to .
Commission File Number 0-599
THE EASTERN COMPANY
-------------------
(Exact Name of Registrant as specified in its charter)
Connecticut 06-0330020
----------- ----------
(State or other jurisdiction of (I.R.S. Employer incorporation or
organization) Identification No.)
112 Bridge Street, Naugatuck, Connecticut 06770
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(203) 729-2255
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No-- .
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes-- No X.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of April 3, 2004
----- -------------------------------
Common Stock, No par value 3,625,339
-1-
PART I
FINANCIAL INFORMATION
THE EASTERN COMPANY AND SUBSIDIARIES
ITEM I CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
------
ASSETS
April 3, 2004 January 3, 2004
------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 2,900,375 $ 4,896,816
Accounts receivable, less allowances:
2004 - $310,000; 2003 - $302,000 13,287,772 11,036,760
Inventories 16,772,800 16,926,548
Prepaid expenses and other 1,796,387 1,642,513
Deferred income taxes 421,700 462,700
------------ ------------
Total Current Assets 35,179,034 34,965,337
--------------------
Property, plant and equipment 43,444,003 42,819,165
Accumulated depreciation (18,697,253) (17,888,740)
------------ ------------
24,746,750 24,930,425
Goodwill and trademarks 10,517,417 10,687,373
Patents, technology and licenses, less accumulated
amortization 2,015,408 1,877,408
Intangible pension asset 964,592 964,592
Prepaid pension cost 957,479 1,192,281
------------ ------------
TOTAL ASSETS $ 74,380,680 $ 74,617,416
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,092,087 $ 4,246,633
Accrued compensation 1,344,745 1,782,408
Other accrued expenses 1,911,519 2,034,918
Current portion of long-term debt 2,002,121 2,007,273
------------ ------------
Total Current Liabilities 10,350,472 10,071,232
-------------------------
Deferred federal income taxes 1,243,264 1,243,264
Long-term debt, less current portion 15,163,192 15,814,669
Accrued postretirement benefits 2,359,770 2,384,770
Accrued rate swap obligation 478,612 580,055
Accrued pension obligation 3,373,577 4,015,858
Shareholders' Equity
Preferred Stock, no par value
Authorized shares - 2,000,000
(No shares issued)
Common Stock, no par value:
Authorized Shares - 25,000,000
Issued and outstanding shares:
2004-3,625,339; 2003-3,616,039
excluding 1,680,342 in 2004 and 1,680,342
in 2003 shares held in treasury 799,392 664,949
Accumulated other comprehensive (loss)/income:
Foreign currency translation (135,565) (166,295)
Additional minimum pension liability, net of taxes (4,049,886) (4,049,886)
Derivative financial instruments, net of taxes (287,612) (348,055)
------------ ------------
(4,473,063) (4,564,236)
Retained earnings 45,085,464 44,406,855
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 41,411,793 40,507,568
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 74,380,680 $ 74,617,416
============ ============
See accompanying notes.
-2-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
April 3, 2004 March 29, 2003
------------- --------------
Net sales $ 24,565,208 $ 21,590,714
Cost of products sold 18,430,062 16,091,179
------------ ------------
6,135,146 5,499,535
Selling and administrative expenses 4,171,486 3,819,453
Interest expense 276,397 346,519
Other income 7,812 12,569
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INCOME BEFORE INCOME TAXES 1,695,075 1,346,132
Income taxes 618,702 392,755
------------ ------------
NET INCOME $ 1,076,373 $ 953,377
============ ============
Earnings per share:
Basic $ 0.30 $ 0.26
Diluted $ 0.29 $ 0.26
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
April 3, 2004 March 29, 2003
------------- --------------
OPERATING ACTIVITIES:
Net income $ 1,076,373 $ 953,377
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 892,152 908,383
Postretirement benefits other than pensions (25,000) 18,396
Provision for doubtful accounts 4,215 27,799
Issuance of Common Stock for directors' fees 19,018 28,894
(Gain)/Loss on sale of equipment & other assets (3,516) -
Changes in operating assets and liabilities:
Accounts receivable (2,405,487) (571,406)
Inventories 180,825 (93,250)
Prepaid expenses and other (159,550) 79,824
Prepaid pension cost (215,543) 207,470
Accounts payable 652,821 161,887
Other Accrued expenses (405,248) (194,126)
Other assets (40,378) (39,479)
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NET CASH (USED)/PROVIDED BY OPERATING ACTIVITIES (429,318) 1,487,769
INVESTING ACTIVITIES:
Proceeds from sale of equipment 3,516 -
Purchases of property, plant, and equipment (638,309) (311,957)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (634,793) (311,957)
FINANCING ACTIVITIES:
Principal payments on long-term debt (656,438) (656,530)
Proceeds from sale of Common Stock 115,425 -
Purchases of Common Stock for treasury - (60,055)
Dividends paid (397,764) (399,506)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (938,777) (1,116,091)
Effect of exchange rate changes on cash 6,447 11,153
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NET CHANGE IN CASH AND CASH EQUIVALENTS (1,996,441) 70,874
Cash and Cash Equivalents at Beginning of Period 4,896,816 5,939,232
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,900,375 $ 6,010,106
=========== ===========
-4-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
April 3, 2004 March 29, 2003
Net income $1,076,373 $ 953,377
Other comprehensive income (loss)
Currency translation 30,730 177,258
Change in fair value of derivative financial
instruments, net of income tax benefit:
2004 - ($41,000)
2003 - ($40,000) 60,443 60,567
Unrealized holding loss on investment in common
stock, net of income tax benefit of $14,300 - (21,568)
---------- ---------
Comprehensive income $1,167,546 $ 1,169,634
========== ===========
-5-
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 3, 2004
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements. Refer to the
Company's consolidated financial statements and notes thereto included in its
Form 10-K for the year ended January 3, 2004 for additional information.
The accompanying condensed consolidated financial statements are unaudited.
However, in the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for interim periods have been reflected therein. Operating results
for interim periods are not necessarily indicative of the results that may be
expected for the full year.
Certain prior year amounts have been reclassified to conform to the current year
presentation. These reclassifications had no effect on previously reported net
income.
The condensed balance sheet as of January 3, 2004 has been derived from the
audited consolidated balance sheet at that date.
Note B - Earnings Per Share
The denominators used in the earnings per share computations follow:
THREE MONTHS ENDED
April 3, 2004 March 29, 2003
Basic:
Denominator for basic earnings per share 3,617,034 3,630,303
========= =========
Diluted:
Weighted average shares outstanding 3,617,034 3,630,303
Dilutive stock options 96,702 --
--------- ---------
Denominator for diluted earnings per share 3,713,736 3,630,303
========= =========
Note C - Inventories
The components of inventories follow:
April 3, 2004 January 3, 2004
------------- ---------------
Raw materials and component parts $ 8,604,447 $ 8,687,003
Work in process 4,075,790 4,112,625
Finished goods 4,092,563 4,126,920
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$ 16,772,800 $ 16,926,548
============ ============
-6-
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 3, 2004
Note D - Segment Information
Segment financial information follows:
THREE MONTHS ENDED
April 3, 2004 March 29, 2003
Revenues:
Sales to unaffiliated customers:
Industrial Hardware $10,912,204 $ 8,605,204
Security Products 10,465,716 9,481,688
Metal Products 3,187,288 3,503,822
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$24,565,208 $21,590,714
Income Before Income Taxes:
Industrial Hardware $ 1,509,582 $ 1,123,869
Security Products 1,361,501 1,069,774
Metal Products (30,630) 144,575
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Operating Profit 2,840,453 2,338,218
General corporate expenses (868,981) (645,567)
Interest expense (276,397) (346,519)
----------- -----------
$ 1,695,075 $ 1,346,132
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 3, 2004 March 29, 2003
------------- --------------
Risk free interest rate N/A 2.78%
Expected volatility N/A 0.306
Expected option life N/A 5 years
Weighted-average dividend yield N/A 3.1%
Assumptions are not applicable (N/A) because no options were granted in the
first quarter of 2004.
-7-
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 3, 2004
Note E - Stock-Based Compensation - continued
THREE MONTHS ENDED
April 3, 2004 March 29, 2003
Net income, as reported $1,076,373 $953,377
Deduct: Total stock-based employee
-------
compensation expense determined
under fair value based method for all
awards granted, net of related tax
effects (4,476) (12,873)
---------- --------
Pro forma net income $1,071,897 $940,504
========== ========
Earnings per share:
Basic-as reported $0.30 $0.26
Basic-pro forma $0.30 $0.26
Diluted-as reported $0.29 $0.26
Diluted-pro forma $0.29 $0.26
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
During the quarter, the Company adopted FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which addresses when a
company should consolidate an entity based on the variable interest model of FIN
46. It defines a variable interest entity ("VIEs") as those entities in which
equity investors do not have the characteristics of a controlling financial
interest or in which equity investors do not bear the residual economic risks.
Upon adoption, FIN 46 did not have any impact on the Company's financial
position and results of operations.
Note G - Legal Proceedings
The Company is currently a party to a patent infringement suit. Although
management has determined this suit is without merit, the Company incurred
approximately $115,000 of legal expenses in 2003, $165,000 of legal expenses in
the first quarter of 2004 and expects to incur additional expenses in 2004 to
defend itself.
There are no other legal proceedings, other than ordinary routine litigation
incidental to the Company's business, or to which either the Company or any of
its subsidiaries is a party or to which any of their property is the subject.
Note H - Debt
Effective January 4, 2004 The Company received approval from its financial
institution to modify the basis of calculating its debt service covenant ratios
from a rolling four-quarter test to a cumulative quarter test. The debt service
covenant test will return to a rolling four-quarter test for the fiscal years
beginning in 2005.
-8-
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 3, 2004
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 2004 and 2003 follows:
Pension Benefits Postretirement Benefits
---------------- -----------------------
2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 294,255 $ 202,354 $ 44,086 $ 92,395
Interest cost 571,589 383,756 77,016 180,168
Expected return on plan assets (650,011) (397,548) (41,123) (90,887)
Transition obligation (51,099) (37,600) 0 0
Prior service cost 49,245 41,504 (11,433) (27,708)
Losses recognized 89,196 61,375 (29,362) (82,155)
--------- --------- -------- --------
Net periodic benefit cost $ 303,175 $ 253,841 $ 33,184 $ 71,813
The Company's funding policy with respect to its qualified plans is to
contribute at least the minimum amount required by applicable laws and
regulations. The Company was required to contribute $1,007,929 into its
salaried plan and $194,123 into one of its hourly plans. The Company has
paid all of the required contributions into the salaried plan as of March 15,
2004 and will make the minimum contribution into its hourly plan prior to
filing its federal income tax return on September 15, 2004.
On December 8, 2003, the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act) was signed into law. The Act introduces a
prescription drug benefit under Medicare (Medicare Part D), as well as a
federal subsidy to sponsors of retiree health care benefit plans that provide
a benefit that is at least actuarially equivalent to Medicare Part D. As of
April 3, 2004, in accordance with FASB Staff Position No. FAS 106-1 any
measures of the Accumulated Postretirement Benefit Obligation (APBO) or net
periodic postretirement benefit cost in the financial statements do not
reflect the effects of the Act on the plan. More specific authoritative
guidance on the accounting of the federal subsidy is pending and, when issued,
could require the company to change previously reported information.
The Company has a contributory savings plan under Section 401(k) of the
Internal Revenue Code covering substantially all U.S. non-union employees. The
plan allows participants to make voluntary contributions of up to 100% of
their annual compensation on a pretax basis, subject to IRS limitations. The
plan provides for contributions by the Company at its discretion. The Company
made contributions of $37,115 in the first quarter of 2004, and $34,508 in the
first quarter of 2003.
-9-
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 twelve weeks
ended April 3, 2004. The interim financial statements and this Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto for the fiscal year ended January 3, 2004 and the related Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in the Company's Annual Report on Form 10-K for the
fiscal year ended January 3, 2004.
Certain statements set forth in this discussion and analysis of financial
condition and results of operations are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. They use such
words as "may," "will," "expect," "believe," "plan" and other similar
terminology. These statements reflect management's current expectations
regarding future events and operating performance and speak only as of the date
of this release. These forward-looking statements involve a number of risks and
uncertainties and actual future results and trends may differ materially
depending on a variety of factors including changing customer preferences, lack
of success of new products, loss of customers, competition, increased raw
material prices, problems associated with foreign sourcing of parts and
products, changes within our industry segments, 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 2004 the Company experienced a 13.8% increase in
sales as compared to the first quarter of 2003. The Industrial Hardware and the
Security Products segments experienced a 26.8% and 10.4%, respectively, increase
in sales during the period while the sales of the Metal Products segment
declined 9.0% from the comparable quarter of 2003.
The Industrial Hardware sales increase came from both distributors and original
equipment manufacturers (OEM's), as the result of a general improvement in the
economy particularly in the manufacturing sector; sales increased to our service
body OEM's, due to sales of our stainless steel paddles and our new PowerUp(TM)
system; subcontractors for military vehicles, as the 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 is experiencing significant growth requiring our hardware and sleeper
boxes for Freightliner's Western Star tractor-trailer truck line.
-10-
The sales increase in the Security Products segment came as a result of
increased sales of locks to computer manufactures such as IBM, Dell and Sun
Micro Systems as we gain more market share from our competitors; increased sales
to the travel industry as the result of the new SearchAlert(TM) lock recently
introduced into the Transportation Security Administration's program for locking
checked baggage at airports; industrial enclosures, and electro-mechanical
timers serving the commercial laundry market as the result of the expanding
economy and increasing market share from competitors.
Sales in the Metals Products segment were down in both the mining and contract
casting product lines. Our proprietary mine roof anchors declined as the result
of mining techniques requiring the use of fewer of our proprietary mine roof
anchors, and sales of contract casting products were down as the result
of moving away from low margin jobs. However the Company has recently signed a
technical development contract with China University of Mining and Technology.
The contract calls for the testing and appraisal of our proprietary mine roof
anchors for use in underground coal mining in China. If initial laboratory test
results prove positive the second phase calls for field testing in one of
China's largest coal mines.
The Company is experiencing or has been notified of cost increases, in the
majority of material it uses such as steel, zinc and brass, with price increases
ranging from 20% to 50%. The Company intends to pass 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 2004 has tightened as the Company has
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.
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 3, 2004 March 29, 2003
Net sales 100.0% 100.0%
Cost of products sold 75.0% 74.5%
----- -----
Gross margin 25.0% 25.5%
Selling and administrative expense 17.0% 17.7%
Interest expense 1.1% 1.6%
Other (income) expense 0.0% (0.1%)
----- -----
Income before income taxes 6.9% 6.2%
Income taxes 2.5% 1.8%
----- -----
Net Income 4.4% 4.4%
===== =====
Net income for the first quarter of 2004 was $1,076,400 or $.29 per diluted
share on sales of $24.6 million compared to net income of $953,000 or $.26 per
diluted share on sales of $21.6 million in the first quarter of 2003.
-11-
Sales for the first quarter 2004 were up 13.8% compared to the same period a
year ago. New product sales contributed 4% while the volume of existing
products increased 10.3%. Prices decreased .5% in the first quarter due to
some price concessions given in order to maintain customer accounts. However,
the Company intends to institute selective price increases in the second
quarter in order to recover the increasing cost of material the Company is
experiencing.
The Industrial Hardware segment's first quarter sales were up 26.8% compared
to the first quarter of 2003. New product sales increased 5.9%, volume of
existing products increased 22.7% and prices were down 1.8%. New products
include the PowerUp(TM) system and power rotary locks. Sales of "sleeper
boxes" for the class 8 truck market were up 62.9%. The Company anticipates
continued sales improvement in the Industrial Hardware segment throughout
2004.
Our Eastern Industrial (Shanghai) Ltd., manufacturing facility located in
Shanghai, China has just begun 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
products, it will include plastic injection molding capability. 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 up 10.4% in the first quarter 2004
as compared to the first quarter of 2003. New product sales increased 3.6% and
sales volume of existing products increased 6.8%. Sales of new products
consisted of the SearchAlert(TM) luggage lock and a remote keyless entry
system for the automotive accessory market.
The Metal Products segment's sales were down 9.0% in the first quarter of 2004
as compared to the first quarter of 2003. Volume of existing products
decreased by 10.7% offset by an increase of 1.7% in prices. Sales of our
contract casting products for use in the commercial and industrial
construction industry decreased 7.8% and sales of our proprietary mine roof
support anchors were down 9.6% for the first quarter of 2004 as compared to
the first quarter of 2003. Sales are expected to remain below prior year
levels throughout 2004.
Gross margin as a percentage of sales for the three months ended April 3, 2004
was 25.0% compared to 25.5% in the comparable period a year ago. The decrease
in gross margin in the first quarter is primarily the result of product mix,
some price erosion, decreased sales volume in the metal products segment,
which resulted in lower plant utilization, higher raw material prices,
operating inefficiencies experienced with the training of new workers in the
Industrial Hardware segment as it prepared for increased production
activities.
Selling and administrative expenses were up 9.2% or $352,000 for the first
quarter of 2004 as compared to the same periods a year ago. The increase was
due in large part to our new manufacturing facility in Shanghai which added
$184,000 of start-up expenses and a patent infringement suit which added an
additional $165,000 of legal expenses.
Interest expense decreased by $70,100 or 20.2% for the first quarter of 2004
as compared to the same periods in 2003. This decrease in interest expense was
due to the lower level of debt in the current period.
Earnings before income taxes for the three months ended April 3, 2004 were up
$348,900 or 25.9% as compared to the same periods of 2003. The Industrial
Hardware segment was up 34.3% or $385,700, the Security Products segment was
up $291,700 or 27.3% and the Metal Products segment was down $175,200 or
121.2% as compared to the first quarter of 2003. The increases in the
Industrial Hardware and Security Products segments reflect the general overall
increase in the economy in the first quarter of 2004, increased market share
and the introduction of new products. The Metal Products segment loss is the
result of the continued decline in the use of our proprietary mine roof
anchors in the North American mining industry as new mining technology
continues to reduce the need for our products.
-12-
The effective tax rate of 36.5% for the first quarter is higher compared to
the 29.2% for the first quarter of 2003. The increase in the effective tax
rate is the result of the Company deriving a higher percentage of its earnings
from countries with higher effective tax rates.
Liquidity and Sources of Capital
The Company used $429,300 from operations for the first three months of 2004
compared to $1,487,800 provided from operations for the same period in 2003.
The decrease in cash flows was the result of increases in the level of sales
at all segments 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 was sufficient to fund capital expenditures, debt service, contributions
to the Company's pension plans, and dividend payments.
Additions to property, plant and equipment were $638,300 during the first
three months of 2003 versus $312,000 for the comparable period in the prior
year. Total capital expenditures for 2004 are expected to be in the range of
$2.0 million to $3.0 million.
Total inventories as of April 3, 2004 were $16.8 million or $154,000 lower
than year end 2003. The inventory turnover ratio of 4.4 turns at the end of
the first quarter was higher than both the prior year first quarter of 4.0
turns and the year end 2003 ratio of 4.1 turns. Accounts receivable increased
by $2.3 million from year end 2003, primarily due to increased sales volume.
The average days sales in accounts receivable for the first quarter of 2004
was 49 days compared to 47 days in the first quarter of 2003 and 48 days at
year end 2003.
Cash flow from operating activities and funds available under the revolving
credit portion of the Company's loan agreement are expected to be sufficient
to cover future foreseeable working capital requirements.
The Company requested and received approval from its financial institution to
modify the basis of calculating its debt service covenant ratios from a
rolling four-quarter test to a cumulative quarter test effective for the
periods beginning January 4, 2004. The debt service covenant test will return
to a rolling four-quarter test for the fiscal years beginning in 2005. This
modification to the debt service covenants will provide the Company more
flexibility within its capital expenditure programs.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------ ----------------------------------------------------------
There have been no material changes in market risk from what was reported in
the 2003 Annual Report on Form 10-K.
ITEM 4 CONTROLS AND PROCEDURES
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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.
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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 -
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The Company is currently a party to a patent infringement suit. Although
management has determined this suit is without merit, the Company incurred
approximately $115,000 of legal expenses in 2003, $165,000 in the first
quarter of 2004 and expects to incur additional expenses in 2004 to defend
itself.
There are no other legal proceedings, other than ordinary routine
litigation incidental to the Company's business, or to which either the
Company or any of its subsidiaries is a party or to which any of their
property is the subject.
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
- ------ -----------------------------------------
None
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-eighth day of April 2004. The matters voted on and the
voting results were:
FOR AGAINST ABSTENTION
1) Election of Charles W. Henry
as a director for a three-year
term expiring in the year 2007: 2,989,240 29,789
Continuing Directors:
Leonard F. Leganza
John W. Everets
David C. Robinson
Donald S. Tuttle III
2) Appointment of Ernst & Young LLP as
independent auditors: 3,007,662 8,251 3,115
ITEM 5 OTHER INFORMATION
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None
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ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
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(a) 31 Certifications required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications pursuant to Rule 13a-14(b) and 18 USC
1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(1) The Registrant's Annual Report on Form 10-K for the
fiscal year ended January 3, 2004 is incorporated herein
by reference.
(b) 99(2) Form 8-K filed on April 28, 2004 setting forth the
press release reporting the Company's earnings for the
quarter ended April 3, 2004 is incorporated herein by
reference.
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, 2004 /s/Leonard F. Leganza
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Leonard F. Leganza
President and Chief Executive Officer
DATE: May 3, 2004 /s/John L. Sullivan, III
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John L. Sullivan, III
Vice President, Secretary and Treasurer
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