UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED April 2, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM to .
Commission File Number 0-599
THE EASTERN COMPANY
-------------------
(Exact Name of Registrant as specified in its charter)
Connecticut 06-0330020
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
112 Bridge Street, Naugatuck, Connecticut 06770
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(203) 729-2255
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No .
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X .
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of April 2, 2005
----- -------------------------------
Common Stock, No par value 3,635,995
-1-
PART I
FINANCIAL INFORMATION
THE EASTERN COMPANY AND SUBSIDIARIES
ITEM I CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
------ -------------------------------------------------
ASSETS April 2, 2005 January 1, 2005
------ ------------- ---------------
CURRENT ASSETS
Cash and cash equivalents $ 4,443,245 $ 4,420,506
Accounts receivable, less allowances:
2005 - $336,000; 2004 - $310,000 13,978,785 12,528,189
Inventories 20,482,821 20,477,604
Prepaid expenses and other assets 1,775,314 2,258,642
Deferred income taxes 834,400 739,500
------------- -------------
Total Current Assets 41,514,565 40,424,441
Property, plant and equipment 42,438,946 42,031,257
Accumulated depreciation (18,908,006) (18,124,710)
------------- -------------
23,530,940 23,906,547
Goodwill 10,595,300 10,604,286
Trademarks 174,527 174,527
Patents, technology and licenses, less accumulated amortization 1,735,076 1,743,266
Intangible pension asset 870,064 870,064
Prepaid pension cost 97,057 348,634
------------- -------------
TOTAL ASSETS 78,517,529 78,071,765
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES
Accounts payable $ 5,810,554 $ 5,010,271
Accrued compensation 1,153,893 2,472,944
Other accrued expenses 2,417,236 2,239,668
Current portion of long-term debt 6,412,439 4,009,811
------------- -------------
Total Current Liabilities 15,794,122 13,732,694
Deferred income taxes 1,780,473 1,452,134
Long-term debt, less current portion 10,950,755 11,804,861
Accrued post-retirement benefits 2,178,571 2,219,821
Accrued pension cost 3,604,874 4,885,160
Interest rate swap obligation 58,469 160,417
Shareholders' Equity
Preferred Stock, no par value
Authorized shares - 2,000,000
(No shares issued)
Common Stock, no par value:
Authorized Shares - 25,000,000
Issued: 3,635,995 shares in 2005 and 3,625,339 shares in 2004 17,608,048 17,583,561
Treasury Stock: 1,688,726 shares in 2005 and 1,680,342 in 2004 (16,655,041) (16,655,041)
Retained earnings 47,858,803 47,568,571
Accumulated other comprehensive (loss)/income:
Foreign currency translation 421,724 463,804
Additional minimum pension liability, net of taxes (5,047,800) (5,047,800)
Derivative financial instruments, net of taxes (35,469) (96,417)
------------- -------------
Accumulated other comprehensive loss (4,661,545) (4,680,413)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY 44,150,265 43,816,678
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 78,517,529 $ 78,071,765
============= =============
See accompanying notes.
-2-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
April 2, 2005 April 3, 2004
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Net sales $ 26,267,584 $ 24,565,208
Cost of products sold (20,797,690) (18,430,062)
------------ ------------
Gross margin 5,469,894 6,135,146
Selling and administrative expenses (4,053,994) (4,171,486)
------------ ------------
Operating profit 1,415,900 1,963,660
Interest expense (246,942) (276,397)
Other income 7,502 7,812
------------ ------------
INCOME BEFORE INCOME TAXES 1,176,460 1,695,075
Income taxes 445,878 618,702
------------ ------------
NET INCOME $ 730,582 $ 1,076,373
============ ============
Earnings per share:
Basic $ 0.20 $ 0.30
Diluted $ 0.19 $ 0.29
Cash dividends per share $ 0.11 $ 0.11
See accompanying notes.
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
April 2, 2005 April 3, 2004
------------- -------------
Net income $ 730,582 $ 1,076,373
Other comprehensive income (loss)
Currency translation (42,080) 30,730
Change in fair value of derivative financial
instruments, net of income tax benefit:
2005 - ($41,000) 60,948 -
2004 - ($41,000) - 60,443
--------- ------------
Comprehensive income $ 749,450 $ 1,167,546
========= ============
See accompanying notes.
-3-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
April 2, 2005 April 3, 2004
------------- -------------
OPERATING ACTIVITIES:
Net income $ 730,582 $ 1,076,373
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 1,094,056 892,152
Provision for doubtful accounts 1,017 4,215
Deferred income taxes 192,439 -
Issuance of Common Stock for directors' fees 24,487 19,018
Gain on sale of equipment & other assets - (3,516)
Changes in operating assets and liabilities:
Accounts receivable (1,458,138) (2,405,487)
Inventories (28,776) 180,825
Prepaid expenses and other 476,689 (159,550)
Prepaid pension cost (1,028,709) (215,543)
Accounts payable 801,161 652,821
Accrued compensation (1,085,011) (363,103)
Other accrued expenses (54,085) (67,145)
Other assets (48,254) (40,378)
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES (382,542) (429,318)
INVESTING ACTIVITIES:
Proceeds from sale of equipment - 3,516
Purchases of property, plant, and equipment (741,805) (638,309)
----------- ------------
NET CASH USED IN INVESTING ACTIVITIES (741,805) (634,793)
FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 3,000,000 -
Principal payments on long-term debt (1,451,478) (656,438)
Proceeds from sale of Common Stock - 115,425
Dividends paid (399,835) (397,764)
----------- ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,148,687 (938,777)
Effect of exchange rate changes on cash (1,601) 6,447
----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 22,739 (1,996,441)
Cash and Cash Equivalents at Beginning of Period 4,420,506 4,896,816
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,443,245 $ 2,900,375
=========== ============
-4-
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 2, 2005
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements. Refer to the
Company's consolidated financial statements and notes thereto included in its
Form 10-K for the year ended January 1, 2005 for additional information.
The accompanying condensed consolidated financial statements are unaudited.
However, in the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for interim periods have been reflected therein. Operating results
for interim periods are not necessarily indicative of the results that may be
expected for the full year.
Certain prior period amounts have been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income.
The condensed balance sheet as of January 1, 2005 has been derived from the
audited consolidated balance sheet at that date.
Note B - Earnings Per Share
The denominators used in the earnings per share computations follow:
THREE MONTHS ENDED
April 2, 2005 April 3, 2004
------------- -------------
Basic:
Denominator for basic earnings per share 3,634,991 3,617,034
========= =========
Diluted:
Weighted average shares outstanding 3,634,991 3,617,034
Dilutive stock options 232,422 96,702
--------- ---------
Denominator for diluted earnings per share 3,867,413 3,713,736
========= =========
Note C - Inventories
The components of inventories follow:
April 2, 2005 January 1, 2005
------------- ---------------
Raw materials and component parts $11,286,034 $11,279,981
Work in process 3,666,425 3,670,812
Finished goods 5,530,362 5,526,811
----------- -----------
$20,482,821 $20,477,604
=========== ===========
-5-
Note D - Segment Information
Segment financial information follows:
THREE MONTHS ENDED
April 2, 2005 April 3, 2004
------------- -------------
Revenues:
Sales to unaffiliated customers:
Industrial Hardware $13,020,270 $10,912,204
Security Products 10,021,576 10,465,716
Metal Products 3,225,738 3,187,288
----------- -----------
$26,267,584 $24,565,208
Income Before Income Taxes:
Industrial Hardware $ 1,305,660 $ 1,057,318
Security Products 880,404 1,052,989
Metal Products (770,164) (146,647)
----------- -----------
Operating Profit 1,415,900 1,963,660
Interest expense (246,942) (276,397)
Other income 7,502 7,812
----------- -----------
$ 1,176,460 $ 1,695,075
Note E - Stock-Based Compensation
The Company measures compensation expense related to stock-based compensation
using the intrinsic value method. Accordingly, no stock-based employee
compensation cost is reflected in net income if the exercise price of the option
equals or exceeds the fair value of the stock on the date of grant.
Pro forma information regarding net income and earnings per share, as required
by Statement No. 123 "Accounting for Stock-Based Compensation", has been
determined as if the Company had accounted for its employee stock options under
the fair value method. The fair value of the stock options was estimated at the
date of grant using a Black-Scholes option pricing model with the following
weighted-average assumptions:
April 2, 2005 April 3, 2004
------------- ------------
Risk free interest rate N/A N/A
Expected volatility N/A N/A
Expected option life N/A N/A
Weighted-average dividend yield N/A N/A
Assumptions are not applicable (N/A) because no options were granted in the
first quarter of 2005 or 2004.
-6-
Note E - Stock-Based Compensation - continued
THREE MONTHS ENDED
April 2, 2005 April 3, 2004
------------- -------------
Net income, as reported $730,582 $1,076,373
Deduct: Total stock-based employee
-------
compensation expense determined
under fair value based method for all
awards granted, net of related tax
effects (438) (4,476)
-------- ----------
Pro forma net income $730,144 $1,071,897
======== ==========
Earnings per share:
Basic-as reported $0.20 $0.30
Basic-pro forma $0.20 $0.30
Diluted-as reported $0.19 $0.29
Diluted-pro forma $0.19 $0.29
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the stock options' vesting period ranging
from 1 to 5 years. The pro forma effect on net income and related earnings per
share may not be representative of future years' impact since the terms and
conditions of new grants may vary from the current terms.
Note F - Recent Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 46, Consolidation of Variable Interest Entities, which was
revised in December 2003 ("FIN No. 46-R"). This rule requires that companies
consolidate a variable interest entity if the company is subject to a majority
of the risk of loss from the variable interest entity's activities and/or is
entitled to receive a majority of the entity's residual returns. The provisions
of FIN No. 46-R were required to be applied as of the end of the first reporting
period after March 15, 2004 for the variable interest entities in which a
company holds a variable interest that it acquired on or before January 31,
2003. The adoption of FIN No. 46-R did not have any impact on the financial
position or results of operations of the Company.
In November 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The
amendments made by SFAS No. 151 clarify that abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials (spoilage) should be
recognized as current-period charges and require the allocation of fixed
production overheads to inventory based on the normal capacity of the production
facilities. The guidance is effective for inventory costs incurred during fiscal
years beginning after June 15, 2005. It is not believed that the adoption of
SFAS No. 151 will have a material impact on the consolidated financial position,
results of operations or cash flows of the Company.
In December 2004, the FASB issued SFAS No. 123 (revised 2004), Share-Based
Payment. SFAS No. 123(R) will require that the compensation cost relating to
share-based payment transactions be recognized in financial statements. That
cost will be measured based on the fair value of the equity or liability
instruments issued. SFAS No. 123(R) covers a wide range of share-based
compensation arrangements including share options, restricted share plans,
performance-based awards, share appreciation rights, and employee share purchase
plans. SFAS No. 123(R) replaces FASB Statement No. 123, Accounting for
Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123, as originally issued in 1995,
established as preferable a fair value-based method of accounting for
share-based payment transactions with employees. However,
-7-
Note F - Recent Accounting Pronouncements - continued
that Statement permitted entities the option of continuing to apply the guidance
in APB Opinion No. 25, as long as the footnotes to financial statements
disclosed what net income would have been had the preferable fair value-based
method been used. Public entities will be required to apply SFAS No. 123(R) as
of their next fiscal year that begins after June 15, 2005. SFAS No. 123(R)
permits public companies to adopt its requirements using one of two methods:
1) A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments
granted after the effective date and (b) based on requirements of
SFAS No. 123 for all awards granted to employees prior to the
effective date of SFAS No. 123(R) that remain unvested on the
effective date.
2) A "modified retrospective" method which includes the requirements
of the modified prospective method described above, but also
permits entities to restate based on the amount previously
recognized under SFAS No. 123 for purpose of pro forma disclosures
either (a) all prior periods presented or (b) prior interim
periods of the year of adoption.
The impact of the adoption of Statement 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had the Company adopted Statement 123(R) in prior periods, the impact
of that standard would have approximated the impact of Statement 123 as
described in the disclosure of pro forma net income (loss) and net income (loss)
per share in the stock based compensation accounting policy note included in
Note E to the consolidated financial statements.
In December 2004, the FASB issued FSP No. FAS 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American
Jobs Creation Act of 2004 ("AJCA"). The AJCA provides a one-time 85% dividends
received deduction for certain foreign earnings that are repatriated under a
plan for reinvestment in the United States, provided certain criteria are met.
FSP No. 109-2 is effective immediately and provides accounting and disclosure
guidance for the repatriation provision. FSP No. 109-2 allows companies
additional time to evaluate the effects of the law on its unremitted earnings
for the purpose of applying the "indefinite reversal criteria" under APB Opinion
No. 23, Accounting for Income Taxes - Special Areas, and requires explanatory
disclosures from companies that have not yet completed the evaluation. The
Company is currently evaluating the effects of the repatriation provision and
its impact on the consolidated financial statements. The Company does not expect
to complete this evaluation before the end of 2005. The range of possible
amounts of unremitted earnings that is being considered for repatriation under
this provision is between zero and $500,000. The related potential range of
income tax is between zero and $84,000.
Note G - Goodwill
The following is a roll-forward of goodwill from year-end 2004 to the end of the
first quarter:
Beginning balance $ 10,604,286
Foreign exchange (8,986)
------------
Ending balance $ 10,595,300
============
Note H - Debt
Effective January 4, 2004, the Company received approval from its financial
institution to modify the basis of calculating its debt service covenant ratios
from a rolling four-quarter test to a cumulative quarter test. The debt service
covenant test returned to a rolling four-quarter test for the fiscal years
beginning in 2005.
-8-
Note I - Retirement Benefit Plans
The Company has non-contributory defined benefit pension plans covering
certain U.S. employees. Plan benefits are generally based upon age at
retirement, years of service and, for its salaried plan, the level of
compensation. The Company also sponsors unfunded nonqualified supplemental
retirement plans that provide certain current and former officers with
benefits in excess of limits imposed by federal tax law. The measurement date
for the obligations disclosed below is September 30 of each year.
The Company also provides health care and life insurance for retired salaried
employees in the United States who meet specific eligibility requirements.
Significant disclosures relating to these benefit plans for the first quarter
of 2005 and 2004 follows:
Pension Benefits Postretirement Benefits
------------------------------ -----------------------------
2005 2004 2005 2004
---- ---- ---- ----
Service cost $ 336,840 $ 294,255 $ 21,679 $ 44,086
Interest cost 556,605 571,589 29,484 71,016
Expected return on plan assets (679,006) (650,011) (20,073) (41,123)
Net amortization and deferral 96,843 87,342 (19,737) (40,795)
--------- --------- -------- --------
Net periodic benefit cost $ 311,282 $ 303,175 $ 11,353 $ 33,184
========= ========= ======== ========
The Company's funding policy with respect to its qualified plans is to
contribute at least the minimum amount required by applicable laws and
regulations. The Company was required to contribute $1,280,286 into its
salaried plan and $208,159 into one of its hourly plans. The Company has paid
all of the required contributions into the salaried plan as of March 31, 2005
and will make the minimum contribution into its hourly plan prior to filing
its federal income tax return on September 15, 2005.
On December 8, 2003, the "Medicare Prescription Drug Improvement and
Modernization Act of 2003" (the "Act") was signed into law. The Act introduces
a prescription drug benefit under Medicare as well as a federal subsidy to
sponsors of retiree health care benefit plans that provide a benefit that is
at least "actuarially equivalent" to Medicare Part D.
In the second quarter of 2004, a FASB Staff Position (FSP FAS 106-2,
Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug Improvement and Modernization Act of 2003) was issued providing guidance
on the accounting for the effects of the Act for employers that sponsor
postretirement health care plans that provide prescription drug benefits. This
FSP superceded FSP FAS 106-1, Accounting and Disclosure Requirements Related
to the Medicare Prescription Drug Improvement and Modernization Act of 2003.
The FSP is effective for the first interim or annual period beginning after
June 15, 2004. The guidance in this FSP applies only to the sponsor of a
single-employer defined benefit postretirement health plan for which the
employer has concluded that prescription drug benefits available under the
plan are actuarially equivalent and, thus, qualify for the subsidy under the
Act and the expected subsidy will offset or reduce the employer's share of the
costs of postretirement prescription drug coverage by the plan.
The Company's actuary has estimated the impact of the Medicare Prescription
Drug Improvement and Modernization Act of 2003, which resulted in a reduction
in the December 31, 2004 accumulated postretirement benefit obligation
("APBO") by $52,668. This reduction has been reflected as an actuarial
experience gain as of December 31, 2004, and the December 31, 2004 APBO has
been reduced accordingly.
The Company has a contributory savings plan under Section 401(k) of the
Internal Revenue Code covering substantially all U.S. non-union employees. The
plan allows participants to make voluntary contributions of up to 100% of
their annual compensation on a pretax basis, subject to IRS limitations. The
plan provides for contributions by the Company at its discretion. The Company
made contributions of $40,400 in the first quarter of 2005, and $37,115 in the
first quarter of 2004.
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
ITEM 2 OF OPERATIONS
- ------ -------------
The following discussion is intended to highlight significant changes in the
Company's financial position and results of operations for the thirteen weeks
ended April 2, 2005. The interim financial statements and this Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto for the fiscal year ended January 1, 2005 and the related Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in the Company's Annual Report on Form 10-K for the
fiscal year ended January 1, 2005.
Certain statements set forth in this discussion and analysis of financial
condition and results of operations are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. They use such
words as "may," "will," "expect," "believe," "plan" and other similar
terminology. These statements reflect management's current expectations
regarding future events and operating performance and speak only as of the date
of this release. These forward-looking statements involve a number of risks and
uncertainties and actual future results and trends may differ materially
depending on a variety of factors including changing customer preferences, lack
of success of new products, loss of customers, competition, increased raw
material prices, problems associated with foreign sourcing of parts and
products, changes within our industry segments, in the overall economy,
litigation and legislation. In addition, terrorist threats and the possible
responses by the U.S. government, the effects on consumer demand, the financial
markets, the travel industry, the trucking industry and other conditions
increase the uncertainty inherent in forward-looking statements. Forward-looking
statements reflect the expectations of the Company at the time they are made,
and investors should rely on them only as expressions of opinion about what may
happen in the future and only at the time they are made. The Company undertakes
no obligation to update any forward-looking statement. Although the Company
believes it has an appropriate business strategy and the resources necessary for
its operations, future revenue and margin trends cannot be reliably predicted
and the Company may alter its business strategies to address changing
conditions.
In addition, the Company makes estimates and assumptions that may materially
affect reported amounts and disclosures. These relate to valuation allowances
for accounts receivable and for excess and obsolete inventories, accruals for
pensions and other postretirement benefits (including forecasted future cost
increases and returns on plan assets), provisions for depreciation (estimating
useful lives), and, on occasion, accruals for contingent losses.
Overview
During the first quarter of 2005, the Company experienced a 6.9% increase in
sales as compared to the first quarter of 2004. The Industrial Hardware and the
Metal Products segments experienced a 19.3% and 1.2%, respectively, increase in
sales during the period while the sales of the Security Products segment
declined 4.2% from the comparable quarter of 2004.
-10-
The following table shows the changes in the first quarter of 2005 compared to
the first quarter of 2004 in selected results, by segment (dollars in
thousands):
Industrial Security Metal
Hardware Products Products Total
-------- -------- -------- -----
Sales $ 2,108 $ (444) $ 38 $ 1,702
Volume 15.0% -5.6% 3.3% 4.7%
Prices 3.6% 0.0% -2.1% 1.3%
New Products 0.7% 1.4% 0.0% 0.9%
---- ---- ---- ----
19.3% -4.2% 1.2% 6.9%
Gross margin $ 337 $ (400) $ (602) $ (665)
11.5% -12.9% -581.1% -10.8%
Operating profit $ 248 $ (172) $ (624) $ (548)
23.5% -16.4% -425.2% -27.9%
The Industrial Hardware sales increase came from both distributors and original
equipment manufacturers (OEM's) as the result of continued improvement in the
economy, particularly in the manufacturing sector. Sales increased to our
subcontractors for military vehicles as a result of retrofitting the Humvee, 1
ton and 3/4 ton trucks with heavy duty rotary and paddle latches as the Army
increases the armor on these vehicles; and class-8 truck market as this industry
continues to experience growth requiring our hardware; and sleeper boxes for
Freightliner's Western Star tractor-trailer truck line.
The sales decrease in the Security Products segment came as a result of a 6.5%
decrease in sales of our products sold to the commercial laundry industry and a
decrease of approximately 50% in sales of locks to computer manufacturers such
as IBM and Sun Micro Systems. The decrease in commercial laundry was mainly in
the mature product lines such as timers, money boxes and coin metering systems.
The decrease in locks to the computer industry is the result of major computer
manufacturers phasing locks out of their products. This segment did experience
increased sales in several markets: the travel industry as the result of the
SearchAlert(TM) lock; locks used for industrial enclosures; and smart card
systems used in a retrofit program serving the commercial laundry market.
Sales in the Metals Products segment were up 1.2%; mining was up 6.5% and
contract casting products were down 10.6%. Our proprietary mine roof anchors
increased as the result of sales to Canada, Norway and Australia. Sales of
contract casting products were down as the result of increased price competition
from China. During 2004, we entered into a technical agreement with the China
University of Mining and Technology for the field-testing and eventual marketing
of the Company's mechanical anchor systems, which are used to secure the roofs
in underground mines. Now that these tests have been substantially and
successfully completed, we are actively marketing our mine roof support products
to penetrate the mining market in China.
Raw material prices have leveled off for the most part and the Company was
successful in passing on to our customers, where possible, these increases.
Currently, there is no indication that the Company will not be able to obtain
all the materials that it requires.
Cash flow in the first quarter of 2005 has tightened as the Company experienced
an increase in sales resulting in the need for additional working capital,
primarily due to timing of accounts receivable collections. The Company's line
of credit, along with controlling discretionary expenditures, should provide
sufficient cash flow to meet all existing obligations.
-11-
A more detailed analysis of the Company's results of operations and financial
condition follows:
Results of Operations
The following table sets forth, for the periods indicated, selected Company
statement of operations data expressed as a percentage of net sales.
Three Months Ended
April 5, 2005 April 3, 2004
----------------- -------------
Net sales 100.0% 100.0%
Cost of products sold 79.2% 75.0%
----- -----
Gross margin 20.8% 25.0%
Selling and administrative expense 15.4% 17.0%
----- -----
Operating profit 5.4% 8.0%
Interest expense 0.9% 1.1%
Other income 0.0% 0.0%
---- ----
Income before income taxes 4.5% 6.9%
Income taxes 1.7% 2.5%
---- ----
Net Income 2.8% 4.4%
==== ====
Net income for the first quarter of 2005 was $730,600 or $.19 per diluted
share on sales of $26.3 million compared to net income of $1,076,400 or $.29
per diluted share on sales of $24.6 million in the first quarter of 2004.
Sales for the first quarter 2005 were up 6.9% compared to the same period a
year ago. New product sales contributed 0.9% and price increases added 1.3%,
while the volume of existing products increased 4.7%.
The Industrial Hardware segment's first quarter sales were up 19.3% compared
to the first quarter of 2004. New product sales increased 0.7%, volume of
existing products increased 15.0% and prices were up 3.6%. New products
include various latches and handles, a non-folding footstep and a recreational
vehicle ramp door. Sales of "sleeper boxes" for the class-8 truck market were
up 35.8%. The Company anticipates continued sales improvement in the
Industrial Hardware segment throughout 2005.
Our Eastern Industrial (Shanghai) Ltd., manufacturing facility located in
Shanghai, China continues to produce products for our U.S and Canadian
affiliates. This subsidiary will be instrumental in helping us to remain price
competitive in North America and will open up the possibility to more
effectively pursue global markets. In addition to producing fabricated metal
and plastic injection molding products, Eastern Industrial will be adding zinc
die-casting capabilities in 2005. It will also serve as a sourcing center for
products that do not compete directly against our North American based
operations.
The Security Products segment's sales were down 4.2% in the first quarter 2005
as compared to the first quarter of 2004. New product sales increased 1.4%,
while sales volume of existing products decreased 5.6%. New products included
a push-button toolbox lock, brackets, funnel sets and a sliding cover handle.
Sales in this segment are projected to improve as the year progresses. The
decrease in sales was primarily in the commercial laundry mechanical product
lines such as timers, money boxes and coin metering systems. Smart Card
systems saw a modest gain, but not sufficient to offset the decline in the
more mature product lines. Our new SearchAlertTM saw a 67% sales gain, however
this was more than offset with a 50% decline in locks sold to the computer
industry resulting from a phase-out by computer manufacturers of locks for
computers.
-12-
The Metal Products segment's sales were up 1.2% in the first quarter of 2005
as compared to the first quarter of 2004. Volume of existing products
increased by 3.3% offset by a decrease of 2.1% in prices. Sales of our
contract casting products for use in the commercial and industrial
construction industry decreased 10.6% mainly due to price competition from
China, while sales of our proprietary mine roof support anchors were up 6.5%
for the first quarter of 2005 as compared to the first quarter of 2004. Mining
sales were down in the U.S. but improved in Canada, Australia and Norway. The
Company is continuing its efforts to penetrate the China mining market with
its mechanical anchors used in mine roof support. Several large government
mines in China, where our mine roof supports have been tested successfully,
have shown an interest in products and are currently evaluating their use
within these mines. Sales in the Metal Products segment are expected to
improve throughout 2005 over prior year levels.
Gross margin as a percentage of sales for the three months ended April 2, 2005
was 20.8% compared to 25.0% in the comparable period a year ago. The decrease
in gross margin in the first quarter of 2005 is the result of product mix,
some price erosion due to competitive pressures, higher raw material costs
that could not be passed along to customers, higher utility costs, and higher
payroll and payroll related charges.
Selling and administrative expenses were down 2.8% or $117,500 for the first
quarter of 2005 as compared to the same period a year ago. The decrease was
due in large part to a patent infringement suit which added an additional
$165,000 of legal expenses to the first quarter of 2004 offset by higher
deferred compensation expenses of $41,700 in the 2005 period.
Operating profit for the three months ended April 2, 2005 was down $547,800 or
27.9% as compared to the same period of 2004. The Industrial Hardware segment
was up 23.5% or $248,300, the Security Products segment was down $172,600 or
16.4% and the Metal Products segment was down $623,500 or 425.2% as compared
to the first quarter of 2004. The increases in the Industrial Hardware segment
reflect the continued overall improvement in the economy in the first quarter
of 2005, increased market share and the introduction of new products. The
Security Products segment decline is due to lower sales volume versus the
prior year period and the higher raw material costs that the Company received
during 2004. The Metal Products segments operating loss was primarily the
result of operating the foundry at reduced production levels relative to the
high fixed operating costs of the foundry. The Company is working on several
projects to increase sales in the Metal Products segment and improve
profitability.
Interest expense decreased by $29,500 or 10.7% for the first quarter of 2005
as compared to the same period in 2004. This decrease in interest expense was
due to the lower average level of debt in the current period.
Other income in the first quarter of 2005 was $7,500, which was comparable to
the prior year period of $7,800.
The effective tax rate of 37.9% for the first quarter is higher compared to
the 36.5% for the first quarter of 2004. The increase in the effective tax
rate is the result of the Company deriving a higher percentage of its earnings
from countries with higher effective tax rates.
Liquidity and Sources of Capital
The Company used $382,500 in operations for the first three months of 2005
compared to $429,300 used by operations for the same period in 2004. The
change in cash flows was the result of changes in the level of sales and the
associated timing differences for collections of accounts receivable and
payments of liabilities and changes in inventories. Cash flow from operations
coupled with cash on hand at the beginning of the year and a draw down of $3.0
million on the Company's revolving loan were sufficient to fund capital
expenditures, debt service, incentive payments, contributions to the Company's
pension plans, and dividend payments.
-13-
Additions to property, plant and equipment were $741,800 during the first
three months of 2005 versus $638,300 for the comparable period in the prior
year. Total capital expenditures for 2005 are expected to be in the range of
$2.0 million to $3.0 million.
Total inventories as of April 2, 2005 were $20.5 million, comparable to
year-end 2004. The inventory turnover ratio of 4.1 turns at the end of the
first quarter was higher than the prior year first quarter of 3.7 turns and
slightly lower than the year-end 2004 ratio of 4.4 turns. Accounts receivable
increased by $1.5 million from year end 2004, primarily due to increased sales
volume. The average days sales in accounts receivable for the first quarter of
2005 was 48 days compared to 49 days in the first quarter of 2004 and 47 days
at year end 2004.
Cash flow from operating activities and funds available under the revolving
credit portion of the Company's loan agreement are expected to be sufficient
to cover future foreseeable working capital requirements.
The Company requested and received approval from its financial institution to
modify the basis of calculating its debt service covenant ratios from a
rolling four-quarter test to a cumulative quarter test effective for the
periods beginning January 4, 2004. The debt service covenant test returned to
a rolling four-quarter test for the fiscal year beginning in 2005.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------ ----------------------------------------------------------
There have been no material changes in market risk from what was reported in
the 2004 Annual Report on Form 10-K.
ITEM 4 CONTROLS AND PROCEDURES
- ------ -----------------------
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation
of the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this report based on such evaluation.
The Company believes that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected. The Company's disclosure controls and procedures
are designed to provide reasonable assurance of achieving their objectives,
and the CEO and CFO have concluded that these controls and procedures are
effective at the "reasonable assurance" level.
Changes in Internal Controls
During the period covered by this report, there have been no significant
changes in the Company's internal control over financial reporting or in other
factors that have materially affected, or are reasonably likely to materially
affect the Company's internal controls.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS -
- ------ -------------------
There are no legal proceedings, other than ordinary routine litigation
incidental to the Company's business, to which either the Company or any of its
subsidiaries is a party or to which any of their property is the subject.
-14-
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- ------ -----------------------------------------------------------
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
- ------ -------------------------------
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
The Registrant held its Annual Meeting of the Stockholders at
The Eastern Company, Naugatuck, Connecticut on Wednesday, the
twenty-seventh day of April, 2005. The matters voted on and
the voting results were:
FOR WITHHELD
1) Election of John W. Everets as
a director for a
three-year term
expiring in the year 2008: 3,375,720 12,642
Election of Leonard F. Leganza as a
director for a three-year term
expiring in the year 2008: 2,960,830 427,532
Continuing Directors:
Charles W. Henry
David C. Robinson
Donald S. Tuttle III
FOR AGAINST ABSTENTION
2) Appointment of Ernst & Young
LLP as independent
registered public
accounting firm: 3,371,410 10,467 6,485
ITEM 5 OTHER INFORMATION
- ------ -----------------
None
ITEM 6 EXHIBITS
- ------ --------
31) Certifications required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32) Certifications pursuant to Rule 13a-14(b) and 18 USC
1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(1)) The Registrant's Annual Report on Form 10-K for
the fiscal year ended January 1, 2005 is incorporated
herein by reference.
99(2)) Form 8-K filed on April 27, 2005 setting forth the
press release reporting the Company's earnings for the
quarter ended April 2, 2005 is incorporated herein by
reference.
-15-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE EASTERN COMPANY
-------------------
(Registrant)
DATE: May 3, 2005 /s/Leonard F. Leganza
----------- ---------------------
Leonard F. Leganza
President and Chief Executive Officer
DATE: May 3, 2005 /s/John L. Sullivan, III
----------- ------------------------
John L. Sullivan, III
Vice President, Secretary and Treasurer
-16-