Attached files

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EX-23 - UHY LLP CONSENT - EASTERN COex23uhy.htm
EX-23 - FML CONSENT - EASTERN COex23fml.htm
EX-31 - CERTIFICATIONS - EASTERN COex31fm10k2009.htm
EX-32 - SEC 1350 CERTIFICATIONS - EASTERN COex32fm10k2009.htm
EX-99 - LETTER TO OUR SHAREHOLDERS - EASTERN COex99presidentletter.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year ended January 2, 2010

OR

 

o

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

(IRS Employer

 

incorporation or organization)

Identification No.)

 

 

112 Bridge Street, Naugatuck, Connecticut

06770

 

(Address of principal executive offices)

(Zip Code)

 

Registrant’s telephone number, including area code: (203) 729-2255

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock No Par Value

(Title of Class)

 

Indicate by check mark if the registrant is a well known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Yes o No x

 

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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).      Yes o No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Act).

 

Yes o No x

 

As of July 4, 2009, the last day of registrant’s most recently completed second fiscal quarter, the aggregate market value of the voting stock held by non-affiliates of the registrant was $86,190,198 (based on the closing sales price of the registrant’s common stock on the last trading date prior to that date). Shares of the registrant’s common stock held by each officer and director and shares held in trust by the pension plans of the Company have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

As of February 27, 2010, 6,065,169 shares of the registrant’s common stock, no par value per share, were issued and outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the annual proxy statement dated March 17, 2010 are incorporated by reference into Part III.

 


The Eastern Company

Form 10-K

 

FOR THE FISCAL YEAR ENDED JANUARY 2, 2010

 

TABLE OF CONTENTS

 

 

 

Page

 

Table of Contents

2.

 

 

 

 

Safe Harbor Statement

3.

 

 

 

PART I

 

 

Item 1.

Business

4.

 

 

 

Item 1A.

Risk Factors

6.

 

 

 

Item 1B.

Unresolved Staff Comments

10.

 

 

 

Item 2.

Properties

10.

 

 

 

Item 3.

Legal Proceedings

11.

 

 

 

Item 4.

(Removed and Reserved)

11.

 

 

 

PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related

 

 

Stockholder Matters and Issuer Purchases of Equity Securities

12.

 

 

 

Item 6.

Selected Financial Data

14.

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial

 

 

Condition and Results of Operations

14.

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures

 

 

About Market Risk

26.

 

 

 

Item 8.

Financial Statements and Supplementary Data

28.

 

 

 

Item 9.

Changes in and Disagreements with Accountants on

 

 

Accounting and Financial Disclosure

56.

 

 

 

Item 9A.

Controls and Procedures

56.

 

 

 

Item 9B.

Other Information

58.

 

 

 

PART III

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

58.

 

 

 

Item 11.

Executive Compensation

58.

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management

 

 

and Related Stockholder Matters

59.

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director

 

 

Independence

59.

 

 

 

Item 14.

Principal Accounting Fees and Services

59.

 

 

 

PART IV

 

 

Item 15.

Exhibits, Financial Statement Schedules

59.

 

 

 

 

Signatures

62.

 

 

 

 

Exhibit Index

63.

 

 

2

 


SAFE HARBOR STATEMENT

UNDER THE PRIVATE SECURITIES

LITIGATION REFORM ACT OF 1995

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements reflect the Company’s current expectations regarding its products, its markets and its future financial and operating performance. These statements, however, are subject to risks and uncertainties that may cause the Company’s actual results in future periods to differ materially from those expected. Such risks and uncertainties include, but are not limited to, unanticipated slowdowns in the Company’s major markets, 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, worldwide conditions and foreign currency fluctuations that may affect results of operations, and other factors discussed from time to time in the Company’s filings with the Securities and Exchange Commission. The Company is not obligated to update or revise the aforementioned statements for those new developments.

 

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PART I

 

ITEM 1

BUSINESS

 

(a) General Development of Business

 

The Eastern Company (the “Company”) was incorporated under the laws of the State of Connecticut in October, 1912, succeeding a co-partnership established in October, 1858.

 

The business of the Company is the manufacture and sale of industrial hardware, security products and metal products from four U.S. operations and six wholly-owned foreign subsidiaries. The Company maintains nine physical locations.

 

RECENT DEVELOPMENTS

 

Effective January 11, 2008 the Company acquired certain assets from Auto-Vehicle Parts Company that included a certain product line owned by one of its divisions, the F.A. Neider  Company (“Neider”).   Neider produces the “footman loop” products, or strap fasteners, which are used to fasten straps, traps, tools, and cargo to a vehicle, container, or trailer. Neider manufactures footman loops used in the following markets: military, aerospace, service body, and trailer. The footman loop product line was integrated into the Company’s Industrial Hardware segment. The cost of the Neider acquisition was $128,325, inclusive of transaction costs. The acquisition was accounted for using the purchase method. The acquired business is included in the consolidated operating results of the Company from the date of acquisition. Neither the actual results nor the pro forma effects of these acquisitions are material to the Company’s financial statements.

 

During the third quarter of 2006, the Company received orders from a military contractor for component parts used in retro-fitting Humvees as part of the military’s up-armor program to provide additional troop protection. These component parts were shipped from September 2006 through the early part of the second quarter of 2007. This program resulted in approximately $39 million in total sales for the Industrial Hardware segment of the Company during the period from September 2006 to April 2007, when the shipments were completed.

 

(b) Financial Information about Industry Segments  

 

Financial information about industry segments is included in Note 11 to the Company’s financial statements, included at Item 8 of this Annual Report on Form 10-K.

 

(c) Narrative Description of Business

 

The Company operates in three business segments: Industrial Hardware, Security Products and Metal Products.

 

Industrial Hardware

 

The Industrial Hardware segment consists of Eberhard Manufacturing, Eberhard Hardware Manufacturing Ltd., Canadian Commercial Vehicles Corporation, Eastern Industrial Ltd. and Sesamee Mexicana, S.A. de C.V. The units design, manufacture and market a diverse product line of industrial and vehicular hardware throughout North America. The segment’s locks, latches, hinges, handles, lightweight honeycomb composite structures and related hardware can be found on tractor-trailer trucks, moving vans, off-road construction and farming equipment, school buses, military vehicles and recreational boats. They are also used on pickup trucks, sport utility vehicles and fire and rescue vehicles. In addition, the segment manufactures a wide selection of fasteners and other closure devices used to secure access doors on various types of industrial equipment such as metal cabinets, machinery housings and electronic instruments. Eastern Industrial expands the range of offerings of this segment to include plastic injection molding.

 

Typical products include passenger restraint locks, slam and draw latches, dead bolt latches, compression latches, cam-type vehicular locks, hinges, tool box locks, light-weight sleeper boxes for Class 8 trucks and school bus door closure hardware. The products are sold directly to original equipment manufacturers and to distributors through a distribution channel consisting of in-house salesmen and outside sales representatives. Sales and customer service efforts are concentrated through in-house sales personnel where greater representation of our diverse product lines can be promoted across a variety of markets.

 

The Industrial Hardware segment sells its products to a diverse array of markets, such as the truck, bus and automotive industries as well as to the industrial equipment, military and marine sectors. Although service, quality and price are major criteria for servicing these markets, the continued introduction of new or improved product designs and the acquisition of synergistic product lines are vital for maintaining and increasing market share.

 

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Security Products

 

The Security Products segment, made up of Greenwald Industries, Illinois Lock Company/CCL Security Products/Royal Lock, World Lock Company Ltd. and World Security Industries Ltd., is a leading manufacturer of security products. This segment manufactures electronic and mechanical locking devices, both keyed and keyless, for the computer, electronics, vending and gaming industries. The segment also supplies its products to the luggage, furniture, laboratory equipment and commercial laundry industries. Greenwald manufactures and markets coin acceptors and other coin security products used primarily in the commercial laundry markets, as well as hardware and accessories for the appliance industry. In addition, the segment provides a new level of security for the access control, municipal parking and vending markets through the use of “smart card” technology.

 

Greenwald’s products include timers, drop meters, coin chutes, money boxes, meter cases, smart cards, value transfer stations, smart card readers, card management software, access control units, oven door latches, oven door switches and smoke eliminators. Illinois Lock Company/CCL Security Products/Royal Lock sales include cabinet locks, cam locks, electric switch locks, tubular key locks and combination padlocks. Many of the products are sold under the names SEARCHALERT™, PRESTOSEAL™, DUO, X-STATIC®, EXCALIBUR™, WARLOCK™, LITE LOCK™, SESAMEE®, BIG TAG®, PRESTOLOCK® and HUSKI™. These products are sold to original equipment manufacturers, distributors, route operators, and locksmiths via in-house salesmen and outside sales representatives. Sales efforts are concentrated through national and regional sales personnel where greater representation of our diverse product lines can be promoted across a variety of markets.

 

The Security Products segment continuously seeks new markets where it can offer competitive pricing and provide customers with engineered solutions for their security needs.

 

Metal Products

 

The Metal Products segment, based at the Company’s Frazer & Jones facility, is the largest and most efficient producer of expansion shells for use in supporting the roofs of underground mines. This segment also manufactures specialty malleable and ductile iron castings.

 

Typical products include mine roof support anchors, couplers for railroad braking systems, adjustable clamps for construction and fittings for electrical installations. Mine roof support anchors are sold to distributors and directly to mines, while specialty castings are sold to original equipment manufacturers.

 

Rising oil and natural gas prices have resulted in continued demand for coal, which has led to increased demand for our highly engineered proprietary mine roof support products produced by this segment of the Company.

 

General

 

Raw materials and outside services were readily available from domestic sources for all of the Company’s segments during 2009 and are expected to be readily available in 2010 and the foreseeable future. The Company also obtains materials from Asian affiliated and nonaffiliated sources. The Company has not experienced any significant problems obtaining material from its Asian sources in 2009 and does not expect any such problems in 2010. In 2008, the Company experienced price increases for zinc, brass and stainless steel, used mainly in the Industrial Hardware and Security Products segments, as well as scrap iron used in the Metal Products segment. These higher prices had a negative impact on gross margin in 2008. The Company experienced fairly stable raw material prices in 2009. The Company expects raw material prices to increase as demand for raw materials increases with improvements in the world economy. These raw material cost increases could negatively impact the Company’s gross margin if raw material prices increase too rapidly for the Company to react or the Company is not able to increase selling prices to its customers to recover these increased costs.

 

Patent protection for the various product lines within the Company is limited, but is sufficient to protect the Company’s competitive positions. Foreign sales and license agreements are not significant.

 

None of the Company’s business segments are seasonal.

 

The Company, across all its business segments, has increased its emphasis on sales and customer service by fulfilling the rapid delivery requirements of our customers. As a result, investments in additional inventories are made on a selective basis.

 

Customer lists for all business segments are broad-based geographically and by markets, and sales are generally not highly concentrated by customer. However, due to the military Humvee retro-fit contract, one customer in the Industrial Hardware

 

5

 


Segment accounted for approximately 14% of total sales in 2007. No other customers equaled 10% or more of the Company’s consolidated sales for any year presented.

 

The dollar amount of the backlog of orders received by the Company is believed to be firm as of the fiscal year end January 2, 2010 at $17,780,000, as compared to $18,936,000 at January 3, 2009. The primary reasons for the decrease from 2008 to 2009 are the timing of orders received from customers and changes in customer ordering habits, such as not issuing blanket purchase orders due to the continuing uncertain economic conditions.

 

The Company encounters competition in all of its business segments. The Company has been successful in dealing with this competition by offering high quality diversified products with the flexibility of meeting customer needs on a timely basis. This is accomplished by effectively using internal engineering resources and cost effective manufacturing capabilities, expanding product lines through product development and acquisitions, and maintaining sufficient inventory for fast turnaround of customer orders. However, imports from Asia and Latin America with favorable currency exchange rates and low cost labor have created additional competitive pressures. The Company currently utilizes three wholly-owned subsidiaries in Asia to help offset offshore competition.

 

Research and development expenditures in 2009 were $1,331,000 and represented approximately 1% of gross revenues. In 2008 and 2007 they were $1,293,000 and $1,439,000, respectively. The research costs are primarily attributable to the Greenwald Industries and Eberhard Mfg. divisions. Greenwald performs ongoing research, in both the mechanical and smart card product lines, which is necessary in order to remain competitive and to continue to provide technologically advanced smart card systems. Eberhard develops new products for the various markets they serve based on changing customer requirements to remain competitive. Other research projects include the development of various locks, and transportation and industrial hardware products.

 

The Company does not anticipate that compliance with federal, state or local environmental laws or regulations will have a material effect on the Company’s capital expenditures, earnings or competitive position.

 

The average number of employees in 2009 was 597.

 

(d) Financial Information about Geographic Areas

 

The Company includes four separate operating divisions located within the United States, two wholly-owned Canadian subsidiaries (one located in Tillsonburg, Ontario, Canada, and one in Kelowna, British Columbia, Canada), a wholly-owned Taiwanese subsidiary located in Taipei, Taiwan, a wholly-owned subsidiary in Hong Kong, a wholly-owned subsidiary in Shanghai, China, and a wholly-owned subsidiary in Lerma, Mexico.

 

Individually, the Canadian, Taiwanese, Hong Kong, Chinese and Mexican subsidiaries’ revenue and assets are not significant. Substantially all other revenues are derived from customers located in the United States.

 

Financial information about foreign and domestic operations’ revenues and identifiable assets is included in Note 11 to the Company’s financial statements, included at Item 8 of this Annual Report on Form 10-K. Information about risks attendant to the Company’s foreign operations is set forth at Item 1A of this Annual Report on Form 10-K.

 

(e) Available Information

 

The Company makes available, free of charge through its Internet website at http://www.easterncompany.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room, 450 Fifth Street, N.W., Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330. The Company’s reports filed with, or furnished to, the SEC are also available on the SEC’s website at www.sec.gov.

 

ITEM 1A

RISK FACTORS

 

In addition to the other information contained in this Form 10-K and the exhibits hereto and the Company’s other filings with the SEC, the following risk factors should be considered carefully in evaluating the Company’s business. The Company’s business, financial condition or results of operation could be materially adversely affected by any of these risks or additional

 

6

 


risks not presently known to the Company, or by risks the Company currently deems immaterial which may also adversely affect its business, financial condition, or results of operations, such as: changes in the economy, including changes in inflation, tax rates and interest rates; risk associated with possible disruption in the Company’s operations due to terrorism and other manmade or natural disasters; future regulatory actions, legal issues or environmental matters; loss of, or changes in, executive management; and changes in accounting standards which are adverse to the Company. Also, there can be no assurance that the Company has correctly identified and appropriately assessed all factors affecting its business or that information publicly available with respect to these matters is complete and correct.

 

The Company’s business is subject to risks associated with conducting business overseas.

 

International operations could be adversely affected by changes in political and economic conditions, trade protection measures, restrictions on repatriation of earnings, differing intellectual property rights, and changes in regulatory requirements that restrict the sales of products or increase costs. Changes in exchange rates between the U.S. dollar and other currencies could result in increases or decreases in earnings, and may adversely affect the value of the Company’s assets outside the United States. The Company’s operations are also subject to the effects of international trade agreements and regulations. Although generally these trade agreements have positive effects, they can also impose requirements that adversely affect the Company’s business, such as setting quotas on product that may be imported from a particular country into the Company’s key markets in North America.

 

The Company’s ability to import products in a timely and cost-effective manner may also be affected by conditions at ports or issues that otherwise affect transportation and warehousing providers, such as port and shipping capacity, labor disputes, severe weather or increased homeland security requirements in the United States or other countries. These issues could delay importation of products or require the Company to locate alternative ports or warehousing providers to avoid disruption to customers. These alternatives may not be available on short notice or could result in higher transit costs, which could have an adverse impact on the Company’s business, financial conditions or results of operations.

 

See also “ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK” of this Form 10-K.

 

In addition, the Company’s growth strategy involves expanding sales of its products into foreign markets. There is no guarantee that the Company’s products will be accepted by foreign customers or how long it may take to develop sales of the Company’s products in these foreign markets.

 

Increases in the price or reduced availability of raw materials.

 

Raw materials needed to manufacture products are obtained from numerous suppliers. Under normal market conditions, these raw materials are readily available on the open market from a variety of producers. However, from time to time the prices and availability of these raw materials fluctuate, which could impair the Company’s ability to procure the required raw materials for its operations or increase the cost of manufacturing its products. If the price of raw materials increases, the Company may be unable to pass these increases on to its customers and could experience reduction to its profit margins. Also, any decrease in the availability of raw materials could impair the Company’s ability to meet production requirements in a timely manner.

 

Increased competition in the markets the Company services could impact revenues and earnings.

 

Any change in competition may result in lost market share or reduced prices, which could result in reduced profit margins. This may impair the ability to grow or even maintain current levels of revenues and earnings. While the Company has an extensive customer base, loss of certain customers could adversely affect the Company’s business, financial condition or results of operations until such business is replaced, and no assurances can be made that the Company would be able to regain or replace any lost customers.

 

The Company is required to evaluate its internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002.

 

The Company is an “accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, and is required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires the Company to include in its report management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of the end of the fiscal period for which the Company is filing its 10-K. This report must also include disclosure of any material weaknesses

 

7

 


in internal control over financial reporting that the Company has identified. Additionally, the Company’s independent registered public accounting firm is required to issue a report on the Company’s internal control over financial reporting and their evaluation of the operating effectiveness of the Company’s internal control over financial reporting. The Company’s assessment requires it to make subjective judgments, and the independent registered public accounting firm may not agree with the Company’s assessment. If the Company or its independent registered public accounting firm were unable to complete the assessments within the period prescribed by Section 404 and thus be unable to conclude that the internal control over financial reporting is effective, investors could lose confidence in the Company’s reported financial information, which could have an adverse effect on the market price of the Company’s common stock or impact the Company’s borrowing ability. In addition, changes in operating conditions and changes in compliance with policies and procedures currently in place may result in inadequate internal control over financial reporting in the future.

 

The inability to identify or complete acquisitions could limit future growth.

 

As part of its growth strategy, the Company continues to pursue acquisitions of complementary products or businesses. The ability to grow through acquisitions depends upon the Company’s ability to identify, negotiate, complete and integrate suitable acquisitions. The Company makes certain assumptions based on the information provided by potential acquisition candidates and also conducts due diligence to ensure the information provided is accurate and based on reasonable assumptions. However, the Company may be unable to realize the anticipated benefits from an acquisition or predict accurately how an acquisition will ultimately affect the business, financial condition or results of operations.

 

Demand for new products and the inability to develop and introduce new competitive products at favorable profit margins could adversely affect the Company’s performance and prospects for future growth, and the Company would not be positioned to maintain current levels of revenues and earnings.

 

The uncertainties associated with developing and introducing new products, such as the market demands and the costs of development and production, may impede the successful development and introduction of new products. Acceptance of the new products may not meet sales expectations due to several factors, such as the Company’s failure to accurately predict market demand or its inability to resolve technical issues in a timely and cost-effective manner. Additionally, the inability to develop new products on a timely basis could result in the loss of business to competitors.

 

The Company could be subject to litigation which could have a material impact on the Company’s business, financial condition or results of operations.            

 

From time to time, the Company’s operations are parties to or targets of lawsuits, claims, investigations and proceedings, including product liability, personal injury, patent and intellectual property, commercial, contract, environmental and employment matters, which are defended and settled in the ordinary course of business. While the Company is unable to predict the outcome of any of these matters, it does not believe, based upon currently available information, that the resolution of any pending matter will have a material adverse effect on its business, financial condition or results of operations. See “ITEM 3 – LEGAL PROCEEDINGS” in this Form 10-K for a discussion of current litigation.

 

The Company could be subject to additional tax liabilities.

 

The Company is subject to income tax laws in the United States, its states and municipalities and those of other foreign jurisdictions in which the Company has business operations. These laws are complex and subject to interpretations by the taxpayer and the relevant governmental taxing authorities. Significant judgment and interpretation is required in determining the Company’s worldwide provision for income taxes. In the ordinary course of business, transactions arise where the ultimate tax determination is uncertain. Although the Company believes its tax estimates are reasonable, the final outcome of tax audits and any related litigation could be materially different from that which is reflected in historical income tax provisions and accruals. Based on the status of a given tax audit or related litigation, a material effect on the Company’s income tax provision or net income may result during the period or periods from the initial recognition of a particular matter in the Company’s reported financial results to the final closure of that tax audit or settlement of related litigation when the ultimate tax and related cash flow is known with certainty.

 

 

8

 


The Company’s goodwill or indefinite-lived intangible assets may become impaired, which could require a significant charge to earnings to be recognized.

 

Under accounting principles generally accepted in the United States, goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment at least annually. Future operating results used in the assumptions, such as sales or profit forecasts, may not materialize, and the Company could be required to record a significant charge to earnings in the financial statements during the period in which any impairment is determined, resulting in an unfavorable impact on our results of operations. Numerous assumptions are used in the evaluation of impairment, and there is no guarantee that the Company’s independent registered public accounting firm would reach the same conclusion as the Company or an independent valuation firm, which could result in a disagreement between management and the independent registered public accounting firm.

 

The Company may need additional capital in the future, and it may not be available on acceptable terms, if at all.

 

From time-to-time, the Company has historically relied on outside financing to fund expanded operations, capital expenditure programs and acquisitions. The Company may require additional capital in the future to fund operations or strategic opportunities. The Company cannot be assured that additional financing will be available on favorable terms, or at all. In addition, the terms of available financing may place limits on the Company’s financial and operating flexibility. If the Company is unable to obtain sufficient capital in the future, the Company may not be able to expand or acquire complementary businesses and may not be able to continue to develop new products or otherwise respond to changing business conditions or competitive pressures.

 

The Company’s stock price is highly volatile due to low float, which is the number of shares of the Company’s common stock that are outstanding and available for trading by the public.

 

The Company’s stock price may change dramatically when buyers seeking to purchase shares of the Company’s common stock exceed the shares available on the market, or when there are no buyers to purchase shares of the Company’s common stock when shareholders are trying to sell their shares.

 

The Company may not be able to reach acceptable terms for contracts negotiated with its labor unions and be subject to work stoppages or disruption of production.

 

During 2010, union contracts covering approximately 18% of the total workforce of the Company will expire. The Company has been successful in negotiating new contracts over the years, but cannot guarantee that will continue. Failure to negotiate new union contracts could result in disruption of production, inability to deliver product or a number of unforeseen circumstances, any of which could have an unfavorable material impact on the Company’s results of operations or financial statements.

 

Deterioration in the creditworthiness of several major customers could have a material impact on the Company’s business, financial condition or results of operations.

 

Included as a significant asset on the Company’s balance sheet is accounts receivable from our customers. If several large customers become insolvent or otherwise unable to pay for products, or become unwilling or unable to make payments in a timely manner, it could have an unfavorable material impact on the Company’s results of operations or financial statements. Although the Company is not dependent on any one customer, and the Company does not have any customers exceeding 10% of total accounts receivable, deterioration in several large customers at the same time could have an unfavorable material impact on the Company’s results of operations or financial statements.

 

The Company’s operating results may fluctuate, which makes the results of operations difficult to predict and could cause the results to fall short of expectations.

 

The Company’s operating results may fluctuate as a result of a number of factors, many outside of our control. As a result, comparing the Company’s operating results on a period-to-period basis may not be meaningful, and past results should not be relied upon as an indication of future performance. Quarterly, year to date and annual costs and expenses as a percentage of revenue may differ significantly from historical or projected rates. Future operating results may fall below expectations. These types of events could cause the price of the Company’s stock to fall.

 

9

 


 

New or existing U.S. or foreign laws could subject the Company to claims or otherwise impact the Company’s business, financial condition or results of operations.

 

The Company is subject to a variety of laws in both the U.S. and foreign countries that are costly to comply with, can result in negative publicity and diversion of management time and effort, and can subject the Company to claims or other remedies.

 

ITEM 1B

UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2

PROPERTIES

 

The corporate office of the Company is located in Naugatuck, Connecticut in a two-story 8,000 square foot administrative building on 3.2 acres of land.

 

All of the Company’s properties are owned or leased and are adequate to satisfy current requirements. All of the Company’s properties have the necessary flexibility to cover any long-term expansion requirements.

 

The Industrial Hardware Group includes the following:

 

The Eberhard Manufacturing Division in Strongsville, Ohio owns 9.6 acres of land and a building containing 138,000 square feet, located in an industrial park. The building is steel frame, one-story, having curtain walls of brick, glass and insulated steel panel. The building has two high bays, one of which houses two units of automated warehousing.

 

The Eberhard Hardware Manufacturing, Ltd., a wholly-owned Canadian subsidiary in Tillsonburg, Ontario, owns 4.4 acres of land and a building containing 31,000 square feet in an industrial park. The building is steel frame, one-story, having curtain walls of brick, glass and insulated steel panel. It is particularly suited for light fabrication, assembly and warehousing and is adequate for long-term expansion requirements.

 

The Canadian Commercial Vehicles Corporation, a wholly-owned subsidiary in Kelowna, British Columbia, leases 55,415 square feet of building space located in an industrial park. The building is made from brick and concrete, contains approximately 5,400 square feet of office space on two levels and houses a modern paint booth for finishing our products. The building is protected by a F1 rated fire suppression system and alarmed for fire and security. The current lease expires December 31, 2012 and is renewable.

 

The Eastern Industrial Ltd., a wholly-owned subsidiary in Shanghai, China, leases brick and concrete buildings containing approximately 47,500 square feet, located in both industrial and commercial areas. A five-year lease was signed in 2009, which expires on March 31, 2014.

 

The Sesamee Mexicana subsidiary moved in November 2009 into a leased facility containing approximately 64,250 square feet located in an industrial park in Lerma, Mexico.  The current lease expires October 15, 2012 and is renewable.  The building is steel framed with concrete block and glass curtain walls.

 

The Security Products Group includes the following:

 

The Greenwald Industries Division in Chester, Connecticut owns 26 acres of land and a building containing 120,000 square feet. The building is steel frame, one story, having brick over concrete blocks.

 

The Illinois Lock Company/CCL Security Products/Royal Lock Division owns 2.5 acres of land and a building containing 44,000 square feet in Wheeling, Illinois. The building is brick and located in an industrial park.

 

10

 


The World Lock Co. Ltd. subsidiary leases 5,285 square feet located in Taipei, Taiwan. The building is made from brick and concrete and is protected by a fire alarm and sprinklers.

 

The Metal Products Group consists of:

 

The Frazer and Jones Division in Solvay, New York owns 17.9 acres of land and buildings containing 205,000 square feet constructed for foundry use. These facilities are well adapted to handle the division’s current and future casting requirements.

 

All owned properties are free and clear of any encumbrances.

 

ITEM 3

LEGAL PROCEEDINGS

 

During 2008, the Company reached a settlement relating to an investigation by the U.S. Department of Environmental Protection and N.Y. Department of Environmental Conservation relating to various anonymous complaints regarding its metal castings facility. Settlement payments and remediation costs approximated $250,000.

 

During 2008, the U.S. Environmental Protection Agency identified the Company as a potentially responsible party in connection with a site in Cleveland, Ohio based on the ownership of the site by a division of the Company in the 1960’s. According to the Agency, the current occupant of the site filed bankruptcy, leaving behind plating operations which required remedial action. The Company declined to participate in the remedial action, and intends to defend against any efforts of the Agency to impose any liability against the Company for environmental conditions on this site which may have occurred in the years since its ownership.

 

There are no other legal proceedings, other than ordinary routine litigation incidental to the Company’s business, to which either the Company or any of its subsidiaries is a party or to which any of their property is the subject.

 

ITEM 4

(REMOVED AND RESERVED)

 

 

 

11

 


PART II

 

ITEM 5

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company’s common stock is traded on the NYSE Amex (formerly the American Stock Exchange) (ticker symbol EML). The approximate number of record holders of the Company common stock on January 2, 2010 was 525.

 

High and low stock prices and dividends for the last two years were:

 

 

2009

 

 

2008

 

Market Price

 

 

 

Market Price

 

Quarter

High

Low

Dividend

 

Quarter

High

Low

Dividend

First

$12.43

$8.11

$.09

 

First

$18.55

$14.51

$.08

Second

17.48

10.35

.09

 

Second

20.00

15.00

.08

Third

18.42

15.30

.09

 

Third

16.10

13.10

.08

Fourth

17.57

11.14

.09

 

Fourth

13.40

7.88

.09

 

The Company increased the dividend rate by 12.5% in the fourth quarter of 2008. The Company expects to continue its policy of paying regular cash dividends, although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements, and financial conditions. The payment of dividends is subject to the restrictions of the Company’s loan agreement if such payment would result in an event of default. See Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 5 to the Company’s financial statements included at Item 8 of this Annual Report on Form 10-K.

 

The following table sets forth information regarding securities authorized for issuance under the Company’s equity compensation plans as of January 2, 2010, including the Company’s 1995 and 2000 plans.

 

Equity Compensation Plan Information

Plan category

Number of securities to be issued upon exercise of outstanding options, warrants and rights

 

Weighted-average exercise price of outstanding options, warrants and rights

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

 

(a)

 

(b)

 

(c)

Equity compensation plans approved by security holders

221,7501

 

$10.58

 

367,5002

Equity compensation plans not approved by security holders

-

 

-

 

-

Total

221,750

 

10.58

 

367,500

 

1 Includes options outstanding under the 1995 and 2000 plans.

2 Includes shares available for future issuance under the 2000 plan, which expires July 19, 2010 under the

 

 

terms of the plan.

 

Each director who is not an employee of the Company (“Outside Director”) is paid a director’s fee for his services at the annual rate of $24,600. All annual fees paid to non-employee members of the Board of Directors of the Company are paid in common stock of the Company or cash, in accordance with the Directors Fee Program adopted by the shareholders on March 26, 1997 and amended on January 5, 2004. The directors make an annual election, within a reasonable time before their first quarterly payment, to receive their fees in the form of cash, stock or a combination thereof. The election remains in force for one year.

 

12

 


Issuer Purchases of Equity Securities

 

 

 

Period

(a) Total Number of Shares Purchased

(b) Average Price Paid per Share

(c ) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

(d) Maximum Number that May Yet Be Purchased Under the Plans or Programs

October 4 – October 31, 2009

-

-

-

-

November 1 – November 28, 2009

12,422

$15.35

-

-

November 29, 2009 – January 2, 2010

27,638

13.80

-

-

Total

40,060

$14.28

-

-

 

The Company does not have any share repurchase plans or programs. The figures shown in the table above are for shares delivered to the Company to exercise stock options.

 

Stock Performance Graph

The following graph sets forth the Company’s cumulative total shareholder return based upon an initial $100 investment made on December 31, 2004 (i.e., stock appreciation plus dividends during the past five fiscal years) compared to the Wilshire 5000 Index and the S&P Industrial Machinery Index.

The Company manufactures and markets a broad range of locks, latches, fasteners and other security hardware that meets the diverse security and safety needs of industrial and commercial customers. Consequently, while the S&P Industrial Machinery Index being used for comparison is the standard index most closely related to the Company, it does not completely represent the Company’s products or market applications. The Wilshire 5000 is a market index made up of 5,000 publicly-traded companies, including those having both large and small capitalization.

 


 

 

Dec. 04

Dec. 05

Dec. 06

Dec. 07

Dec. 08

Dec. 09

The Eastern Company

$100

$99

$152

$145

$70

$112

Wilshire 5000

$100

$106

$123

$130

$82

$102

S&P Industrial Machinery

$100

$98

$112

$136

$81

$114

 

Copyright© 2010 Standard & Poor's, a division of The McGraw-Hill Companies Inc. All rights reserved. (www.researchdatagroup.com/S&P.htm)

 

13

 


ITEM 6

SELECTED FINANCIAL DATA

 

 

2009

2008

2007

2006

2005

INCOME STATEMENT ITEMS (in thousands)

 

 

 

 

 

Net sales

$ 112,665

$ 135,878

$ 156,281

$ 138,465

$ 109,107

Cost of products sold

92,031

110,415

120,343

103,882

84,375

Depreciation and amortization

4,103

4,128

4,370

3,746

3,460

Interest expense

1,728

1,064

1,289

1,098

1,014

Income before income taxes

1,902

6,043

14,845

14,846

7,020

Income taxes

865

1,538

4,765

5,187

2,653

Net income

1,036

4,505

10,081

9,659

4,367

Dividends

2,155

1,938

1,802

1,715

1,600

 

 

 

 

 

 

BALANCE SHEET ITEMS (in thousands)

 

 

 

 

 

Inventories

$ 24,520

$ 30,797

$ 30,491

$ 28,043

$ 20,768

Working capital

44,280

48,745

47,028

35,546

31,223

Property, plant and equipment, net

22,974

23,911

25,234

25,816

22,397

Total assets

100,872

106,017

108,352

103,485

81,622

Shareholders’ equity

66,597

62,482

70,817

54,391

46,172

Capital expenditures

2,226

2,331

2,868

6,722

1,750

Long-term obligations, less current portion

4,286

11,429

14,383

17,507

12,384

 

 

 

 

 

 

PER SHARE DATA

 

 

 

 

 

Net income per share

 

 

 

 

 

Basic

$ .17

$ .77

$ 1.79

$ 1.76

$ .80

Diluted

.17

.73

1.68

1.67

.75

Dividends

.36

.33

.32

.31

.29

Shareholders’ equity (Basic)

11.13

10.63

12.58

9.94

8.47

 

 

 

 

 

 

Average shares outstanding:

Basic

5,985,640

5,875,140

5,631,073

5,474,137

5,455,073

 

Diluted

6,241,780

6,159,563

5,989,754

5,768,108

5,828,837

 

The information in the table above reflects a 3-for-2 stock split effective October 2006.

 

 

ITEM 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Summary

 

Net sales for 2009 decreased 17% to $112.7 million from $135.9 million in 2008. Net income for 2009 decreased to $1.0 million, or $.17 per diluted share, from $4.5 million, or $.73 per diluted share in 2008. Net sales in the Industrial Hardware and Security Products segments decreased approximately 17% and 24%, respectively, in 2009, primarily resulting from the economic slowdown in the many markets we serve. The Metal Products segment sales were comparable in 2009 and 2008, resulting from continued demand for our mine roof support products.

 

14

 


The following table shows, for the fourth quarter of 2009 and 2008, selected line items from the consolidated statements of income as a percentage of net sales, by segment.

 

 

 

2009 Fourth Quarter

 

 

 

Industrial

Security

Metal

 

 

 

 

 

Hardware

Products

Products

Total

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of products sold

 

71.6

%

74.9

%

107.4

%

79.2

%

Gross margin

 

28.4

%

25.1

%

-7.4

%

20.8

%

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

14.9

%

18.3

%

8.6

%

15.0

%

Operating profit

 

13.5

%

6.8

%

-16.0

%

5.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

2008 Fourth Quarter

 

 

 

Industrial

Security

Metal

 

 

 

 

 

Hardware

Products

Products

Total

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of products sold

 

72.7

%

76.8

%

106.1

%

80.3

%

Gross margin

 

27.3

%

23.2

%

-6.1

%

19.7

%

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

14.8

%

18.2

%

8.9

%

14.9

%

Operating profit

 

12.5

%

5.0

%

-15.0

%

4.8

%

 

The following table shows the amount of change from the fourth quarter of 2008 to the fourth quarter of 2009 in sales, cost of products sold, gross margin, selling and administrative expenses and operating profit, by segment (dollars in thousands).

 

 

 

Industrial

 

Security

 

Metal

 

 

 

 

 

Hardware

 

Products

 

Products

 

Total

 

Net sales

 

$

(1,706

)

$

(1,794

)

$

(796

)

$

(4,296

)

Volume

 

 

-20.1

%

 

-18.0

%

 

-16.2

%

 

-18.6

%

Prices

 

 

1.2

%

 

2.0

%

 

2.6

%

 

1.7

%

New Products

 

 

7.4

%

 

0.6

%

 

-

%

 

3.6

%

 

 

 

-11.5

%

 

-15.4

%

 

-13.6

%

 

-13.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

$

(1,389

)

$

(1,563

)

$

(779

)

$

(3,731

)

 

 

 

-12.9

%

 

-17.4

%

 

-12.5

%

 

-14.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

$

(317

)

$

(231

)

$

(17

)

$

(565

)

 

 

 

-7.9

%

 

-8.5

%

 

-4.7

%

 

-8.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

$

(235

)

$

(314

)

$

(84

)

$

(633

)

 

 

 

-10.8

%

 

-14.8

%

 

-16.0

%

 

-13.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

$

(82

)

$

83

 

$

67

 

$

68

 

 

 

 

-4.5

%

 

14.3

%

 

7.6

%

 

4.4

%

                                                                                                                                                 

Net sales in the fourth quarter of 2009 decreased 13% to $28.0 million from $32.3 million a year earlier. Net income for the quarter decreased 65% to $369,000 (or $.06 per diluted share) from $1.1 million (or $.17 per diluted share) a year earlier. The decrease in sales in the fourth quarter from 2008 to 2009 is primarily attributable to the continued economic slowdown in many of the markets served by our Industrial Hardware and Security Products segments and decreases in the contract casting business in the Metal Products segment. The decrease in sales volume of existing products in those segments was partially offset by the introduction of new products and price increases to customers. The decrease in profit in the fourth quarter from 2008 to 2009 is due to the termination of the interest rate swap contract in December 2009, which resulted in a charge to interest expense of $967,350. See Note 5 to the Company’s financial statements included at Item 8 of this Annual Report on Form 10-K.

 

15

 


Gross margin for the fourth quarter of 2009 decreased 8.9% from the fourth quarter of 2008. The decrease is primarily the result of lower sales volume in the 2009 fourth quarter as a result of the continued economic slowdown which affected many of the markets we serve.

 

Selling and administrative expenses for the fourth quarter of 2009 decreased 13.1% compared to the prior year quarter. The overall decrease was due to lower payroll and payroll related charges, advertising expense, travel expense and reduced sales commissions as a result of lower sales volume.

 

Authoritative Accounting Guidance

 

In December 2007, Financial Accounting Standards Board (“FASB”) issued revised authoritative guidance on disclosures related to Business Combinations. This guidance significantly changed the principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. It also provided guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company adopted this guidance effective January 4, 2009. Since this guidance was effective prospectively, except for certain retrospective adjustments to deferred tax balances, its adoption had no impact on the consolidated financial statements of the Company.

 

In December 2007, the FASB issued authoritative guidance which clarified the classification of noncontrolling interests in consolidated balance sheets and reporting transactions between the reporting entity and holders of noncontrolling interests. Under this guidance, noncontrolling interests are considered equity and reported as an element of consolidated equity. Further, net income encompasses all consolidated subsidiaries with disclosure of the attribution of net income between controlling and noncontrolling interests. The Company adopted this guidance effective January 4, 2009. Since this guidance was effective prospectively, its adoption had no impact on the consolidated financial statements of the Company.

 

In March 2008, the FASB issued authoritative guidance relating to disclosures about derivative instruments and hedging activities which expanded the disclosure requirements about an entity’s derivative instruments and hedging activities. The guidance expanded the disclosure provisions to apply to all entities with derivative instruments. The provisions also apply to related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments must provide more robust qualitative disclosures and expanded quantitative disclosures. Such disclosures generally will need to be presented for every annual and interim reporting period. The Company adopted this guidance effective January 4, 2009. Since this guidance required additional disclosure only, its adoption had no material impact on the consolidated financial statements of the Company.

 

In April 2008, the FASB issued authoritative guidance relating to the determination of the useful life of intangible assets. This guidance amended the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The intent of this guidance was to improve the consistency between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of the asset in other applicable accounting literature. The Company adopted this guidance effective January 4, 2009. Since this guidance must be applied prospectively, its adoption had no impact on the consolidated financial statements of the Company.

 

In December 2008, the FASB issued authoritative guidance on employer’s disclosures about postretirement benefit plan assets, which requires additional disclosures for assets held by employer pension and other postretirement benefit plans. The required disclosures include information about fair value measurements of plan assets, including the investment policies and strategies for the major categories of plan assets, and significant concentrations of risk within plan assets. This guidance was effective for fiscal years ending after December 15, 2009. Since this guidance provides only disclosure requirements, it did not have a material impact on the consolidated financial statements of the Company.

 

In May 2009, the FASB issued authoritative guidance on subsequent events, which introduces the concept of financial statements being available to be issued. This guidance will require the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date (that is, whether that date represents the date the financial statements were issued or were available to be issued). For SEC registrants, this date will continue to be the date on which financial statements are filed with the SEC. This guidance was effective for fiscal years and interim periods beginning after June 15, 2009. The adoption of this new guidance had no impact on the consolidated financial statements of the Company. In February 2010, this guidance was effectively reversed for SEC filers because of a potential conflict between the guidance and SEC requirements.

 

In June 2009, the FASB issued authoritative guidance on consolidation of variable interest entities. The new guidance is intended to improve financial reporting by requiring additional disclosures about a company’s involvement in variable interest

 

16

 


entities. This new guidance is effective for fiscal years and interim periods beginning after November 15, 2009. The Company has not determined the impact, if any, of the adoption of this guidance on the consolidated financial statements of the Company.

 

In June 2009, the FASB issued The FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (“the Codification”). The Codification is the source for authoritative U.S. Generally Accepted Accounting Principles recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the SEC under the authority of the federal securities laws are also sources of authoritative GAAP for SEC registrants. All other non-grandfathered non-SEC accounting literature not included in the Codification is non-authoritative. The Codification was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The adoption of the Codification had no impact on the consolidated financial statements of the Company.

 

In August 2009, the FASB issued new accounting guidance to provide clarification on measuring liabilities at fair value when the quoted price in an active market for an identical liability is not available. The new guidance was effective for the first reporting period beginning after August 28, 2009. The adoption of this guidance had no impact on the consolidated financial statements of the Company.

In January 2010, the FASB issued new accounting guidance which requires new disclosures regarding transfers in and out of Level 1 and Level 2 fair value measurements, as well as requiring presentation on a gross basis of information about purchases, sales, issuances and settlements in Level 3 fair value measurements. The guidance also clarifies existing disclosures regarding level of disaggregation, inputs and valuation techniques. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2009. Disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010. As this guidance requires only additional disclosure, there should be no impact on the consolidated financial statements of the Company upon adoption.

 

Critical Accounting Policies and Estimates

 

The preparation of the financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Areas of uncertainty that require judgments, estimates and assumptions include items such as the accounting for derivatives; environmental matters; the testing of goodwill and other intangible assets for impairment; proceeds on assets to be sold; pensions and other postretirement benefits; and tax matters. Management uses historical experience and all available information to make its estimates and assumptions, but actual results will inevitably differ from the estimates and assumptions that are used to prepare the Company’s financial statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and related footnotes provide a meaningful and fair presentation of the Company.

 

Management believes that the application of these estimates and assumptions on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company’s operating results and financial condition.

 

Allowance for Doubtful Accounts

 

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews the collectibility of its receivables on an ongoing basis taking into account a combination of factors. The Company reviews potential problems, such as past due accounts, a bankruptcy filing or deterioration in the customer’s financial condition, to ensure the Company is adequately accrued for potential loss. Accounts are considered past due based on when payment was originally due. If a customer’s situation changes, such as a bankruptcy or creditworthiness, or there is a change in the current economic climate, the Company may modify its estimate of the allowance for doubtful accounts. The Company will write off accounts receivable after reasonable collection efforts have been made and the accounts are deemed uncollectible.

 

Inventory Reserve

 

Inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (“LIFO”) method at the Company’s U.S. facilities. Accordingly, a LIFO valuation reserve is calculated using the dollar value link chain method.

 

We review the net realizable value of inventory in detail on an ongoing basis, giving consideration to deterioration, obsolescence and other factors. Based on these assessments, we provide for an inventory reserve in the period in which an impairment is identified. The reserve fluctuates with market conditions, design cycles and other economic factors.

 

17

 


Goodwill and Other Intangible Assets

 

Intangible assets with finite useful lives are amortized generally on a straight-line basis over the periods benefited. Goodwill and other intangible assets with indefinite useful lives are not amortized. Each year during the second quarter, the carrying value of goodwill and other intangible assets with indefinite useful lives is tested for impairment. The Company uses the discounted cash flow method to calculate the fair value of goodwill associated with its reporting units. No impairments of goodwill were deemed to exist. The determination of discounted cash flows is based on the businesses’ strategic plans and long-range planning forecasts. The revenue growth rates included in the plans are management’s best estimates based on current and forecasted market conditions. Profit margin assumptions are projected by each business based on the current cost structures and anticipated cost reductions. There can be no assurance that operations will achieve the future cash flows reflected in the projections. If different assumptions were used in these plans, the related discounted cash flows used in measuring impairment could be different and an impairment of assets might need to be recorded.

 

Pension and Other Postretirement Benefits

 

The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions about such factors as expected return on plan assets, discount rates at which liabilities could be settled, rate of increase in future compensation levels, mortality rates, and trends in health insurance costs. These assumptions are reviewed annually and updated as required. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect the expense recognized and obligations recorded in future periods.

 

The discount rate used is based on a single equivalent discount rate derived with the assistance of our actuaries by matching expected future benefit payments in each year to the corresponding spot rates from the Citigroup Pension Liability Yield Curve, comprised of high quality (rated AA or better) corporate bonds. The expected long-term rate of return on assets is also developed with input from the Company’s actuarial firms. We consider the Company’s historical experience with pension fund asset performance, the current and expected allocation of our plan assets, and expected long-term rates of return. The long-term rate-of-return assumption used for determining net periodic pension expense for 2009 was 8.5%. The Company reviews the long-term rate of return each year. Future actual pension income and expense will depend on future investment performance, changes in future discount rates, and various other factors related to the population of participants in the Company’s pension plans.

 

The Company expects to make cash contributions of approximately $2.5 million and $141,000 to its pension plans and postretirement plan, respectively, in 2010.

 

RESULTS OF OPERATIONS

 

Fiscal 2009 Compared to Fiscal 2008

 

The following table shows, for 2009 and 2008, selected line items from the consolidated statements of income as a percentage of net sales, by segment.

 

 

 

Industrial

Security

Metal

 

 

 

 

Hardware

Products

Products

Total

 

 

2009

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of products sold

 

75.6

%

78.2

%

103.7

%

81.7

%

Gross margin

 

24.4

%

21.8

%

-3.7

%

18.3

%

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

15.2

%

18.1

%

8.8

%

15.1

%

Operating profit

 

9.2

%

3.7

%

-12.5

%

3.2

%

 

 

 

 

 

 

 

 

 

 

 

 

2008

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of products sold

 

77.8

%

77.0

%

102.7

%

81.3

%

Gross margin

 

22.2

%

23.0

%

-2.7

%

18.7

%

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

13.5

%

15.7

%

8.1

%

13.5

%

Operating profit

 

8.7

%

7.3

%

-10.8

%

5.2

%

 

 

18

 


The following table shows the amount of change from 2008 to 2009 in sales, cost of products sold, gross margin, selling and administrative expenses, and operating profit, by segment (dollars in thousands):

 

 

 

Industrial

 

Security

 

Metal

 

 

 

 

 

Hardware

 

Products

 

Products

 

Total

 

Net sales

 

$

(10,086

)

$

(13,186

)

$

59

 

$

(23,213

)

Volume

 

 

-29.8

%

 

-29.4

%

 

-4.9

%

 

-25.9

%

Prices

 

 

0.9

%

 

4.8

%

 

2.9

%

 

2.8

%

New Products

 

 

12.1

%

 

0.7

%

 

2.3

%

 

6.0

%

 

 

 

-16.8

%

 

-23.9

%

 

0.3

%

 

-17.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

$

(8,979

)

$

(9,661

)

$

256

 

$

(18,384

)

 

 

 

-19.2

%

 

-22.7

%

 

1.2

%

 

-16.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

$

(1,107

)

$

(3,525

)

$

(197

)

$

(4,829

)

 

 

 

-8.3

%

 

-27.8

%

 

-34.6

%

 

-19.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

$

(488

)

$

(1,033

)

$

144

 

$

(1,377

)

 

 

 

-6.0

%

 

-11.9

%

 

8.6

%

 

-7.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

$

(619

)

$

(2,492

)

$

(341

)

$

(3,452

)

 

 

 

-11.8

%

 

-61.8

%

 

-15.2

%

 

-49.1

%

 

 

Industrial Hardware Segment

 

Net sales in the Industrial Hardware segment decreased 17% in 2009 from the 2008 level. This decrease was primarily due to reduced sales of existing products to the vehicular markets in 2009 compared to the prior year, while smaller declines were experienced in many of the other markets that use our Industrial Hardware products. New product introductions offset part of the decrease in sales for this segment. All of the new products were internally developed and offered to the many markets we service, including: military, utility truck, vehicular accessories and buses. New products included a lever arm assembly for service bodies, a variety of lightweight composite panels for the marine, transportation, high tech and construction markets, including in the construction of local delivery vans in Mexico where the lighter weight of the vehicles reduces fuel consumption, several new products for the military market including a roof center case assembly, a turret latch and a variety of handles, as well as an assortment of handles and latches used in many of the markets to which we sell.

 

Cost of products sold for the Industrial Hardware segment decreased 19% from 2008 to 2009. The primary reason for this decrease was the lower sales volume in 2009 and lower payroll and payroll related charges compared to the prior year.

 

Gross margin as a percentage of net sales improved from 22% in 2008 to 25% in 2009. The improvement in gross margin was primarily the result of lower raw material costs in 2009 compared to the higher raw material costs in 2008 that the Company was unable to recover from its customers.

 

Selling and administrative expenses decreased 6% from 2008 levels due to decreases in payroll and payroll related charges and lower expenditures for travel.

 

Security Products Segment

 

Net sales in the Security Products segment decreased 24% from 2008 to 2009. The primary reason for the decrease was a decrease in sales volume resulting from the continued economic slowdown in many of the markets served by the Security Products segment, including the travel, coin-op and commercial laundry markets. New products were mainly lock related, such as: a double bitted non-reversible cam lock for the enclosure market and various parts used in the musical instrument accessory market, as well as a variety of other lock products for various markets.

 

19

 


Cost of products sold for the Security Products segment decreased 23% from 2008 to 2009. The decrease in cost of products sold was directly proportionate to the decrease in sales.

 

Gross margin for 2009 at 22% was comparable to the 2008 level of 23% as a percentage of net sales for the Security Products segment.

 

Selling and administrative expenses decreased 12% from the same period a year ago due to a reduction in payroll and payroll related charges and decreased expenses for advertising and sales commissions.

 

Metal Products Segment

 

Net sales in the Metal Products segment were comparable for 2009 and 2008. Sales of mine products increased 14% in 2009 compared to 2008. Sales of contract casting products decreased 35% from 2008 levels. In 2009, sales of mine roof supports increased in the U.S. markets, continuing the growth experienced in 2007 and 2008. Sales of new products in 2009 consisted of a crater head for use in underground mining applications.

 

Cost of products sold for the Metal Products segment increased 1% from 2008 to 2009. Cost increases were experienced for raw materials, outside parts and processing, and worker’s compensation insurance.

 

Gross margin as a percentage of sales in the Metal Products segment decreased slightly from -3% in 2008 to -4% in 2009. The negative results were primarily caused by excessive scrap and down time due to equipment failures. These operational issues are being addressed through a $2.5 million capital expenditure program in 2010.

 

Selling and administrative expenses in the Metal Products segment increased 9% from 2008 to 2009, due to increased payroll and payroll related charges.

 

Other Items

 

The following table shows the amount of change from 2008 to 2009 in other items (dollars in thousands):

 

 

 

 

Total

 

Interest expense

 

$

664

 

 

 

 

62.5

%

 

 

 

 

 

Other income

 

$

(25

)

 

 

 

-33.3

%

 

 

 

 

 

Income taxes

 

$

(673

)

 

 

 

-43.8

%

 

Interest expense increased from 2008 to 2009 primarily due to the termination of the interest rate swap contract in December 2009. The increase was partially offset by lower interest paid throughout 2009 on the decreased level of debt compared to the prior year.

 

Other income decreased from 2008 to 2009 due to lower interest income earned on cash balances in the Company’s cash management program in 2009.

 

Income taxes – the effective tax rate increased in 2009 to 45% from the 25% rate in 2008. The increase is primarily the result of a discrete tax item and a change in the mix of U.S and foreign income, as well as a change in the mix of U.S. earnings in states with lower income tax rates.

 

20

 


Fiscal 2008 Compared to Fiscal 2007

 

The following table shows, for 2008 and 2007, selected line items from the consolidated statements of income as a percentage of net sales, by segment.

 

 

 

2008

 

 

Industrial

Security

Metal

 

 

 

 

Hardware

Products

Products

Total

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of products sold

 

77.8

%

77.0

%

102.7

%

81.3

%

Gross margin

 

22.2

%

23.0

%

-2.7

%

18.7

%

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

13.5

%

15.7

%

8.1

%

13.5

%

Operating profit

 

8.7

%

7.3

%

-10.8

%

5.2

%

 

 

 

 

 

 

 

 

 

 

 

 

2007

 

 

Industrial

Security

Metal

 

 

 

 

Hardware

Products

Products

Total

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of products sold

 

72.5

%

76.8

%

104.3

%

77.0

%

Gross margin

 

27.5

%

23.2

%

-4.3

%

23.0

%

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

11.6

%

14.6

%

12.0

%

12.8

%

Operating profit

 

15.9

%

8.6

%

-16.3

%

10.2

%

 

 

The following table shows the amount of change from 2007 to 2008 in sales, cost of products sold, gross margin, selling and administrative expenses, and operating profit, by segment (dollars in thousands):

 

 

 

Industrial

 

Security

 

Metal

 

 

 

 

 

Hardware

 

Products

 

Products

 

Total

 

Net sales

 

$

(21,561

)

$

(5,560

)

$

6,718

 

$

(20,403

)

Volume

 

 

-32.2

%

 

-12.0

%

 

29.4

%

 

-18.8

%

Prices

 

 

1.2

%

 

1.7

%

 

15.1

%

 

2.6

%

New Products

 

 

4.6

%

 

1.1

%

 

3.7

%

 

3.1

%

 

 

 

-26.4

%

 

-9.2

%

 

48.2

%

 

-13.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products sold

 

$

(12,426

)

$

(4,185

)

$

6,683

 

$

(9,928

)

 

 

 

-21.0

%

 

-9.0

%

 

46.0

%

 

-8.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

$

(9,135

)

$

(1,375

)

$

35

 

$

10,475

 

 

 

 

-40.7

%

 

-9.8

%

 

5.7

%

 

-29.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

$

(1,377

)

$

(201

)

$

2

 

$

(1,576

)

 

 

 

-14.5

%

 

-2.3

%

 

0.1

%

 

-7.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

$

(7,758

)

$

(1,174

)

$

33

 

$

(8,899

)

 

 

 

-59.7

%

 

-22.6

%

 

1.5

%

 

-55.9

%

 

 

 

21

 


Industrial Hardware Segment

 

Net sales in the Industrial Hardware segment decreased 26.4% in 2008 from the 2007 level. This decrease was primarily due to the 2007 period having benefited from the one-time limited contract to supply latching system components for use in the military’s up-armored Humvee program which was completed in April 2007. New product introductions offset part of the decrease in sales for this segment. All of the new products were internally developed and offered to the many markets we service, including: military, utility truck, vehicular accessories and buses. New products included a rear door lock and an out door handle for the bus market, a variety of lightweight composite panels for the marine, transportation, high tech and construction markets, several new products for the military market including a center case kit and a variety of handles, as well as an assortment of handles and latches used in many of the markets to which we sell. Sales volume of existing products was comparable to the prior year in most of the markets serviced by the Industrial Hardware segment. However, decreases in sales volume occurred in the truck accessory, Class 8 truck, service body, and trailer markets, following the general economic decline in the heavy and light truck markets.

 

Cost of products sold for the Industrial Hardware segment decreased 21.0% from 2007 to 2008. The lower manufacturing costs associated with the lower volume of sales was unfavorably impacted by higher costs of raw materials, increases in payroll related charges, maintenance and repair and research and development.

 

Gross margin as a percentage of net sales decreased from 27.5% to 22.2%, driven by higher manufacturing costs which could not be fully recovered through selling price increases due to the competitive nature of many of the products we sell.

 

Selling and administrative expenses decreased 14.5% from 2007 levels due to decreases in payroll and payroll related charges.

 

Security Products Segment

 

Net sales in the Security Products segment decreased 9.2% from 2007 to 2008. The primary reason for the decrease was a decrease in sales volume resulting from the economic slowdown in many of the markets served by the Security Products segment, including the travel, coin-op and commercial laundry markets. New products were mainly lock related, such as: a wing knob lock with a flip-up cover used in the automotive accessory market and various parts used in the motorcycle market, as well as a variety of other lock products for various markets.

 

Cost of products sold for the Security Products segment decreased 9.0% from 2007 to 2008. The decrease in cost of products sold was directly proportionate to the decrease in sales.

 

Gross margin for 2008 at 23.0% was comparable to 2007 level of 23.2% as a percentage of net sales for the Security Products segment.

 

Selling and administrative expenses decreased 2.3% from the same period a year ago due to a reduction in payroll and payroll related charges.

 

Metal Products Segment

 

Net sales in the Metal Products segment increased 48.2% from 2007 to 2008. Sales of mine products increased 46% in 2008 compared to 2007. Sales of contract casting products increased 29% from 2007. In 2008, sales of mine roof supports increased in both the U.S. and Canadian markets, continuing the growth experienced in 2007. Shipments of ductile iron castings more than doubled to 2,284 tons in 2008 from 1,058 tons in 2007. Sales of new products in 2008 consisted of a crater head for use in underground mining applications.

 

Cost of products sold for the Metal Products segment increased 46.0% from 2007 to 2008. Cost increases were experienced for raw materials, payroll and payroll related charges, utilities, outside parts and processing, supplies and tools and equipment maintenance.

 

Gross margin in the Metal Products segment improved slightly from -4.3% to -2.8% from 2007 and 2008. The negative results were primarily caused by $1.5 million in excessive scrap due to equipment failures. Additionally, production down-time resulted in an estimated negative impact of approximately $500,000. These operational issues are being addressed.

 

Selling and administrative expenses in the Metal Products segment were comparable for 2007 and 2008.

 

22

 


Other Items

 

The following table shows the amount of change from 2007 to 2008 in other items (dollars in thousands):

 

 

 

 

Total

 

Interest expense

 

$

(225

)

 

 

 

-17.5

%

 

 

 

 

 

Other income

 

$

(171

)

 

 

 

-83.1

%

 

 

 

 

 

Income taxes

 

$

(3,227

)

 

 

 

-67.7

%

 

Interest expense decreased from 2007 to 2008 primarily due to the decreased level of debt.

 

Other income decreased from 2007 to 2008 due to lower interest income earned on cash balances in the Company’s cash management program in 2008.

 

Income taxes – the effective tax rate decreased in 2008 to 25% from the 32% rate in 2007. The decrease is the result of a change in the mix of U.S and foreign income, as well as a change in the mix of U.S. earnings in states with lower income tax rates.

 

Liquidity and Sources of Capital

 

The Company’s financial position remained strong throughout 2009, despite a loss in the first quarter that caused the Company to fail its fixed coverage ratio covenant for the first, second and third quarters. The primary source of the Company’s cash is earnings from operating activities adjusted for cash generated from or used for net working capital. The most significant recurring non-cash items included in income are depreciation and amortization expense. Changes in working capital fluctuate with the changes in operating activities. As sales increase, there generally is an increased need for working capital. Since increases in working capital reduce the Company’s cash, management attempts to keep the Company’s investment in net working capital at a reasonable level by closely monitoring inventory levels (by matching production to expected market demand), keeping tight control over the collection of receivables, and optimizing payment terms on its trade and other payables.

 

The Company is dependent on the continued demand for its products and subsequent collection of accounts receivable from its customers. The Company serves a broad base of customers and industries with a variety of products. As a result, any fluctuations in demand or payment from a particular industry or customer will not have a material impact on the Company’s sales and collection of receivables. Management expects that the Company’s foreseeable cash needs for operations, capital expenditures, debt service and dividend payments will continue to be met by the Company’s operating cash flows and available credit facility.

 

 

 

2009

 

2008

 

2007

 

Current ratio

 

3.9

 

4.8

 

3.9

 

Average days’ sales in accounts receivable

 

51

 

52

 

52

 

Inventory turnover

 

3.8

 

3.6

 

3.9

 

Ratio of working capital to sales

 

39.3

%

35.9

%

30.1

%

Total debt to shareholders’ equity

 

17.2

%

21.9

%

24.7

%

 

At January 2, 2010, January 3, 2009, and December 29, 2007, the Company had cash and cash equivalents of $16.7 million, $9.0 million and $8.2 million, respectively, and working capital of $44.3 million, $48.7 million and $47.0 million, respectively.

 

Net cash provided by operating activities was $13.3 million in 2009 compared to $7.6 million in 2008 and $8.8 million in 2007. The $5.7 million increase in 2009 is the result of improvements in working capital during the year offset by the lower profitability. The $1.2 million decrease from 2007 to 2008 was primarily related to the decline in profitability and changes in working capital. During 2009, working capital provided $7.6 million in cash, most related to a $6.7 million decline in

 

23

 


inventory during the period. During 2008, working capital used $1.4 million in cash. In 2008, a $1.6 million decline in accounts receivable was offset by a $1.1 million increase in inventory and a $1.9 decrease in accounts payable, accrued compensation and other accrued expenses. During 2007, working capital used $5.5 million in cash. In 2007, changes in inventory, recoverable taxes, accounts payable and other accrued expenses accounted for $13.3 million of cash usage, while changes in accounts receivable and other long term liabilities provided $7.7 million in cash.

 

During 2009, 2008 and 2007 the Company used $2.2, $2.4 and $2.8 million of cash in investing activities, respectively. The entire amount in 2009 was for the purchase of fixed assets. In 2008, the Company made one small acquisition using approximately $128,000. The balance for 2008 and for 2007 related primarily to the purchase of fixed assets. The Company expects to begin a major equipment upgrade in the Metal Products Group during 2010 and as a result we expect capital expenditures for 2010 to be approximately $4 million to $5 million.

 

Net cash used by financing activities in 2009 totaled $3.4 million. This consisted of the payment of $2.2 million in dividends and $2.2 million of long-term debt. These amounts were offset by the receipt of approximately $1 million related to the exercise of stock options during the year ($1.6 million from the sales of common stock, $200,000 in tax benefits related to the options, and the purchase of approximately $800,000 in treasury shares). In 2009, 153,421 shares were issued as a result of options being exercised at an average price of approximately $10.32 per share, and 55,881 shares were purchased for the treasury at an average price of $14.27 per share. While there is no assurance that the Company will receive additional funds resulting from the exercise of options in 2010, options representing an additional 113,750 shares at an average price of $9.50 per share are due to expire during 2010 if they are not exercised. Net cash used by financing activities totaled $4.2 million in 2008, including $3.8 million paid to reduce the Company’s debt, and $1.9 million paid out as dividends during the year. The Company also received approximately $1.6 million net related to the exercise of stock options during the year ($1.9 million from the sales of common stock, $400,000 in tax benefits related to the options, and the purchase of approximately $600,000 in treasury shares). In 2008, 196,606 shares were issued as a result of options being exercised at an average price of approximately $9.47 per share and 42,955 shares were purchased for the treasury at an average price of $14.21 per share. Net cash used by financing activities in 2007 totaled approximately $1.1 million. Payments of $3.1 million in debt and $1.8 million in dividends were offset by $2.6 million received from the exercise of stock options and an additional $1.6 million related to tax benefits derived from these same stock option transactions. In 2007, 339,749 shares were issued as a result of options being exercised at an average price of approximately $7.54 per share.

 

The Company leases certain equipment and buildings under cancelable and non-cancelable operating leases expiring at various dates up to five years. Rent expense amounted to approximately $759,000, $908,000 and $882,000 in 2009, 2008 and 2007, respectively.

 

On September 22, 2006 the Company signed an unsecured loan agreement (“Loan Agreement”), which included a $20,000,000 term loan and a revolving line of credit, with its lender, Bank of America, N.A. The term portion of the loan required quarterly payments of $714,286 for a period of seven (7) years, maturing on September 22, 2013. Prior to April 21, 2009, the revolving credit portion allowed the Company to borrow up to $12,000,000 with a maturity date of September 22, 2009. The revolving credit portion had a variable quarterly commitment fee ranging from 0.10% to 0.25% based on operating results. Effective April 21, 2009, the Company agreed to a reduction in the amount available on the revolving credit portion to $3,000,000. Effective June 19, 2009, the quarterly commitment fee was fixed at 0.5%. There were no outstanding balances under the revolving credit portion at January 2, 2010 or January 3, 2009.

 

The interest rates on the term and the revolving credit portions of the Loan Agreement vary. Prior to June 19, 2009, the interest rates varied based on the LIBOR rate plus a margin spread of 1.0% to 1.65% for the term portion and 1.0% to 1.6% for the revolving credit portion. The margin rate spread was based on operating results calculated on a rolling-four-quarter basis. Effective June 19, 2009, the margin spread was fixed at a rate of 2.25%. The Company may also borrow funds at the lender’s prime rate. On January 2, 2010, the interest rate on the term portion of the Loan Agreement was approximately 2.54%.

 

On November 13, 2009, the Company amended its Loan Agreement with Bank of America, N.A. The amendment extended the term of the revolving credit portion of the Loan Agreement to May 31, 2010 and permanently reduced the amount available to borrow to $3,000,000. In addition, the margin rate spread was fixed at two and one quarter percent (2.25%); the unused line fee was increased to one half of one percent (0.50%); and the fixed coverage ratio covenant was modified such that it will be calculated on a fiscal year to date basis (instead of a rolling four quarter basis) commencing with the second quarter of fiscal 2009, provided that if the Company fails to comply with such fixed coverage ratio covenant for any quarter, then such ratio will be re-calculated to add back the amount of permitted dividends declared and actually paid during the period to meet the required 1.1 to 1.0 ratio, so long as the payment of such dividends does not result in the amount of consolidated cash to be below $10,000,000 on the date of determination. The testing period will return to a rolling 4 quarter period effective with the end of the first quarter of 2010. The amendment also required the Company to secure all

 

24

 


of the present and future indebtedness of the Company and its subsidiaries with a continuing first priority security interest in all present and future assets of the Company and its consolidated subsidiaries.

 

On November 2, 2006, the Company entered into an interest rate swap contract with the lender with an original notional amount of $20,000,000, which was equal to 100% of the outstanding balance of the term loan on that date. The notional amount began decreasing on a quarterly basis on January 2, 2007 following the principal repayment schedule of the term loan. The Company has a fixed interest rate of 5.25% on the swap contract and paid the difference between the fixed rate and LIBOR when LIBOR was below 5.25% and received interest when the LIBOR rate exceeded 5.25%. This remained in effect until December 22, 2009 when the Company terminated the interest rate swap contract at a cost of $967,350, which was accounted for as a charge to interest expense. After terminating the contract, the Company commenced a refinancing plan of the Company’s outstanding debt.

 

Subsequent to January 2, 2010, the Company completed the refinancing of all of its debt. On January 29, 2010, the Company signed a new secured Loan Agreement (the “New Loan Agreement”) with People’s United Bank (“People’s”) which included a $5,000,000 term portion and a $10,000,000 revolving credit portion. The term portion of the loan requires quarterly payments of $178,571 for a period of seven (7) years, maturing on January 31, 2017. The revolving credit portion has a quarterly commitment fee of one quarter of one percent (0.25%). The proceeds of the term portion along with the Company’s available cash were used to retire the remaining portion of the debt with Bank of America, N.A., which on January 29, 2010 totaled $10,714,286.

 

Interest on the term portion of the New Loan Agreement is fixed at 4.98%. The interest rate on the revolving credit portion of the New Loan Agreement varies based on the LIBOR rate or People’s Prime rate plus a margin spread of 2.25%, with a floor rate of 4.0%.

 

The Company’s loan covenants restrict it from incurring any indebtedness (from any person other than the lender) that exceeds the aggregate sum of $2.0 million, or that exceeds $1.0 million in any single transaction, without the express consent of the lender or until the full payment of the current obligation has been made. The loan covenants also prohibit the Company from paying any dividends in the event the payment would result in a default under the terms of the Loan Agreement.

 

Tabular Disclosure of Contractual Obligations

 

The Company’s known contractual obligations as of January 2, 2010, are shown below (in thousands):

 

 

 

 

Payment due by period

 

 


Total

 

Less than 1 Year

 

1-3 Years

 

3-5 Years

 

More than 5 Years

 

Long-term debt obligations

 

$

11,429

 

$

7,143

 

$

1,429

 

$

1,607

 

$

1,250

 

Estimated interest on long-term debt

 

 

915

 

 

181

 

 

388

 

 

264

 

 

82

 

Operating lease obligations

 

 

1,788

 

 

592

 

 

1,070

 

 

126

 

 

--

 

Estimated contributions to pension plans

 

 

12,144

 

 

328

 

 

3,971

 

 

3,971

 

 

3,874

 

Estimated post retirement benefits
other than pensions

 

 

1,341

 

 

141

 

 

298

 

 

329

 

 

573

 

Total

 

$

27,617

 

$

8,385

 

$

7,156

 

$

6,297

 

$

5,779

 

 

The Company paid approximately $5.7 million of the $7.1 million of long-term debt obligations due in less than one year, shown in the table above, in connection with the refinancing of the Company’s debt on January 29, 2010.

 

The amounts shown in the above table for estimated contributions to pension plans and estimated postretirement benefits other than pensions are based on the assumptions in Note 10 to the consolidated financial statements, as well as the assumption that participant counts will remain stable.

 

The Company does not have any non-cancelable open purchase orders.

 

25

 


During the fourth quarter of Fiscal 2008 a change in the general economy caused a significant tightening of credit by financial institutions. During Fiscal 2009, the Company increased its cash position by approximately $7.8 million. While the Company used approximately $5.7 million of this in January 2010 in order to refinance its outstanding debt, the Company believes it has sufficient cash on hand and credit resources available to it to sustain itself though these difficult economic times.

 

 

 

ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company’s foreign manufacturing facilities account for approximately 12% of total sales and 15% of total assets. Its U.S. operations buy from and sell to these foreign affiliates, and also make limited sales (approximately 11% of total sales) to nonaffiliated foreign customers. This trade activity could be affected by fluctuations in foreign currency exchange or by weak economic conditions. The Company’s currency exposure is concentrated in the Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB and Hong Kong dollar. Because of the Company’s limited exposure to any single foreign market, any exchange gains or losses have not been material and are not expected to be material in the future. Had the exchange rate as of January 2, 2010 for all of the listed currencies changed by 1%, the total change in reported earnings would have been less than $5,000. As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments. In 2009, a 10% increase/decrease in exchange rates would have resulted in a translation increase/decrease to sales of approximately $1.2 million, and to equity of approximately $2.5 million.

 

On January 29, 2010, subsequent to the date of the financial statements included in Item 8 of this Form 10-K and prior to filing this Form 10-K, the Company eliminated its interest rate risk by refinancing its long-term debt at a fixed rate of 4.98%. See Note 5 to the Company’s financial statements included at Item 8 of this Annual Report on Form 10-K.

 

26

 


 

 

[This page intentionally left blank.]

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 


ITEM 8        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

The Eastern Company

 

Consolidated Balance Sheets

 

 

 

 

January 2

 

January 3

 

 

 

2010

 

2009

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

16,746,673

 

$

8,967,625

 

Accounts receivable, less allowances of $392,000 in 2009 and $328,000 in 2008

 

 

15,326,416

 

 

17,021,774

 

 

 

 

 

 

 

 

 

Inventories:

 

 

 

 

 

 

 

Raw materials and component parts

 

 

7,837,854

 

 

7,719,540

 

Work in process

 

 

4,367,851

 

 

6,448,593

 

Finished goods

 

 

12,314,584

 

 

16,628,746

 

 

 

 

24,520,289

 

 

30,796,879

 

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

2,037,745

 

 

2,366,634

 

Recoverable income taxes receivable

 

 

 

 

1,313,628

 

Deferred income taxes

 

 

1,129,898

 

 

1,225,723

 

Total Current Assets

 

 

59,761,021

 

 

61,692,263

 

 

 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

 

 

 

 

 

Land

 

 

1,134,743

 

 

1,102,385

 

Buildings

 

 

13,790,853

 

 

13,751,059

 

Machinery and equipment

 

 

35,413,406

 

 

33,574,613

 

Accumulated depreciation

 

 

(27,365,369

)

 

(24,517,348

)

 

 

 

22,973,633

 

 

23,910,709

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

Goodwill

 

 

13,869,005

 

 

13,700,356

 

Trademarks

 

 

151,341

 

 

143,818

 

Patents, technology and other intangibles net of accumulated amortization

 

 

2,796,698

 

 

3,415,012

 

Deferred income taxes

 

 

1,283,323

 

 

3,154,810

 

Prepaid pension cost

 

 

36,838

 

 

 

 

 

 

18,137,205

 

 

20,413,996

 

 

 

$

100,871,859

 

$

106,016,968

 

 

 

28

 


Consolidated Balance Sheets

 

 

 

 

January 2

 

January 3

 

 

 

2010

 

2009

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

5,335,317

 

$

7,081,303

 

Accrued compensation

 

 

1,811,236

 

 

1,919,322

 

Other accrued expenses

 

 

1,191,360

 

 

1,706,681

 

Current portion of long-term debt

 

 

7,142,858

 

 

2,240,202

 

Total Current Liabilities

 

 

15,480,771

 

 

12,947,508

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

1,077,247

 

 

1,614,833

 

Long-term debt, less current portion

 

 

4,285,713

 

 

11,428,571

 

Accrued postretirement benefits

 

 

1,341,498

 

 

1,062,719

 

Accrued pension cost

 

 

12,089,326

 

 

15,311,924

 

Interest rate swap obligation

 

 

 

 

1,169,848

 

 

 

 

 

 

 

 

 

Commitments and contingencies (See Note 4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

Voting Preferred Stock, no par value:

 

 

 

 

 

 

 

Authorized and unissued: 1,000,000 shares

 

 

 

 

 

 

 

Nonvoting Preferred Stock, no par value:

 

 

 

 

 

 

 

Authorized and unissued: 1,000,000 shares

 

 

 

 

 

 

 

Common Stock, no par value:

 

 

 

 

 

 

 

Authorized: 50,000,000 shares

 

 

 

 

 

 

 

Issued: 8,709,384 shares in 2009 and 8,553,353 shares in 2008

 

 

26,236,477

 

 

24,418,916

 

Treasury Stock: 2,644,215 shares in 2009 and 2,588,334 shares in 2008

 

 

(18,375,416

)

 

(17,578,088

)

Retained earnings

 

 

67,558,201

 

 

68,676,943

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

Foreign currency translation

 

 

1,696,013

 

 

664,990

 

Unrecognized net pension and postretirement benefit costs, net of taxes

 

 

(10,517,971

)

 

(12,944,539

)

Derivative financial instruments, net of taxes

 

 

 

 

(756,657

)

 

 

 

(8,821,958

)

 

(13,036,206

)

Total Shareholders’ Equity

 

 

66,597,304

 

 

62,481,565

 

 

 

$

100,871,859

 

$

106,016,968

 

 

See accompanying notes.

 

29

 


Consolidated Statements of Income

 

 

 

 

 

Year ended

 

 

 

 

 

January 2

 

January 3

 

December 29

 

 

 

2010

 

2009

 

2007

 

Net sales

 

$

112,665,464

 

$

135,878,490

 

$

156,281,083

 

Cost of products sold

 

 

(92,031,078

)

 

(110,415,392

)

 

(120,343,196

)

Gross margin

 

 

20,634,386

 

 

25,463,098

 

 

35,937,887

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expenses

 

 

(17,055,610

)

 

(18,432,700

)

 

(20,008,851

)

Operating profit

 

 

3,578,776

 

 

7,030,398

 

 

15,929,036

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(1,727,980

)

 

(1,063,607

)

 

(1,288,952

)

Other income

 

 

50,733

 

 

76,057

 

 

205,379

 

Income before income taxes

 

 

1,901,529

 

 

6,042,848

 

 

14,845,463

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

865,122

 

 

1,538,225

 

 

4,764,770

 

Net income

 

$

1,036,407

 

$

4,504,623

 

$

10,080,693

 

Earnings per Share:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.77

 

$

1.79

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.17

 

$

0.73

 

$

1.68

 

 

See accompanying notes.

 

Consolidated Statements of Comprehensive Income (Loss)

 

 

 

 

 

Year ended

 

 

 

 

 

January 2

 

January 3

 

December 29

 

 

 

2010

 

2009

 

2007

 

Net income

 

$

1,036,407

 

$

4,504,623

 

$

10,080,693

 

Other comprehensive income/(loss) -

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation

 

 

1,031,023

 

 

(1,735,278

)

 

1,643,816

 

Change in fair value of derivative financial instruments, net of income tax (expense)/benefit of ($72,200) in 2009, $204,866 in 2008 and $158,343 in 2007

 

 

130,298

 

 

(387,041

)

 

(281,185

)

Reclassification adjustment for termination of derivative financial instrument, net of income tax expense of $340,991

 

 

626,359

 

 

 

 

 

Change in pension and postretirement benefit costs, net of income taxes (expense)/benefit of ($1,341,658) in 2009, $5,581,644 in 2008 and ($1,808,898) in 2007

 

 

2,426,568

 

 

(10,306,221

)

 

3,193,078

 

 

 

 

4,214,248

 

 

(12,428,540

)

 

4,555,709

 

Comprehensive income/(loss)

 

$

5,250,655

 

$

(7,923,917

)

$

14,636,402

 

 

See accompanying notes.

 

30

 


Consolidated Statements of Shareholders’ Equity

 

 

Common Shares

 

Common
Stock

 

Treasury
Shares

 

Treasury
Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Shareholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 30, 2006

 

8,012,550

 

$

17,974,115

 

(2,533,089

)

$

(16,655,041

)

$

58,279,371

 

$

(5,207,240

)

$

54,391,205

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

10,080,693

 

 

 

 

 

10,080,693

 

Cash dividends declared, $.32 per share

 

 

 

 

 

 

 

 

 

 

 

 

(1,801,570

)

 

 

 

 

(1,801,570

)

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,643,816

 

 

1,643,816

 

Change in pension and postretirement benefit costs, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,193,078

 

 

3,193,078

 

Change in derivative financial instrument, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(281,185

)

 

(281,185

)

Change in accounting for uncertain tax positions

 

 

 

 

 

 

 

 

 

 

 

 

(295,928

)

 

 

 

 

(295,928

)

Purchase of Common Stock for treasury

 

 

 

 

 

 

(12,290

)

 

(312,521

)

 

 

 

 

 

 

 

(312,521

)

Issuance of Common Stock upon the exercise of stock options

 

339,749

 

 

2,562,997

 

 

 

 

 

 

 

 

 

 

 

 

 

2,562,997

 

Tax benefit from exercise of non-qualified stock options and disqualifying dispositions of incentive stock options

 

 

 

 

1,575,500

 

 

 

 

 

 

 

 

 

 

 

 

 

1,575,500

 

Cash payment for fractional shares resulting from exercise of stock options

 

 

 

 

(20

)

 

 

 

 

 

 

 

 

 

 

 

 

(20

)

Issuance of Common Stock for directors’ fees

 

2,679

 

 

61,203

 

 

 

 

 

 

 

 

 

 

 

 

 

61,203

 

Balances at December 29, 2007

 

8,354,978

 

 

22,173,795

 

(2,545,379

)

 

(16,967,562

)

 

66,262,566

 

 

(651,531

)

 

70,817,268

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

4,504,623

 

 

 

 

 

4,504,623

 

Cash dividends declared, $.33 per share

 

 

 

 

 

 

 

 

 

 

 

 

(1,938,172

)

 

 

 

 

(1,938,172

)

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,735,278

)

 

(1,735,278

)

Change in pension and postretirement benefit costs, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,306,221

)

 

(10,306,221

)

Change in derivative financial instrument, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(387,041

)

 

(387,041

)

Effects of changing pension plan measurement date pursuant to ASC 715, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

(152,074

)

 

43,865

 

 

(108,209

)

 

31

 


 

Consolidated Statements of Shareholders’ Equity (continued)

 

 

Common Shares

 

Common
Stock

 

Treasury
Shares

 

Treasury
Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Shareholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of Common Stock for treasury

 

 

 

 

 

 

(42,955

)

 

(610,526

)

 

 

 

 

 

 

 

(610,526

)

Issuance of Common Stock upon the exercise of stock options

 

196,606

 

 

1,861,486

 

 

 

 

 

 

 

 

 

 

 

 

 

1,861,486

 

Tax benefit from exercise of non-qualified stock options and disqualifying dispositions of incentive stock options

 

 

 

 

355,799

 

 

 

 

 

 

 

 

 

 

 

 

 

355,799

 

Cash payment for fractional shares resulting from exercise of stock options

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

 

 

 

 

(4

)

Issuance of Common Stock for directors’ fees

 

1,769

 

 

27,840

 

 

 

 

 

 

 

 

 

 

 

 

 

27,840

 

Balances at January 3, 2009

 

8,553,353

 

 

24,418,916

 

(2,588,334

)

 

(17,578,088

)

 

68,676,943

 

 

(13,036,206

)

 

62,481,565

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

1,036,407

 

 

 

 

 

1,036,407

 

Cash dividends declared, $.36 per share

 

 

 

 

 

 

 

 

 

 

 

 

(2,155,149

)

 

 

 

 

(2,155,149

)

Currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,031,023

 

 

1,031,023

 

Change in pension and postretirement benefit costs, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,426,568

 

 

2,426,568

 

Change in derivative financial instrument, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

130,298

 

 

130,298

 

Termination of derivative financial instrument, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

626,359

 

 

626,359

 

Purchase of Common Stock for treasury

 

 

 

 

 

 

(55,881

)

 

(797,328

)

 

 

 

 

 

 

 

(797,328

)

Issuance of Common Stock upon the exercise of stock options

 

153,421

 

 

1,584,042

 

 

 

 

 

 

 

 

 

 

 

 

 

1,584,042

 

Tax benefit from exercise of non-qualified stock options and disqualifying dispositions of incentive stock options

 

 

 

 

202,767

 

 

 

 

 

 

 

 

 

 

 

 

 

202,767

 

Issuance of Common Stock for directors’ fees

 

2,610

 

 

30,752

 

 

 

 

 

 

 

 

 

 

 

 

 

30,752

 

Balances at January 2, 2010

 

8,709,384

 

$

26,236,477

 

(2,644,215

)

$

(18,375,416

)

$

67,558,201

 

$

(8,821,958

)

$

66,597,304

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

32

 


Consolidated Statements of Cash Flows

 

 

 

 

 

Year ended

 

 

 

 

 

January 2

 

January 3

 

December 29

 

 

 

2010

 

2009

 

2007

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

Net income

 

$

1,036,407

 

$

4,504,623

 

$

10,080,693

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

4,103,317

 

 

4,128,312

 

 

4,369,998

 

Loss on sale of equipment and other assets

 

 

5,644

 

 

7,003

 

 

65,182

 

Provision for doubtful accounts

 

 

320,716

 

 

132,988

 

 

45,740

 

Deferred income taxes

 

 

235,788

 

 

286,046

 

 

(404,618

)

Issuance of Common Stock for directors’ fees

 

 

30,752

 

 

27,840

 

 

61,203

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,573,393

 

 

1,467,368

 

 

6,133,976

 

Inventories

 

 

6,671,197

 

 

(1,099,265

)

 

(1,923,947

)

Prepaid expenses and other

 

 

361,028

 

 

272,933

 

 

(462,604

)

Prepaid pension cost

 

 

791,059

 

 

(130,905

)

 

(684,514

)

Recoverable taxes receivable

 

 

1,313,628

 

 

100,288

 

 

(1,411,477

)

Other assets

 

 

(15,847

)

 

(111,295

)

 

(229,858

)

Accounts payable

 

 

(1,858,201

)

 

(911,386

)

 

(5,190,868

)

Accrued compensation

 

 

(127,707

)

 

(634,707

)

 

(549,639

)

Other accrued expenses

 

 

(1,097,616

)

 

(426,618

)

 

(1,139,189

)

Net cash provided by operating activities

 

 

13,343,558

 

 

7,613,225

 

 

8,760,078

 

 

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(2,226,025

)

 

(2,331,341

)

 

(2,867,829

)

Proceeds from sale of equipment and other assets

 

 

 

 

13,246

 

 

25,120

 

Business acquisitions

 

 

 

 

(128,325

)

 

 

Net cash used in investing activities

 

 

(2,226,025

)

 

(2,446,420

)

 

(2,842,709

)

 

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(2,240,202

)

 

(3,838,029

)

 

(3,111,907

)

Proceeds from sales of Common Stock

 

 

1,584,042

 

 

1,861,486

 

 

2,562,997

 

Tax benefit from disqualifying disposition of incentive stock options and exercise of non-qualified stock options

 

 

202,767

 

 

355,799

 

 

1,575,500

 

Purchases of Common Stock for treasury

 

 

(797,328

)

 

(610,526

)

 

(312,521

)

Cash payment for fractional shares resulting from exercise of stock options

 

 

 

 

(4

)

 

(20

)

Dividends paid

 

 

(2,155,149

)

 

(1,938,172

)

 

(1,801,570

)

Net cash used in financing activities

 

 

(3,405,870

)

 

(4,169,446

)

 

(1,087,521

)

Effect of exchange rate changes on cash

 

 

67,385

 

 

(239,456

)

 

278,416

 

Net change in cash and cash equivalents

 

 

7,779,048

 

 

757,903

 

 

5,108,264

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of year

 

 

8,967,625

 

 

8,209,722

 

 

3,101,458

 

Cash and cash equivalents at end of year

 

$

16,746,673

 

$

8,967,625

 

$

8,209,722

 

 

See accompanying notes.

 

33

 


The Eastern Company

 

Notes to Consolidated Financial Statements

 

1. DESCRIPTION OF BUSINESS

 

The operations of The Eastern Company (the “Company”) consist of three business segments: industrial hardware, security products, and metal products. The industrial hardware segment produces latching devices for use on industrial equipment and instrumentation as well as a broad line of proprietary hardware designed for truck bodies and other vehicular type equipment. The security products segment manufactures and markets a broad range of locks for traditional general purpose security applications as well as specialized locks for soft luggage, coin-operated vending and gaming equipment, and electric and computer peripheral components. This segment also manufactures and markets coin acceptors and metering systems to secure cash used in the commercial laundry industry and produces cashless payment systems utilizing advanced smart card technology. The metal products segment produces anchoring devices used in supporting the roofs of underground coal mines and specialty products, which serve the construction, automotive and electrical industries.

 

On August 13, 2008, the Company entered into a joint venture agreement to further develop existing technology for use in the Security Products segment.  The joint venture is currently not material to the consolidated financial statements of the Company.  The Company's 80% ownership of this joint venture has been consolidated into its financial statements with the remaining 20% ownership accounted for as a minority interest therein, and included in other accrued expenses.

 

Sales are made to customers primarily in North America.

 

The consolidated balance sheets reflect the reclassification of debt per the refinancing which occurred in January 2010. See Note 5 Debt.

 

2. ACCOUNTING POLICIES

 

Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Fiscal Year

 

The Company’s year ends on the Saturday nearest to December 31. Fiscal 2009 and 2007 were 52 weeks, 2008 was a 53 week year.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All intercompany accounts and transactions are eliminated.

 

Cash Equivalents and Concentrations of Credit Risk

 

Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents. The Company has deposits that exceed amounts insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution.

 

Reclassification

 

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net income.

 

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The Eastern Company

 

Notes to Consolidated Financial Statements (continued)

 

2. ACCOUNTING POLICIES (continued)

 

Foreign Currency Translation

 

For foreign operations, balance sheet accounts are translated at the current year-end exchange rate; income statement accounts are translated at the average exchange rate for the year. Resulting translation adjustments are made directly to a separate component of shareholders’ equity – “Accumulated other comprehensive income (loss) – Foreign currency translation”. Foreign currency exchange transaction gains and losses are not material in any year.

 

Recognition of Revenue and Accounts Receivable