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EX-31 - CERTIFICATION 31 - EASTERN COex31_3rd2014.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q

(Mark One)

 
 
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 27, 2014
 

 
OR
 

 
 
[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                          to
 

Commission File Number:    0599

 
THE EASTERN COMPANY
(Exact name of registrant as specified in its charter)

Connecticut
06-0330020
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)


112 Bridge Street, Naugatuck, Connecticut
06770
(Address of principal executive offices)
(Zip Code)


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

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 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   [X] No [  ]

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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [  ]
Accelerated filer [X]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Smaller reporting company [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding as of October 22, 2014
Common Stock, No par value
6,223,577

 
-1-
 
 

 


PART 1 – FINANCIAL INFORMATION




ITEM 1 – FINANCIAL STATEMENTS



THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



ASSETS
 
September 27, 2014
 
December 28, 2013
 
Current Assets
             
Cash and cash equivalents
 
$
21,198,789
 
$
19,988,361
 
Accounts receivable, less allowances: $461,000 - 2014; $410,000 - 2013
   
18,541,198
   
16,284,603
 
Inventories
   
30,702,662
   
30,657,612
 
Prepaid expenses and other assets
   
3,179,641
   
3,244,686
 
Deferred income taxes
   
818,662
   
818,662
 
Total Current Assets
   
74,440,952
   
70,993,924
 
               
               
Property, Plant and Equipment
   
63,172,766
   
61,849,854
 
Accumulated depreciation
   
(36,002,525
)
 
(34,458,096
)
     
27,170,241
   
27,391,758
 
               
               
Goodwill
   
13,791,518
   
13,842,047
 
Trademarks
   
174,662
   
173,177
 
Patents, technology, and other intangibles net of accumulated amortization
   
1,395,236
   
1,457,503
 
     
15,361,416
   
15,472,727
 
TOTAL ASSETS
 
$
116,972,609
 
$
113,858,409
 









 
-2-



 
 

 






LIABILITIES AND SHAREHOLDERS’ EQUITY
 
September 27, 2014
 
December 28, 2013
 
Current Liabilities
             
Accounts payable
 
$
8,589,710
 
$
7,302,368
 
Accrued compensation
   
2,301,203
   
3,007,169
 
Other accrued expenses
   
1,290,712
   
1,519,338
 
Current portion of long-term debt
   
1,785,714
   
1,785,714
 
Total Current Liabilities
   
13,967,339
   
13,614,589
 
               
Deferred income taxes
   
1,412,833
   
1,111,755
 
Other long-term liabilities
   
248,417
   
248,417
 
Long-term debt, less current portion
   
3,214,286
   
4,285,714
 
Accrued postretirement benefits
   
2,367,640
   
2,232,872
 
Accrued pension cost
   
10,853,517
   
10,860,211
 
               
               
               
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: 8,918,306 shares in 2014 and 8,916,897 shares in 2013
   
28,644,073
   
28,621,582
 
Treasury Stock: 2,694,729 shares in 2014 and 2013
   
(19,105,723
)
 
(19,105,723
)
Retained earnings
   
86,332,484
   
83,006,671
 
               
Accumulated other comprehensive income (loss):
             
Foreign currency translation
   
1,485,885
   
1,983,506
 
Unrecognized net pension and postretirement benefit costs, net of tax
   
(12,448,142
)
 
(13,001,185
)
   Accumulated other comprehensive loss
   
(10,962,257
)
 
(11,017,679
)
Total Shareholders’ Equity
   
84,908,577
   
81,504,851
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
116,972,609
 
$
113,858,409
 

See accompanying notes.
 
-3-
 
 

 



THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

   
Nine Months Ended
 
Three Months Ended
 
     
September 27, 2014
   
September 28, 2013
   
September 27, 2014
   
September 28, 2013
 
Net sales
 
$
106,432,304
 
$
108,196,240
 
$
35,803,405
 
$
34,256,086
 
Cost of products sold
   
(82,501,121
)
 
(86,174,409
)
 
(27,161,932
)
 
(27,031,677
)
Gross margin
   
23,931,183
   
22,021,831
   
8,641,473
   
7,224,409
 
                           
Selling and administrative expenses
   
(15,097,253
)
 
(14,671,986
)
 
(4,892,600
)
 
(4,767,505
)
Operating profit
   
8,833,930
   
7,349,845
   
3,748,873
   
2,456,904
 
                           
Interest expense
   
(193,875
)
 
(249,481
)
 
(60,680
)
 
(78,629
)
Other income
   
37,996
   
36,660
   
14,030
   
8,201
 
Income before income taxes
   
8,678,051
   
7,137,024
   
3,702,223
   
2,386,476
 
                           
Income taxes
   
3,049,846
   
2,158,699
   
1,270,406
   
587,693
 
Net income
 
$
5,628,205
 
$
4,978,325
 
$
2,431,817
 
$
1,798,783
 
                           
Earnings per Share:
                         
Basic
 
$
.90
 
$
.80
 
$
.39
 
$
.29
 
                           
Diluted
 
$
.90
 
$
.80
 
$
.39
 
$
.29
 
                           
Cash dividends per share:
 
$
.37
#
$
.31
 
$
.15
#
$
.11
 

# - The Company paid an additional one-time dividend of $0.04 per share in the third quarter of 2014.

See accompanying notes.



THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 
Nine Months Ended
 
Three Months Ended
 
   
September 27, 2014
   
September 28, 2013
   
September 27, 2014
   
September 28, 2013
 
Net income
$
5,628,205
 
$
4,978,325
 
$
2,431,817
 
$
1,798,783
 
Other comprehensive income/(loss):
                       
Change in foreign currency translation
 
(497,620
)
 
(337,367
)
 
(444,848
)
 
199,495
 
Change in pension and postretirement benefit costs, net of taxes of:
2014 – $301,078 and $100,360, respectively
2013 – $442,866 and $149,033, respectively
 
553,043
   
811,003
   
184,348
   
272,919
 
Total other comprehensive income/(loss)
 
55,423
   
473,636
   
(260,500
)
 
472,414
 
Comprehensive income
$
5,683,628
 
$
5,451,961
 
$
2,171,317
 
$
2,271,197
 

See accompanying notes.
 
-4-
 
 

 



THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


   
Nine Months Ended
 
   
September 27, 2014
 
September 28, 2013
 
Operating Activities
             
Net income
 
$
5,628,205
 
$
4,978,325
 
Adjustments to reconcile net income to net cash provided by operating activities:
             
Depreciation and amortization
   
2,506,785
   
2,916,310
 
Loss on sale of equipment and other assets
   
105,511
   
28,065
 
Provision for doubtful accounts
   
71,229
   
76,201
 
Deferred income taxes
   
-
   
(1,959
)
Issuance of Common Stock for directors’ fees
   
22,491
   
16,872
 
Changes in operating assets and liabilities:
             
Accounts receivable
   
(2,448,174
)
 
(499,335
)
Inventories
   
(207,873
)
 
(1,092,971
)
Prepaid expenses and other
   
56,064
   
201,459
 
Prepaid pension cost
   
865,344
   
1,842,832
 
Recoverable taxes receivable
   
-
   
1,158,632
 
Other assets
   
(141,478
)
 
(59,685
)
Accounts payable
   
1,357,742
   
655,352
 
Accrued compensation
   
(672,074
)
 
(960,059
)
Other accrued expenses
   
(130,173
)
 
(1,366,903
)
Net cash provided by operating activities
   
7,013,599
   
7,893,136
 
               
Investing Activities
             
Purchases of property, plant and equipment
   
(2,292,872
)
 
(4,160,251
)
Proceeds from sales of equipment and other assets
   
19,000
   
-
 
Net cash used in investing activities
   
(2,273,872
)
 
(4,160,251
)
               
Financing Activities
             
Principal payments on long-term debt
   
(1,071,428
)
 
(1,071,429
)
Proceeds from sales of Common Stock
   
-
   
13,580
 
Dividends paid
   
(2,302,391
)
 
(1,928,439
)
Net cash used in financing activities
   
(3,373,819
)
 
(2,986,288
)
               
Effect of exchange rate changes on cash
   
(155,480
)
 
(147,996
)
Net change in cash and cash equivalents
   
1,210,428
   
598,601
 
               
Cash and cash equivalents at beginning of period
   
19,988,361
   
18,482,144
 
Cash and cash equivalents at end of period
 
$
21,198,789
 
$
19,080,745
 

See accompanying notes.


-5-

 
 

 


THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 27, 2014


Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. Refer to the Company’s consolidated financial statements and notes thereto included in its Form 10-K for the year ended December 28, 2013 for additional information.

The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. All intercompany accounts and transactions are eliminated. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

The condensed consolidated balance sheet as of December 28, 2013 has been derived from the audited consolidated balance sheet at that date.


Note B – Earnings Per Share

The denominators used in the earnings per share computations follow:

 
Nine Months Ended
 
Three Months Ended
 
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Basic:
             
Weighted average shares outstanding
6,222,678
 
6,220,620
 
6,223,140
 
6,221,515
               
Diluted:
             
Weighted average shares outstanding
6,222,678
 
6,220,620
 
6,223,140
 
6,221,515
Dilutive stock options
17,127
 
17,027
 
17,256
 
16,559
Denominator for diluted earnings per share
6,239,805
 
6,237,647
 
6,240,396
 
6,238,074


Note C – Inventories

The components of inventories follow:

 
September 27, 2014
 
December 28, 2013
       
Raw material and component parts
$    8,259,016
 
$    8,256,977
Work in process
      4,943,129
 
      4,925,001
Finished goods
    17,500,517
 
    17,475,634
 
$  30,702,662
 
$  30,657,612


-6-

 
 

 


Note D – Segment Information

Segment financial information follows:


   
Nine Months Ended
     
Three Months Ended
 
   
September 27, 2014
     
September 28, 2013
     
September 27, 2014
     
September 28, 2013
 
Revenues:
                                     
Sales to unaffiliated customers:
                                     
Industrial Hardware
 
$
44,202,346
     
$
46,682,686
     
$
15,006,948
     
$
15,067,122
 
Security Products
   
37,748,241
       
36,647,899
       
12,780,359
       
12,690,410
 
Metal Products
   
24,481,717
       
24,865,655
       
8,016,098
       
6,498,554
 
   
$
106,432,304
     
$
108,196,240
     
$
35,803,405
     
$
34,256,086
 
                                       
Income before income taxes:
                                     
     Industrial Hardware
 
$
3,994,443
     
$
3,507,935
     
$
1,428,040
     
$
1,444,830
 
     Security Products
   
3,088,610
       
1,737,150
       
1,643,159
       
499,717
 
     Metal Products
   
1,750,877
       
2,104,760
       
677,674
       
512,357
 
Operating Profit
   
8,833,930
       
7,349,845
       
3,748,873
       
2,456,904
 
     Interest expense
   
(193,875
)
     
(249,481
)
     
(60,680
)
     
(78,629
)
     Other income
   
37,996
       
36,660
       
14,030
       
8,201
 
   
$
8,678,051
     
$
7,137,024
     
$
3,702,223
     
$
2,386,476
 


Note E – Recent Accounting Pronouncements
 
In April 2014, the FASB issued authoritative guidance which changes the criteria for determining which disposals can be presented as discontinued operations and modifies the related disclosure requirements. To qualify as a discontinued operation the standard requires a disposal to represent a strategic shift that has, or will have, a major effect on an entity's operations and financial results. The standard also expands the disclosures for discontinued operations and requires new disclosures related to individually material dispositions that do not qualify as discontinued operations. The guidance is effective for fiscal years beginning after December 15, 2014, with early adoption permitted.  The Company will adopt this guidance with its fiscal year effective January 4, 2015 and does not expect any impact on the consolidated financial statements of the Company.  This guidance will impact the reporting of any future dispositions.

In May 2014, the FASB issued authoritative guidance which impacts virtually all aspects of an entity's revenue recognition. The core principle of the new standard is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted.  The Company has not determined the impact of the adoption of this guidance on the consolidated financial statements of the Company.

The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company.

 
-7-
 
 

 


Note F – Debt

On January 29, 2010, the Company signed a secured Loan Agreement (the “Loan Agreement”) with People’s United Bank (“People’s”) which included a $5,000,000 term portion (the “Original Term Loan”) and a $10,000,000 revolving credit portion.  On January 25, 2012, the Company amended the loan agreement by taking an additional $5,000,000 term loan (the “2012 Term Loan”).  Interest on the Original Term Loan portion of the Loan Agreement is fixed at 4.98%.  Interest on the 2012 Term Loan is fixed at 3.90%.  The interest rate on the revolving credit portion of the Loan Agreement varied based on the LIBOR rate plus a margin spread of 2.25%, with a floor rate of 3.25% or People’s Prime rate and a maturity date of January 31, 2014.  On January 23, 2014, the Company signed an amendment to its secured Loan Agreement with People’s which extended the maturity date of the $10,000,000 revolver portion of the Loan Agreement to July 1, 2016 and changed the interest rate to LIBOR plus 2.25%, eliminating the floor previously in place, or People’s Prime rate.   The Company did not utilize the revolving credit facility during Fiscal 2013 or during the first nine months of Fiscal 2014.

The Company has loan covenants under the Loan Agreement which require the Company to maintain a fixed charge coverage ratio of at least 1.1 to 1, a leverage ratio of no more than 1.75 to 1, and minimum tangible net worth of $43 million as of the end of Fiscal 2010 increasing each year by 50% of consolidated net income.  This amount was approximately $52.8 million for Fiscal 2013.  As part of the amendment signed on January 23, 2014, the leverage ratio was eliminated and the minimum tangible net worth covenant was modified to a fixed $55 million, effective as of March 29, 2014.  In addition, the Company has restrictions on, among other things, new capital leases, purchases or redemptions of its capital stock, mergers and divestitures, and new borrowing.  The Company was in compliance with all covenants in 2013 and for the nine month period ended September 27, 2014.

Note G – Goodwill

The following is a roll-forward of goodwill from year-end 2013 to the end of the third quarter 2014:

   
Industrial
Hardware
Segment
 
Security
Products
Segment
 
Metal
Products
Segment
 
 
 
Total
 
                           
Beginning balance
 
$
2,008,231
 
$
11,833,816
 
$
 
$
13,842,047
 
Foreign exchange
   
 (50,529
)
 
 —
   
   
 (50,529
)
Ending balance
 
$
1,957,702
 
$
11,833,816
 
$
 
$
13,791,518
 


Note H – Intangibles

Patents are recorded at cost and are amortized using the straight-line method over the lives of the patents. Technology and licenses are recorded at cost and are generally amortized on a straight-line basis over periods ranging from 5 to 17 years. Non-compete agreements and customer relationships are being amortized using the straight-line method over a period of 5 years. Trademarks are not amortized as their lives are deemed to be indefinite.
 
-8-
 
 

 

The gross carrying amount and accumulated amortization of amortizable intangible assets:

   
 
Industrial
Hardware
Segment
 
 
Security
Products
Segment
 
 
Metal
Products
Segment
 
 
 
 
Total
 
Weighted-Average
Amortization Period (Years)
 
2014 Patents and developed
technology
                             
Gross Amount:
 
$
2,582,456
 
$
1,062,380
 
$
--
 
$
3,644,836
 
15.8
 
Accumulated Amortization:
   
1,690,710
   
558,890
   
--
   
2,249,600
     
Net September 27, 2014 per Balance Sheet
 
$
891,746
 
$
503,490
 
$
--
 
$
1,395,236
     


2013 Patents and developed
technology
                             
   Gross Amount:
 
$
2,595,931
 
$
1,041,250
 
$
--
 
$
3,637,181
 
16.0
 
   Accumulated Amortization:
   
1,676,440
   
503,238
   
--
   
2,179,678
     
Net December 28, 2013 per Balance Sheet
 
$
919,491
 
$
538,012
 
$
--
 
$
1,457,503
     


Note I – Retirement Benefit Plans

The Company has non-contributory defined benefit pension plans covering certain U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for its salaried plan, the level of compensation. The Company also sponsors unfunded nonqualified supplemental retirement plans that provide certain current and former officers with benefits in excess of limits imposed by federal tax law.

The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.

Significant disclosures relating to these benefit plans for the third quarter and first nine months of fiscal 2014 and 2013 follow:
   
Pension Benefits
 
   
Nine Months Ended
 
Three Months Ended
 
   
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
Service cost
 
$
2,095,271
 
$
2,259,723
 
$
698,423
 
$
755,661
 
Interest cost
   
2,487,835
   
2,130,467
   
829,278
   
710,350
 
Expected return on plan assets
   
(3,607,894
)
 
(3,302,736
)
 
(1,202,632
)
 
(1,100,912
)
Amortization of prior service cost
   
163,940
   
192,345
   
54,647
   
69,630
 
Amortization of the net loss
   
708,098
   
1,065,295
   
236,033
   
353,579
 
Net periodic benefit cost
 
$
1,847,250
 
$
2,345,094
 
$
615,749
 
$
788,308
 


   
Postretirement Benefits
 
   
Nine Months Ended
 
Three Months Ended
 
   
September 27,
2014
 
September 28,
2013
 
September 27,
2014
 
September 28,
2013
 
Service cost
 
$
130,427
 
$
151,926
 
$
43,476
 
$
50,642
 
Interest cost
   
118,112
   
106,565
   
39,371
   
35,522
 
Expected return on plan assets
   
(71,109
)
 
(73,041
)
 
(23,703
)
 
(24,347
)
Amortization of prior service cost
   
(17,917
)
 
(17,916
)
 
(5,972
)
 
(5,972
)
Amortization of the net loss
   
--
   
14,145
   
--
   
4,715
 
Net periodic benefit cost
 
$
159,513
 
$
181,679
 
$
53,172
 
$
60,560
 

 
-9-
 
 

 

The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations.  In 2014, the Company expects to contribute $2.5 million into its pension plans and $63,000 into its postretirement plan. As of September 27, 2014, the Company has made contributions totaling approximately $970,000 into its pension plans and $43,000 to its postretirement plan and will make the remaining contributions as required during the remainder of the year.

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code covering substantially all U.S. non-union employees. The plan allows participants to make voluntary contributions of up to 100% of their annual compensation on a pretax basis, subject to IRS limitations. The plan provides for contributions by the Company at its discretion. The Company made contributions of $49,975 and $153,431 in the third quarter and first nine months of 2014, respectively and $48,062 and $148,797 in the third quarter and first nine months of 2013, respectively.

Note J – Stock Based Compensation and Stock Options

The Company has stock option plans for officers, other key employees, and non-employee directors. As of September 27, 2014 two plans have shares reserved for future issuance, the 1995 and 2010 plans.  Incentive stock options granted under the 1995 and 2010 plans must have exercise prices that are not less than 100% of the fair market value of the stock on the dates the options are granted. Restricted stock awards may also be granted to participants under the 2010 plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. Under the 1995 and 2010 plans, nonqualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors. No options or restricted stock were granted in the first nine months of 2014 or 2013.

As of September 27, 2014, there were 500,000 shares available for future grant under the above noted 2010 plan and there were no shares available for grant under the 1995 plan.  As of September 27, 2014, there were 520,000 shares of common stock reserved under all option plans for future issuance.



   
Nine Months Ended
September 27, 2014
 
Year Ended
December 28, 2013
   
Shares
 
Weighted - Average Exercise Price
 
Shares
 
Weighted - Average Exercise Price
Outstanding at beginning of period
 
20,000
 
$
13.580
 
21,000
 
$
13.580
Exercised
 
   
 
(1,000
)
 
13.580
Outstanding at end of period
 
20,000
   
13.580
 
20,000
   
13.580



Options Outstanding and Exercisable
 
 
 
Range of Exercise Prices
 
 
Outstanding as of September 27, 2014
Weighted- Average Remaining Contractual Life
 
 
Weighted- Average Exercise Price
$13.58
20,000
0.2
  $13.580

At September 27, 2014, outstanding and exercisable options had an intrinsic value of $38,000.


Note K – Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions.  With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2011 and non-U.S. income tax examinations by tax authorities prior to 2008.  During the third quarter of 2013, the Internal Revenue Service completed its examination of the tax returns for Fiscal Years 2010 and 2011. There were no changes to the Company’s financial statements as a result of this audit.
 
-10-
 
 

 


During the first nine months of Fiscal 2014, the Company repatriated approximately $2.8 million in cash from its foreign subsidiaries.  The impact of this has been an increase in the effective tax rate by approximately 1.4%.

The total amount of unrecognized tax benefits could increase or decrease within the next twelve months for a number of reasons, including the closure of federal, state and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB Accounting Standards Codification (“ASC”) 740.  There have been no significant changes to the amount of unrecognized tax benefits during the three or nine month period ended September 27, 2014.  As a result of the expiration of the statute of limitations in various state jurisdictions, the Company recorded a net tax benefit of $18,850.  This net tax benefit resulted from the release of unrecognized tax benefits related to state income tax nexus issues and the associated accrued interest. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.


Note L - Financial Instruments and Fair Value Measurements
 
Financial Risk Management Objectives and Policies

The Company is exposed primarily to credit, interest rate and currency exchange rate risks which arise in the normal course of business.
 
Credit Risk
 
Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its receivable accounts with customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. At September 27, 2014 and December 28, 2013, there were no significant concentrations of credit risk. No one customer represented more than 10% of the Company’s net trade receivables at September 27, 2014 or at December 28, 2013.  The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.

Interest Rate Risk
 
On September 27, 2014, the Company has no exposure to the risk of changes in market interest rates as the interest rate on the outstanding debt is fixed at 4.98% and 3.90%.

Fair Value Measurements

Assets and liabilities that require fair value measurement are recorded at fair value using market and income valuation approaches and considering the Company’s and counterparty’s credit risk. The Company uses the market approach and the income approach to value assets and liabilities as appropriate. There are no assets or liabilities requiring fair value measurements on September 27, 2014 or December 28, 2013.

 
-11-

 
 

 


ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to highlight significant changes in the Company’s financial position and results of operations for the thirty-nine weeks ended September 27, 2014. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 28, 2013 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013.

Certain statements set forth in this discussion and analysis of financial condition and results of operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They use such words as “may,” “will,” “expect,” “believe,” “plan” and other similar terminology. These statements reflect management’s current expectations regarding future events and operating performance and speak only as of the date of this release. These forward-looking statements involve a number of risks and uncertainties, and actual future results and trends may differ materially depending on a variety of factors, including changing customer preferences, lack of success of new products, loss of customers, competition, increased raw material prices, problems associated with foreign sourcing of parts and products, changes within our industry segments and in the overall economy, litigation and legislation. In addition, terrorist threats and the possible responses by the U.S. government, the effects on consumer demand, the financial markets, the travel industry, the trucking industry and other conditions increase the uncertainty inherent in forward-looking statements. Forward-looking statements reflect the expectations of the Company at the time they are made, and investors should rely on them only as expressions of opinion about what may happen in the future and only at the time they are made. The Company undertakes no obligation to update any forward-looking statement. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions.

In addition, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and for excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses.

Recent Developments

On July 23, 2014, the Board of Directors of the Company voted to pay an additional one-time extra dividend of four cents ($0.04) per share along with the regular quarterly dividend payment of eleven cents ($0.11) per share in the third quarter of 2014.  The third quarter 2014 dividend payment represented the 296th consecutive quarterly dividend.



Overview

Sales in the third quarter of 2014 increased 5% compared to the third quarter of 2013, which was the result of an increase of 3% in sales of existing products in many of the markets we serve and an increase of 2% from the introduction of new products. In the third quarter of 2014 Industrial Hardware sales were comparable to the prior year period, Metal Products sales increased 23% and Security Products sales increased 1% compared to the prior year period.

Gross margin as a percentage of sales for the three months ended September 27, 2014 was 24% compared to 21% in the comparable period a year ago.  The increase was the result of changes in cost of products sold, the mix of products produced and higher sales volume causing higher utilization of the Company’s production capacity in the 2014 period.
 
-12-
 
 

 

Sales in the first nine months of 2014 decreased 2% compared to the prior year period, which was primarily the result of a decrease of 4% in sales of existing products in many of the markets we serve. The decrease was offset in part by the introduction of new products which increased sales by 2%.  Sales decreased in the first nine months of 2014 by 5% in the Industrial Hardware segment and by 2% in the Metal Products segment, and increased by 3% in the Security Products segment compared to the prior year period.

Gross margin as a percentage of sales for the nine months ended September 27, 2014 was 23% compared to 20% in the comparable period a year ago.  This increase was the result of changes in cost of products sold and the mix of products produced.
 
 
Raw material prices have increased compared to the prior year periods.  The Company, through price increases, is recovering these additional costs from our customers, wherever possible.  The Company expects that raw material prices will continue to increase as worldwide economic conditions improve, which may have a negative impact on future operating margins if not recovered by price increases.  Currently, there is no indication that the Company will be unable to obtain supplies of all the raw materials that it requires.

Cash flow from operations in the first nine months of 2014 decreased compared to the same period in 2013. This decrease is primarily due to the timing differences in the collections of accounts receivable, payments of liabilities, and changes in inventories.  Cash on hand, cash flow from operations, along with the result of controlling discretionary expenditures, should enable the Company to meet all its existing obligations and continue its quarterly dividend payments.

A more detailed analysis of the Company’s results of operations and financial condition follows:

Results of Operations

The following table shows, for the periods indicated, selected line items from the condensed consolidated statements of operations as a percentage of net sales, by segment:

 
Three Months Ended September 27, 2014
 
Industrial
Security
Metal
 
 
Hardware
Products
Products
Total
Net sales
100.0%
100.0%
100.0%
100.0%
Cost of products sold
74.4%
71.8%
85.1%
75.9%
Gross margin
25.6%
28.2%
14.9%
24.1%
         
Selling and administrative expense
16.1%
15.3%
6.5%
13.6%
Operating profit
9.5%
12.9%
8.4%
10.5%
         
         
 
Three Months Ended September 28, 2013
 
Industrial
Security
Metal
 
 
Hardware
Products
Products
Total
Net sales
100.0%
100.0%
100.0%
100.0%
Cost of products sold
74.9%
81.0%
84.0%
78.9%
Gross margin
25.1%
19.0%
16.0%
21.1%
         
Selling and administrative expense
15.5%
15.0%
8.1%
13.9%
Operating profit
9.6%
4.0%
7.9%
7.2%

 
-13-
 
 

 

The following table shows the amount of change for the third quarter of 2014 compared to the third quarter of 2013 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
         $     (60)
       $       90
          $  1,517
        $  1,547
         
         Volume
-2.2%
-0.3%
21.4%
3.0%
         Prices
-0.2%
0.4%
-0.3%
0.0%
         New products
    2.0%
     0.6%
   2.3%
     1.5%
 
-0.4%
0.7%
23.4%
4.5%
         
Cost of products sold
        $   (121)
       $ (1,108)
  $  1,359
        $     130
 
-1.1%
-10.8%
24.9%
0.5%
         
Gross margin
      $        61
    $   1,198
        $     158
      $  1,417
 
1.6%
49.7%
15.2%
19.6%
         
Selling and administrative expenses
      $        78
    $        54
       $       (7)
      $     125
 
3.3%
2.8%
-1.3%
2.6%
         
Operating profit
      $      (17)
     $   1,144
        $     165
      $  1,292
 
-1.2%
228.8%
32.3%
52.6%


The following table shows, for the periods indicated, selected line items from the condensed consolidated statements of income as a percentage of net sales, by segment:

 
Nine Months Ended September 27, 2014
 
Industrial
Security
Metal
 
 
Hardware
Products
Products
Total
Net sales
100.0%
100.0%
100.0%
100.0%
Cost of products sold
74.5%
75.6%
85.8%
77.5%
Gross margin
25.5%
24.4%
14.2%
22.5%
         
Selling and administrative expense
16.5%
16.2%
7.0%
14.2%
Operating profit
9.0%
8.2%
7.2%
8.3%
         
         
 
Nine Months Ended September 28, 2013
 
Industrial
Security
Metal
 
 
Hardware
Products
Products
Total
Net sales
100.0%
100.0%
100.0%
100.0%
Cost of products sold
77.2%
79.5%
84.6%
79.6%
Gross margin
22.8%
20.5%
15.4%
20.4%
         
Selling and administrative expense
15.3%
15.8%
7.0%
13.6%
Operating profit
7.5%
4.7%
8.4%
6.8%

 
-14-
 
 

 


The following table shows the amount of change for the first nine months of 2014 compared to the first nine months of 2013 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
         $ (2,480)
       $   1,100
         $    (384)
      $ (1,764)
         
         Volume
-8.2%
1.8%
-3.9%
-3.8%
         Prices
-0.1%
0.2%
-0.2%
0.0%
         New products
    3.0%
     1.0%
    2.6%
    2.2%
 
-5.3%
3.0%
-1.5%
-1.6%
         
Cost of products sold
        $ (3,088)
       $    (567)
  $      (18)
        $ (3,673)
 
-8.6%
-1.9%
-0.1%
-4.3%
         
Gross margin
      $       608
     $    1,667
     $    (366)
      $    1,909
 
5.7%
22.1%
-9.5%
8.7%
         
Selling and administrative expenses
      $       121
     $       316
       $      (12)
      $       425
 
1.7%
5.5%
-0.7%
2.9%
         
Operating profit
      $       487
    $    1,351
      $    (354)
      $    1,484
 
13.9%
77.8%
-16.8%
20.2%


Industrial Hardware Segment

Net sales in the Industrial Hardware segment were comparable in the third quarter of 2014 and 2013 and decreased 5% in the first nine months compared to the prior year period.  The decrease in sales in the first nine months of 2014 reflected a decrease in sales of existing products, primarily lightweight composite panels which were used in the fracking industry, as well as lower sales to our distributors and military markets in 2014 compared to the prior year periods.  The decrease in sales of the lightweight composite panels for the fracking tank was the result of a customer exiting the fracking business.  The overall decrease in sales in the first nine months of 2014 were offset by an increase in sales to several of the markets we sell into, including: the Class 8 truck, truck accessory, off-highway, bus, and industrial markets compared to the same period in 2013 and the introduction of new products. All of the new products were developed internally and included a cab handle and paddle, a rotary and lever arm, a lever assembly, a paddle lock, a striker pin, luggage latch and a trigger latch for the Class 8 truck market; a rotary, a mini rotary and a gate lock for the off-highway market; a trigger latch for the bus market; a 3 point compression latch, a stainless steel catch, a trigger latch, an ergonomic t-handle, and a paddle assembly for the distribution market; a striker and rotary, a rotary lock and a paddle rotary for the industrial market; as well as a variety of locking and latching products for the many markets we serve.

Cost of products sold for the Industrial Hardware segment decreased $0.1 million or 1% in the third quarter and $3.1 million or 9% in the first nine months of 2014 compared to the same periods in 2013.

The most significant factors resulting in changes in cost of products sold in the third quarter of 2014 compared to the 2013 third quarter included:

§  
an increase of $0.1 million or 101% in foreign currency exchange;
§  
an increase of $0.1 million or 48% in miscellaneous income;
§  
a decrease of $0.2 million or 33% in depreciation costs;
§  
and a decrease of $0.1 million or 3% in costs for payroll and payroll related charges.
 
-15-
 
 

 


The most significant factors resulting in changes in cost of products sold in the first nine months of 2014 compared to the 2013 period included:

§  
an increase of $0.1 million or 116% in foreign currency exchange;
§  
an increase of $0.1 million or 62% in engineering expense;
§  
an increase of $0.1 million or 7% in supplies and tools;
§  
a decrease of $2.2 million or 10% in raw materials;
§  
a decrease of $0.4 million or 32% in depreciation expense;
§  
a decrease of $0.4 million or 5% in costs for payroll and payroll related charges;
§  
a decrease of $0.2 million or 53% in miscellaneous income;
§  
a decrease of $0.1 million or 12% in other shipping expenses;
§  
and a decrease of $0.1 million or 17% in rent expense.

Gross margin as a percentage of sales in the third quarter increased to 26% in 2014 from 25% in the prior year period and increased in the first nine months to 26% from 23% in the prior year period.  The increases in gross margin for both the third quarter and first nine months of 2014 reflect the mix of products produced and the changes to cost of products sold discussed above.

Selling and administrative expenses in the Industrial Hardware segment increased $0.1 million or 3% in the third quarter and increased $0.1 million or 2% in the first nine months of 2014 as compared to the 2013 periods.

The most significant factor resulting in changes in selling and administrative expenses in the Industrial Hardware segment in the third quarter of 2014 compared to the 2013 third quarter included:

§  
an increase of $0.1 million or 7% in costs for payroll and payroll related charges.

The most significant factor resulting in changes in selling and administrative expenses in the Industrial Hardware segment in the first nine months of 2014 compared to the 2013 period included:

§  
an increase of $0.1 million or 1% in costs for payroll and payroll related charges.


Security Products Segment

Net sales in the Security Products segment increased 1% in the third quarter and 3% in the first nine months of 2014 compared to the 2013 periods.  The increase in sales in the third quarter of 2014 compared to the 2013 period was primarily the result of new lock products to the many markets we serve.  The increase in the first nine months of 2014 compared to the prior year period was the result of higher sales volume of existing products primarily to the commercial laundry market and the introduction of new lock products to the many markets we serve.  Sales of new products included a flush mount handle for tonneau covers, a locking T-handle for truck caps and cable and stud locks for bicycle racks for the vehicular market and a custom brass padlock, a rekeyable padlock for the locksmith market and a passive keyless entry system for the storage market.

Cost of products sold for the Security Products segment decreased $1.1 million or 11% in the third quarter and decreased $0.6 million or 2% in the first nine months of 2014 compared to the same periods in 2013.

The most significant factors resulting in changes in cost of products sold in the third quarter of 2014 compared to the 2013 third quarter included:

§  
an increase of $0.3 million or 18% in payroll and payroll related charges;
§  
an increase of $0.3 million or 1,354% in shipping expenses;
§  
an increase of $0.1 million or 27% in supplies and tools;
§  
an increase of $0.1 million or 115% in costs for fire and liability insurance;
§  
an increase of $0.1 million or 284% in miscellaneous taxes;
§  
a decrease of $0.6 million or 100% in severance costs for relocation of a facility in China which occurred in the 2013 period;
§  
and a decrease of $1.4 million or 20% in raw materials.
 
-16-
 
 

 

The most significant factors resulting in changes in cost of products sold in the first nine months of 2014 compared to the 2013 period included:

§  
an increase of $0.9 million or 18% in payroll and payroll related charges;
§  
an increase of $0.6 million or 672% in shipping expenses;
§  
an increase of $0.2 million or 35% in supplies and tools;
§  
an increase of $0.2 million or 392% in freight on sales;
§  
an increase of $0.1 million or 88% in costs for fire and liability insurance;
§  
an increase of $0.1 million or 1,606% for rental equipment;
§  
an increase of $0.1 million or 160% related to costs for maintenance and repairs;
§  
an increase of $0.1 million or 129% in miscellaneous taxes;
§  
a decrease of $0.1 million or 60% for tools and jigs;
§  
a decrease of $0.6 million or 100% in severance costs for relocation of a facility in China;
§  
and a decrease of $2.2 million or 11% in raw materials.

Gross margin as a percentage of sales in the third quarter increased to 28% in 2014 from 19% in the prior year period and in the first nine months to 24% from 21% in the prior year period.  The increases in both the third quarter and first nine months of 2014 reflect the mix of products produced and the changes in cost of products sold discussed above as well as the higher sales volume in the first nine months compared to the 2013 period.

Selling and administrative expenses in the Security Products segment increased $0.1 million or 3% in the third quarter and $0.3 million or 6% in the first nine months of 2014 as compared to the 2013 periods.

The most significant factor resulting in changes in selling and administrative expenses in the Security Products segment in the third quarter of 2014 compared to the 2013 third quarter included:

§  
an increase of $0.1 million or 5% in costs for payroll and payroll related charges.

The most significant factor resulting in changes in selling and administrative expenses in the Security Products segment in the first nine months of 2014 compared to the 2013 period included:

§  
an increase of $0.3 million or 6% in costs for payroll and payroll related charges.
 
 

Metal Products Segment

Net sales in the Metal Products segment increased 23% in the third quarter and decreased 2% in the first nine months of 2014 as compared to the prior year periods.  The increase in sales in the third quarter of 2014 compared to the prior year period was the result of higher sales of existing products to both the contract casting and mining markets and the introduction of new products. The decrease in sales in the first nine months of 2014 was primarily the result of lower sales of existing products to the mining market. The decrease in the first nine months of 2014 was reduced by the introduction of new products.  New mining products included a cable head, a shell and a small hole flange nut.  Sales of mining products were up 17% in the third quarter resulting from stronger demand in both the U.S. and Canadian mining markets compared to the 2013 period.  Sales were down 7% in the first nine months of 2014 compared to the prior year period, the result of weaker demand in the first half of 2014 in both the U.S. and Canadian mining markets.  Sales of contract castings increased 64% in the third quarter and 42% in the first nine months of 2014 from the prior year levels.  The increase in sales of contract castings was primarily the result of increased sales of existing products to the solar and vehicular markets.  Contract casting sales also benefited from the sales of a new rail clamp product for a solar panel application and nuts for the utility market.
 
 
 
-17-
 
 

 

Cost of products sold for the Metal Products segment increased $1.4 million or 25% in the third quarter of 2014 compared to the prior year period and were comparable in the first nine months of 2014 and 2013.

The most significant factors resulting in changes in cost of products sold in the third quarter of 2014 compared to the 2013 third quarter included:

§  
an increase of $1.9 million or 427% in raw materials;
§  
a decrease of $0.2 million or 35% related to costs for maintenance and repairs;
§  
and a decrease of $0.3 million or 11% in costs for payroll and payroll related charges.

The most significant factors resulting in changes in cost of products sold in the first nine months of 2014 compared to the 2013 period included:

§  
an increase of $0.7 million or 14% in raw materials;
§  
an increase of $0.1 million or 3% in supplies and tools;
§  
an increase of $0.1 million or 8% in utility costs;
§  
a decrease of $0.8 million or 9% in costs for payroll and payroll related charges;
§  
and a decrease of $0.1 million or 7% related to costs for maintenance and repairs.

Gross margin as a percentage of net sales decreased to 15% in the third quarter of 2014 from 16% in the prior year period and to 14% in the first nine months of 2014 from 15% in the 2013 period. The decreases in both the third quarter and first nine months of 2014 are due to the mix of products produced as well as the changes in cost of products sold discussed above.

Selling and administrative expenses in the Metal Products segment were comparable for the third quarter and first nine months of 2014 and 2013.


Other Items

Interest expense decreased 23% in the third quarter and 22% in the first nine months of 2014 compared to the prior year period due to the decreased level of debt in 2014.

Other income was not material to the financial statements.

Income taxes reflected the change in the operating results.  The effective tax rate in the third quarter was 34% compared to the prior year period of 25% and in the first nine months of 2014 was 35% compared to 30% in the 2013 period.  The higher rates in 2014 also reflect taxes paid on the repatriation of approximately $2.8 million of cash from foreign subsidiaries.
 
 
 
-18-
 
 

 


Liquidity and Sources of Capital

The Company generated $7.0 million of cash from its operations during the first nine months of 2014 compared to $7.9 million during the same period in 2013.  The decrease in cash flows in the quarter was primarily the result of the associated timing differences in the collections of accounts receivable, payments of liabilities, and changes in inventories.  Cash flow from operations coupled with cash on hand at the beginning of the year was sufficient to fund capital expenditures, debt service, and dividend payments.

Additions to property, plant and equipment were $2.3 million for the first nine months of 2014 compared to $4.2 million for the same period in 2013.  Total capital expenditures for 2014 are expected to be approximately $3 to $3.5 million.  As of September 27, 2014, there is approximately $725,000 of outstanding commitments for the remaining capital expenditures.

The following table shows key financial ratios at the end of each period:

   
Third
Quarter
2014
Third
Quarter
2013
Year
End
2013
Current ratio
 
5.3
 
5.5
 
5.2
 
Average days’ sales in accounts receivable
 
48
 
50
 
47
 
Inventory turnover
 
3.6
 
3.8
 
3.7
 
Total debt to shareholders’ equity
 
5.9
     %
8.6
%
7.4
%

The following table shows important liquidity measures as of the balance sheet date for each period below (in millions):
   
Third
Quarter
2014
 
Third
Quarter
2013
 
Year
End
2013
 
Cash and cash equivalents
     
 
     
  - Held in the United States
$
11.3
$
8.5
$
10.2
 
  - Held by a foreign subsidiary
 
9.9
 
10.6
 
9.8
 
   
21.2
 
19.1
 
20.0
 
Working capital
 
 60.5
 
 59.4
 
 57.4
 
Net cash provided by operating activities
 
 7.0
 
 7.9
 
 11.3
 
Change in working capital impact on net cash
    provided by operating activities
 
 
(1.3
)
 
(0.1
)
 
(0.2
)
Net cash used in investing activities
 
(2.3
)
(4.2
)
(5.5
)
Net cash used in financing activities
 
(3.4
)
(3.0
)
(4.0
)

During the first nine months of Fiscal 2014, the Company repatriated approximately $2.8 million in cash from its foreign subsidiaries.  The impact of this was an increase in the effective tax rate by approximately 1.4%.  U.S. income taxes have not been provided on the undistributed earnings of the Company’s foreign subsidiaries except where required under U.S. tax laws.  The Company would be required to accrue and pay United States income taxes to repatriate the funds held by foreign subsidiaries not otherwise provided. The Company intends to reinvest these earnings outside the United States indefinitely.

All cash held by foreign subsidiaries is readily convertible into other currencies, including the U.S. Dollar.

Total inventories remained fairly constant at $30.7 million on September 27, 2014 compared to $30.7 million at year end 2013 and $30.4 million at the end of the third quarter of 2013.  Accounts receivable was $18.5 million compared to $16.3 million at year end 2013 and $18.7 million at the end of the third quarter of fiscal 2013.  The increase from year end is related to increased revenue in the current quarter as compared to the last quarter of Fiscal 2013.

Cash on hand, cash flow from operating activities and funds available under the revolving credit portion of the Company’s Loan Agreement are expected to be sufficient to cover future foreseeable working capital requirements.

 
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk from what was reported in the 2013 Annual Report on Form 10-K.


ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

As of the end of the quarter ended September 27, 2014, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 240.13a-15.  As defined in Exchange Act Rules 240.13a-15(e) and 240.15d-15(e), “the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.”  Based upon that evaluation, the CEO and CFO concluded that the Company’s current disclosure controls and procedures were effective as of the September 27, 2014 evaluation date.

The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO have concluded that these controls and procedures are effective at the “reasonable assurance” level.

Changes in Internal Controls:

During the period covered by this report, there have been no significant changes in the Company’s internal control over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls.


PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

During the fourth quarter of 2010, the Company was contacted by the State of Illinois regarding potential ground contamination at our plant in Wheeling, Illinois.  The Company enlisted into a voluntary remediation program in Illinois and has engaged an environmental clean-up company to perform testing and develop a remediation plan, if needed.  No estimate for the cost of remediation was available when this Form 10-Q was filed with the SEC.

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.
 
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ITEM 1A – RISK FACTORS

There have been no material changes in risk factors from what was reported in the 2013 Annual Report on Form 10-K.


ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There have been no sales of unregistered securities by the Company or purchases of registered equity securities by the Company during the period covered by this report.

 

 
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
 

None


ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5 – OTHER INFORMATION

None


ITEM 6 – EXHIBITS

31) Certifications required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32) Certifications pursuant to Rule 13a-14(b) and 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99(1)) The Registrant’s Annual Report on Form 10-K for the fiscal year ended December 28, 2013 is incorporated herein by reference.

99(2)) Form 8-K filed on April 23, 2014 setting forth the press release reporting the Company’s earnings for the quarter ended March 29, 2014 is incorporated herein by reference.

99(3)) Form 8-K filed on April 24, 2014 setting forth the results of the vote at the annual meeting of shareholders of the Company which was held on April 23, 2014 is incorporated herein by reference.

99(4)) Form 8-K filed on July 23, 2014 setting forth the press release reporting the Company’s earnings for the quarter ended June 28, 2014 is incorporated herein by reference.

99(5)) Form 8-K filed on October 22, 2014 setting forth the press release reporting the Company’s earnings for the quarter ended September 27, 2014 is incorporated herein by reference.
 
99(6)) Form 8-K filed on October 23, 2014 setting forth the amendment of the Employment Agreement dated December 18, 2013 with Leonard F. Leganza is incorporated herein by reference.

     



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
THE EASTERN COMPANY
 
(Registrant)
 
DATE:  October 24, 2014
/s/Leonard F. Leganza
 
Leonard F. Leganza
Chairman, President and Chief Executive Officer
   
DATE:  October 24, 2014
/s/John L. Sullivan III
 
John L. Sullivan III
Vice President and Chief Financial Officer

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