Form 10-Q EASTERN CO For: Jul 02
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended |
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
(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of |
| (I.R.S. Employer |
incorporation or organization) |
| Identification No.) |
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(Address of principal executive offices) |
| (Zip Code) |
( |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | ☒ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
|
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of July 2, 2022,
The Eastern Company
Form 10-Q
FOR THE QUARTERLY PERIOD ENDED JULY 2, 2022
TABLE OF CONTENTS
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3. | ||
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 17. | |
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| 2 |
| Table of Contents |
PART 1 – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
THE EASTERN COMPANY AND SUBSIDIARIES | ||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) | ||||||||||||||||
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| Three Months Ended |
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| Six Months Ended |
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| July 2, 2022 |
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| July 3, 2021 |
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| July 2, 2022 |
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| July 3, 2021 |
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Net sales |
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Cost of products sold |
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Gross margin |
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Product development expense |
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Selling general and administrative expenses |
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Operating profit |
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Interest expense |
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Other income |
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Income from continuing operations before income taxes |
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Income tax expense |
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Net income from continuing operations |
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Discontinued Operations (see note B) |
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Gain from operations of discontinued operations |
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Loss on classification as held for sale |
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Income tax (expense) benefit |
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Gain (loss) from discontinued operations |
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Net income (loss) |
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Earnings per share from continuing operations: |
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Basic |
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Diluted |
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Earnings (loss) per share from discontinued operations: |
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Basic |
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Diluted |
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Total earnings (loss) per share: |
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Basic |
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Diluted |
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Cash dividends per share: |
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See accompanying notes. |
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| 3 |
| Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
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| Three Months Ended |
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| Six Months Ended |
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| July 2, 2022 |
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| July 3, 2021 |
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| July 2, 2022 |
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| July 3, 2021 |
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Net income (loss) |
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Other comprehensive income (loss): |
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Change in foreign currency translation |
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Change in fair value of interest rate swap, net of tax cost (benefit) of: |
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2022 - $ |
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Change in pension and postretirement benefit costs, net of taxes of: |
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2022 - $ |
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Total other comprehensive income (loss) |
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Comprehensive income (loss) |
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See accompanying notes. |
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| 4 |
| Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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| July 2, 2022 |
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| January 1, 2022 |
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| (unaudited) |
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ASSETS |
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Current Assets |
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Cash and cash equivalents |
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Accounts receivable, less allowances: 2022 - $ |
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Inventories |
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Current portion of notes receivable |
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Prepaid expenses and other assets |
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Current assets held for sale |
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Total Current Assets |
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Property, Plant and Equipment |
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Accumulated depreciation |
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Property, Plant and Equipment, Net |
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Goodwill |
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Trademarks |
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Patents and other intangibles net of accumulated amortization |
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Long term notes receivable, less current portion |
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Right of Use Assets |
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Total Other Assets |
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TOTAL ASSETS |
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See accompanying notes. |
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| 5 |
| Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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| July 2, 2022 |
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| January 1, 2022 |
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| (unaudited) |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities |
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Accounts payable |
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Accrued compensation |
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Other accrued expenses |
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Current portion of lease liability |
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Current portion of long-term debt |
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Current liabilities held for sale |
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Total Current Liabilities |
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Deferred income taxes |
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Other long-term liabilities |
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Lease liability |
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Long-term debt, less current portion |
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Accrued postretirement benefits |
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Accrued pension cost |
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Total Liabilities |
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Shareholders’ Equity |
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Voting Preferred Stock, no par value: |
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Authorized and unissued: |
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Nonvoting Preferred Stock, no par value: |
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Authorized and unissued: |
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Common Stock, no par value, Authorized: |
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Issued: |
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Outstanding: |
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Treasury Stock: |
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Retained earnings |
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Accumulated other comprehensive income (loss): |
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Foreign currency translation |
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Unrealized gain (loss) on interest rate swap, net of tax |
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Unrecognized net pension and postretirement benefit costs, net of tax |
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Accumulated other comprehensive loss |
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Total Shareholders’ Equity |
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TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
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See accompanying notes. |
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| 6 |
| Table of Contents |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
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| Six Months Ended |
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| July 2, 2022 |
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| July 3, 2021 |
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Operating Activities |
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Net income |
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Less: gain (loss) from discontinued operations |
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Income from continuing operations |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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Unrecognized pension and postretirement benefits |
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Loss (gain) on sale of equipment and other assets |
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Provision for doubtful accounts |
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Stock compensation expense |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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Prepaid expenses and other |
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Other assets |
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Accounts payable |
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Accrued compensation |
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Other accrued expenses |
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Net cash (used in) provided by operating activities |
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Investing Activities |
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Payments received from notes receivable |
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Proceeds from sale of equipment |
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Purchases of property, plant and equipment |
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Net cash provided by investing activities |
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Financing Activities |
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Proceeds from short term borrowings (revolver) |
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Principal payments on long-term debt |
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Financing leases, net |
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Purchase common stock for treasury |
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Dividends paid |
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Net cash provided by (used in) financing activities |
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Discontinued Operations |
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Cash (used in) provided by operating activities |
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Cash used in investing activities |
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Cash (used in) provided by discontinued operations |
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Effect of exchange rate changes on cash |
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Net change in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period ¹ |
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Supplemental disclosure of cash flow information: |
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Interest |
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Income taxes |
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Non-cash investing and financing activities |
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Right of use asset |
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Lease liability |
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¹ includes cash from assets held for sale of $0.1 million as of July 2, 2022 and $1.6 million as of July 3, 2021 |
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See accompanying notes |
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| 7 |
| Table of Contents |
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
July 2, 2022
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 Rule 8-03 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2022, filed with the Securities and Exchange Commission on March 17, 2022 (the “2021 Form 10-K”), for additional information.
The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. All intercompany accounts and transactions are eliminated.
The condensed consolidated balance sheet as of January 1, 2022 has been derived from the audited consolidated balance sheet at that date.
The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2021 or the 2021 fiscal year mean the 52-week period ended on January 1, 2022, and references to 2022 or the 2022 fiscal year mean the 52-week period ending on December 31, 2022. In a 52-week fiscal year, each quarter has 13 weeks. References to the second quarter of 2021, the second fiscal quarter of 2021 or the three months ended July 3, 2021 mean the period from April 4, 2021 to July 3, 2021. References to the second quarter of 2022, the second fiscal quarter of 2022 or the three months ended July 2, 2022, mean the 13-week period from April 3, 2022 to July 2, 2022.
Certain amounts in the financial statements have been reclassified to conform with the current presentation with no impact or change to previously reported net income or shareholder’s equity.
Note B – Discontinued Operations
In the second quarter of 2021, the Company determined that the companies included in our former Diversified Products segment no longer fit with our long-term strategy and the Company initiated the process of selling the companies within the Diversified Products segment. We believe that selling the companies within this segment will allow management to focus on our core capabilities and offerings.
The former Diversified Products segment met the criteria to be held for sale and furthermore, we determined that the assets held for sale qualify for discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.
On November 3, 2021, the Company sold its Greenwald Industries, Inc. division (“Greenwald”). Greenwald, located in Chester, CT, is an OEM manufacturer offering a range of payment solutions from coin-vending products to smart card systems and payment applications.
On November 22, 2021, the Company sold its Frazer & Jones Company division (“Frazer & Jones”). Frazer & Jones is a ductile and malleable iron foundry located in Syracuse, NY. Eastern has exited the mining business to focus on our three core businesses.
| 8 |
| Table of Contents |
Summarized Financial Information of Discontinued Operations
The following table represents income from discontinued operations, net of tax:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
|
| (unaudited) |
| ||||
Net sales |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Cost of products sold |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Gross margin |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Restructuring costs |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
| ( | ) |
Operating income (loss) |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Gain (Loss) from discontinued operations before income taxes |
|
|
|
|
| ( | ) |
|
|
|
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) benefit |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Income (loss) from discontinued operations, net of tax |
| $ |
|
| $ | ( | ) |
| $ |
|
| $ | ( | ) | ||
The following table represents the assets and liabilities from discontinued operations:
|
| July 2, 2022 |
|
| January 1, 2022 |
| ||
|
| (unaudited) |
|
|
|
| ||
Cash |
| $ |
|
| $ |
| ||
Accounts receivable |
|
|
|
|
|
| ||
Inventory |
|
|
|
|
|
| ||
Prepaid expenses |
|
|
|
|
|
| ||
Property, plant and equipment, net |
|
|
|
|
|
| ||
Right of use assets |
|
|
|
|
|
| ||
Total assets of discontinued operations¹ |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Accounts payable |
| $ |
|
| $ |
| ||
Accrued compensation and other accrued expenses |
|
|
|
|
|
| ||
Current portion of lease liability |
|
|
|
|
|
| ||
Other long-term liabilities |
|
|
|
|
|
| ||
Total liabilities of discontinued operations¹ |
| $ |
|
| $ |
| ||
¹ The total assets and liabilities of discontinued operations are presented as current in the July 2, 2022 and January 1, 2022 balance sheets as we expect to sell the discontinued operations and collect proceeds within one year of the applicable balance sheet date. |
| 9 |
| Table of Contents |
Note C – Earnings Per Share
The denominators used to calculate earnings per share are as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Basic: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Dilutive stock appreciation rights |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Denominator for diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Note D – Inventories
Inventories from continuing operations consist of the following components:
|
| July 2, 2022 |
|
| January 1, 2022 |
| ||
|
|
|
|
|
|
| ||
Raw material and component parts |
| $ |
|
| $ |
| ||
Work in process |
|
|
|
|
|
| ||
Finished goods |
|
|
|
|
|
| ||
Total inventories |
| $ |
|
| $ |
| ||
Note E - Goodwill
The aggregate carrying amount of goodwill from continuing operations is approximately $
The Company tests its reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events and circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. The Company tests reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources.
Note F – Leases
The Company presents right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company accounts for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.
The Company has operating leases for buildings, warehouses, and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability.
| 10 |
| Table of Contents |
Currently, the Company has
Total lease expense for each of the next five fiscal years is estimated to be as follows: remainder of 2022 - $
Note G - Debt
On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association and TD Bank, N.A. as lenders (the “Credit Agreement”), that included a $
The Company’s loan covenants under the Credit Agreement require
On August 30, 2019, the Company entered an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $
The interest rates under the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the phasing out of LIBOR. Information regarding the phasing out of LIBOR is provided below.
On July 27, 2017, the Financial Conduct Authority (the “FCA”) (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. In December 2020, the ICE Benchmark Administration (the “IBA”) announced a market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023, which the FCA supports. On March 5, 2021, the IBA released its feedback statement reporting the results of the market consultation. Pursuant to its feedback statement, the IBA ceased publication of all settings of non-US dollar LIBOR and only the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings scheduled to be discontinued after June 30, 2023. The Alternative Reference Rates Committee (ARRC), a financial industry group convened by the Federal Reserve Board, has recommended the use of a secured overnight financing rate (“SOFR”) to replace LIBOR. In addition, on March 15, 2022, the Adjustable Interest Rate Act (the “LIBOR Act”) was signed into law, which provided a replacement framework for outstanding financial contracts tied to LIBOR once LIBOR ceases to be published. The LIBOR Act provides a statutory mechanism and safe harbor that applies on a nationwide basis to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board based on SOFR, for certain contracts that reference LIBOR and contain no or insufficient fallback provisions. The LIBOR Act preempts and supersedes any state or local law, statute, rule, regulation or standard relating to the selection or use of a benchmark replacement or related changes and allows parties that already have effective fallback provisions to opt out of the legislation. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate which has implications for how interest and other payments are based. Changes in the method of calculating the replacement of LIBOR with an alternative rate or benchmark are still in flux, and once an alternate rate is adopted, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect the Company’s results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks at this time.
| 11 |
| Table of Contents |
Note H - Stock Options and Awards
The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers, other key employees, and non-employee directors expired in February 2020. On February 19, 2020, the Board of Directors of the Company (the “Board”) adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”). On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The 2020 Plan replaced the 2010 Plan. The Company has no other existing plan pursuant to which equity awards may be granted.
Incentive stock options granted under the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Board. Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Board. During the first six months of fiscal 2022, the Company granted
The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During the first six months of fiscal 2022 and 2021 the Company did not issue any SARs.
Stock-based compensation expense in connection with SARs previously granted to employees was approximately $
As of July 2, 2022, there were
The following tables set forth the outstanding SARs for the period specified:
|
| Six Months Ended |
|
| Year Ended |
| ||||||||||
|
| July 2, 2022 |
|
| January 1, 2022 |
| ||||||||||
|
| Units |
|
| Weighted Average Exercise Price |
|
| Units |
|
| Weighted Average Exercise Price |
| ||||
Outstanding at beginning of period |
|
|
|
| $ |
|
|
|
|
| $ |
| ||||
Issued |
|
| - |
|
|
|
|
|
| - |
|
|
|
| ||
Exercised |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Forfeited |
|
| ( | ) |
|
|
|
|
| ( | ) |
|
|
| ||
Outstanding at end of period |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| 12 |
| Table of Contents |
SARs Outstanding and Exercisable |
|
|
|
|
|
|
|
|
| |||||||||||||||
Range of Exercise Prices |
| Outstanding as of July 2, 2022 |
|
| Weighted Average Remaining Contractual Life |
|
| Weighted Average Exercise Price |
|
| Exercisable as of July 2, 2022 |
|
| Weighted Average Remaining Contractual Life |
|
| Weighted Average Exercise Price |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
$ |
|
|
|
|
|
|
| $ |
|
|
|
|
|
|
|
| $ |
| ||||||
The following tables set forth the outstanding stock awards for the period specified:
|
| Six Months Ended |
|
| Year Ended |
| ||
|
| July 2, 2022 |
|
| January 1, 2022 |
| ||
|
| Units |
|
| Units |
| ||
Outstanding at beginning of period |
|
|
|
|
|
| ||
Issued |
|
|
|
|
|
| ||
Exercised |
|
| - |
|
|
| - |
|
Forfeited |
|
| ( | ) |
|
| ( | ) |
Outstanding at end of period |
|
|
|
|
|
| ||
As of July 2, 2022, outstanding SARs and stock awards had an intrinsic value of $
Note I – Share Repurchase Program
On May 2, 2018, the Company announced that the Board of Directors of the Company had authorized a new program to repurchase up to
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Maximum Number of Shares that may yet be Purchased Under the Plans or Programs |
| ||||
Balance as of April 2, 2022 |
|
|
|
| $ |
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 3, 2022 - July 2, 2022 |
|
|
|
|
|
|
|
|
|
|
| ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of July 2, 2022 |
|
|
|
| $ |
|
|
|
|
|
|
| ||||
| 13 |
| Table of Contents |
Note J – Revenue Recognition
The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled. The Company records revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which are delivering goods or services, determines the transaction price, allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.
Customer volume rebates, product returns, discount and allowance are variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material.
The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.
Note K - Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2017 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2015.
The total amount of unrecognized tax benefits could increase or decrease within the next 12 months following July 2, 2022 for several 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 ASC Topic 740, “Income Taxes.” There have been no significant changes to the value of unrecognized tax benefits during the six months ended July 2, 2022. 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 following July 2, 2022.
Note L - Retirement Benefit Plans
The Company has four non-contributory defined benefit pension plans covering most U.S. employees. Three of these pension plans are frozen and participants in these three plans have not accrued benefits since the date on which these plans were frozen. A fourth pension plan does not permit new participants but existing participants in this fourth pension plan continue to accrue benefits. Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain 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 first three months and first six months 2022 and 2021 are as follows:
|
| Pension Benefits |
| |||||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Service cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Expected return on plan assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amortization of the net loss |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net periodic benefit |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| $ | ( | ) |
| 14 |
| Table of Contents |
|
| Other Postretirement Benefits |
| |||||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Service cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Expected return on plan assets |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Amortization of prior service cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Amortization of the net loss |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
|
| ( | ) |
Net periodic benefit cost |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
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 2022, the Company expects to contribute $
The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion.
The Company made contributions to the plan as follows:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Regular matching contribution |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Transitional credit contribution |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Non-discretionary contribution |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Total contributions for the period |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
The non-discretionary contribution of $
| 15 |
| Table of Contents |
Note M - Recent Accounting Pronouncements
Adopted
In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Tax. The changes implemented in ASU 2019-12 include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to employee stock ownership plans. The Company adopted ASU 2019-12 as of January 3, 2021. The adoption of this guidance did not have a material impact 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.
Note N - Concentration of Risk
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 accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As of July 2, 2022, there was one significant concentration of credit risk with a customer, who has receivables representing
The Company has deposits that exceed amounts up to $
Interest Rate Risk
The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based on the LIBOR rate plus a margin spread of
Currency Exchange Rate Risk
The Company’s currency exposure is concentrated in the British pound, Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB and the Hong Kong dollar. Because of the Company’s limited exposure to any single foreign market, any currency gains or losses have not been material and are not expected to be material in the future. As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments.
| 16 |
| Table of Contents |
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 financial position and results of operations of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the quarter ended July 2, 2022. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended January 1, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s Annual Report on Form 10-K for the fiscal year ended January 1, 2022, which was filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2022 (the “2021 Form 10-K”).
The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2021 or the 2021 fiscal year mean the 52-week period ended on January 1, 2022, and references to 2022 or the 2022 fiscal year mean the 52-week period ending on December 31, 2022. In a 52-week fiscal year, each quarter has 13 weeks. References to the second quarter of 2021, the second fiscal quarter of 2021 or the three months ended July 3, 2021, mean the period from April 4, 2021 to July 3, 2021. References to the second quarter of 2022, the second fiscal quarter of 2022 or the three months ended July 2, 2022, mean the 13-week period from April 3, 2022 to July 2, 2022. References to the first six months of 2021 or the six months ended July 3, 2021 mean the period from January 3, 2021 to July 3, 2021. References to the first six months of 2022 or the six months ended July 2, 2022 mean the period from January 1, 2022 to July 2, 2022.
Safe Harbor for Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q of the Company that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These factors include the scope and duration of the COVID-19 pandemic, including timing of the distribution of COVID-19 vaccines and rates of vaccination, the extent of resurgences,, the emergence of additional virus variants and how quickly and to what extent normal economic activity can resume, and economic effects of the COVID-19 pandemic, including supply chain disruptions, cost inflation, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, and risks associated with employees working remotely or operating with reduced workforce. Other factors include, but are not limited to risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability; restrictions on operating flexibility imposed by the agreement governing our credit facility; the inability to achieve the savings expected from global sourcing of materials; the impact of higher raw material and component costs, including the impact of supply chain shortages and inflation, particularly steel, plastics, scrap iron, zinc, copper and electronic components; lower-cost competition; our ability to design, introduce and sell new products and related components; market acceptance of our products; the inability to attain expected benefits from acquisitions or the inability to effectively integrate such acquisitions and achieve expected synergies; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, and general industrial markets; costs and liabilities associated with environmental compliance; the impact of climate change or terrorist threats and the possible responses by the U.S. and foreign governments; failure to protect our intellectual property; cyberattacks; materially adverse or unanticipated legal judgments, fines, penalties or settlements; and other risks identified and discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the 2021 Form 10-K and that may be identified from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the SEC. 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. Also, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and 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. The Company undertakes no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise, except as required by law.
| 17 |
| Table of Contents |
Overview
COVID-19 Update
The COVID-19 pandemic has affected our businesses, including our supply chain, our operations, the labor force, and costs throughout 2021 and into 2022. We continue to follow CDC guidelines, including the use of proper personal protection equipment, social distancing, and sanitizing work areas. As a result of these measures, the COVID pandemic had minimal impact on our North American capacity utilization at most of our production facilities in the second quarter of 2022. Many of the Company’s employees have received COVID-19 vaccinations, and we will continue to encourage our workforce to get vaccinated. In the second quarter of 2022, we are experienced interruptions in China of our operations and supply base as a result of another variant of COVID-19 and the response to minimize its spread. A more significant resurgence of the COVID-19 pandemic or development of additional severe or highly contagious variants could cause further disruptions in our business and could adversely affect our financial condition, results of operations and cash flow.
During the past two years and continuing into 2022, the Company implemented a broad range of policies and procedures to ensure that employees at all our locations remain healthy. Steps that we have taken to reduce the risk of COVID-19 to our employees include, among others: protecting employee health by instructing employees to stay home if they exhibit symptoms of COVID-19; providing standard surgical masks and educating employees on hand hygiene to help stop the spread. We maintain a clean work environment by frequently cleaning all touch points with products that meet EPA criteria for use against COVID-19; educating employees to clean their personal workspace at the beginning and the end of every shift; and providing hand sanitizer and disposable wipes. We encourage social distancing, limit in-person meetings, reduced all non-essential workplace travel and continue to seek and implement additional methods to reduce the risk of COVID-19 to our employees.
the extent to which our operations will be further affected by COVID-19 in 2022 is dependent on future developments including new COVID variants, effectiveness of vaccines, new medication, and governmental restrictions. All these factors could result in further supply chain shortages and resulting cost inflation, increased operating cost, difficulty in finding workers, continued port congestion, and higher shipping costs. With the inherent uncertainty of the COVID-19 pandemic it is difficult to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations and the extent of the effects it could have on our consolidated business, results of operations and financial condition. For a discussion of certain COVID-19-related risks, see Part I, Item 1A, “Risk Factors”, of the 2021 Form 10-K.
General Overview
The following analysis excludes discontinued operations.
Net sales in the second quarter of 2022 increased by 14% to $69.5 million from $61.2 million in the corresponding period in 2021. Net sales for the first six months of 2022 increased by 13% to $138.6 million from $123.0 million in the same period last year. Sales increased for both the second quarter and six-month periods due to increased demand for truck accessories and returnable transport packaging products as well as from distributors. Our returnable transport packaging sales continue to benefit from the increase in new automotive product launches, including several electric vehicle launches. Our backlog as of July 2, 2022 decreased 0.4% to $82.8 million from $83.2 million as of July 3, 2021.
Net sales of existing products increased 9% in the second quarter of 2022 and 6% for the first six months of 2022 compared to the corresponding periods in 2021. Price increases and new products increased net sales by 5% in the second quarter and 7% in the first six months of 2022, compared to the corresponding periods in 2021. New products included various truck mirror assemblies, rotary latches, D-rings, and mirror cams. Price increases primarily reflect our efforts to recover increases in raw material and freight costs.
Cost of products sold increased by $6.3 million, or 13%, in the second quarter of 2022 and increased by $14.5 million, or 16% in the first six months of 2022 compared to the corresponding periods in 2021. The increases are primarily due to higher sales volume and increases in the cost of materials. The cost of several frequently used raw materials have increased significantly, year-over-year. For example, the cost of most common forms of cold-rolled steel increased 2% between the second quarter of 2021 and the second quarter of 2022; nickel increased 95%; and copper and zinc increased 5% and 41% respectively. Price increases to our customers recovered a portion of the increase in raw material costs. Finally, the Company paid tariff costs on China-sourced products of approximately $0.8 million and $1.3 million in the second quarter and first six months of 2022 respectively, compared to $0.8 million and $1.4 million in the second quarter and first six months of 2021 respectively. A significant portion of tariffs on China-sourced products have been recovered through price increases.
Gross margin as a percent of sales was 23% in the second quarter and 22% in the first six months of 2022 compared to 23% in the second quarter and 24% in the first six months of fiscal 2021. Our gross margins in the second quarter and first six months of 2022 reflect the impact of price increases to customers to recover increases in raw material costs.
Product development expense decreased $0.1 million, or 12% in the second quarter of 2022 and increased $0.1 million, or 2%, in the first six months of 2022 compared to the corresponding periods in 2021. As a percentage of net sales, product development costs were 1.4% and 1.6% for the second quarter and first six months of 2022, respectively, compared to 1.8% and 1.7% for the corresponding periods in 2021.
| 18 |
| Table of Contents |
Selling, general and administrative expense increased $0.8 million, or 8%, in the second quarter of 2022 and increased $1.7 million, or 9% in the first six months of 2022 when compared to the corresponding periods in 2021 primarily due to increased commissions and other selling costs, payroll-related expenses, and travel costs. This increase in selling expenses reflect both the increase in sales as well as our investments in sales capabilities.
Interest expense increased $0.1 million in the second quarter of 2022 and was flat in the first six months of 2022 compared to the corresponding periods in 2021.
Other income was flat in the second quarter and decreased $2.0 million in the first six months of 2022 compared to the corresponding periods in 2021. The decrease in other income of $2.0 million in the first six months of 2022 was primarily driven by a gain on the sale of the Eberhard Hardware Ltd. building of $1.8 million in the first quarter of 2021.
Net income from continuing operations for the second quarter of fiscal 2022 was $3.7 million, or $0.59 per diluted share compared to net income of $2.8 million, or $0.44 per diluted share for the comparable period in 2021. In the first six months of 2022 net income was $6.4 million, or $1.02 per diluted share compared to net income of $8.4 million, or $1.35 per diluted share for the comparable period in 2021.
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:
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net sales |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Cost of products sold |
|
| 77.0 | % |
|
| 77.2 | % |
|
| 77.9 | % |
|
| 76.0 | % |
Gross margin |
|
| 23.0 | % |
|
| 22.8 | % |
|
| 22.1 | % |
|
| 24.0 | % |
Product development expense |
|
| 1.4 | % |
|
| 1.8 | % |
|
| 1.6 | % |
|
| 1.7 | % |
Selling, general and administrative expense |
|
| 14.6 | % |
|
| 15.3 | % |
|
| 14.4 | % |
|
| 14.9 | % |
Operating Profit |
|
| 7.0 | % |
|
| 5.7 | % |
|
| 6.1 | % |
|
| 7.4 | % |
| 19 |
| Table of Contents |
The following table shows the change in sales and operating profit for the second quarter and first six months of 2022 compared to the second quarter and first six months of 2021 (dollars in thousands):
|
| Three Months |
|
| Six Months |
| ||
|
| Ended |
|
| Ended |
| ||
|
| July 2, 2022 |
|
| July 2, 2022 |
| ||
|
|
|
|
|
|
| ||
Net Sales |
| $ | 8,292 |
|
| $ | 15,534 |
|
|
|
|
|
|
|
|
|
|
Volume |
|
| 9.3 | % |
|
| 6.3 | % |
Price |
|
| 2.5 | % |
|
| 2.7 | % |
New products |
|
| 1.7 | % |
|
| 3.6 | % |
|
|
| 13.5 | % |
|
| 12.6 | % |
|
|
|
|
|
|
|
|
|
Operating Profit |
| $ | 1,374 |
|
| $ | (660 | ) |
Liquidity and Sources of Capital
The Company consumed approximately $2.5 million of cash from continuing operations during the first six months of fiscal 2022 compared to generating approximately $4.3 million during the first six months of fiscal 2021. Cash flow from operations in the first six months of 2022 was lower when compared to the corresponding period last year primarily due to an increase in inventory and accounts receivable. The effects of the COVID-19 pandemic are continuing to impact the supply chain and as a result inventories have increased due to increased shipping time, port congestion, and selective pre-buying of raw materials to ensure availability and mitigate the impact of likely future inflationary price increases. Cash flow from operations coupled with cash at the beginning of the 2022 fiscal year and the proceeds from the line of credit were sufficient to fund capital expenditures, debt service, and dividend payments for the first six months of 2022. The Company has $10.0 million available on its revolving line of credit. See Note G - Debt for further discussion on the Company’s debt facilities.
Additions to property, plant and equipment for continuing operations were approximately $1.1 million for the first six months of 2022 and $1.8 million for the first six months of 2021. Additionally, in the first six months of 2022 the Company received proceeds of $1.3 million from the sale of one of its properties compared to $2.0 million from the sale of one of its facilities in Canada during the first six months of 2021. As of July 2, 2022, there were approximately $0.3 million of outstanding commitments for capital expenditures.
The following table shows key financial ratios at the end of each specified period:
|
| Second Quarter 2022 |
|
| Second Quarter 2021 |
|
| Fiscal Year 2021 |
| |||
Current ratio |
|
| 3.0 |
|
|
| 2.8 |
|
|
| 2.5 |
|
Average days’ sales in accounts receivable |
|
| 62 |
|
|
| 53 |
|
|
| 64 |
|
Inventory turnover |
|
| 3.2 |
|
|
| 3.8 |
|
|
| 3.0 |
|
Total debt to shareholders’ equity |
|
| 64.5 | % |
|
| 80.8 | % |
|
| 62.2 | % |
| 20 |
| Table of Contents |
The following table shows important liquidity measures as of the balance sheet date for each specified period (in millions):
|
| Second |
|
| Second |
|
| Fiscal |
| |||
|
| Quarter |
|
| Quarter |
|
| Year |
| |||
|
| 2022 |
|
| 2021 |
|
| 2021 |
| |||
Cash and cash equivalents |
|
|
|
|
|
|
|
|
| |||
- Held in the United States |
| $ | 3.6 |
|
| $ | 13.4 |
|
| $ | 4.3 |
|
- Held by a foreign subsidiary |
|
| 3.6 |
|
|
| 5.1 |
|
|
| 2.3 |
|
|
|
| 7.2 |
|
|
| 18.5 |
|
|
| 6.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
| 89.6 |
|
|
| 90.6 |
|
|
| 74.1 |
|
Net cash (used in) provided by operating activities |
|
| (2.5 | ) |
|
| 4.3 |
|
|
| (7.8 | ) |
Change in working capital impact on net cash used in operating activities |
|
| (13.2 | ) |
|
| (5.3 | ) |
|
| (22.9 | ) |
Net cash provided by investing activities |
|
| 0.6 |
|
|
| 0.9 |
|
|
| 13.6 |
|
Net cash provided by (used in) financing activities |
|
| 2.9 |
|
|
| (3.5 | ) |
|
| (20.3 | ) |
Inventories of $67.7 million as of July 2, 2022, represent an increase of 7.7% as compared to $62.9 million at the end of fiscal year 2021 and an increase of 38.6% as compared to $48.8 million at the end of the second quarter of fiscal 2021. Accounts receivable, less allowances, were $46.3 million as of July 2, 2022, as compared to $43.2 million at 2021 fiscal year end and $35.1 million at the end of the second quarter of fiscal 2021.
Cash, cash flow from operating activities, and funds available under the revolving credit portion of the Credit Agreement are expected to be sufficient to cover future foreseeable working capital requirements. However, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available. In addition, the interest rate on borrowings under the Credit Agreement varies based on our senior net leverage ratio, and the Credit Agreement requires us to maintain a senior net leverage ratio not to exceed 4.25 to 1 and a fixed charge coverage ratio to be not less than 1.25 to 1. A decrease in earnings due to the impact of COVID-19 or the resulting harm to the financial condition of our customers or economic conditions generally, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and our fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and could cause us to fail to comply with the covenants under our Credit Agreement.
As of the end of the fiscal quarter ended July 2, 2022, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Estimates
The preparation of 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. For a full description of our critical accounting policies, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 2021 Form 10-K. While there have been no material changes to our critical accounting estimates, we continue to monitor the methodologies and assumptions underlying such critical accounting estimates.
| 21 |
| Table of Contents |
Non-GAAP Financial Measures
The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP.
To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income, diluted earnings per common share, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.
Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, certain one-time costs arising from the impacts of impairment losses, gains/losses on the sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operating performance.
Adjusted Earnings Per Share from Continuing Operations is defined as diluted earnings per share from continuing operations excluding, when incurred, certain per share one-time costs arising from, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs. We believe that Adjusted Earnings Per Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis.
Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain one-time costs arising from impairment losses, gains/losses on sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring expenses. Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Management uses such measures to evaluate performance period-over-period, to analyze the underlying trends in our business, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, U.S. GAAP financial measures.
We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.
| 22 |
| Table of Contents |
Reconciliation of Non-GAAP Measures |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Adjusted Net Income and EPS from Continuing Operations Calculation |
|
|
|
|
|
|
| |||||||||
For the Three and Six Months ended July 2, 2022 and July 3, 2021 |
|
|
|
|
|
|
| |||||||||
($000's) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 3,701 |
|
| $ | 2,755 |
|
| $ | 6,387 |
|
| $ | 8,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.59 |
|
| $ | 0.44 |
|
| $ | 1.02 |
|
| $ | 1.35 |
|
Diluted |
| $ | 0.59 |
|
| $ | 0.44 |
|
| $ | 1.02 |
|
| $ | 1.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of Eberhard Hardware Ltd building, net of tax |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,353 | )A |
Loss on sale of Wheeling, IL building, net of tax |
|
| - |
|
|
| - |
|
|
| 202 | B |
|
| - |
|
Total adjustments (Non-GAAP) |
| $ | - |
|
| $ | - |
|
| $ | 202 |
|
| $ | (1,353 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net income from continuing operations |
| $ | 3,701 |
|
| $ | 2,755 |
|
| $ | 6,589 |
|
| $ | 7,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted earnings per share from continuing operations (Non-GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.59 |
|
| $ | 0.44 |
|
| $ | 1.06 |
|
| $ | 1.13 |
|
Diluted |
| $ | 0.59 |
|
| $ | 0.44 |
|
| $ | 1.05 |
|
| $ | 1.13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A) Gain on sale of Eberhard Hardware Ltd building |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
B) Loss on sale of ILC building in Wheeling, IL |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 23 |
| Table of Contents |
Reconciliation of Non-GAAP Measures |
|
|
|
|
|
|
|
| ||||||||
Adjusted EBITDA from Continuing Operations Calculation |
|
|
|
|
|
|
| |||||||||
For the Three and Six Months ended July 2, 2022 and July 3, 2021 |
|
|
|
|
|
|
| |||||||||
($000's) |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
| ||||||||||
|
| Three Months Ended |
|
| Six Months Ended |
| ||||||||||
|
| July 2, 2022 |
|
| July 3, 2021 |
|
| July 2, 2022 |
|
| July 3, 2021 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 3,701 |
|
| $ | 2,755 |
|
| $ | 6,387 |
|
| $ | 8,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| 504 |
|
|
| 434 |
|
|
| 938 |
|
|
| 961 |
|
Provision for income taxes |
|
| 1,194 |
|
|
| 848 |
|
|
| 2,075 |
|
|
| 2,601 |
|
Depreciation and amortization |
|
| 1,803 |
|
|
| 1,721 |
|
|
| 3,633 |
|
|
| 3,531 |
|
Gain on sale of Eberhard Hardware Ltd Building |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,841 | )A |
Loss on sale of Wheeling, IL building |
|
| - |
|
|
| - |
|
|
| 269 | B |
|
| - |
|
Adjusted EBITDA from continuing operations |
| $ | 7,202 |
|
| $ | 5,758 |
|
| $ | 13,302 |
|
| $ | 13,701 |
|
|
|
|
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|
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|
|
|
|
|
|
|
A) Gain on sale of Eberhard Hardware Ltd building |
|
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|
|
|
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|
|
|
|
|
|
|
|
B) Loss on sale of ILC building in Wheeling, IL |
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|
|
|
| 24 |
| Table of Contents |
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a result of the Company’s status as a smaller reporting company pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide information under this Item 3.
ITEM 4 – CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
As of July 2, 2022, 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 the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 240.13a-15(e) and 240.15d-15(e)) pursuant to Exchange Act Rule 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 Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’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 Exchange 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”.
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 as of July 2, 2022.
Changes in Internal Control Over Financial Reporting:
During the period covered by this Quarterly Report on Form 10-Q, there were no changes in the Company's internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 25 |
| Table of Contents |
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS
The Company is a party to various legal proceedings from time to time related to its normal business operations. As of the end of the quarter ended July 2, 2022, the Company does not have any material pending legal proceedings, other than as set forth in Part I, Item 3 of the 2021 Form 10-K, or any material legal proceedings known to be contemplated by governmental authorities.
ITEM 1A – RISK FACTORS
The Company’s business is subject to several risks, some of which are beyond its control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the Company’s shareholders should carefully consider the risk factors discussed in Part I, Item 1A “Risk Factors” of the 2021 Form 10-K. These risk factors could have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity and could cause our operating results to vary significantly from period to period. As of July 2, 2022, there have been no material changes to the risk factors disclosed in the 2021 Form 10-K. The Company may disclose changes to such risk factors or disclose additional risk factors from time to time in its future filings with the SEC. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition, or operating results.
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On May 2, 2018, the Company announced that the Board had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. Below is a summary of the Company’s share repurchases during the second quarter of 2022.
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Maximum Number of Shares that may yet be Purchased Under the Plans or Programs |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
April 3, 2022 – April 30, 2022 |
|
| 9,762 |
|
|
| 23.55 |
|
|
| 9,762 |
|
|
| 90,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
May 1, 2022 – May 28, 2022 |
|
| 10,000 |
|
|
| 21.45 |
|
|
| 10,000 |
|
|
| 80,404 |
|
|
|
|
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|
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|
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May 29, 2022 – July 2, 2022 |
|
| 10,000 |
|
|
| 21.22 |
|
|
| 10,000 |
|
|
| 70,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
| 29,762 |
|
| $ | 22.06 |
|
|
| 29,762 |
|
|
| 70,404 |
|
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None
| 26 |
| Table of Contents |
ITEM 6 – EXHIBITS
|
|
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|
101) | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended April 2, 2022, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations (Unaudited) for the three months ended April 2, 2022 and April 3, 2021; (ii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three ended April 2, 2022, and April 3, 2021; (iii) Condensed Consolidated Balance Sheets (Unaudited) as of April 2, 2022 and January 1, 2022; (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended April 2, 2022 and April 3, 2021; and (iv) Notes to the Condensed Consolidated Financial Statements (Unaudited).** |
|
|
104) | Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101). ** |
|
|
* Filed herewith.
** Furnished herewith
| 27 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| THE EASTERN COMPANY |
|
|
| (Registrant)
|
|
DATE: August 8, 2022 |
| /s/August M. Vlak |
|
|
| August M. Vlak President and Chief Executive Officer |
|
|
|
|
|
DATE: August 8, 2022 |
| /s/Peter O’Hara |
|
|
| Peter O’Hara Chief Financial Officer |
|
| 28 |
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