SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM to . Commission File Number 0-599 THE EASTERN COMPANY (Exact Name of Registrant as specified in its charter) Connecticut 06-0330020 ----------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 112 Bridge Street, Naugatuck, Connecticut 06770 ----------------------------------------- ----- (Address of principal executive offices) (Zip Code) (203) 729-2255 -------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___. Indicate 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 March 30, 2002 ----- -------------------------------- Common Stock, No par value 3,630,520 -1-
PART I FINANCIAL INFORMATION THE EASTERN COMPANY AND SUBSIDIARIES ITEM I CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> ASSETS March 30, 2002 December 29, 2001 -------------- ----------------- <S> <C> <C> CURRENT ASSETS Cash and cash equivalents $ 5,325,145 $ 4,955,020 Investment in common stock 801,245 850,017 Accounts receivable, less allowance: 2002- $347,000; 2001- $344,000 11,545,618 10,814,017 Inventories 17,770,885 18,590,847 Prepaid expenses and other current assets 2,050,308 1,690,917 Deferred income taxes 640,200 640,200 ---------- ---------- Total Current Assets 38,133,401 37,541,018 -------------------- Property, plant and equipment 40,680,051 40,323,624 Accumulated depreciation (15,074,043) (14,337,979) ---------- ---------- 25,606,008 25,985,645 Prepaid pension cost 5,246,924 5,321,110 Goodwill 10,640,114 10,603,638 Other assets, net 2,485,407 2,444,643 --------- ----------- TOTAL ASSETS $ 82,111,854 $ 81,896,054 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 3,837,578 $ 3,471,951 Accrued compensation 1,534,508 982,464 Other accrued expenses 1,653,485 2,066,734 Current portion of long-term debt 3,505,134 3,388,662 ------------ ------------ Total Current Liabilites 10,530,705 9,909,811 ------------------------ Deferred federal income taxes 3,181,000 3,126,500 Long-term debt, less current portion 24,092,309 25,013,906 Accrued postretirement benefits 2,754,660 2,735,910 Interest rate swap obligation 869,842 1,054,420 Shareholders' Equity Common Stock, No Par Value: Authorized shares - 25,000,000 Issued and outstanding shares: 2002-3,630,520; 2001-3,629,185 excluding 1,652,320 shares held in treasury 859,439 839,155 Preferred Stock, No Par Value Authorized shares - 2,000,000 (No shares issued) Accumulated other comprehensive loss: Foreign currency transalation (908,171) (1,156,515) Derivative financial instruments (521,842) (632,420) Unrealized holding gain on investment in common stock 31,700 60,972 ------------ ------------ (1,398,313) (1,727,963) Retained earnings 41,222,212 40,944,315 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 40,683,338 40,055,507 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 82,111,854 $ 81,896,054 ============ ============ </TABLE> See accompanying notes. -2-
THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED March 30, 2002 March 31, 2001 -------------- -------------- <S> <C> <C> Net sales $ 20,320,517 $ 22,676,922 Interest income 13,215 39,425 ------------ ------------ 20,333,732 22,716,347 Cost of products sold 15,210,958 16,491,845 ------------ ------------ 5,122,774 6,224,502 Selling and administrative expenses 3,641,780 3,600,558 Interest expense 446,715 645,885 Goodwill amortization -- 239,763 ------------ ------------ INCOME BEFORE INCOME TAXES 1,034,279 1,738,296 Income taxes 357,172 586,424 ------------ ------------ NET INCOME $ 677,107 $ 1,151,872 ============ ============ Net income per share: Basic $ 0.19 $ 0.32 Diluted $ 0.18 $ 0.31 Cash dividends per share $ 0.11 $ 0.11 </TABLE> See accompanying notes. -3-
THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> THREE MONTHS ENDED March 30, 2002 March 31, 2001 -------------- -------------- <S> <C> <C> OPERATING ACTIVITIES: Net income $ 677,107 $ 1,151,872 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 743,650 802,446 Amortization 115,487 310,036 Provision for losses on accounts receivable 3,919 -- Issuance of Common Stock for directors' fees 20,284 51,290 Changes in operating assets and liabilities: Accounts receivable (748,438) (1,274,008) Inventories 792,056 (155,209) Prepaid expenses (177,216) (164,375) Prepaid pension 74,186 (52,289) Accounts payable 147,153 68,974 Accrued expenses 537,196 (429,883) Other assets (216,293) (72,544) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,969,091 236,310 INVESTING ACTIVITIES: Purchases of property, plant, and equipment (386,427) (523,539) ----------- ----------- NET CASH USED BY INVESTING ACTIVITIES (386,427) (523,539) FINANCING ACTIVITIES: Principal payments on long-term debt and notes payable (803,775) (693,172) Dividends paid (399,210) (400,218) ----------- ----------- NET CASH USED BY FINANCING ACTIVITIES (1,202,985) (1,093,390) Effect of exchange rate changes on cash (9,554) 23,725 ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS 370,125 (1,356,894) Cash and Cash Equivalents at Beginning of Period 4,955,020 4,541,706 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,325,145 $ 3,184,812 =========== =========== </TABLE> See accompanying notes. -4-
THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNADUITED) <TABLE> <CAPTION> THREE MONTHS ENDED March 30, 2002 March 31, 2001 -------------- -------------- <S> <C> <C> Net income $ 677,107 $ 1,151,872 Other comprehensive loss - Foreign currency translation 248,344 (140,166) Cumulative effect of accounting change for derivative financial intruments, net of income taxes of $265,000 -- (400,756) Change in fair value of derivative financial instruments, net of income taxes of ($74,000) in 2002 and $105,000 in 2001 110,578 (162,431) Unrealized holding loss on investment in common stock, net of income taxes of $19,500 (29,272) -- ----------- ----------- 329,650 (703,353) ----------- ----------- Comprehensive income $ 1,006,757 $ 448,519 =========== =========== </TABLE> See accompanying notes. -5-
THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 30, 2002 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 accounting principles generally accepted 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 29, 2001 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. The condensed balance sheet as of December 29, 2001 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: <TABLE> <CAPTION> THREE MONTHS ENDED March 30, 2002 March 31, 2001 -------------- -------------- <S> <C> <C> Basic: Weighted average shares outstanding 3,629,258 3,631,195 Contingent shares outstanding -- (11,250) --------- --------- Denominator for basic earnings per share 3,629,258 3,619,945 ========= ========= Diluted: Weighted average shares outstanding 3,629,258 3,631,195 Contingent shares outstanding -- (11,250) Dilutive stock options 112,777 82,010 --------- --------- Denominator for diluted earnings per share 3,742,035 3,701,955 ========= ========= </TABLE> Note C - Inventories The components of inventories follow: <TABLE> <CAPTION> March 30, 2002 December 29, 2001 -------------- ----------------- <S> <C> <C> Raw materials and component parts $ 7,872,502 $ 8,228,364 Work in process 4,193,929 4,390,818 Finished goods 5,704,454 5,971,665 ------------ ------------ $ 17,770,885 $ 18,590,847 ============ ============ </TABLE> -6-
THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 30, 2002 Note D - Segment Information Segment financial information follows: <TABLE> <CAPTION> THREE MONTHS ENDED March 30, 2002 March 31, 2001 -------------- -------------- <S> <C> <C> Revenues: Sales to unaffiliated customers: Industrial Hardware $ 6,897,070 $ 8,033,559 Security Products 9,055,813 9,498,206 Metal Products 4,367,634 5,145,157 ------------ ------------ 20,320,517 22,676,922 General corporate 13,215 39,425 ------------ ------------ $ 20,333,732 $ 22,716,347 ============ ============ Income Before Income Taxes: Industrial Hardware $ 737,395 $ 1,278,875 Security Products 803,878 899,130 Metal Products 247,364 367,631 ------------ ------------ Operating Profit 1,788,637 2,545,636 General corporate expenses (307,643) (161,455) Interest expense (446,715) (645,885) ------------ ------------ $ 1,034,279 $ 1,738,296 ============ ============ </TABLE> Note E - FASB Statement 142 - Goodwill and Other Intangible Assets Effective December 30, 2001, the Company adopted FASB Statement 142, Goodwill and Other Intangible Assets. Under the new standards, goodwill is no longer amortized but will be subjected to annual impairment tests; other intangibles continue to be amortized over their useful lives. Goodwill amortization for the quarter ended March 31, 2001 was $239,763. Had this statement been in effect December 31, 2000, then net income and earnings per share (basic) would have been $1,295,730 and $.36 for the first quarter of 2001 compared to the reported amounts of $1,151,872 and $.32. Note F - FASB Statement 133 - Accounting for Derivative Instruments and Hedging Activities Effective December 31, 2000, the Company adopted FASB Statement 133, Accounting for Derivative Instruments and Hedging Activities. The statement requires the Company to recognize all derivatives in the balance sheet at fair value. Further, derivatives that are not hedges are adjusted to fair value through operations. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of assets, liabilities, or firm commitments through operations or recognized in other comprehensive income until the hedged item is recognized in operations. The adoption of Statement No. 133 resulted in a charge to comprehensive income for the cumulative effect of accounting change of $400,756 in the first quarter of 2001. -7-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net income per share (basic) for the first quarter of 2002 was $677,000 or $.19 per share (basic) on sales of $20.3 million compared to $1,152,000 or $.32 per share (basic) on sales of $22.7 million in the first quarter of 2001. Sales for the first quarter 2002 were down 10% compared to the same period a year ago. New product introductions were up 3%, price increases were up 1% and volume decreased 14%. The Industrial Hardware segment sales declined 14% as compared to the first quarter of 2001. Sales volume declined 20%, while internally developed new products (for the utility truck and vehicular accessory markets) increased sales by 6%. Sales of heavy hardware to the tractor-trailer market decreased 40% from 2001 levels. Sales to this market began declining in the latter half of 2000 and are expected to continue to decline through the second quarter of 2002. Truck and trailer manufacturers still burdened with excessive inventories have held production levels to a minimum thus reducing purchase commitments. This market is expected to show a moderate increase in the second half of 2002 as manufacturers begin to replenish their inventories. Sales of industrial hardware (such as rotary locks, locking recessed handles, multi-point paddle handles and slam latches) to original equipment manufacturers and distributors were off 17% from prior year sales levels primarily the result of the continued softness in the manufacturing sector of the economy. Sales of school bus door closures decreased 4% as compared to the same period a year ago. Sales of automotive accessories (toolbox locks, push button locks and rotary latches for tonneau covers used on pickup trucks) were up 12% from prior year levels. New product sales include a dual push button package for toolbox applications, rotary latches and cable for the tonneau cover market, push button lock systems for utility body applications, a mini rotary lock for door enclosures and school bus hardware. The Company anticipates an improvement in business in the second half of 2002. The Security Products segment's sales were down 5% in the first quarter 2002 as compared to the first quarter of 2001. Price increases and sales of new products were each up 1% and volume was down 7%. The volume decrease was primarily due to the continued general slowness in the economy and the reduced activity levels of the travel sector. Sales of locks to the computer and travel markets are continuing at a reduced level from the prior year. Sales of new products included a new push button lock, drawer slides and luggage tags. Sales of security products to the commercial laundry industry increased 2% as compared to the first quarter of 2001. Sales to original equipment manufacturers such as Whirlpool, GE, Maytag and Alliance were up by 11%. Sales to distributors and route operators in that industry were off 2% while sales of Smart Card products increased 3% as compared to the first quarter of 2001. In the Metal Products segment, sales were down 15% from the previous year. Volume dropped 16%, while price increases raised sales 1%. Current year sales for contract castings were down 22% from the comparable period in 2001. The decrease in the contract casting business was mainly the result of a decrease in the commercial and industrial construction sector of the economy where many of our contract casting customers sell products such as pole line hardware, beam clamps and electrical and gas fittings. Further weakening demand for contract castings is the ongoing competition from China, Germany and Mexico where labor costs are generally lower and weak currency exchange rates create pricing pressures in the U. S. casting markets. Sales of mine roof support anchors were down 10% compared to the same period a year ago. In 2001, the energy crisis in California and the surge in natural gas prices created an increase in demand for coal and resulted in the opening of several underground coal mines using the Company's proprietary mine roof anchor support systems. In 2002, demand for coal has softened as the result of an extremely mild winter. Coal stockpiles have been replenished and many Appalachian coal companies have announced production cutbacks. Although -8-
the price of natural gas, oil and the weather influence the demand for coal, it is still the least costly and the most price stable energy source available today. Mining technology continues to evolve and the Company continues to look at new manufacturing methods and alternative products to remain competitive, including the addition of ductile iron casting capabilities and the development of new mine roof anchor systems to more effectively compete with resin bolt systems. Gross margin as a percentage of sales for the three months ended March 30, 2002 was approximately 25% compared to 27% for the comparable period a year ago. The decrease in gross margin is primarily the result of product mix and reduced sales volume at certain locations. Selling and administrative expenses were up 1% or $41 thousand for the three months ended March 30, 2002 compared to the same period a year ago. The higher selling and administrative expenses are due to increased personnel expenses. Interest expense for the first quarter of 2002 was $447 thousand versus $646 thousand for the first quarter of 2001. The decrease in interest expense was due to the lower debt and lower interest rates. Earnings before income taxes for the first quarter of 2002 were down 41% or $704 thousand compared to the first quarter of 2001. The Industrial Hardware segment was down 42% or $541 thousand for 3 months as compared to the same period a year ago. The decrease was the direct result of lower sales volume of industrial and transportation hardware reflecting less than fully utilized production facilities. The Security Products segment earnings before income taxes for the three months ended March 30, 2002 were down 11% or $95 thousand as compared to the first quarter of 2001. This decrease was the result of lower sales volume for our various lock products. The Metal Products segment earnings were down 33% or $120 thousand compared to the first quarter of 2001. The decrease was due to lower sales of mine roof expansion anchors as well as lower contract casting sales, as the result of foreign competition from Asia, Latin America and Europe. Weak currency exchanges continue to create pricing pressures on the contract casting market. Liquidity and Sources of Capital Cash flows from operations were $2.0 million for the first quarter of 2002 versus $236 thousand for the same period in 2001. The change in cash flows resulted from the associated timing differences for 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 first quarter of 2002 was sufficient to fund capital expenditures, debt service and dividend payments. Additions to property, plant and equipment were $386 thousand during the first quarter of 2002 versus $524 thousand for the comparable period a year ago. Total 2002 capital expenditures are not expected to exceed the annual expected $3.0 million level of depreciation. Total inventories as of March 30, 2002 were $17.8 million or $820 thousand lower than year end 2001. The inventory turnover ratio of 3.4 turns at the end of the first quarter was slightly better than the year end ratio of 3.3 turns. However, it was slightly lower than the 3.9 turns experienced in the first quarter of 2001. Accounts receivable increased by $732 thousand from year end 2001, primarily due to increased sales volume compared to the fourth quarter of 2001. The average day's sales in accounts receivable for the first quarter of 2002 was 52 days compared to the first quarter of 2001 of 59 days. Cash flow from operating activities and funds available under the revolving credit portion of the Company's loan agreement should be sufficient to cover future foreseeable working capital requirements. -9-
Other Matters No other matters are currently pending. Note: The preceding information contains forward looking statements which reflect the Company's current expectations regarding its future operating performance and achievements and is subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. Such risks and uncertainties include changing customer preferences, lack of success of new products, loss of customers, competition, increased raw material prices and problems associated with foreign sourcing of parts and products. The Company is not obligated to update or revise the aforementioned statements for new developments ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes in market risk from what was reported in the 2001 Annual Report on Form 10-K. -10-
PART II OTHER INFORMATION ITEM 1 LEGAL PROCEEDINGS - ------ ----------------- There are no significant pending legal proceedings, other than ordinary routine litigation incidental to the Company's business, to which either the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS - ------ ----------------------------------------- None ITEM 3 DEFAULTS UPON SENIOR SECURITIES None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------ --------------------------------------------------- The Registrant held its Annual Meeting of the Stockholders at The Eastern Company, Naugatuck, Connecticut on Wednesday, the twenty-fourth day of April 2002. The matters voted on and the voting results were: <TABLE> <CAPTION> FOR WITHHELD AGAINST ABSTENTION <S> <C> <C> <C> <C> 1) Election of two director for a three-year term expiring in the year 2005. John W. Everets 3,230,275 37,671 Leonard F. Leganza 3,218,909 49,337 Continuing Directors: Donald S. Tuttle III David C. Robinson Charles W. Henry 2) Appointment of Ernst & Young LLP as independent auditors: 3,251,034 12,022 5,189 </TABLE> ITEM 5 OTHER INFORMATION - ------ ----------------- None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- None -11-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE EASTERN COMPANY ------------------- (Registrant) DATE: May 13, 2002 /s/Leonard F. Leganza ------------ --------------------- Leonard F. Leganza President and Chief Executive Officer DATE: May 13, 2002 /s/John L. Sullivan III ------------ ----------------------- John L. Sullivan, III Vice President, Secretary and Treasurer -12-