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 June 28, 1997
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 June 28, 1997
----- -------------------------------
Common Stock, No par value 2,737,135
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<PAGE>
PART I
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
THE EASTERN COMPANY AND SUBSIDIARIES
ITEM I CONSOLIDATED CONDENSED BALANCE SHEET (UNAUDITED)
- ------
ASSETS
June 28, 1997 December 28, 1996
------------- -----------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 1,464,789 $ 2,269,031
Accounts receivable, less allowance: 9,014,446 7,018,961
1997-$633,000; 1996-$567,000
Inventories 12,306,246 10,897,827
Prepaid expenses and other current assets 1,733,413 2,287,155
----------- -------------
Total Current Assets 24,518,894 22,472,974
Property, plant and equipment 26,924,469 25,961,043
Accumulated depreciation (13,400,712) (12,074,420)
----------- ------------
13,523,757 13,886,623
Prepaid pension cost 4,053,199 4,017,397
Other assets, net
2,204,452 2,115,240
----------- ------------
TOTAL ASSETS $44,300,302 $ 42,492,234
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 3,130,980 $ 3,630,980
Accounts payable 2,881,741 2,396,582
Accrued compensation and withholding 1,491,392 859,701
Accrued expenses 1,112,222 823,560
----------- ------------
Total Current Liabilities 8,616,335 7,710,823
Deferred federal income taxes 2,389,800 2,389,800
Long-term debt 91,631 224,415
Accrued postretirement benefits 2,818,577 2,812,690
SHAREHOLDERS' EQUITY
Common Stock, No Par Value:
Authorized Shares - 25,000,000
Issued and outstanding shares: 8,445,842 8,272,614
1997-2,737,135; 1996-2,696,284
(Excluding Shares in Treasury:
1997-639,760; 1996-610,987)
Preferred Stock, No Par Value
Authorized Shares - 2,000,000
(No shares issued)
Unearned compensation (266,563) (200,938)
Retained earnings 22,204,680 21,282,830
----------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $44,300,302 $42,492,234
=========== ============
</TABLE>
See accompanying notes.
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<PAGE>
<TABLE>
<CAPTION>
THE EASTERN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
<S> <C> <C> <C> <C>
June 28, 1997 June 29, 1996 June 28, 1997 June 29, 1996
------------- ------------- ------------- -------------
Net sales $32,853,668 $29,892,588 $16,919,070 $15,351,036
Interest income 69,947 70,530 33,970 33,821
----------- ----------- ----------- -----------
Total 32,923,615 29,963,118 16,953,040 15,384,857
Cost of products sold 24,413,837 24,233,990 12,464,078 12,116,441
----------- ----------- ----------- -----------
8,509,778 5,729,128 4,488,962 3,268,416
Selling and administrative expenses 6,094,355 5,349,975 3,112,386 2,658,140
Interest expense 134,095 73,666 67,788 22,827
----------- ----------- --------- ----------
INCOME BEFORE INCOME TAXES 2,281,328 305,487 1,308,788 587,449
Income taxes 833,965 130,945 475,848 210,746
----------- ----------- --------- ----------
NET INCOME 1,447,363 174,542 832,940 376,703
=========== =========== ========= ==========
Net income per share $ 0.53 $ 0.06 $ 0.30 $ 0.13
Cash dividends per share $ 0.23 $ 0.23 $ 0.115 $ 0.115
Average shares outstanding 2,737,570 2,696,820 2,737,570 2,696,820
See accompanying notes.
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</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE EASTERN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
<S> <C> <C>
June 28, 1997 June 29, 1996
------------- -------------
OPERATING ACTIVITIES:
Net income $ 1,447,363 $ 174,542
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,524,692 1,524,080
Loss (gain) on sale of equipment and other assets 2,335 335
Postretirement benefits other than pensions 5,887 6,000
Provision for losses on accounts receivable 66,047 35,242
Issuance of Common Stock for directors' fees 25,814 --
Changes in operating assets and liabilities:
Accounts receivable (2,071,798) (432,808)
Inventories (1,421,504) 499,270
Prepaid expenses 552,897 12,023
Prepaid pension (35,801) (733,267)
Accounts payable 739,302 (520,783)
Accrued expenses 801,187 1,044,110
Other assets (281,494) (44,421)
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,354,927 1,564,323
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (1,028,524) (1,787,962)
Other 46,429 13,600
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (982,095) (1,774,362)
FINANCING ACTIVITIES:
Payment on line of credit (500,000) --
Proceeds from line of credit -- 1,500,000
Principal payments on long-term debt (128,556) (60,000)
Proceeds from sales of Common Stock 453,529 28,125
Purchases of Common Stock for treasury (371,740) --
Dividends paid (632,651) (620,493)
---------- ----------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (1,179,418) 847,632
Effect of exchange rate changes on cash 2,344 5,247
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (804,242) 642,840
Cash and Cash Equivalents at Beginning of Year 2,269,031 1,521,361
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,464,789 $ 2,164,201
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
<TABLE>
<CAPTION>
THE EASTERN COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
<S> <C> <C> <C> <C>
June 28, 1997 June 29, 1996 June 28, 1997 June 29, 1996
------------- ------------- ------------- -------------
Primary:
Average shares outstanding 2,737,570 2,696,820 2,737,570 2,696,820
Net effect of dilutive stock
options -- based on the
treasury stock method
using average market price 30,792 29,582 30,792 29,582
--------- --------- --------- ---------
Total 2,768,362 2,726,402 2,768,362 2,726,402
========= ========= ========= =========
Net income 1,447,363 174,542 832,940 376,703
========= ========= ========= =========
Net income per share $0.52 $0.06 $0.30 $0.13
========= ========= ========= =========
Fully diluted:
Average shares outstanding 2,737,570 2,696,820 2,737,570 2,696,820
Net effect of dilutive stock
options -- based on the
treasury stock method
using quarter-end market
price, if higher than average
market price 38,091 29,582 38,091 29,582
--------- --------- --------- ---------
Total 2,775,661 2,726,402 2,775,661 2,726,402
========= ========= ========= =========
Net income 1,447,363 174,542 832,940 376,703
========= ========= ========= =========
Net income per share $0.52 $0.06 $0.30 $0.13
========= ========= ========= =========
</TABLE>
See accompanying notes.
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<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 28, 1997
Note A - Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
The accompanying consolidated condensed financial statements are unaudited.
However, in the opinion of the Registrant's management, all adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the results of operations for such interim periods have been reflected
therein.
The condensed balance sheet as of December 28, 1996 has been derived from the
audited financial statements at that date.
Note B - Net Income Per Share
Net income per share of common stock is based on the weighted average number of
shares outstanding during each period (1997- 2,737,570 shares; 1996 - 2,696,820
shares). Common stock equivalents (Stock Options) did not have a material
dilutive effect on net income per share. The computation of net income per share
of common stock on a fully diluted basis did not result in any material dilution
in 1997 or 1996.
For the year ending January 3, 1998 and periods thereafter the Registrant will
be required to adopt FASB Statement No. 128 "Earnings Per Share". The adoption
of this standard in not expected to have a significant impact on earnings per
share.
Note C - Litigation
The Registrant is involved in litigation relating to environmental matters for
which the ultimate outcome is not expected to have any material adverse impact
on financial position, operating results or liquidity. See Part II Item 1 Legal
Proceedings for further information.
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<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Net income for the second quarter of 1997 continued its upward trend with $833
thousand or $.30 per share on sales of $16.9 million versus the second quarter
of 1996 of $377 thousand or $.13 per share on sales of $15.4 million. Net income
for the first six months of 1997 was $1.4 million or $.53 per share on sales of
$32.9 million versus the first six months of 1996 of $175 thousand or $.06 per
share on sales of $29.9 million. Net income for the first half 1997 would have
been 18% higher without expenses incurred in the first quarter of 1997
associated with this year's proxy contest.
Second quarter sales were up 10% compared to the same period a year ago. Volume
was up 6%, while price increases and new products each contributed 2% over the
comparable quarter of 1996. Sales for the first half of 1997 were also up 10%
compared to the same period a year ago. Volume was up 5%, prices were up 3% and
new products were up 2%. New products include vehicular hardware products
produced and designed by Eberhard Manufacturing division and malleable castings
products manufactured by the Frazer & Jones division. Demand for the
Registrant's expansion shells, used in the mining industry, was up 14% for the
first half of 1997 vs the first half of 1996 primarily due to increased business
with Excel Mining Systems, the Country's leading producer of mine roof bolts.
Contract malleable casting sales were up 26% from the comparable six month
period a year ago. Demand for the Registrant's heavy hardware, servicing the
tractor trailer industry, was down 3% from the first half of 1996 with no
significant erosion anticipated for the second half of 1997. Increased business
with independent distributors and original equipment manufacturers of industrial
hardware and vehicular accessories has helped offset the decline in the tractor
trailer industry. Sales of custom locks were up 4% in the second quarter and up
6% for the first half over the comparable period a year ago, and are expected to
increase in the second half as shipments commence on computer lock applications.
Two new PrestoLocks are being offered by our CCL Security division in the second
half of 1997 to the soft luggage markets to further enhance our position in that
market. The Registrant's overall results are expected to show futher improvment
in the second half of 1997.
The Registrant's gross margin as a percentage of sales for the three and six
months ended June 28, 1997 was approximately 26% compared to 21% and 19% for the
comparable periods a year ago. The improvement in gross margin in 1997 for both
the three and six month periods versus the comparable period a year ago is
mainly due to increased sales volume and more efficient utilization of
production facilities.
Selling and administrative expenses were up 17.1% or $454 thousand and up 13.9%
or $744 thousand for the three and six months ended June 28, 1997 as compared to
the same periods a year ago. Selling and administrative expenses expressed as a
percentage of sales for the three and six month periods ended June 28, 1997 were
19% and 18% respectively, versus a year ago of 18% and 17% respectively.
Increases in selling and administrative expenses in the second quarter of 1997
were attributable to increased sales commissions incurred for increased sales
activity by our outside sales representatives, one time charges in connection
with the early retirement of the Company's former Chief Executive Officer and
some increased legal expenses incurred by the Registrant in connection with the
Beacon Heights and Laurel Park landfill suits discussed under legal proceedings
below. Additionally, first half selling and administrative expenses were up due
to defense costs incurred in the first quarter proxy contest.
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<PAGE>
Liquidity and Sources of Capital
Cash flows from operations were $1.355 million for the first half of 1997 versus
$1.564 million in the first half of 1996. The change in cash flows resulted from
timing differences for collections of accounts receivable and payments of
liabilities and an increase in inventory. Cash flow from operations along with
cash generated from the exercise of stock options was sufficient to fund the
Registrant's capital expenditure program, dividend payments and the purchase of
28,773 shares of common stock for treasury.
Additions to property, plant and equipment were $1.0 million during the first
half of 1997 versus $1.8 million for the comparable period a year ago. Total
1997 capital expenditures are expected to be lower than the expected $2.6
million level of depreciation for the year.
Inventory balances at the end of the second quarter of 1997 of $12.3 million
were $1.4 million higher than year end 1996, and $1.0 million higher than the
second quarter of 1996. Inventory turns of 4.0 times at the end of the second
quarter of 1997 was comparable to both the previous year end rate and also the
second quarter of 1996. Accounts receivable at the end of the second quarter
1997 were $9.0 million which was $2.0 million higher than year end and $800
thousand higher than the second quarter of 1996. The average day's sales in
accounts receivable was 48 days at the end of the second quarter 1997 versus 49
days for the comparable period a year ago. The increase in accounts receivable
was driven by growth in sales volume.
During the third quarter of 1997 the Registrant drew down an additional $2.0
million under its short-term line of credit to help fund the purchase of 149,118
shares of common stock for treasury. In addition, the Registrant has extended
its unsecured line of credit from $5 million to $7 million to accommodate
working capital requirements.
Other Matters
On June 24, 1994, the Registrant settled all claims with both the Beacon Heights
Coalition and the Laurel Park Coalition and the respective complaints against
the Registrant on behalf of the Coalitions were dismissed by stipulation. A
final judgement was entered by the US District Court in the consolidated
proceedings on March 17, 1995. Appeals, however, were filed by two government
agencies as described in Part II, Item 1 below.
On November 1, 1996, the United States Court of Appeals for the Second Circuit
reversed the US District Court's ruling dismissing government agencies
environmental claims against the Registrant and certain other defendants, and
the environmental claims by Laurel Park and Beacon Heights Coalitions against
numerous defendants. The Court of Appeals, is expected to remand the case to the
U.S. District Court in Connecticut for further proceedings. See further
description in Part II, Item 1 below.
The Registrant continues to actively monitor the situation. It is management's
opinion that the resolution of these matters will not have a material adverse
effect on the Registrant's financial position, operating results or liquidity.
Note: The preceding information contains statements which reflect the
Registrant's current expectations regarding its future operating performance and
achievements and are subject to certain risks and uncertainties that could cause
actual results to differ materially from those set forth in such statements. The
Registrant is not obligated to update or revise the aforementioned statements
for new developments.
-8-
<PAGE>
PART II
OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS -
In April 1988, Murtha Enterprises Inc. and related parties (collectively
"Murtha"), as the result of a February 1987 suit (docket number N-87-52 PCD)
brought by the U. S. Environmental Protection Agency (the "EPA") and others,
concerning the Beacon Heights and Laurel Park landfills, instituted third-party
actions against approximately 200 companies or individuals including the
Registrant. The underlying suit against Murtha was settled with EPA and the
other parties and the Consent Decree has been approved by the Court.
On September 22, 1988, the EPA filed a complaint against the Registrant and
seven other defendants seeking recovery of present and future response costs
incurred by the United States in connection with the Beacon Heights landfill.
The complaint alleged total damages of approximately $1.8 million ($1.3
million actual and $.5 million future). On October 31, 1988 the court
consolidated the EPA action against the Registrant with the other cases under
docket number N-87-52 (PCD).
By complaint dated September 6, 1990, the Beacon Heights Coalition (the
"Beacon Coalition"), a group of parties who have entered into a consent order
with EPA, instituted a direct action against the Registrant and approximately
400 other named parties concerning the Beacon Heights landfill. The Beacon
Coalition claimed that these defendants generated or transported hazardous
substances disposed of at the Beacon Heights landfill, and are therefore
responsible for a share of the Beacon Coalition's response costs.
The Registrant has filed answers to both the EPA Complaint and the Beacon
Coalition Complaint.
In March 1991, a Laurel Park Coalition which did not include the Registrant
entered into Consent Decree and Administrative Order by Consent with the EPA
and the State of Connecticut to remediate the Laurel Park landfill. The
Consent Decree has been approved by the Court.
In May 1991, EPA and the State of Connecticut ("State") each filed a
complaint against the Registrant and three other defendants seeking recovery
of present and future response costs incurred in connection with the Laurel
Park landfill. The EPA claims costs in excess of $1.8 million and the state
claims costs in excess of $2.5 million. On July 1, 1991, the court
consolidated these actions against the Registrant with the other cases under
docket number N-87-52 (PCD). The Registrant filed answers to both of these
complaints.
By order dated February 8, 1994, the court granted a motion filed by
Registrant for judgement on the pleadings against EPA and the state with
respect to each of their claims against Registrant. By motions dated February
22, 1994 and February 23, 1994, EPA and the state respectively moved for
reconsideration of the court's order, which motions were denied.
By order dated February 8, 1994, the court permitted the Laurel Park
Coalition to file a complaint against eight parties including the Registrant,
which claims were to be assigned for trial if the Coalition files a complaint.
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<PAGE>
On June 24, 1994 , the Registrant settled all claims with both the Beacon
Heights Coalition and the Laurel Park Coalition and the respective complaints
against the Registrant on behalf of the Coalitions were dismissed by
stipulation. No complaints are now pending in the U.S. District Court
involving the Registrant.
On March 17, 1995, the U.S. District Court entered a final judgement in the
consolidated proceedings (docket number N-87-52(PCD)) which included the
granting of Registrant's motion for judgement on the pleadings. As a result of
this judgement, no complaints were then pending in the U.S. District Court
involving the Registrant.
On April 17, 1995, the State filed its notice of appeal from this final
judgement with the U.S. District Court. On May 10, 1995, EPA filed its notice of
appeal from the judgement.
On November 1, 1996 the U.S. Court of Appeals for the Second Circuit
reversed the District Court ruling dismissing EPA and State of Connecticut
environmental claims against the Registrant and environmental claims by the
Laurel Park and Beacon Heights Coalitions against numerous defendants. The Court
of Appeals remanded the case to the U.S. District Court in Connecticut for
further proceedings. The governmental lawsuits, brought after governmental
settlements with the Coalitions, seek to recover remediation costs of the
governments unreimbursed by the Coalition settlements or the settlement with the
owner/operator in connection with the Laurel Park and Beacon Heights landfills.
The EPA has claimed that the Registrant and five other defendants (two corporate
and three individual) are responsible for an aggregate of $3.0 million in
remediation costs with respect to the Beacon Heights landfill and that the
Registrant and one other corporate defendant are responsible for an aggregate of
$2.3 million in remediation costs with respect to the Laurel Park landfill;
Connecticut has claimed that the Registrant and one other defendant are
responsible for an aggregate of $800,000 in remediation costs with respect to
the Laurel Park landfill. The Registrant intends to continue to vigorously
contest any liability relating to these governmental claims. The Registrant
would also pursue its rights of contribution against the other defendants in the
event of any liability, which the Registrant expects would significantly reduce
any liability imposed. In addition, it would file claims against its insurance
carriers.
In its decision, the Second Circuit also reversed the U.S. District Court's
dismissal of numerous actions brought by the Beacon Heights and Laurel Park
Coalitions against non-settling parties. These Coalitions assumed full
responsibility for cleaning up the two landfill sites and, as noted above, the
Registrant has settled with both Coalitions with respect to liability at these
sites in 1994. It is believed that many of the defendants in the pending
Coalition actions and certain other persons who have not been sued by the
governments have a responsibility for remediation cost and may be brought into
these actions as co-defendants with the Registrant. The Registrant intends to
resist the EPA and State claims and if necessary bring these other persons into
the action to share the costs of reimbursements to the governments if ultimately
imposed.
After rejecting motions for rehearing, the Court of Appeals returned the
cases to the US District Court. On July 21, 1997, the District Court issued an
order appointing a Special Master to mediate, find facts if necessary and report
back to the court within six months as to all remaining claims for contribution.
The Registrant is actively participating in this process as it pertains to the
EPA and State Claims against the Registrant and the Registrant's contribution
rights against third-party defendants.
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<PAGE>
The Registrant will continue to vigorously pursue its legal interest in this
matter. The Registrant believes that these actions will not have a materially
adverse impact on the Registrant's consolidated financial position, operating
results or liquidity.
There are no other material legal proceedings, other than ordinary routine
litigation incidental to the business, to which either the Registrant or any of
its subsidiaries is a party of or which any of their property is the subject.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------ ---------------------------------------------------
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
B. Reports on form 8-K
None
-11-
<PAGE>
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: August 11, 1997 /s/ Leonard F. Leganza
----------------------------------------
Leonard F. Leganza
President and Chief Executive Officer
DATE: August 11, 1997 /s/ Donald E. Whitmore, Jr.
----------------------------------------
Donald E. Whitmore, Jr., Executive Vice
President and Chief Financial Officer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> JUN-28-1997
<CASH> 1464789
<SECURITIES> 0
<RECEIVABLES> 9014446
<ALLOWANCES> 633000
<INVENTORY> 12306246
<CURRENT-ASSETS> 24518894
<PP&E> 26924469
<DEPRECIATION> 13400712
<TOTAL-ASSETS> 44300302
<CURRENT-LIABILITIES> 8616335
<BONDS> 0
0
0
<COMMON> 8445842
<OTHER-SE> 21938117
<TOTAL-LIABILITY-AND-EQUITY> 44300302
<SALES> 32853668
<TOTAL-REVENUES> 32923615
<CGS> 24413837
<TOTAL-COSTS> 24413837
<OTHER-EXPENSES> 6048765
<LOSS-PROVISION> 66047
<INTEREST-EXPENSE> 134095
<INCOME-PRETAX> 2281328
<INCOME-TAX> 833965
<INCOME-CONTINUING> 1447363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1447363
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
