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 APRIL 4, 1998
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 APRIL 4, 1998
----- -------------------------------
Common Stock, No par value 2,425,849
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<PAGE>
PART I
<TABLE>
<CAPTION>
FINANCIAL INFORMATION
THE EASTERN COMPANY AND SUBSIDIARIES
ITEM I CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
ASSETS
April 4, 1998 January 3, 1998
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CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 2,240,287 $ 2,111,289
Accounts receivable, less allowance:
1998- $362,000; 1997- $329,000 10,333,697 8,725,167
Inventories 12,588,746 12,414,866
Prepaid expenses and other current assets 2,243,807 2,846,557
------------ ------------
Total Current Assets 27,406,537 26,097,879
Property, plant and equipment 26,170,017 25,434,424
Accumulated depreciation (12,614,629) (11,997,894)
------------ ------------
13,555,388 13,436,530
Prepaid pension cost 4,218,530 4,217,604
Other assets, net 1,960,659 2,046,148
------------ ------------
TOTAL ASSETS $ 47,141,114 $ 45,798,161
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 3,608,268 $ 3,663,662
Accounts payable 8,092,327 3,499,857
Accrued compensation and withholding 1,806,117 1,413,418
Other accrued expenses 2,709,594 2,662,088
------------ ------------
Total Current Liabilites 16,216,306 11,239,025
Deferred federal income taxes 2,492,200 2,492,200
Long-term debt 60,000 60,000
Accrued postretirement benefits 2,766,795 2,763,795
Shareholders' Equity
Common Stock, No Par Value:
Authorized Shares - 25,000,000
Issued and outstanding shares:
1998-2,425,849; 1997-2,593,089 1,591,930 6,078,427
(Excluding shares in Treasury:
1998-1,012,335; 1997-831,780)
Preferred Stock, No Par Value
Authorized shares - 2,000,000
(No shares issued)
Unearned compensation (548,906) (492,969)
Accumulated translation adjustment (607,069) (563,211)
Retained earnings 25,169,858 24,220,894
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 47,141,114 $ 45,798,161
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
<TABLE>
<CAPTION>
THE EASTERN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
<S> <C> <C>
April 4, 1998 March 29, 1997
------------- --------------
Net sales $ 18,411,956 $ 15,934,598
Interest income 23,444 35,977
------------ ------------
Total 18,435,400 15,970,575
Cost of products sold 13,481,567 11,949,759
------------ ------------
4,953,833 4,020,816
Selling and administrative expenses 2,924,369 2,981,969
Interest expense 75,570 66,307
------------ ------------
INCOME BEFORE INCOME TAXES 1,953,894 972,540
Income taxes 663,797 358,117
------------ ------------
NET INCOME $ 1,290,097 $ 614,423
============ ============
Net income per share:
Basic $ 0.50 $ 0.23
Diluted $ 0.49 $ 0.22
Cash dividends per share $ 0.130 $ 0.115
</TABLE>
See accompanying notes.
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<PAGE>
<TABLE>
<CAPTION>
THE EASTERN COMPANY AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
<S> <C> <C>
April 4, 1998 March 29, 1997
------------- --------------
OPERATING ACTIVITIES:
Net income $ 1,290,097 $ 614,423
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 763,799 659,864
Postretirement benefits other than pensions 3,000 2,943
Provision for losses on accounts receivable 32,404 17,500
Issuance of Common Stock for directors' fees 17,807 -
Changes in operating assets and liabilities:
Accounts receivable (1,218,677) (1,627,285)
Inventories (191,730) (587,000)
Prepaid expenses 176,140 370,489
Prepaid pension (926) (38,534)
Accounts payable 4,590,391 686,337
Accrued expenses 447,502 638,191
Other assets (7,187) 84,033
------------ -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,902,620 820,961
INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (795,462) (538,062)
Other 3,634 38,256
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES (791,828) (499,806)
FINANCING ACTIVITIES:
Payment on short term debt - (500,000)
Principal payments on long-term debt and notes payable (60,000) (60,000)
Proceeds from sales of Common Stock 93,750 453,528
Purchases of Common Stock for treasury (4,673,678) -
Dividends paid (338,446) (317,880)
------------ ------------
NET CASH USED BY FINANCING ACTIVITIES (4,978,374) (424,352)
Effect of exchange rate changes on cash (3,420) 1,942
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 128,998 (101,255)
Cash and Cash Equivalents at Beginning of Year 2,111,289 2,269,031
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,240,287 $ 2,167,776
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
<TABLE>
<CAPTION>
THE EASTERN COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNADUITED)
THREE MONTHS ENDED
<S> <C> <C>
April 4, 1998 March 29, 1997
------------- --------------
Net income 1,290,097 614,423
Other comprehensive (loss) income:
Foreign currency translation (43,858) 15,737
--------- -------
Comprehensive income 1,246,239 630,160
========= =======
</TABLE>
See accompanying notes.
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<PAGE>
THE EASTERN COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
April 4, 1998
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
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 such interim periods have been reflected therein.
The condensed balance sheet as of January 3, 1998 has been derived from the
audited financial statements at that date.
Note B - Earnings Per Share
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<CAPTION>
The denominators used in the earnings per share computations follow:
<S> <C> <C>
April 4,1998 March 29, 1997
------------ --------------
Basic:
Weighted average shares outstanding 2,591,755 2,754,888
Contingent shares outstanding (32,500) (22,500)
----------- -----------
Denominator for basic earnings per share 2,559,255 2,732,388
Diluted:
Weighted average shares outstanding 2,591,755 2,754,888
Contingent shares outstanding (32,500) (22,500)
Dilutive stock options 89,874 29,349
---------- -----------
Denominator for diluted earnings per share 2,649,129 2,761,737
</TABLE>
Note C - Changes in Accounting Principles
- -----------------------------------------
Effective January 4, 1998, The Eastern Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". The adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Under SFAS 130 the Company's foreign currency translation adjustments,
which are reported separately in shareholders' equity, are also required to be
included in the determination of other comprehensive income or loss. The prior
year financial statements have been reclassified to conform to the requirements
of SFAS 130.
Note D - 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
Eastern's first quarter 1998 net income more than doubled to a record $1.3
million or $.50 per share on sales of $18.4 million as compared to net income in
the first quarter of 1997 of $614 thousand or $.23 per share on sales of $15.9
million. This represents the fifth consecutive quarter of improved earnings
reaffirming Eastern's continued strength in its core businesses and improved
manufacturing efficiency. Management's belief in Eastern's continued growth is
evidenced by the positive first quarter performance and resulted in the Board
of Directors increasing the Company's quarterly dividend payout 15% from $.13
to $.15 payable June 15, 1998 to stockholders of record as of May 29, 1998.
This represents the second dividend increase to shareholders in the past six
months and also reaffirms Eastern's primary goal of increasing shareholder
value.
The first quarter 1998 net sales increased 16% or $2.5 million compard to the
first quarter of 1997. Sales volume was up 11% while price increases and new
products contributed 2% and 3% respectively. Sales growth was up across all
product lines. Sales of custom locks were up 22% over the prior year. Increased
business in the automotive accessories market where the Registrant's
Eberhard Manufacturing division produces several key-locking devices used to
secure access to toolboxes, typically seen located in the front of the cargo
bed of pick-up trucks, were up significantly over the same period a year ago.
Heavy locks sold to the tractor trailer industry were up 15% over the comparable
period a year ago. Sales volume to the mining industry also increased 10% over
the comparable period a year ago as the Registrant fulfills its long-term supply
agreement entered into in August 1996 with Excel Mining System, the country's
largest manufacturer of mine roof bolts. New products include contract castings
offered by the Frazer & Jones Division as well as various custom engineered
vehicular accessory products offered by the Eberhard Manufacturing Division.
Gross margin as a percentage of sales for the three months ended April 4, 1998
was 27% compared to 25% for the same period a year ago. Despite increased
payroll costs associated with higher employment levels, all of Eastern's
divisions and subsidiaries reported improved gross margins. The improved gross
margin is attributable to fuller use of productive and capacity and improved
sales prices.
Selling and administrative expenses were down $58 thousand as compared to
the same period a year ago. Expressed as a percent of sales, selling and
administrative expenses were 15.9% versus 18.7% for the comparable period a year
ago. However, prior year selling and administrative expenses included one time
charges incurred as the result of proxy contest. Without those charges, first
quarter 1998 selling and administrative expenses would have been up 9% or $280
thousand over the comparable period in 1997. This increase is attributable
to increased selling commission expenses and incentive compensation payments
both directly related to increased sales and profitability.
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<PAGE>
Liquidity and Sources of Capital
Cash flows from operations were $5.9 million for the first quarter of 1998
versus $821 thousand in the first quarter of 1997. Changes in cash flow from
operations in the first quarter of 1998 includes $4.6 million accounts
payable for the purchase of 178,400 shares of the Registrant's common stock
for the treasury. Subsequent to the close of the first quarter, the Registrant
borrowed $5 million against its short-term line of credit for the aforementioned
stock purchase and other working capital requirements. Cash generated from
operations of $1.3 million was sufficient to fund the Registrant's capital
expenditure program and make its 230th consecutive quarterly dividend payment to
shareholders.
Inventory balances at the end of the first quarter of 1998 of $12.6 million were
$174 thousand higher than year end 1997, and $1.1 million higher than the first
quarter of 1997. Inventory turns of 4.3 times at the end of the first quarter of
1998 was slightly higher than the previous year end rate and also the first
quarter of 1997. Current inventory levels are adequate to meet customer
requirements. However the Registrant anticipates some increase in inventory
levels because of increased sales activity. Accounts receivable increased by
$1.6 million, compared to year end 1997; this increase was driven by the growth
in sales volume. The average day's sales in accounts receivable for the first
quarter of 1998 was 51 days; this compares to a level of 49 days for the
comparable period a year ago.
Additions to property, plant and equipment were $792 thousand during the first
three months of 1998 versus $500 thousand for the comparable period a year ago.
Total 1998 capital expenditures are expected to exceed the $2.6 million level of
depreciation for the year.
The Registrant has a $10 million line of credit of which $8.5 million has been
utilized. The Registrant's strong balance sheet and internal cash flow
generation should be sufficient to cover future 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. Claims
against the Registrant and certain other defendants filed by the two government
agencies as described in Part II, item 1 below were dismissed by the Court. A
final judgement was entered by the U. S. District Court in the consolidated
proceedings on March 17, 1995. Appeals, however, were filed by the 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 U.S. District Court's ruling dismissing the government agencies'
environmental claims against the Registrant and certain other defendants, and
the environmental claims by the Laurel Park and Beacon Heights Coalitions
against numerous defendants 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.
-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 judgment 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.
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.
-9-
<PAGE>
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 two other corporate defendants are
responsible for an aggregate of $3.1 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 $.8
million 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 claims and if necessary bring these other persons into the action
to share the costs of reimbursements to the government 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 Claims against the Registrant and the Registrant's contribution rights
against the United States and third-party defendants. In January 1998, the
Registrant entered into a proposed consent decree with the State which was
approved by the court.
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 significant 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.
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<PAGE>
ITEM 2 CHANGES IN SECURITIES
- ------ ---------------------
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-second day of April,
1998. The matters voted on and the voting results were:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
FOR WITHHELD AGAINST ABSTENTION
1) Election of two directors
for three year terms expiring in
the year 2001.
Charles W. Henry 2,365,449 45,326
Donald E. Whitmore, Jr, 2,395,535 15,240
Continuing Directors:
John W. Everets
Leonard F. Leganza
Russell G. McMillen
David C. Robinson
Donald S. Tuttle III
2) Approval of Ernst & Young LLP
as independent auditors: 2,406,859 1,070 2,846
</TABLE>
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<PAGE>
ITEM 5 OTHER INFORMATION -
- ------- -----------------
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
None
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 19, 1998 /s/Leonard F. Leganza
------------ ---------------------
Leonard F. Leganza
President and Chief Executive Officer
DATE: May 19, 1998 /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> 3-MOS
<FISCAL-YEAR-END> JAN-3-1998
<PERIOD-END> APR-4-1998
<CASH> 2240287
<SECURITIES> 0
<RECEIVABLES> 10333697
<ALLOWANCES> 362000
<INVENTORY> 12588746
<CURRENT-ASSETS> 27406537
<PP&E> 26170017
<DEPRECIATION> 12614629
<TOTAL-ASSETS> 47141114
<CURRENT-LIABILITIES> 16216306
<BONDS> 0
0
0
<COMMON> 1591930
<OTHER-SE> 24013883
<TOTAL-LIABILITY-AND-EQUITY> 47141114
<SALES> 18411956
<TOTAL-REVENUES> 18435400
<CGS> 13481567
<TOTAL-COSTS> 13481567
<OTHER-EXPENSES> 2891965
<LOSS-PROVISION> 32404
<INTEREST-EXPENSE> 75570
<INCOME-PRETAX> 1953894
<INCOME-TAX> 663797
<INCOME-CONTINUING> 1290097
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1290097
<EPS-PRIMARY> .50
<EPS-DILUTED> .49
</TABLE>
