UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED July 1, 2006
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
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THE EASTERN COMPANY
-------------------
(Exact name of registrant as specified in its charter)
Connecticut 06-0330020
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
112 Bridge Street, Naugatuck, Connecticut 06770
----------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(203) 729-2255
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of July 1, 2006
----- -------------------------------
Common Stock, No par value 3,651,499
-1-
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS July 1, 2006 December 31, 2005
------ ------------ -----------------
Current Assets
Cash and cash equivalents $ 2,739,441 $ 6,345,947
Accounts receivable, less allowances: $294,000 - 2006; $295,000 - 2005 16,111,181 14,825,014
Inventories 23,613,634 20,767,749
Prepaid expenses and other assets 2,171,782 2,391,125
Deferred income taxes 715,321 715,321
------------- -------------
Total Current Assets 45,351,359 45,045,156
Property, Plant and Equipment 45,024,413 42,468,773
Accumulated depreciation (21,765,757) (20,072,087)
------------- -------------
23,258,656 22,396,686
Goodwill 10,691,280 10,641,532
Trademarks 126,392 103,498
Patents, technology, and licenses, less accumulated amortization 1,952,362 1,946,502
Interest rate swap asset 167,725 32,081
Intangible pension asset 732,554 732,554
Prepaid pension cost 744,928 723,826
------------- -------------
14,415,241 14,179,993
------------- -------------
TOTAL ASSETS $ 83,025,256 $ 81,621,835
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 6,744,299 $ 5,599,260
Accrued compensation 1,293,321 1,527,640
Other accrued expenses 3,310,520 3,275,159
Current portion of long-term debt 3,449,066 3,420,523
------------- -------------
Total Current Liabilities 14,797,206 13,822,582
Deferred income taxes 944,106 895,019
Long-term debt, less current portion 10,713,824 12,384,338
Accrued post-retirement benefits 1,980,971 2,078,056
Accrued pension cost 6,369,834 6,270,075
Shareholders' Equity
Preferred Stock, no par value: Authorized and unissued 2,000,000 shares
Common Stock, no par value: Authorized: 25,000,000 shares
Issued: 5,340,225 shares in 2006 and 5,328,417 shares in 2005 17,937,001 17,694,851
Treasury Stock: 1,688,726 shares (16,655,041) (16,655,041)
Retained earnings 51,853,544 50,335,658
Accumulated other comprehensive income (loss):
Foreign currency translation 1,019,523 818,566
Additional minimum pension liability, net of taxes (6,042,553) (6,042,553)
Derivative financial instruments, net of taxes 106,841 20,284
------------- -------------
Accumulated other comprehensive loss (4,916,189) (5,203,703)
------------- -------------
Total Shareholders' Equity 48,219,315 46,171,765
------------- -------------
TOTAL LIBILITIES AND SHAREHOLDERS' EQUITY $ 83,025,256 $ 81,621,835
============= =============
See accompanying notes.
-2-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months Ended Three Months Ended
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Net sales $ 57,529,342 $ 53,688,878 $ 29,669,159 $ 27,421,294
Cost of products sold (44,570,597) (41,766,852) (23,194,158) (20,969,162)
-------------- -------------- -------------- --------------
Gross margin 12,958,745 11,922,026 6,475,001 6,452,132
Selling and administrative expenses (8,722,668) (8,547,685) (4,261,200) (4,493,691)
-------------- -------------- -------------- --------------
Operating profit 4,236,077 3,374,341 2,213,801 1,958,441
Interest expense (471,101) (523,257) (231,525) (276,315)
Other income 47,630 23,672 17,707 16,170
-------------- -------------- -------------- --------------
Income before income taxes 3,812,606 2,874,756 1,999,983 1,698,296
Income taxes 1,456,284 1,060,785 787,426 614,907
-------------- -------------- -------------- --------------
Net income $ 2,356,322 $ 1,813,971 $ 1,212,557 $ 1,083,389
============== ============== ============== ==============
Earnings per Share:
Basic $ .65 $ .50 $ .33 $ .30
======= ======= ======= =======
Diluted $ .61 $ .47 $ .31 $ .28
======= ======= ======= =======
Cash dividends per share: $ .23 $ .22 $ .12 $ .11
See accompanying notes.
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Six Months Ended Three Months Ended
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Net income $ 2,356,322 $ 1,813,971 $ 1,212,557 $ 1,083,389
Other comprehensive income/(loss) -
Change in foreign currency translation 200,957 (34,320) 122,476 7,760
Change in fair value of derivative
financial instruments, net of
income taxes of:
2006 - ($49,087) and ($17,925)
respectively 86,557 - 33,379 -
2005 - ($64,000) and ($23,000)
respectively - 96,417 - 60,948
------------- ------------- ------------- -------------
287,514 62,097 155,855 68,708
------------- ------------- ------------- -------------
Comprehensive income $ 2,643,836 $ 1,876,068 $ 1,368,412 $ 1,152,097
============= ============= ============= =============
See accompanying notes.
-3-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
July 1, 2006 July 2, 2005
------------ -------------
Operating Activities
Net income $ 2,356,322 $ 1,813,971
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,736,285 1,782,112
Provision for doubtful accounts 3,464 5,022
Deferred income taxes - 192,439
Issuance of Common Stock for directors' fees 38,451 51,417
Changes in operating assets and liabilities:
Accounts receivable (1,289,683) (1,815,594)
Inventories (2,870,071) 92,969
Prepaid expenses and other 213,018 208,669
Prepaid pension cost 78,656 (698,422)
Other assets (84,492) (111,545)
Accounts payable 1,434,903 752,789
Accrued compensation (161,194) (1,198,515)
Other accrued expenses (347,850) (440,349)
------------ ------------
Net cash provided by operating activities 1,107,809 634,963
Investing Activities
Purchases of property, plant and equipment (2,364,583) (920,031)
Proceeds from sale of equipment 15,035 -
------------ ------------
Net cash used in investing activities (2,349,548) (920,031)
Financing Activities
Principal payments on long-term debt (1,710,919) (2,203,599)
Proceeds from revolving credit loan - 3,000,000
Proceeds from sales of Common Stock 203,700 -
Dividends paid (838,436) (799,795)
------------ ------------
Net cash used in financing activities (2,345,655) (3,394)
Effect of exchange rate changes on cash (19,112) 6,298
------------ ------------
Net change in cash and cash equivalents (3,606,506) (282,164)
Cash and cash equivalents at beginning of period 6,345,947 4,420,506
------------ ------------
Cash and cash equivalents at end of period $ 2,739,441 $ 4,138,342
============ ============
See accompanying notes.
-4-
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 1, 2006
Note A - Basis of Presentation
------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements. Refer to the
Company's consolidated financial statements and notes thereto included in its
Form 10-K for the year ended December 31, 2005 for additional information.
The accompanying condensed consolidated financial statements are unaudited.
However, in the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for interim periods have been reflected therein. All intercompany
accounts and transactions are eliminated. Operating results for interim periods
are not necessarily indicative of the results that may be expected for the full
year.
Certain prior period amounts have been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income.
The condensed consolidated balance sheet as of December 31, 2005 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:
Six Months Ended Three Months Ended
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Basic:
Denominator for basic earnings per share 3,646,915 3,635,546 3,650,703 3,636,100
Diluted:
Weighted average shares outstanding 3,646,915 3,635,546 3,650,703 3,636,100
Dilutive stock options 223,587 240,690 230,925 248,959
--------- --------- --------- ---------
Denominator for diluted earnings per share 3,870,502 3,876,236 3,881,628 3,885,059
========= ========= ========= =========
Note C - Inventories
--------------------
The components of inventories follow:
July 1, 2006 December 31, 2005
------------ -----------------
Raw materials and component parts $11,287,317 $ 9,917,792
Work in process 5,313,068 4,681,623
Finished Goods 7,013,249 6,168,334
----------- -----------
$23,613,634 $20,767,749
=========== ===========
-5-
Note D - Segment Information
----------------------------
Segment financial information follows:
SIX MONTHS ENDED THREE MONTHS ENDED
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Revenues:
Sales to unaffiliated customers:
Industrial Hardware $ 27,348,308 $ 26,837,746 $ 14,468,868 $ 13,817,476
Security Products 23,505,178 21,233,164 11,895,829 11,211,588
Metal Products 6,675,856 5,617,968 3,304,462 2,392,230
------------ ------------ ------------ ------------
$ 57,529,342 $ 53,688,878 $ 29,669,159 $ 27,421,294
============ ============ ============ ============
Income Before Income Taxes:
Industrial Hardware $ 2,198,731 $ 2,646,857 $ 1,187,819 $ 1,341,197
Security Products 2,421,964 1,885,274 1,270,298 1,004,870
Metal Products (384,618) (1,157,790) (244,316) (387,626)
------------ ------------ ------------ ------------
Operating Profit 4,236,077 3,374,341 2,213,801 1,958,441
Interest expense (471,101) (523,257) (231,525) (276,315)
Other income 47,630 23,672 17,707 16,170
------------ ------------ ------------ ------------
$ 3,812,606 $ 2,874,756 $ 1,999,983 $ 1,698,296
============ ============ ============ ============
Note E - Recent Accounting Pronouncements
-----------------------------------------
The Company adopted FASB Statement of Financial Accounting Standards ("SFAS")
No. 123 (revised 2004), Share-Based Payment, using the modified prospective
method effective January 1, 2006. No stock options were granted in the first six
months of 2006 and, as all stock options outstanding at December 31, 2005 were
fully vested, the adoption of SFAS No. 123(R) had no impact on the Company's
consolidated financial statements.
The following table approximates the effect on net income and earnings per
share if the Company had applied SFAS No. 123(R) for the periods ended July 2,
2005 and had adopted this statement on January 2, 2005:
SIX MONTHS THREE MONTHS
ENDED ENDED
July 2, 2005 July 2, 2005
------------ ------------
Net income, as reported $1,813,971 $1,083,389
Deduct: Total stock-based employee
-------
compensation expense determined
under fair value based method for all
awards granted, net of related tax
effects (876) (438)
---------- ----------
Pro forma net income $1,813,095 $1,082,951
========== ==========
Earnings per share:
Basic-as reported $0.50 $0.30
Basic-pro forma $0.50 $0.30
Diluted-as reported $0.47 $0.28
Diluted-pro forma $0.47 $0.28
-6-
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the stock options' vesting period ranging
from 1 to 5 years. The pro forma effect on net income and related earnings per
share may not be representative of future years' impact since the terms and
conditions of new grants may vary from the current terms.
The Company adopted SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4, effective January 1, 2006. The amendments made by SFAS No. 151
clarify that abnormal amounts of idle facility expense, freight, handling costs,
and wasted materials (spoilage) should be recognized as current-period charges
and require the allocation of fixed production overheads to inventory based on
the normal capacity of the production facilities. The adoption of SFAS No. 151
did not have a material impact on the consolidated financial statements of the
Company.
The Company adopted SFAS No. 154, Accounting Changes and Error Corrections--a
replacement of APB Opinion No. 20 (Accounting Changes) and FASB Statement No. 3
(Reporting Accounting Changes in Interim Financial Statements), effective
January 1, 2006. SFAS No. 154 provides guidance on accounting for and
reporting of accounting changes and error corrections. It requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the specific period effects or the
cumulative effect of the change. The adoption of SFAS No. 154 did not have a
material impact on the Company's consolidated financial statements.
Note F - Debt
-------------
On March 8, 2006, the Company signed a capital lease in the amount of $68,948
with Citicorp Vendor Finance for the purchase of new lighting equipment at its
Greenwald facility in Chester, Connecticut. The lease has a three year term at
0% interest rate. Payments under the lease are $1,915 per month.
Note G - Goodwill
-----------------
The following is a roll-forward of goodwill from year-end 2005 to the end of the
second quarter 2006:
Beginning balance - December 31, 2005 $ 10,641,532
Foreign exchange 49,748
------------
Ending balance - July 1, 2006 $ 10,691,280
============
Note H - Retirement Benefit Plans
---------------------------------
The Company has non-contributory defined benefit pension plans covering certain
U.S. employees. Plan benefits are generally based upon age at retirement, years
of service and, for its salaried plan, the level of compensation. The Company
also sponsors unfunded nonqualified supplemental retirement plans that provide
certain current and former officers with benefits in excess of limits imposed by
federal tax law. The measurement date for the obligations disclosed below is
September 30 of each year.
The Company also provides health care and life insurance for retired salaried
employees in the United States who meet specific eligibility requirements.
-7-
Significant disclosures relating to these benefit plans for the second quarter
and first six months of Fiscal 2006 and 2005 follow:
Pension Benefits
----------------
Six Months Ended Three Months Ended
-------------------------------- --------------------------------
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Service cost $ 800,332 $ 673,680 $ 398,875 $ 336,840
Interest cost 1,166,466 1,113,211 545,892 566,606
Expected return on plan assets (1,512,097) (1,358,011) (756,048) (679,005)
Net amortization and deferral 299,288 193,686 149,643 96,843
---------- ---------- ---------- ----------
Net periodic benefit cost $ 753,989 $ 622,566 $ 338,362 $ 321,284
========== ========== ========== ==========
Post-retirement Benefits
------------------------
Six Months Ended Three Months Ended
-------------------------------- --------------------------------
July 1, 2006 July 2, 2005 July 1, 2006 July 2, 2005
------------ ------------ ------------ ------------
Service cost $ 43,282 $ 43,358 $ 21,641 $ 21,679
Interest cost 52,112 59,204 26,056 29,720
Expected return on plan assets (43,252) (39,594) (21,626) (19,521)
Net amortization and deferral (41,758) (38,801) (20,879) (19,064)
---------- ---------- ---------- ----------
Net periodic benefit cost $ 10,384 $ 24,167 $ 5,192 $ 12,814
========== ========== ========== ==========
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. For 2005, the Company was required to contribute $1,403,000 into
its salaried plan ($600,000 contributed as of July 1, 2006) and $266,000 into
one of its hourly plans ($208,000 contributed as of July 1, 2006). The Company
will make the remaining contributions prior to filing its federal income tax
return on September 15, 2006. The required contributions for 2006 have not yet
been determined by the Company's actuaries. Any required contribution will be
paid prior to filing its federal tax return on September 15, 2007.
The Company has a contributory savings plan under Section 401(k) of the Internal
Revenue Code covering substantially all U.S. non-union employees. The plan
allows participants to make voluntary contributions of up to 100% of their
annual compensation on a pretax basis, subject to IRS limitations. The plan
provides for contributions by the Company at its discretion. The Company made
contributions of $43,910 and $86,153 in the second quarter and first six months
of 2006, respectively, and $42,313 and $82,713 in the second quarter and first
six months of 2005, respectively.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is intended to highlight significant changes in the
Company's financial position and results of operations for the twenty-six weeks
ended July 1, 2006. The interim financial statements and this Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto for the fiscal year ended December 31, 2005 and the related Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005.
Certain statements set forth in this discussion and analysis of financial
condition and results of operations are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. They use such
words as "may," "will," "expect," "believe," "plan" and other similar
terminology. These statements reflect management's current expectations
regarding future events and operating performance and speak only as of the date
of this release. These forward-looking statements involve a number of risks and
uncertainties and actual future results and trends may differ materially
depending on a variety of factors including changing customer preferences, lack
of success of new products, loss of customers, competition, increased raw
material prices, problems associated with foreign sourcing of parts and
products, changes within our industry segments, in the overall economy,
litigation and legislation. In addition, terrorist threats and the possible
responses by the U.S. government, the effects on consumer demand, the financial
-8-
markets, the travel industry, the trucking industry and other conditions
increase the uncertainty inherent in forward-looking statements. Forward-looking
statements reflect the expectations of the Company at the time they are made,
and investors should rely on them only as expressions of opinion about what may
happen in the future and only at the time they are made. The Company undertakes
no obligation to update any forward-looking statement. Although the Company
believes it has an appropriate business strategy and the resources necessary for
its operations, future revenue and margin trends cannot be reliably predicted
and the Company may alter its business strategies to address changing
conditions.
In addition, the Company makes estimates and assumptions that may materially
affect reported amounts and disclosures. These relate to valuation allowances
for accounts receivable and for excess and obsolete inventories, accruals for
pensions and other postretirement benefits (including forecasted future cost
increases and returns on plan assets), provisions for depreciation (estimating
useful lives), and, on occasion, accruals for contingent losses.
OVERVIEW
Net sales for the second quarter of 2006 increased 8% to $29.7 million from
$27.4 million in the second quarter of 2005. Second quarter net income increased
12% to $1.2 million, or $0.31 per diluted share, from $1.1 million, or $0.28 per
diluted share.
Net sales for the first six months of 2006 increased 7% to $57.5 million from
$53.7 million in the first six months of 2005. Net income increased 30% to $2.4
million, or $0.61 per diluted share, from $1.8 million, or $0.47 per diluted
share.
Raw material prices have increased sharply during the first half of 2006, mainly
in zinc, brass and stainless steel. The Company is recovering these increases
from our customers, wherever possible. Currently, there is no indication that
the Company will not be able to obtain supplies of all the materials that it
requires.
Cash flow from operations in the first six months of 2006 has improved compared
to the same period in 2005. The Company's line of credit, along with controlling
discretionary expenditures, should provide sufficient cash flow to enable the
Company to meet all its existing obligations.
A more detailed analysis of the Company's results of operations and financial
condition follows:
RESULTS OF OPERATIONS
The following table shows, for the second quarter of 2006 and 2005, selected
line items from the condensed consolidated statements of income as a percentage
of net sales, by segment:
Three Months Ended July 1, 2006
-------------------------------
Industrial Security Metal
Hardware Products Products Total
---------- -------- -------- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 78.3% 72.6% 97.6% 78.2%
Gross margin 21.7% 27.4% 2.4% 21.8%
Selling and administrative expense 13.4% 16.8% 9.8% 14.3%
Operating profit 8.3% 10.6% -7.4% 7.5%
Three Months Ended July 2, 2005
-------------------------------
Industrial Security Metal
Hardware Products Products Total
---------- -------- -------- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 75.2% 72.1% 104.1% 76.5%
Gross margin 24.8% 27.9% -4.1% 23.5%
Selling and administrative expense 15.0% 19.0% 12.1% 16.4%
Operating profit 9.8% 8.9% -16.2% 7.1%
-9-
The following table shows the amount of change from the second quarter of 2005
to the second quarter of 2006 in sales, cost of products sold, gross margin,
selling and administrative expenses and operating profit, by segment (dollars in
thousands):
Industrial Security Metal
Hardware Products Products Total
---------- -------- -------- -----
Net sales $ 651 $ 685 $ 912 $ 2,248
Volume 2.9% 5.4% 28.1% 6.1%
Prices 0.0% 0.3% 0.0% 0.1%
New Products 1.8% 0.4% 10.0% 2.0%
--- --- ---- ---
4.7% 6.1% 38.1% 8.2%
Cost of products sold $ 938 $ 551 $ 736 $ 2,225
9.0% 6.8% 29.6% 10.6%
Gross margin $ (287) $ 134 $ 176 $ 23
-8.4% 4.3% 179.8% 0.4%
Selling and administrative
expenses $ (134) $ (131) $ 33 $ (232)
-6.4% -6.2% 11.4% -5.2%
Operating profit $ (153) $ 265 $ 143 $ 255
-11.4% 26.4% 37.0% 13.0%
The following table shows, for the first six months of 2006 and 2005, selected
line items from the condensed consolidated statements of income as a percentage
of net sales, by segment:
Six Months Ended July 1, 2006
-----------------------------
Industrial Security Metal
Hardware Products Products Total
---------- -------- -------- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 77.2% 72.5% 96.0% 77.5%
Gross margin 22.8% 27.5% 4.0% 22.5%
Selling and administrative expense 14.8% 17.1% 9.7% 15.2%
Operating profit 8.0% 10.4% -5.7% 7.3%
Six Months Ended July 2, 2005
-----------------------------
Industrial Security Metal
Hardware Products Products Total
---------- -------- -------- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 75.1% 72.5% 110.6% 77.8%
Gross margin 24.9% 27.5% -10.6% 22.2%
Selling and administrative expense 15.1% 18.6% 10.0% 15.9%
Operating profit 9.8% 8.9% -20.6% 6.3%
-10-
The following table shows the amount of change from the first six months of 2006
compared to the first six months of 2005 in sales, cost of products sold, gross
margin, selling and administrative expenses and operating profit, by segment
(dollars in thousands):
Industrial Security Metal
Hardware Products Products Total
---------- -------- -------- -----
Net sales $ 510 $ 2,272 $ 1,058 $ 3,840
Volume -2.1% 9.7% 12.6% 4.1%
Prices 0.0% 0.2% 0.6% 0.2%
New Products 4.0% 0.7% 5.6% 2.9%
--- --- --- ---
1.9% 10.7% 18.8% 7.2%
Cost of products sold $ 957 $ 1,651 $ 195 $ 2,803
4.8% 10.7% 3.1% 6.7%
Gross margin $ (447) $ 621 $ 863 $ 1,037
-6.7% 10.7% 144.5% 8.7%
Selling and administrative
expenses $ 2 $ 84 $ 89 $ 175
0.0% 2.1% 15.9% 2.0%
Operating profit $ (449) $ 537 $ 774 $ 862
-16.9% 28.5% 66.8% 25.5%
INDUSTRIAL HARDWARE SEGMENT
Net sales in the Industrial Hardware segment were up 5% in the second quarter
and 2% in the first half of 2006 compared to the prior year periods. The sales
increase was mainly the result of increased sales of hardware to the truck
accessories and service body markets and new products, which more than offset
decreased sales of "sleeper boxes" for the Class 8 trailer truck market compared
to the same period in 2005. The Company expects the sales volume of "sleeper
boxes" to improve as the year progresses. In addition, new products developed
using our lightweight honeycomb composites included a mobile pickup mounted
camper shell for emergency vehicle use and a mobile building door for military
use. Other new products included a retro-fit kit for the military Humvee, a 3
point t-handle assembly and a star wheel rotary assembly for the truck accessory
market, a hidden hinge and a remote magnet alarm for the service body market and
an assortment of handles and latches used in many of the markets we sell to. All
of the new products were developed internally for the variety of markets we
serve.
Our Eastern Industrial (Shanghai) Ltd., manufacturing facility located in
Shanghai, China continues to produce products for our U.S. affiliates and in the
first half of 2006 also continued ramping up for shipments of products to
non-associated customers. This subsidiary will be instrumental in helping us to
remain price competitive in North America and will open up the possibility to
effectively pursue global markets.
Cost of products sold for the Industrial Hardware segment increased 9% in the
second quarter and 5% in the first half of 2006 compared to the prior year
periods. The increase in the cost of products sold is primarily the result of
increases in sales volume, costs of raw materials, payroll and payroll related
charges and utilities that were experienced during the periods.
Gross margin as a percent of net sales decreased from 25% to 22% in the second
quarter and from 25% to 23% in the first half of 2006 compared to the prior year
periods due to the higher manufacturing costs and changes in the mix of products
sold.
Selling and administrative expenses for the second quarter decreased 6%
compared to the prior year period due to decreases in advertising expenses,
travel costs and payroll and payroll related charges. Selling and administrative
expenses for the first half of 2006 were comparable to the prior year period.
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SECURITY PRODUCTS SEGMENT
Net sales in the Security Products segment increased 6% in the second quarter
and 11% in the first half of 2006 compared to 2005 periods. Sales volume in the
second quarter of 2006 was up in all of the segments' operating units except for
commercial laundry compared to the 2005 second quarter. Sales volume increases
were experienced at all of the segment's operating units during the first six
months of 2006 and in many of the markets we service including: automotive
accessories, coin operated machines, gaming, electronics, enclosures and
commercial laundry. Sales of new products focused on lock products such as the
Super SesameeTM padlock, an electric car lock set, a remote keyless lock, and
cash drawer bill hold down and till assemblies as well as various other items
for the many markets we service.
Cost of products sold for the Security Products segment was up 7% in the second
quarter and 11% in the first half of 2006 compared to the 2005 periods. Most of
the increase in cost of products sold was the result of increased sales volume.
Additional factors affecting this segment were increases in raw material costs,
freight costs, payroll and payroll related charges and utilities.
Gross margin as a percentage of sales in the second quarter of 2006 decreased to
27% from 28% in the 2005 period due to higher manufacturing costs in the 2006
quarter. Gross margin as a percentage of sales was comparable at 27.5% for the
first half of both 2006 and 2005.
Selling and administrative expenses decreased 6% in the second quarter and
increased 2% in the first half of 2006 from 2005 levels. The decrease in the
second quarter was due to lower travel and trade show expenses compared to the
same period in 2005. The increase in the first half was due to higher payroll
and payroll related charges and advertising expenses which exceeded reductions
in travel and trade show expenses resulting in the overall increase in 2006.
METAL PRODUCTS SEGMENT
Net sales in the Metal Products segment were up 38% in the second quarter and
19% in the first half of 2006 as compared to the prior year periods. Sales of
mining products were up 48% in the second quarter of 2006 compared to the second
quarter of 2005 and sales of contract castings increased 7% from the prior year
levels. Sales of mining products were up 21% in the first half of 2006 compared
to the first six months of 2005 and sales of contract castings increased 12%
from the comparable period in 2005. New product sales were primarily a new mine
roof anchor for the Canadian mining market and a large flange nut. The Company
expects the installation of the new automatic pouring system for ductile iron
which was completed in July to increase efficiency in producing ductile iron
castings and is continuing its marketing efforts for mine roof anchors in the
China mining industry.
Cost of products sold increased 30% in the second quarter and 3% in the first
half of 2006 compared to the same periods in 2005. The increase was mainly due
to increases in sales volume, raw materials and payroll and payroll related
charges.
Gross margin as a percentage of net sales increased from -4% to 2% in the second
quarter of 2006 compared to the 2005 period and improved from -11% in the first
half of 2005 to 4% for the first half of 2006. The improvement is primarily due
to the increased sales volume and the mix of products produced.
Selling and administrative expenses were up 11% in the second quarter and up 16%
the first half of 2006 compared to the same periods in 2005. The increases were
related to increases in payroll and payroll related charges, advertising costs
and travel expenses.
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OTHER ITEMS
Interest expense decreased 16% in the second quarter and 10% in the first six
months of 2006 compared to the prior year periods mainly due to the new swap
contract associated with the loan agreement which was amended in August 2005 and
lower debt balances.
Other income increased 10% in the second quarter and 101% from the first six
months of 2005 to 2006 due to higher cash balances in the Company's cash
management program, which resulted in higher interest income.
Income taxes increased in line with the higher earnings level. The effective tax
rate in the second quarter of 2006 increased to 39% from the 2005 rate of 36%.
The effective tax rate in the first six months of 2006 was 38% compared to 37%
in the first six months of 2005. The increase in the effective tax rates in 2006
are the result of the Company deriving a higher percentage of its earnings from
countries with higher effective tax rates.
LIQUIDITY AND SOURCES OF CAPITAL
The Company generated $1.1 million from operations for the first six months of
2006 compared to $635,000 for the same period in 2005. The change in cash
flows was the result of improved earnings, the timing differences for
collections of accounts receivable and payments of liabilities and changes in
inventories. Cash flow from operations coupled with cash on hand at the
beginning of the year were sufficient to fund capital expenditures, debt
service, incentive payments, contributions to the Company's pension plans, and
dividend payments.
Additions to property, plant and equipment were $2.4 million during the first
six months of 2006 versus $920,000 for the comparable period in the prior
year. Total capital expenditures for 2006 are expected to be in the range of
$3.0 million to $4.0 million.
Total inventories as of July 1, 2006 were $23.6 million, compared to $20.8
million at year-end 2005. The inventory turnover ratio of 3.8 turns at the end
of the second quarter was slightly lower than both the prior year second
quarter and year-end 2005 ratio of 4.1 turns. The increase in inventory is a
result of increased business in the United States, an increase in the level of
ductile iron inventory in anticipation of the installation of the new
auto-pour system in the Metal Products segment, and the ramping up of
production at our facility in Shanghai, China. Accounts receivable increased
by $1.3 million from year end 2005, primarily due to increased sales volume.
The average days sales in accounts receivable for the second quarter of 2006
was 49 days compared to 48 days in the second quarter of 2005 and 49 days at
year end 2005.
Cash flow from operating activities and funds available under the revolving
credit portion of the Company's loan agreement are expected to be sufficient
to cover future foreseeable working capital requirements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from what was reported in
the 2005 Annual Report on Form 10-K.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation
of the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this report based on such evaluation.
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The Company believes that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected. The Company's disclosure controls and procedures
are designed to provide reasonable assurance of achieving their objectives,
and the CEO and CFO have concluded that these controls and procedures are
effective at the "reasonable assurance" level.
Changes in Internal Controls
During the period covered by this report, there have been no significant
changes in the Company's internal control over financial reporting or in other
factors that have materially affected, or are reasonably likely to materially
affect the Company's internal controls.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the Company's business, to which either the Company or
any of its subsidiaries is a party or to which any of their property is the
subject.
ITEM 1A - RISK FACTORS
There have been no material changes in risk factors from what was reported in
the 2005 Annual Report on Form 10-K.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no sales of unregistered securities by the Company or purchases
of registered equity securities by the Company during the period covered by this
report.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
See the information set forth in Item 4 of the Form 10-Q of the Company for the
quarterly period ended April 1, 2006.
ITEM 5 - OTHER INFORMATION
None
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ITEM 6 - EXHIBITS
31) Certifications required by Rule 13a-14(a) of the Securities
Exchange Act of 1934, as amended, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32) Certifications pursuant to Rule 13a-14(b) and 18 USC 1350 as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99(1)) The Registrant's Annual Report on Form 10-K for the fiscal year
ended December 31, 2005 is incorporated herein by reference.
99(2)) Form 8-K filed on April 26, 2006 setting forth the press
release reporting the Company's earnings for the quarter ended April
1, 2006 is incorporated herein by reference.
99(3)) Form 8-K filed on July 26, 2006 setting forth the press release
reporting the Company's earnings for the quarter ended July 1, 2006 is
incorporated herein by reference.
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: July 28, 2006 /s/Leonard F. Leganza
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Leonard F. Leganza
President and Chief Executive Officer
DATE: July 28, 2006 /s/John L. Sullivan III
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John L. Sullivan III
Vice President, Secretary and Treasurer
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