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EASTERN CO - Quarter Report: 2023 July (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended July 1, 2023

 

 

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 001-35383

 

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.)

 

3 Enterprise Drive, Suite 408, Shelton, Connecticut

 

06484

(Address of principal executive offices)

 

(Zip Code)

 

(203)-729-2255

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, No Par Value

EML

NASDAQ Global Market

 

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      No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes      No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐     No

 

As of July 1, 2023, 6,238,316 shares of the registrant’s common stock, no par value per share, were issued and outstanding.

 

 

 

 

The Eastern Company

Form 10-Q

 

FOR THE QUARTERLY PERIOD ENDED JULY 1, 2023

 

TABLE OF CONTENTS

 

 

 

 

Page

 

PART I

FINANCIAL INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Financial Statements

 

3.

 

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16.

 

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

24.

 

 

 

 

 

 

Item 4.

Controls and Procedures

 

24.

 

 

 

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

25.

 

 

 

 

 

 

Item 1A.

Risk Factors

 

25.

 

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

25.

 

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

 

25.

 

 

 

 

 

 

Item 4.

Mine Safety Disclosures

 

25.

 

 

 

 

 

 

Item 5.

Other Information

 

25.

 

 

 

 

 

 

Item 6

Exhibits

 

26.

 

 

 

 

 

 

 

Signatures

 

27.

 

 

 
-2-

Table of Contents

 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1 – FINANCIAL STATEMENTS

 

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

Net sales

 

$68,337,790

 

 

$69,540,054

 

 

$140,833,158

 

 

$138,554,702

 

Cost of products sold

 

 

(53,189,948)

 

 

(53,552,232)

 

 

(110,187,615)

 

 

(107,991,200)

Gross margin

 

 

15,147,842

 

 

 

15,987,822

 

 

 

30,645,543

 

 

 

30,563,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product development expense

 

 

(1,431,110)

 

 

(959,364)

 

 

(2,832,309)

 

 

(2,156,372)

Selling general and administrative expenses

 

 

(11,289,037)

 

 

(10,141,815)

 

 

(23,226,674)

 

 

(20,007,429)

Operating profit

 

 

2,427,695

 

 

 

4,886,643

 

 

 

4,586,560

 

 

 

8,399,701

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(781,104)

 

 

(503,787)

 

 

(1,507,110)

 

 

(938,121)

Other income (expense)

 

 

252,180

 

 

 

511,810

 

 

 

(378,520)

 

 

1,000,330

 

Income from continuing operations before income taxes

 

 

1,898,771

 

 

 

4,894,666

 

 

 

2,700,930

 

 

 

8,461,910

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(499,564)

 

 

(1,193,877)

 

 

(694,409)

 

 

(2,075,002)

Net income from continuing operations

 

 

1,399,207

 

 

 

3,700,789

 

 

 

2,006,521

 

 

 

6,386,908

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued Operations (see note B)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from operations of discontinued operations

 

 

-

 

 

 

459,563

 

 

 

-

 

 

 

930,749

 

Income tax expense

 

 

-

 

 

 

(123,737)

 

 

-

 

 

 

(250,604)

Gain from discontinued operations

 

 

-

 

 

 

335,826

 

 

 

-

 

 

 

680,145

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$1,399,207

 

 

$4,036,615

 

 

$2,006,521

 

 

$7,067,053

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.22

 

 

$0.59

 

 

$0.32

 

 

$1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$0.22

 

 

$0.59

 

 

$0.32

 

 

$1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$-

 

 

$0.06

 

 

$-

 

 

$0.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$-

 

 

$0.06

 

 

$-

 

 

$0.11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.22

 

 

$0.65

 

 

$0.32

 

 

$1.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$0.22

 

 

$0.65

 

 

$0.32

 

 

$1.13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash dividends per share:

 

$0.11

 

 

$0.11

 

 

$0.22

 

 

$0.22

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
-3-

Table of Contents

 

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

Net income

 

$1,399,207

 

 

$4,036,615

 

 

$2,006,521

 

 

$7,067,053

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in foreign currency translation

 

 

(431,042)

 

 

(1,173,177)

 

 

(94,457)

 

 

(970,896)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of interest rate swap, net of tax (benefit) cost of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023 - $(274,957) and $(362,648) respectively; 2022 - $93,659 and $427,294 respectively

 

 

(1,172,067)

 

 

296,588

 

 

 

(1,449,754)

 

 

1,353,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in pension and postretirement benefit costs, net of taxes of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2023 - $74,359 and $148,719 respectively; 2022 - $92,235 and $184,470 respectively

 

 

252,670

 

 

 

313,409

 

 

 

505,338

 

 

 

626,817

 

Total other comprehensive (loss) income

 

 

(1,350,439)

 

 

(563,180)

 

 

(1,038,873)

 

 

1,009,020

 

Comprehensive income

 

$48,768

 

 

$3,473,435

 

 

$967,648

 

 

$8,076,073

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
-4-

Table of Contents

 

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

July 1, 2023

 

 

December 31, 2022

 

 

 

(unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$13,204,674

 

 

$10,187,522

 

Accounts receivable, less allowances: 2023 - $601,516; 2022 - $677,000

 

 

41,983,715

 

 

 

42,886,250

 

Inventories

 

 

57,536,157

 

 

 

64,636,591

 

Current portion of notes receivable

 

 

168,160

 

 

 

1,006,421

 

Prepaid expenses and other assets

 

 

6,172,162

 

 

 

6,598,774

 

Total Current Assets

 

 

119,064,868

 

 

 

125,315,558

 

 

 

 

 

 

 

 

 

 

Property, Plant and Equipment

 

 

57,338,192

 

 

 

56,112,889

 

Accumulated depreciation

 

 

(31,228,575)

 

 

(30,000,797)

Property, Plant and Equipment, Net

 

 

26,109,617

 

 

 

26,112,092

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

70,810,947

 

 

 

70,777,459

 

Trademarks

 

 

5,514,956

 

 

 

5,514,886

 

Patents and other intangibles net of accumulated amortization

 

 

17,058,089

 

 

 

18,819,897

 

Long term notes receivable, less current portion

 

 

876,427

 

 

 

2,276,631

 

Deferred Income Taxes

 

 

488,989

 

 

 

488,989

 

Right of Use Assets

 

 

16,621,564

 

 

 

12,217,521

 

Total Other Assets

 

 

111,370,972

 

 

 

110,095,383

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$256,545,457

 

 

$261,523,033

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 
-5-

Table of Contents

 

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

July 1, 2023

 

 

December 31, 2022

 

 

 

(unaudited)

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Accounts payable

 

$27,010,990

 

 

$27,638,317

 

Accrued compensation

 

 

3,758,455

 

 

 

3,327,832

 

Other accrued expenses

 

 

3,683,882

 

 

 

3,944,964

 

Current portion of operating lease liability

 

 

3,583,505

 

 

 

3,059,547

 

Current portion of finance lease liability

 

 

152,253

 

 

 

-

 

Current portion of long-term debt

 

 

3,011,829

 

 

 

9,010,793

 

Total Current Liabilities

 

 

41,200,914

 

 

 

46,981,453

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

 

754,763

 

 

 

754,762

 

Operating lease liability, less current portion

 

 

13,038,059

 

 

 

9,195,205

 

Finance lease liability, less current portion

 

 

836,445

 

 

 

-

 

Long-term debt, less current portion

 

 

51,379,405

 

 

 

55,136,231

 

Accrued postretirement benefits

 

 

664,710

 

 

 

666,222

 

Accrued pension cost

 

 

22,448,575

 

 

 

22,174,465

 

Total Liabilities

 

 

130,322,871

 

 

 

134,908,338

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Voting Preferred Stock, no par value:

 

 

 

 

 

 

 

 

Authorized and unissued: 1,000,000 shares

 

 

 

 

 

 

 

 

Nonvoting Preferred Stock, no par value:

 

 

 

 

 

 

 

 

Authorized and unissued: 1,000,000 shares

 

 

 

 

 

 

 

 

Common Stock, no par value, Authorized: 50,000,000 shares

 

 

33,596,350

 

 

 

33,586,165

 

Issued: 9,072,761 shares at 2023 and 9,056,421 shares at 2022

 

 

 

 

 

 

 

 

Outstanding: 6,238,316 shares at 2023 and 6,221,976 shares at 2022

 

 

 

 

 

 

 

 

Treasury Stock: 2,834,445 shares at 2023 and 2,834,445 shares at 2022

 

 

(22,544,685)

 

 

(22,544,684)

Retained earnings

 

 

139,622,432

 

 

 

138,985,852

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

(1,235,435)

 

 

(1,140,978)

Unrealized gain on interest rate swap, net of tax

 

 

-

 

 

 

1,449,754

 

Unrecognized net pension and postretirement benefit costs, net of tax

 

 

(23,216,076)

 

 

(23,721,414)

Accumulated other comprehensive loss

 

 

(24,451,511)

 

 

(23,412,638)

Total Shareholders’ Equity

 

 

126,222,586

 

 

 

126,614,695

 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$256,545,457

 

 

$261,523,033

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

 

 

 

 

 

 

 

 

 
-6-

Table of Contents

 

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

Operating Activities

 

 

 

 

 

 

Net income

 

$2,006,521

 

 

$7,067,053

 

Less: gain from discontinued operations

 

 

-

 

 

 

680,145

 

Income from continuing operations

 

$2,006,521

 

 

$6,386,908

 

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,621,126

 

 

 

3,632,317

 

Unrecognized pension and postretirement benefits

 

 

656,655

 

 

 

81,210

 

Loss on sale of equipment and other assets

 

 

318,775

 

 

 

276,250

 

Provision for doubtful accounts

 

 

(16,731)

 

 

39,437

 

Stock compensation expense

 

 

10,185

 

 

 

414,619

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

918,871

 

 

 

(3,302,349)

Inventories

 

 

7,711,536

 

 

 

(5,237,113)

Prepaid expenses and other

 

 

562,548

 

 

 

(1,228,182)

Other assets

 

 

163,077

 

 

 

58,576

 

Accounts payable

 

 

(953,660)

 

 

(100,497)

Accrued compensation

 

 

(165,590)

 

 

(1,711,069)

Other accrued expenses

 

 

(1,274,858)

 

 

(1,812,968)

Net cash provided by (used in) operating activities

 

 

13,558,455

 

 

 

(2,502,862)

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Business Acquisition

 

 

(547,638)

 

 

-

 

Payments received from notes receivable

 

 

2,309,236

 

 

 

428,832

 

Proceeds from sale of equipment

 

 

-

 

 

 

1,371,073

 

Purchases of property, plant and equipment

 

 

(1,978,784)

 

 

(1,140,728)

Net cash (used in) provided by investing activities

 

 

(217,186)

 

 

659,177

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Principal payments on long-term debt

 

 

(69,248,743)

 

 

(3,767,866)

Principal payments on short-term borrowing (revolver)

 

 

(252,025)

 

 

-

 

Proceeds from short term borrowings (revolver)

 

 

-

 

 

 

10,000,000

 

Proceeds from new long-term debt financing

 

 

60,000,000

 

 

 

-

 

Financing leases, net

 

 

674,558

 

 

 

(126,547)

Purchase common stock for treasury

 

 

-

 

 

 

(1,423,378)

Dividends paid

 

 

(1,369,941)

 

 

(1,372,101)

Net cash (used in) provided by financing activities

 

 

(10,196,151)

 

 

3,310,108

 

 

 

 

 

 

 

 

 

 

Discontinued Operations

 

 

 

 

 

 

 

 

Cash used in operating activities

 

 

-

 

 

 

(717,668)

Cash used in discontinued operations

 

 

-

 

 

 

(717,668)

 

 

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

 

(127,966)

 

 

(160,653)

Net change in cash and cash equivalents

 

 

3,017,152

 

 

 

588,103

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

10,187,522

 

 

 

6,602,429

 

Cash and cash equivalents at end of period ¹

 

$13,204,674

 

 

$7,190,532

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest

 

$1,364,527

 

 

$1,012,157

 

Income taxes

 

 

315,120

 

 

 

1,647,375

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Right of use asset

 

 

4,404,043

 

 

 

1,694,711

 

Lease liability

 

 

(5,355,510)

 

 

(1,595,081)

 

 

 

 

 

 

 

 

 

¹ includes cash from assets held for sale of $0.1 million as of July 2, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes

 

 

 

 

 

 

 

 

 

 
-7-

Table of Contents

 

THE EASTERN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

July 1, 2023

 

Note A – Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 14, 2023 (the “2022 Form 10-K”), for additional information.

 

The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. All intercompany accounts and transactions are eliminated.

 

The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited consolidated balance sheet at that date.

 

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2022 or the 2022 fiscal year mean the 52-week period ended on December 31, 2022, and references to 2023 or the 2023 fiscal year mean the 52-week period ending on December 30, 2023. In a 52-week fiscal year, each quarter has 13 weeks. References to the second quarter of 2022, the second fiscal quarter of 2022 or the three months ended July 2, 2022, mean the period from April 3, 2022 to July 2, 2022. References to the second quarter of 2023, the second fiscal quarter of 2023 or the three months ended July 1, 2023, mean the 13-week period from April 2, 2023 to July 1, 2023. References to the first six months of 2022 or the six months ended July 2, 2022 mean the period from January 2, 2022 to July 2, 2022. References to the first six months of 2023 or the six months ended July 1, 2023 mean the period from January 1, 2023 to July 1, 2023.

 

Certain amounts in the 2022 financial statements have been reclassified to conform with the 2023 presentation with no impact or change to previously reported net income or shareholders’ equity.

 

Note B – Discontinued Operations

 

In the second quarter of 2021, the Company determined that the companies included in our former Diversified Products segment no longer fit with our long-term strategy and the Company initiated the process of selling the companies within the Diversified Products segment, which process was completed with the sale of the Company’s Argo EMS business (“Argo”) on October 19, 2022. Argo supplied printed circuit boards and other electronic assemblies to original equipment manufacturers in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial control, medical, and military products. We believe that the sale of the Diversified Products segment has allowed management to focus on our core capabilities and offerings.

 

The former Diversified Products segment met the criteria to be held for sale and furthermore, we determined that the assets held for sale qualify for discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statement of operations as discontinued operations for the prior period presented. The results of the former Diversified Products segment are not reflected in the unaudited condensed consolidated statements of income for the three and six months ended July 1, 2023 because dispositions of the businesses that comprised that segment were completed prior to the start of the period.

 

 
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Summarized Financial Information of Discontinued Operations

 

The following table represents income from discontinued operations, net of tax:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

 

(unaudited)

 

Net sales

 

$-

 

 

$2,473,201

 

 

$-

 

 

$4,840,427

 

Cost of products sold

 

 

-

 

 

 

(1,683,295)

 

 

-

 

 

 

(3,287,057)

Gross margin

 

 

-

 

 

 

789,906

 

 

 

-

 

 

 

1,553,370

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

-

 

 

 

(289,497)

 

 

-

 

 

 

(546,557)

Operating income (loss)

 

 

-

 

 

 

500,409

 

 

 

-

 

 

 

1,006,813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

-

 

 

 

(40,846)

 

 

-

 

 

 

(76,064)

Gain (Loss) from discontinued operations before income taxes

 

 

-

 

 

 

459,563

 

 

 

-

 

 

 

930,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax (expense) benefit

 

 

-

 

 

 

(123,737)

 

 

-

 

 

 

(250,604)

Income (loss) from discontinued operations, net of tax

 

$-

 

 

$335,826

 

 

$-

 

 

$680,145

 

 

Note C – Earnings Per Share

 

The denominators used to calculate earnings per share are as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

6,232,717

 

 

 

6,222,818

 

 

 

6,227,873

 

 

 

6,235,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

6,232,717

 

 

 

6,222,818

 

 

 

6,227,873

 

 

 

6,235,231

 

Dilutive stock appreciation rights

 

 

32,462

 

 

 

14,102

 

 

 

32,462

 

 

 

14,102

 

Denominator for diluted earnings per share

 

 

6,265,179

 

 

 

6,236,920

 

 

 

6,260,335

 

 

 

6,249,333

 

 

Note D – Inventories

 

Inventories from continuing operations consist of the following components:

 

 

 

July 1, 2023

 

 

December 31, 2022

 

 

 

 

 

 

 

 

Raw material and component parts

 

$23,076,826

 

 

$25,924,696

 

Work in process

 

 

8,298,926

 

 

 

9,323,082

 

Finished goods

 

 

26,160,405

 

 

 

29,388,813

 

Total inventories

 

$57,536,157

 

 

$64,636,591

 

 

 
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Note E - Goodwill

 

The aggregate carrying amount of goodwill from continuing operations is approximately $70.8 million as of July 1, 2023 and includes the write-off of approximately $0.5 million of goodwill associated with the closure of Associated Toolmakers Ltd. In the second quarter of 2023. Additionally, the Company recorded approximately $0.5 million of goodwill associated with the acquisition of Sureflex, Inc. in the second quarter of 2023. See Note O – Business Acquisitions for further details. No impairment was recognized in the second quarter of 2023.

 

The Company tests its reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events and circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. The Company tests reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources.

 

Note F – Leases

 

The Company presents right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company accounts for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.

 

The Company has operating leases for buildings, warehouses, and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability.

 

Currently, the Company has twenty-one operating leases with a lease liability of $16.6 million and four finance leases with a lease liability of $1.0 million as of July 1, 2023. The terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. There are no related party lease transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.

 

Approximate total minimum lease payments for each of the next five fiscal years is estimated to be as follows: remainder of 2023 - $2.0 million; 2024 - $3.6 million; 2025 - $2.3 million; 2026 - $1.8 million; 2027 - $1.5 million; and $6.4 million thereafter. The weighted average remaining lease term is 7.4 years. The implicit interest rate used was 5.0% to 8.25%.

 

Note G - Debt

 

On June 16, 2023, the Company entered into a credit agreement with TD Bank, N.A., Wells Fargo Bank, Bank of America, and M&T Bank as lenders (the “Credit Agreement”), that included a $60 million term portion and a $30 million revolving commitment portion. The proceeds of the term loan were used to repay the Company’s remaining outstanding term loan and to terminate its existing credit facility with Santander Bank, N.A. (approximately $59 million). The term loan portion of the credit facility requires quarterly principal payments of (i) $750,000 beginning on September 30, 2023 through June 30, 2025, (ii) $1,125,000 beginning on September 30, 2025 through June 30, 2027, and (iii) $1,500,000 beginning on September 30, 2027 through March 31, 2028, with the balance of the term loan payable on the maturity date of June 16, 2028. Amounts outstanding under the revolving portion of the credit facility are generally due and payable on the expiration date of the Credit Agreement (June 16, 2028). The Company can elect to prepay some or all the outstanding balance from time to time without penalty. A commitment fee is payable on the unused portion of the revolving credit facility based on the Company’s consolidated ratio of net debt to adjusted EBITDA from time to time. Currently, the commitment fee is 0.30%. As of July 1, 2023, the Company has not borrowed any funds on the revolving commitment portion of the credit facility.

 

 
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The term loan bears interest at a variable rate based on the SOFR rate plus an applicable margin of 1.875% to 2.625%, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.875% to 1.625% or the SOFR rate plus an applicable margin of 1.875% to 2.625%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated as of June 16, 2023, with TD Bank N.A., as administrative agent.

 

The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 3.5 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. The Company was in compliance with all its covenants under the Credit Agreement on July 1, 2023, and through the date of filing this Form 10-Q.

 

Note H - Stock Options and Awards

 

On February 19, 2020, the Board of Directors of the Company (the “Board”) adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”), which replaced The Eastern Company 2010 Executive Stock Incentive Plan after its expiration in February 2020. On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The Company has no other existing plan pursuant to which equity awards may be granted.

 

Incentive stock options granted under the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Board. Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Board. During the first six months of fiscal 2023 and 2022, the Company granted 64,500 and 43,300 stock awards, respectively, that were subject to the meeting of performance measurements or time based. For the first six months of fiscal years 2023 and 2022, the Company used fair market value to determine the associated expense with stock awards.

 

The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During the first six months of fiscal 2023 and 2022 the Company did not issue any SARs.

 

Stock-based compensation (income) expense, including forfeitures, in connection with SARs and stock awards previously granted to employees was approximately $21,000 and $136,000 in the second quarter of 2023 and the second quarter of 2022, respectively, and was approximately $(163,000) and $250,000 in the first six months of fiscal years 2023 and 2022, respectively.

 

As of July 1, 2023, there were 898,105 shares of Company common stock reserved and available for future grant under the 2020 Plan.

 

The following tables set forth the outstanding SARs for the period specified:

 

 

 

Six Months Ended

 

 

Year Ended

 

 

 

July 1, 2023

 

 

December 31, 2022

 

 

 

Units

 

 

Weighted Average Exercise Price

 

 

Units

 

 

Weighted Average Exercise Price

 

Outstanding at beginning of period

 

 

146,166

 

 

$23.22

 

 

 

180,833

 

 

$22.88

 

Expired

 

 

(50,833)

 

 

24.24

 

 

 

-

 

 

 

-

 

Exercised

 

 

(33,333)

 

 

21.10

 

 

 

(16,667)

 

 

21.20

 

Forfeited

 

 

(49,000)

 

 

22.80

 

 

 

(18,000)

 

 

21.74

 

Outstanding at end of period

 

 

13,000

 

 

 

24.19

 

 

 

146,166

 

 

 

23.22

 

 

 
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Table of Contents

 

SARs Outstanding and Exercisable

 

 

 

 

 

 

 

 

 

Range of Exercise Prices

 

Outstanding as of July 1, 2023

 

 

Weighted Average Remaining Contractual Life

 

 

Weighted Average Exercise Price

 

 

Exercisable as of July 1, 2023

 

 

Weighted Average Remaining Contractual Life

 

 

Weighted Average Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$19.44 - $26.30

 

 

13,000

 

 

 

1.0

 

 

$24.19

 

 

 

13,000

 

 

 

1.0

 

 

$24.19

 

 

The following tables set forth the outstanding stock awards for the period specified:

 

 

 

Six Months Ended

 

 

Year Ended

 

 

 

July 1, 2023

 

 

December 31, 2022

 

 

 

Shares

 

 

Shares

 

Outstanding at beginning of period

 

 

64,500

 

 

 

27,300

 

Issued

 

 

64,500

 

 

 

43,300

 

Exercised

 

 

(10,600)

 

 

-

 

Forfeited

 

 

(33,100)

 

 

(6,100)

Outstanding at end of period

 

 

85,300

 

 

 

64,500

 

 

As of July 1, 2023, outstanding SARs and stock awards had an intrinsic value of $1,543,077.

 

Note I – Share Repurchase Program

 

On May 2, 2018, the Company announced that the Board of Directors of the Company had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Below is a summary of the Company’s shares repurchased during the second quarter of 2023.

 

Period

 

Total Number of Shares Purchased

 

 

Average Price Paid Per Share

 

 

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

 

 

Maximum Number of Shares that may yet be Purchased Under the Plans or Programs

 

Balance as of April 1, 2023

 

 

139,716

 

 

$24.61

 

 

 

139,716

 

 

 

60,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 2, 2023 – July 1, 2023

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of July 1, 2023

 

 

139,716

 

 

$24.61

 

 

 

139,716

 

 

 

60,284

 

 

 
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Note J – Revenue Recognition

 

The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled. The Company records revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”. The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which are delivering goods or services, determines the transaction price, allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.

 

Customer volume rebates, product returns, discount and allowance are variable considerations and are recorded as a reduction of revenue in the same period that the related sales are recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material.

 

The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.

 

Note K - Income Taxes

 

The Company files income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2018 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2016.

 

The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for several reasons, including the closure of federal, state, and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB ASC Topic 740, “Income Taxes.”  There have been no significant changes to the value of unrecognized tax benefits during the six months ended July 1, 2023. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.

 

Note L – Retirement Benefit Plans

 

The Company has four non-contributory defined benefit pension plans covering most U.S. employees. Three of these pension plans are frozen and participants in these three plans have not accrued benefits since the date on which these plans were frozen. A fourth pension plan does not permit new participants but existing participants in this fourth pension plan continue to accrue benefits. Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law.

 

The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.

 

Significant disclosures relating to these benefit plans for the first three months and first six months 2023 and 2022 are as follows:

 

 

 

Pension Benefits

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

Service cost

 

$216,153

 

 

$269,743

 

 

$432,306

 

 

$539,487

 

Interest cost

 

 

990,053

 

 

 

608,191

 

 

 

1,980,107

 

 

 

1,216,380

 

Expected return on plan assets

 

 

(1,049,014)

 

 

(1,460,661)

 

 

(2,098,030)

 

 

(2,921,322)

Amortization of prior service cost

 

 

-

 

 

 

16,563

 

 

 

-

 

 

 

33,126

 

Amortization of the net loss

 

 

342,865

 

 

 

390,075

 

 

 

685,730

 

 

 

780,150

 

Net periodic benefit cost (benefit)

 

$500,057

 

 

$(176,089)

 

$1,000,113

 

 

$(352,179)

 

 
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Table of Contents

 

 

 

Other Postretirement Benefits

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

Service cost

 

$6,486

 

 

$13,323

 

 

$12,972

 

 

$26,646

 

Interest cost

 

 

14,533

 

 

 

10,988

 

 

 

29,066

 

 

 

21,976

 

Expected return on plan assets

 

 

(4,849)

 

 

(4,400)

 

 

(9,698)

 

 

(8,800)

Amortization of prior service cost

 

 

1,060

 

 

 

1,060

 

 

 

2,120

 

 

 

2,120

 

Amortization of the net loss

 

 

(16,895)

 

 

(2,054)

 

 

(33,790)

 

 

(4,108)

Net periodic benefit cost

 

$335

 

 

$18,917

 

 

$670

 

 

$37,834

 

 

The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In fiscal year 2023, the Company expects to contribute approximately $800,000 into its pension plans and approximately $50,000 into its postretirement plan. As of July 1, 2023, the Company has contributed $164,000 to its pension plans, has contributed $28,000 to its postretirement plan, and expects to make the remaining contributions as required during the remainder of the fiscal year.

 

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion.

 

The Company made contributions to the plan as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

Regular matching contribution

 

$253,665

 

 

$161,714

 

 

$506,426

 

 

$372,654

 

Transitional credit contribution

 

 

26,344

 

 

 

28,179

 

 

 

60,663

 

 

 

79,742

 

Non-discretionary contribution

 

 

89,163

 

 

 

16,769

 

 

 

521,112

 

 

 

360,146

 

Total contributions for the period

 

$369,172

 

 

$206,662

 

 

$1,088,201

 

 

$812,542

 

 

The non-discretionary contribution of $328,953 made in the six months ended July 1, 2023, was accrued for, and expensed in the prior fiscal year.

 

Effective January 1, 2023, the non-discretionary contributions are being contributed on a weekly basis.

 

Note M - Recent Accounting Pronouncements

 

The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company.

 

Note N - Concentration of Risk

 

Credit Risk

 

Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As of July 1, 2023, there were two significant concentrations of credit risk with two customers, who had receivables representing 12% and 13% of our net accounts receivable. One single customer represented 14% of the Company’s net accounts receivable as of December 31, 2022. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.

 

 
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The Company has deposits that exceed amounts up to $250,000 that are insured by the Federal Deposit Insurance Corporation (FDIC), but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution.

 

Interest Rate Risk

 

The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based on the SOFR rate plus an applicable margin of 1.875% to 2.625%, depending on the Company’s senior net leverage ratio.

 

Currency Exchange Rate Risk

 

The Company’s currency exposure is concentrated in the Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB, Hong Kong dollar and United Kingdom pound sterling. Because of the Company’s limited exposure to any single foreign market, any exchange gains or losses have not been material and are not expected to be material in the future. As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments.

 

Note O – Business Acquisition

 

On June 29, 2023 the Company acquired certain assets, including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights, rights existing under all sales and purchase agreements, and assumed certain liabilities of Sureflex, Inc. (“Sureflex”). These assets are held in our Velvac, Inc. (“Velvac”) subsidiary. We expect that Sureflex, which manufactures tractor-trailer electrical connection cable assemblies, will enable the Company to manufacture electrical products and become more competitive with respect to cost and quality.

 

The acquisition of Sureflex was accounted for under Business Combinations (Topic 805). The acquired business is included in the consolidated operating results of the Company from the effective date of the acquisition. The excess of the cost of Sureflex over the fair market value of the net assets acquired of $0.5 million has been recorded as goodwill.

 

Neither the actual results nor the pro forma effects of the Sureflex acquisition are material to the Company’s financial statements.

 

 
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion is intended to highlight significant changes in the financial position and results of operations of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the three and six months ended July 1, 2023. 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, 2022 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which was filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2023 (the “2022 Form 10-K”).

 

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2022 or the 2022 fiscal year mean the 52-week period ended on December 31, 2022, and references to 2023 or the 2023 fiscal year mean the 52-week period ending on December 30, 2023. In a 52-week fiscal year, each quarter has 13 weeks. References to the second quarter of 2022, the second fiscal quarter of 2022 or the three months ended July 2, 2022, mean the period from April 3, 2022 to July 2, 2022. References to the first quarter of 2023, the first fiscal quarter of 2023 or the three months ended July 1, 2023, mean the 13-week period from April 2, 2023 to July 1, 2023. References to the first six months of 2022 or the six months ended July 2, 2022 mean the period from January 2, 2022 to July 2, 2022. References to the first six months of 2023 or the six months ended July 1, 2023 mean the period from January 1, 2023 to July 1, 2023.

 

Safe Harbor for Forward-Looking Statements

 

Statements contained in this Quarterly Report on Form 10-Q of the Company that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.   Forward-looking statements may be identified by the use of forward-looking terminology such as “would,” “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” “plan,” “potential,” “opportunities,” or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These factors include the impact of the COVID-19 pandemic and resulting economic effects, the impact of higher raw material and component costs and cost inflation, supply chain disruptions and shortages, particularly with respect to steel, plastics, scrap iron, zinc, copper and electronic components, rising interest rates, delays in delivery of our products to our customers, the impact of global economic conditions on demand for our products, including the impact, length and degree of economic downturns on the customers and markets we serve, reductions in production levels, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, the potential impact of bank failures on our ability to access financing or capital markets, and the impact of market conditions on pension plan funded status. Other factors include, but are not limited to: restrictions on operating flexibility imposed by the agreement governing our credit facility; the effect on interest rates of the replacement of the London Interbank Offered Rate (LIBOR) with a Secured Overnight Financing Rate (SOFR); risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability;  the inability to achieve the savings expected from global sourcing of materials; lower-cost competition; our ability to design, introduce and sell new or updated products and related components; market acceptance of our products;  the inability to attain expected benefits from acquisitions or the inability to effectively integrate such acquisitions and achieve expected synergies; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, and general industrial markets; costs and liabilities associated with environmental compliance; the impact of climate change or terrorist threats and the possible responses by the U.S. and foreign governments; failure to protect our intellectual property; cyberattacks; materially adverse or unanticipated legal judgments, fines, penalties or settlements; and other risks identified and discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the 2022 Form 10-K and that may be identified from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the SEC. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions. Also, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses. The Company undertakes no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise, except as required by law.

 

 
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Overview

 

General Overview

 

The following analysis excludes discontinued operations.

 

Net sales in the second quarter of 2023 decreased 2% to $68.3 million from $69.5 million in the corresponding period in 2022. Net sales for the first six months of 2023 increased by 2% to $140.8 million from $138.6 million in the corresponding period last year. Sales decreased in the second quarter of 2023 primarily due to lower demand for returnable transport packaging products. Sales increased for the first six months of 2023 compared to the first six months of 2022 primarily due to increased demand for truck accessories products as well as increased demand from distributors. Our backlog as of July 1, 2023 was down 9% to $75.3 million from $82.8 million as of July 2, 2022 as we continue to optimize our supply chain to reduce past due orders and transition from old to new programs with our commercial vehicle and automotive customers and increased shipments to customers.

 

Net sales of existing products decreased 4% in the second quarter of 2023 and were flat for the first six months of 2023 compared to the corresponding period in 2022. Price increases and new products increased net sales by 2% in the second quarter and 2% in the first six months of 2023, compared to the corresponding periods in 2022. New products included various truck mirror assemblies, rotary latches, D-rings, and mirror cams. Price increases primarily reflect our efforts to recover increases in raw material and freight costs.

 

Cost of products sold decreased $0.4 million, or 1%, in the second quarter of 2023 and increased by $2.2 million, or 2% in the first six months of 2023 compared to the corresponding periods in 2022. The decrease in the second quarter of 2023  and increase for the first six months of 2023 are primarily due to lower and higher sales volumes, respectively. Additionally, the Company paid tariff costs on China-sourced products of approximately $0.5 million and $1.1 million in the second quarter and first six months of 2023 respectively, compared to $0.8 million and $1.3 million in the second quarter and first six months of fiscal 2022 respectively. Most tariffs on China-sourced products have been recovered through price increases.

 

Gross margin as a percentage of sales was 22% in the second quarter and 22% in the first six months of 2023 compared to 23% in the second quarter and 22% in the first six months of 2022.

 

Product development expense increased $0.5 million, or 49% in the second quarter of 2023 and increased $0.7 million, or 31% in the first six months of 2023 when compared to the corresponding periods in 2022 as we continue to invest in new products at Eberhard and Velvac. As a percentage of net sales, product development costs were 2.1% and 2.0% for the second quarter and first six months of 2023, respectively, compared to 1.4% and 1.6% for the corresponding periods in 2022.

 

Selling and administrative expense increased $1.1 million, or 11%, in the second quarter of 2023 when compared to the second quarter of 2022 primarily due to legal, professional, and selling costs and payroll-related expenses. Selling and administrative expenses increased $3.2 million, or 16% in the first six months of 2023 when compared to the corresponding periods in 2022 primarily due to severance and other accrued compensation expenses of $1.8 million related to the elimination of the Chief Operating Officer position and the departure of our previous Chief Executive Officer during the first quarter of 2023 and legal, professional, and selling costs and payroll-related expenses during the first six months of 2023. The increase in selling expenses reflects both the increase in sales during the first six months ended 2023 as well as our investments in sales capabilities.

 

Interest expense increased $0.3 million in the second quarter and $0.6 million in the first six months of 2023 compared to the corresponding periods in 2022 due to higher borrowing rates.

 

Other income decreased $0.3 million in the second quarter of 2023 and decreased $1.4 million in the first six months of 2023 compared to the corresponding periods in 2022. The decrease in other income of $0.3 million in the second quarter of 2023 was primarily driven by unfavorable pension costs of $0.3 million in the second quarter of 2023, while in the second quarter of 2022 the Company had a favorable pension cost adjustment of $0.4 million, $1.4 million expense associated with the closure of Associated Toolmakers, Ltd., partially offset by a $1.6 million favorable adjustment for the final settlement of our swap agreement with Santander Bank, N.A. (“Santander”). The decrease in other income of $1.4 million for the first six months of 2023 when compared to the corresponding period in 2022 was primarily driven by unfavorable pension costs of $0.6 million for the first six months of 2023, while in the first six months of 2022 the Company had favorable pension cost adjustments of $0.9 million, $1.4 million expense associated with the closure of Associated Toolmakers, Ltd., an unfavorable working capital adjustment of $0.4 million in the first quarter of 2023 related to the sale of the Greenwald business, partially offset by a $1.6 million favorable adjustment for the final settlement of our swap agreement with Santander, while in the first quarter of 2022 the Company had a loss on the sale of the Wheeling, IL building of $0.3 million.

 

 
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Net income from continuing operations for the second quarter of 2023 was $1.4 million, or $0.22 per diluted share, compared to net income from continuing operations of $3.7 million, or $0.59 per diluted share, for the comparable period in 2022. In the first six months of 2023 net income was $2.0 million, or $0.32 per diluted share compared to net income of $6.4 million, or $1.02 per diluted share for the comparable period in 2022.

 

A more detailed analysis of the Company’s results of operations and financial condition follows:

 

Results of Operations

 

The following table shows, for the periods indicated, selected line items from the condensed consolidated statements of income as a percentage of net sales:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

 

100.0%

 

 

100.0%

 

 

100.0%

 

 

100.0%

Cost of products sold

 

 

77.8%

 

 

77.0%

 

 

78.2%

 

 

77.9%

Gross margin

 

 

22.2%

 

 

23.0%

 

 

21.8%

 

 

22.1%

Product development expense

 

 

2.1%

 

 

1.4%

 

 

2.0%

 

 

1.6%

Selling and administrative expense

 

 

16.5%

 

 

14.6%

 

 

16.5%

 

 

14.4%

Operating Profit

 

 

3.6%

 

 

7.0%

 

 

3.3%

 

 

6.1%

 

The following table shows the change in sales and operating profit for the second quarter and first six months of 2023 compared to the second quarter and first six months of 2022 (dollars in thousands):

 

 

 

Three Months

 

 

Six Months

 

 

 

Ended

 

 

Ended

 

 

 

July 1, 2023

 

 

July 1, 2023

 

 

 

 

 

 

 

 

Net Sales

 

$(1,202)

 

$2,278

 

 

 

 

 

 

 

 

 

 

Volume

 

 

-3.6%

 

 

-0.1%

Price

 

 

0.7%

 

 

0.8%

New products

 

 

1.2%

 

 

1.0%

 

 

 

-1.7%

 

 

1.7%

 

 

 

 

 

 

 

 

 

Operating Profit

 

$(2,459)

 

$(3,813)

 

Liquidity and Sources of Capital

 

The Company generated approximately $13.6 million of cash from continuing operations during the first six months of fiscal 2023 compared to consuming approximately $2.5 million during the first six of fiscal 2022. Cash flow from operations in the first six months of 2023 was higher when compared to the corresponding period last year primarily due to a decrease in inventory. Cash flow from operations coupled with cash at the beginning of the 2023 fiscal year were sufficient to fund capital expenditures, debt service, and dividend payments for the first six months of 2023. See Note G - Debt for further discussion on the Company’s debt facilities.

 

 
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Additions to property, plant and equipment for continuing operations were approximately $2.0 million for the first six months of 2023 and $1.1 million for the first six months of 2022.  As of July 1, 2023, there was approximately $1.1 million of outstanding commitments for capital expenditures.

 

The following table shows key financial ratios at the end of each specified period:

 

 

 

Second

Quarter

2023

 

 

Second

Quarter

2022

 

 

Fiscal

Year

2022

 

Current ratio

 

 

2.9

 

 

 

3.0

 

 

 

2.7

 

Average days’ sales in accounts receivable

 

 

55

 

 

 

62

 

 

 

56

 

Inventory turnover

 

 

3.8

 

 

 

3.2

 

 

 

3.4

 

Total debt to shareholders’ equity

 

 

43.1%

 

 

64.5%

 

 

50.7%

 

The following table shows important liquidity measures as of the balance sheet date for each specified period (in millions):

 

 

 

Second

 

 

Second

 

 

Fiscal

 

 

 

Quarter

 

 

Quarter

 

 

Year

 

 

 

2023

 

 

2022

 

 

2022

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

- Held in the United States

 

$8.8

 

 

$3.6

 

 

$7.4

 

- Held by a foreign subsidiary

 

 

4.4

 

 

 

3.6

 

 

 

2.8

 

 

 

 

13.2

 

 

 

7.2

 

 

 

10.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

 

77.8

 

 

 

89.6

 

 

 

78.3

 

Net cash provided by (used in) operating activities

 

 

13.6

 

 

 

(2.5)

 

 

7.4

 

Change in working capital impact on net cash Provided by (used in) operating activities

 

 

7.0

 

 

 

(13.2)

 

 

(5.2)

Net cash (used in) provided by investing activities

 

 

(0.2)

 

 

0.6

 

 

 

5.1

 

Net cash (used in) provided by financing activities

 

 

(10.2)

 

 

2.9

 

 

 

(11.8)

 

Inventories of $57.5 million as of July 1, 2023, represent a decrease of 11.0% as compared to $64.6 million at the end of fiscal year 2022 and a decrease of 15.1% as compared to $67.7 million at the end of the second quarter of fiscal 2022. Accounts receivable, less allowances, were $42.0 million as of July 1, 2023, as compared to $42.9 million at 2022 fiscal year end and $46.3 million at the end of the second quarter of fiscal 2022.

 

On June 16, 2023, the Company incurred indebtedness under the Credit Agreement in the aggregate principal amount of $60 million in the form of a term loan, the proceeds of which were used to repay the Company’s remaining outstanding term loan and to terminate its existing credit facility with Santander Bank.  See Note G for additional information regarding the terms of the Credit Agreement, including repayment terms, interest rates and applicable loan covenants.  Under the terms of the Credit Agreement, the Company is subject to restrictive covenants that limit our ability to, among other things, incur additional indebtedness, pay dividends or make other distributions, and consolidate, merge, sell or otherwise dispose of assets, as well as financial covenants that require us to maintain a fixed charge coverage ratio and a maximum senior net leverage ratio.  These covenants may limit how we conduct our business, and in the event of certain defaults, our repayment obligations may be accelerated.  We were in compliance with all our covenants as of July 1, 2023.   

 

Cash, cash flow from operating activities and funds available under the revolving credit portion of the Credit Agreement are expected to be sufficient to cover future foreseeable working capital requirements. However, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available. In addition, the interest rate on borrowings under the Credit Agreement varies based on our senior net leverage ratio, and the Credit Agreement requires us to maintain a senior net leverage ratio not to exceed 3.50 to 1 and a fixed charge coverage ratio to be not less than 1.25 to 1. A decrease in earnings due to the impact of COVID-19 or the resulting harm to the financial condition of our customers or economic conditions generally, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and our fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and could cause us to fail to comply with the covenants under our Credit Agreement.

 

 
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As of the end of the second quarter of July 1, 2023, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

Critical Accounting Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. For a full description of our critical accounting estimates, refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of the 2022 Form 10-K. While there have been no material changes to our critical accounting estimates, we continue to monitor the methodologies and assumptions underlying such critical accounting estimates.

 

 
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Non-GAAP Financial Measures

 

The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP.

 

To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income from continuing operations, diluted earnings per share from continuing operations, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

 

Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs.  Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis across periods by removing the impact of certain items that management believes do not directly reflect our underlying operating performance.

 

Adjusted Earnings Per Share from Continuing Operations is defined as earnings per share from continuing operations excluding, when incurred, certain per share gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs.  We believe that Adjusted Earnings Per Diluted Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis from period to period.

 

Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses.  Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

 

Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, U.S. GAAP financial measures.

 

We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.

 

 
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Reconciliation of Non-GAAP Measures

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted Net Income and EPS from Continuing Operations Calculation

 

 

 

 

 

 

 

For the Three and Six Months ended July 1, 2023 and July 2, 2022

 

 

 

 

 

 

 

($000's)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

Net income from continuing operations as reported per generally accepted accounting principles (GAAP)

 

$1,399

 

 

$3,701

 

 

$2,007

 

 

$6,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.22

 

 

$0.59

 

 

$0.32

 

 

$1.02

 

Diluted

 

$0.22

 

 

$0.59

 

 

$0.32

 

 

$1.02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on sale of Wheeling, IL building, net of tax

 

 

-

 

 

 

-

 

 

 

 

 

 

 

202A

Severance and accrued compensation, net of tax

 

 

 

 

 

 

 

 

 

 

1,349B

 

 

 

 

Greenwald final sale adjustment

 

 

 

 

 

 

 

 

 

 

293C

 

 

 

 

Associated Toolmakers, Ltd. closure, net of tax

 

 

1,086D

 

 

 

 

 

 

1,086D

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total adjustments (non-GAAP)

 

$1,086

 

 

$-

 

 

$2,728

 

 

$202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted net income from continuing operations (non-GAAP)

 

$2,485

 

 

$3,701

 

 

$4,735

 

 

$6,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted earnings per share from continuing operations (non-GAAP):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$0.40

 

 

$0.59

 

 

$0.76

 

 

$1.06

 

Diluted

 

$0.40

 

 

$0.59

 

 

$0.76

 

 

$1.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A) Loss on sale of ILC building in Wheeling, IL

B) Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the former Chief Executive Officer

C) Final settlement of working capital adjustment associated with Greenwald sale

D) Associated Toolmakers, Ltd. closure costs

 

 
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Reconciliation of Non-GAAP Measures

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from Continuing Operations Calculation

 

 

 

 

 

 

 

 

 

 

For the Three and Six Months ended July 1, 2023 and July 2, 2022

 

 

 

 

 

 

 

 

 

 

($000's)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

July 1, 2023

 

 

July 2, 2022

 

 

July 1, 2023

 

 

July 2, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations as reported per generally accepted accounting principles (GAAP)

 

$1,399

 

 

$3,701

 

 

$2,007

 

 

$6,387

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

781

 

 

 

504

 

 

 

1,507

 

 

 

938

 

Provision for income taxes

 

 

500

 

 

 

1,194

 

 

 

694

 

 

 

2,075

 

Depreciation and amortization

 

 

1,806

 

 

 

1,803

 

 

 

3,621

 

 

 

3,633

 

Loss on sale of Wheeling, IL building

 

 

-

 

 

 

-

 

 

 

 

 

 

 

269A

Severance and accrued compensation, net of tax

 

 

 

 

 

 

 

 

 

 

1,799B

 

 

 

 

Greenwald final sale adjustment

 

 

 

 

 

 

 

 

 

 

390C

 

 

 

 

Associated Toolmakers, Ltd. closure

 

 

1,448D

 

 

 

 

 

 

1,448D

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from continuing operations

 

$5,934

 

 

$7,202

 

 

$11,466

 

 

$13,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A) Loss on sale of ILC building in Wheeling, IL

B) Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the former Chief Executive Officer

C) Final settlement of working capital adjustment associated with Greenwald sale

D) Associated Toolmakers, Ltd. closure costs

 

 
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a result of the Company’s status as a smaller reporting company pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide information under this Item 3.

 

ITEM 4 – CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures:

 

As of July 1, 2023, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) pursuant to Exchange Act Rule 13a-15.  As defined in Exchange Act Rules 13a-15(e) and 15d-15(e), “the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.”

 

The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO have concluded that these controls and procedures are effective at the “reasonable assurance” level as of July 1, 2023.

 

Changes in Internal Control Over Financial Reporting:

 

During the period covered by this Quarterly Report on Form 10-Q, there were no changes in the Company's internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 
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PART II – OTHER INFORMATION

 

ITEM 1 – LEGAL PROCEEDINGS

 

The Company is a party to various legal proceedings from time to time related to its normal business operations. As of the end of the quarter ended July 1, 2023, the Company does not have any material pending legal proceedings, other than as set forth in Part I, Item 3 of the 2022 Form 10-K, or any material legal proceedings known to be contemplated by governmental authorities.

 

ITEM 1A – RISK FACTORS

 

The Company’s business is subject to several risks, some of which are beyond its control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the Company’s shareholders should carefully consider the risk factors discussed in Part I, Item 1A “Risk Factors” of the 2022 Form 10-K. These risk factors could have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity and could cause our operating results to vary significantly from period to period. As of July 1, 2023, there have been no material changes to the risk factors disclosed in the 2022 Form 10-K. The Company may disclose changes to such risk factors or disclose additional risk factors from time to time in its future filings with the SEC. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition, or operating results.

 

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

On May 2, 2018, the Company announced that the Board had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Exchange Act. During the second quarter of 2023, the Company had no share repurchases.

 

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4 – MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 – OTHER INFORMATION

 

None.

 

 
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ITEM 6 – EXHIBITS

 

3.1)

Restated Certificate of Incorporation of the Company, as amended (conformed copy) (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on May 6, 2020).

 

 

3.2)

Amended and Restated By-Laws of the Company, as amended through March 11, 2022 (incorporated by reference to Exhibit 3(ii) to the Company’s Current Report on Form 8-K filed on March 11, 2022).

 

 

10.1)

Credit Agreement, dated as of June 16, 2023 among The Eastern Company as Borrower, the Lenders signatory thereto and TD Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 20, 2023).

 

 

10.2)

Security Agreement, dated as of June 16, 2023 among The Eastern Company as Borrower, the Lenders signatory thereto and TD Bank, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on June 20, 2023).

 

 

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.**

 

 

101)

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Income (Unaudited) for the three months ended July 1, 2023 and July 2, 2022; (ii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the six months ended July 1, 2023, and July 2, 2022; (iii) Condensed Consolidated Balance Sheets (Unaudited) as of July 1, 2023 and December 31, 2022; (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended July 1, 2023 and July 2, 2022; and (iv) Notes to the Condensed Consolidated Financial Statements (Unaudited).**

 

 

104)

Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101). **

  

* Filed herewith.

** Furnished herewith

 

 
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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

THE EASTERN COMPANY

 

 

(Registrant)

 

 

DATE:  August 8, 2023

/s/Mark Hernandez

 

 

Mark Hernandez

President and Chief Executive Officer

 

 

 

 

DATE:  August 8, 2023

/s/Nicholas Vlahos

 

 

Nicholas Vlahos

Vice President and Chief Financial Officer

 

 

 
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