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Item 2. Management’s Discussion and Analysis

2021-11-10 compared with 2021-08-12 · 78 added, 51 removed, 132 unchanged (49% of the section changed)

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 quarter ended July 3, 2021.

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 January 2, 2021 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 January 2, 2021, which was filed with the Securities and Exchange Commission (the “SEC”) on March 16, 2021 (the “2020 Form 10-K”).

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In a 53-week fiscal year, each of the first two fiscal quarters and the fourth quarter are 13 weeks long, and the third fiscal quarter is 14 weeks long.

References to the second quarter of 2020, the second fiscal quarter of 2020 or the three months ended June 27, 2020 mean the period from March 29, 2020 to June 27, 2020.

References to the second quarter of 2021, the second fiscal quarter of 2021 or the three months ended July 3, 2021 mean the 13-week period from April 4, 2021 to July 3, 2021.

References to the third quarter of 2020, the third fiscal quarter of 2020 or the three months ended October 3, 2020 mean the period from June 28, 2020 to October 3, 2020.

References to the third quarter of 2021, the third fiscal quarter of 2021 or the three months ended October 2, 2021 mean the 13-week period from July 4, 2021 to October 2, 2021.

References to the nine months ended October 3, 2020 or the first nine months of fiscal 2020 mean the period from December 29, 2019 to October 3, 2020, and references to the nine months ended October 2, 2021 or the first nine months of fiscal 2021 mean the period from January 3, 2021 to October 2, 2021.

Safe Harbor for Forward-Looking Statements

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COVID-19 Update

The direct impact of the COVID-19 pandemic has been minimal at most of our operations through the second quarter of 2021.

The direct impact of the COVID-19 pandemic has been minimal at most of our operations through the third quarter of 2021.

We continue to follow CDC guidelines, including the use of proper personal protection equipment, social distancing and sanitizing work areas.

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Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.

The loss recognized in the write-down of the Diversified Products segment to fair value in the second quarter of 2021 was $8.1 million, net of tax with anticipated cash flow over the next twelve months of approximately $25.0 million.

The majority of this cash will be used to pay down debt.

The loss recognized in the write-down of the Diversified Products segment to fair value in the second quarter of 2021 was $8.1 million, net of tax.

In the third quarter of 2021 a gain of $1.0 million, net of tax was recognized to adjust the Diversified Products segment to fair value.

Anticipated cash flow over the next twelve months is approximately $25.0 million.

The majority of this cash is expected to be used to pay down debt.

On November 3, 2021 the Company sold its Greenwald Industries, Inc.

division (“Greenwald”) for a sales price of $8.0 million, subject to a final working capital adjustment.

Greenwald, which is located in Chester, CT, is an OEM manufacturer offering a range of payment solutions from coin-vending products to smart card systems and payment applications.

The following analysis excludes discontinued operations.

Net sales in the second quarter of 2021 increased 55% to $61.2 million from $39.5 million in the corresponding period in 2020 and net sales for the first six months of 2021 increased 35% to $123 million from $91.4 million in the same period last year.

Sales increased for both the second quarter and six-month periods due to increased demand for truck accessories, automotive returnable packaging, blow mold tooling, and distribution products.

Backlog as of July 3, 2021 was up 61% to $89.2 million from $55.3 million in 2020.

Net sales of existing products increased 44% in the second quarter of 2021 and 26% for the first six months of 2021 compared to the corresponding periods in 2020.

Price increases and new products increased net sales by 11% in the second quarter of 2021 and 9% for the first six months of 2021, compared to the corresponding periods in 2020.

New products included various truck mirror assemblies, truck compression latches, a cable lock, and a mirror cam.

Cost of products sold increased $18.1 million, or 62%, in the second quarter of 2021 and increased $25.4 million, or 37% for the first six months of 2021 compared to the corresponding periods in 2020.

Net sales in the third quarter of 2021 increased 15% to $63.9 million from $55.7 million in the corresponding period in 2020 and net sales for the first nine months of 2021 increased 27% to $186.9 million from $147.1 million in the same period last year.

Sales increased for both the third quarter and nine-month periods due to increased demand for truck accessories, automotive returnable packaging, blow mold tooling, and distribution products.

Backlog as of October 2, 2021 was up 44% to $83.1 million from $57.7 million as of October 3, 2020.

Net sales of existing products increased 4% in the third quarter of 2021 and 18% for the first nine months of 2021 compared to the corresponding periods in 2020.

Price increases and new products increased net sales by 10% in the third quarter of 2021 and 10% for the first nine months of 2021, compared to the corresponding periods in 2020.

New products included various truck mirror assemblies, rotary latches, D-rings, and mirror cams.

Cost of products sold increased $6.3 million, or 15%, in the third quarter of 2021 and increased $31.8 million, or 29% for the first nine months of 2021 compared to the corresponding periods in 2020.

The increases are primarily due to higher sales volume, increases in the prices of material, and increases in freight rates.

The prices of several frequently used raw materials prices have increased significantly, year-over-year.

For example, the price of most common forms of hot-rolled steel increased 236% between Q2 2020 and Q2 2021;

For example, the price of most common forms of hot-rolled steel increased 245% between the third quarter of 2020 and the third quarter of 2021;

cold-rolled steel increased 206%;

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and copper and zinc increased 43% and 29% respectively.

Additionally, our freight costs increased $1.4 million, or 148%, in the second quarter of 2021 and increased $2.1 million, or 97%, in the first six months of 2021 when compared to the corresponding periods in 2020.

Additionally, our freight costs increased $1.4 million, or 110%, in the third quarter of 2021 and increased $3.5 million, or 99%, in the first nine months of 2021 when compared to the corresponding periods in 2020.

This increase is due to increased sales volume and freight rates as shipping demand has exceeded available carriers.

Price increases to our customers recovered a portion of the increase in raw material prices and freight rates.

Finally, the Company paid tariff costs on China-sourced products of approximately $0.8 million and $1.4 million in the second quarter and first six months of 2021 respectively, compared to $0.5 million and $1.7 million in the second quarter and first six months of fiscal 2020 respectively.

Finally, the Company paid tariff costs on China-sourced products of approximately $0.6 million and $2.0 million in the third quarter and first nine months of 2021 respectively, compared to $0.6 million and $2.4 million in the third quarter and first nine months of fiscal 2020 respectively.

All tariffs on China-sourced products have been recovered through price increases.

Gross margin as a percent of sales was 23% in the second quarter and 24% in the first six months of fiscal 2021 compared to 26% in the second quarter and 25% in the first six months of fiscal 2020.

Product development expense increased $0.2 million, or 19% in the second quarter of 2021 and increased $0.3 million, or 15%, in the first six months of 2021 compared to the corresponding periods in 2020.

As a percentage of net sales, product development costs were 1.8% and 1.7% for the second quarter and first six months of 2021, respectively, and 2.3%, and 2.0% for the corresponding periods in 2020, respectively.

Selling and administrative expense increased $2.8 million, or 43%, in the second quarter of 2021 and increased $3.6 million, or 24% in the first six months of 2021 compared to the corresponding period in 2020 primarily due to increased commissions and other selling costs, amortization expense, payroll-related expenses, and incentive costs, which were suspended in the first quarter of fiscal 2020.

Interest expense was flat in the second quarter and decreased $0.1 million for the first six months of 2021 compared to the corresponding periods in 2020.

Other income increased $0.2 million in the second quarter and increased $2.3 million in the first six months of 2021 compared to the corresponding periods in 2020.

The increase in the second quarter was due to an increase in the favorable return in our pension plan assets of $0.2 million.

The increase in other income of $2.3 million in the first six months was driven by a gain on the sale of the Eberhard Hardware Ltd.

Building of $1.8 million, a favorable return on pension plan assets of $1.0 million less offset by a one-time sale-leaseback transaction gain in the first quarter of 2020.

Net income for the second quarter of fiscal 2021 was $2.8 million, or $0.44 per diluted share compared to net income of $2.1 million, or $0.33 per diluted share, for the comparable period in 2020.

In the first six months of 2021 net income was $8.5 million, or $1.34 per diluted share compared to net income of $4.8 million, or $0.76 per diluted share for the comparable period in 2020.

Gross margin as a percent of sales was 24% in the third quarter and 24% in the first nine months of fiscal 2021 compared to 24% in the third quarter and 25% in the first nine months of fiscal 2020.

Product development expense increased $0.4 million, or 73% in the third quarter of 2021 and increased $0.7 million, or 28%, in the first nine months of 2021 compared to the corresponding periods in 2020.

As a percentage of net sales, product development costs were 1.5% and 1.6% for the third quarter and first nine months of 2021, respectively, and 1.0%, and 1.6% for the corresponding periods in 2020, respectively.

Selling and administrative expense increased $0.9 million, or 11%, in the third quarter of 2021 and increased $4.5 million, or 19% in the first nine months of 2021 compared to the corresponding period in 2020 primarily due to increased commissions and other selling costs, amortization expense, payroll-related expenses, and incentive costs, which were suspended in the first quarter of fiscal 2020.

Interest expense decreased $0.1 million in the third quarter and decreased $0.2 million for the first nine months of 2021 compared to the corresponding periods in 2020.

Other income was flat in the third quarter and increased $2.4 million in the first nine months of 2021 compared to the corresponding periods in 2020.

The increase in other income of $2.4 million in the first nine months was driven by a gain on the sale of the Eberhard Hardware Ltd.

Building of $1.8 million and a favorable return on pension plan assets of $0.6 million.

Net income from continuing operations for the third quarter of fiscal 2021 was $3.8 million, or $0.61 per diluted share compared to net income of $3.2 million, or $0.51 per diluted share for the comparable period in 2020.

In the first nine months of 2021 net income from continuing operations was $12.3 million, or $1.96 per diluted share compared to net income of $7.9 million, or $1.26 per diluted share for the comparable period in 2020.

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

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Three Months Ended

Six Months Ended

Nine Months Ended

Cost of products sold

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Operating Profit

The following table shows the change in sales and operating profit for the second quarter and first six months of fiscal 2021 compared to the second quarter and first six months of fiscal 2020 (dollars in thousands):

The following table shows the change in sales and operating profit for the third quarter and first nine months of fiscal 2021 compared to the third quarter and first nine months of fiscal 2020 (dollars in thousands):

Operating Profit

Liquidity and Sources of Capital

The Company generated approximately $4.3 million of cash from operations during the first six months of fiscal 2021 compared to approximately $6.6 million during the first six months of fiscal 2020.

The cash flows in the first six months of fiscal 2021 were lower when compared to the corresponding period last year due to an increase in inventory and accounts receivable partially offset by an increase in accounts payable.

Cash flow from operations coupled with cash at the beginning of the 2021 fiscal year was sufficient to fund capital expenditures, debt service, and dividend payments for the first six months of fiscal 2021.

Additions to property, plant and equipment were approximately $1.8 million for the first six months of fiscal 2021 and $0.8 million for the first six months of fiscal 2020.

Additionally, in the first six months of 2021 the company received proceeds of $2.0 million from the sale of one of its facilities in Canada.

As of July 3, 2021, there were approximately $0.4 million of outstanding commitments for capital expenditures.

The Company consumed approximately $3.3 million of cash from continuing operations during the first nine months of fiscal 2021 compared to generating approximately $19.4 million during the first nine months of fiscal 2020.

The cash flows in the first nine months of fiscal 2021 were lower when compared to the corresponding period last year due to an increase in inventory and accounts receivable partially offset by an increase in accounts payable.

The effects of the COVID-19 pandemic are continuing to impact the supply chain and as such inventories and accounts payable have increased due to increased shipping time and port congestion as well as selective pre-buying of raw materials to avoid increasing prices.

Additions to property, plant and equipment were approximately $2.1 million for the first nine months of fiscal 2021 and $1.5 million for the first nine months of fiscal 2020 from continuing operations.

Additionally, in the first nine months of 2021 the company received proceeds of $2.0 million from the sale of one of its facilities in Canada.

As of October 2, 2021, there were approximately $0.3 million of outstanding commitments for capital expenditures.

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

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Working capital

Net cash provided by operating activities

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

Net cash (used in) provided by operating activities

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

Net cash provided by (used in) investing activities

Net cash used in financing activities

Inventories of $48.8 million as of July 3, 2021 represent an increase of 13.0% as compared to $43.1 million at the end of fiscal year 2020 and an increase of 12.0% as compared to $43.7 million at the end of the second quarter of fiscal 2020.

Accounts receivable, less allowances, were $35.1 million as of July 3, 2021, as compared to $31.8 million at 2020 fiscal year end and $28.4 million at the end of the second quarter of fiscal 2020.

Inventories of $56.7 million as of October 2, 2021 represent an increase of 31.5% as compared to $43.1 million at the end of fiscal year 2020 and an increase of 46.1% as compared to $38.8 million at the end of the third quarter of fiscal 2020.

Accounts receivable, less allowances, were $41.3 million as of October 2, 2021, as compared to $31.8 million at 2020 fiscal year end and $28.0 million at the end of the third quarter of fiscal 2020.

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.

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Off-Balance Sheet Arrangements

As of the end of the fiscal quarter ended July 3, 2021, 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.

As of the end of the fiscal quarter ended October 2, 2021, 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.

Non-GAAP Financial Measures

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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 GAAP financial measures, such as net sales, net income, diluted earnings per common share, or other measures prescribed by U.S.

These measures are not substitutes for their comparable U.S.

GAAP financial measures, such as net sales, net income, diluted earnings per common share, 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 they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, factory relocation expenses 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 by removing the impact of certain items that management believes do not directly reflect our underlying operations.

Adjusted Earnings Per Share from Continuing Operations is defined as diluted earnings per share from continuing operations excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, factory relocation expenses and restructuring costs.

We believe that Adjusted Earnings Per Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis.

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 they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, factory relocation expenses 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 including our business segments, 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, GAAP financial measures.

We believe that presenting non-GAAP financial measures in addition to GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making.

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.

Reconciliation of Net Income from Continuing Operations to Adjusted Net Income from Continuing Operations and Adjusted Earnings Per Share from Continuing Operations Calculation For the Three and Six Months ended July 3, 2021 and June 27, 2020

Reconciliation of Non-GAAP Measures

EPS from Continuing Operations Calculation

For the Three and Nine Months ended October 2, 2021 and October 3, 2020

Three Months Ended

Six Months Ended

Nine Months Ended

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

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Gain on sale of Eberhard Hardware Ltd building, net of tax

Factory relocation, net of tax

Transaction expenses

Factory start-up costs, net of tax

Total adjustments (Non-GAAP)

Adjusted net income from continuing operations

Adjusted earnings per share from continuing operations ;

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

A) Gain on sale of Eberhard Hardware Ltd building

Reconciliation of Net Income from Continuing Operations to Adjusted EBITDA from Continuing Operations calculation For the Three and Six Months ended July 3, 2021 and June 27, 2020

B) Cost incurred on relocation of Velvac factory in Reynosa, MX

C) Costs incurred on the acquisition of Hallink RSB, Inc.

D) Costs incurred on start-up of Eberhard factory in Reynosa, MX

E) Costs incurred on relocation of ILC facility in Wheeling, IL

Reconciliation of Non-GAAP Measures

EBITDA from Continuing Operations Calculation

For the Three and Nine Months ended October 2, 2021 and October 3, 2020

Three Months Ended

Six Months Ended

Nine Months Ended

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

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Gain on sale of Eberhard Hardware Ltd Building

Factory relocation

Transaction expenses

Factory start-up costs

Adjusted EBITDA from continuing operations

A) Gain on sale of Eberhard Hardware Ltd building

B) Cost incurred on relocation of Velvac factory in Reynosa, MX

C) Costs incurred on the acquisition of Hallink RSB, Inc.

D) Costs incurred on start-up of Eberhard factory in Reynosa, MX

E) Costs incurred on relocation of ILC facility in Wheeling, IL

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis