Item 1. Business
ITEM 1 BUSINESS
General Development of Business
The Eastern Company was incorporated under the laws of the State of Connecticut in October 1912, succeeding a co-partnership established in October 1858. The businesses of the Company design, manufacture and sell unique engineered solutions for industrial markets.
Today, the Company maintains 19 physical locations across North America, Europe, and Asia.
BUSINESS HIGHLIGHTS
On November 3, 2021, the Company sold its Greenwald Industries division (“Greenwald”). Greenwald is an original equipment manufacturer (“OEM”) offering a range of payment solutions from coin-vending products to smart card systems and payment applications.
On November 22, 2021, the Company sold its Frazer & Jones Company division (“Frazer & Jones”). Frazer & Jones is a high quality ductile and malleable iron foundry located in Syracuse, NY.
In the second fiscal quarter of 2021 the Company determined that the companies included in its Diversified Products segment, including Greenwald, Frazer & Jones, and Argo EMS, no longer fit with our long-term strategy and met the criteria to be treated as held for sale, and that the assets held for sale qualify for discontinued operations.
On November 19, 2020, the Company sold its subsidiary Sesamee Mexicana, S.A. de C.V. (“Sesamee Mexicana”). Sesamee Mexicana designs and manufactures composite panels and distributes industrial hardware. Eastern has exited the composite panels business as part of its strategy to streamline its business.
On August 10, 2020, the Company acquired certain assets, including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights and rights existing under all sales and purchase agreements, and assumed certain liabilities, of Hallink, RSB Inc. These assets are held in our subsidiary, Hallink Moulds, Inc. (“Hallink Moulds”). Hallink Moulds is a leader in innovative injection blow mold tooling and is a leading supplier of blow molds and change parts to the food, beverage, healthcare and chemical industries. Hallink Moulds specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry offering integrated turnkey solutions to its customers worldwide. The total consideration for the acquisition of Hallink Moulds was approximately $7.2 million which was paid out of the Company’s cash reserves.
On June 15, 2020, the Company sold its subsidiary, the Canadian Commercial Vehicles Corporation (“CCV”). CCV designs and manufactures composite panels. Eastern has exited the composite panels business as part of its strategy to streamline its business.
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Description of Business
The Eastern Company manages industrial businesses that design, manufacture and sell unique engineered solutions to industrial markets. We believe Eastern’s businesses operate in industries with long-term macroeconomic growth opportunities. We look to acquire businesses that produce stable and growing earnings and cash flows. Eastern focuses on acquisitions that further strengthen its core business but may pursue acquisitions in industries other than those in which its businesses currently operate if an acquisition presents an attractive opportunity.
Eastern manages the financial, operational, and strategic performance of its businesses to increase cash generation, operating earnings, and long-term shareholder value. Among other things, Eastern monitors financial and operational performance of each of its businesses and instills consistent financial discipline. Eastern’s management analyzes and pursues prudent organic growth strategies and works to execute attractive external growth and acquisition opportunities.
In addition, Eastern recruits and retains talented managers to operate its businesses. We look for leaders who are accountable, maintain cost discipline, act quickly, and build strong followership.
Company Operations
The Company’s operations consist of Big 3 Precision, including Big 3 Precision Products Inc. (“Big 3 Products”) and Big 3 Mold Services, Inc. (“Big 3 Mold”), Hallink Moulds, Inc. (“Hallink Moulds” or “Hallink”), and Associated Toolmakers Ltd. (“Associated Toolmakers”); Eberhard Manufacturing Company (“Eberhard Manufacturing”), Eastern Industrial Ltd, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries (together “Eberhard”); and Velvac Holdings Inc. (“Velvac”). These businesses design, manufacture, and market a diverse product line of custom and standard vehicular and industrial hardware, including turnkey returnable packaging solutions, access and security hardware, mirrors, and mirror-cameras.
Big 3 Products and Big 3 Mold’s turnkey returnable packaging solutions are used in the assembly processes of vehicles, aircraft, and durable goods and in the production processes of plastic packaging products, packaged consumer goods and pharmaceuticals. Big 3 Products works with leading OEMs to design and produce custom returnable transport packaging to integrate with OEM assembly processes. Big 3 Mold is a global leader in the design and manufacture of blow mold tools. Hallink Moulds is a leader in innovative injection blow mold tooling and is a leading supplier of blow molds and change parts to the food, beverage, healthcare, and chemical industry. Hallink specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry offering integrated turnkey solutions to its customers worldwide.
In 2020, we combined all businesses associated with the Eberhard Manufacturing and Illinois Lock Company to create Eberhard, a global leader in the engineering and manufacturing of access and security hardware. Eberhard offers a standard product line of rotary latches, compression latches, draw latches, hinges, camlocks, key switches, padlocks, and handles among other products, as well as comprehensive development and program management services for custom electromechanical and mechanical systems designed for specific OEMs and customer applications. Eberhard’s products are found in an expansive range of applications and products globally.
Velvac is a designer and manufacturer of proprietary vision technology for OEMs and aftermarket applications, and a leading provider of aftermarket components to the heavy-duty truck market in North America. Velvac serves diverse, niche segments within the heavy- and medium-duty truck, motorhome, and bus markets.
Human Capital
We believe our success depends on the skills, experience, and industry knowledge of our key talent. As such, our management team places significant focus and attention on the attraction, development, and retention of employees, as well as ensuring our corporate culture reflects Eastern’s values, and our Board of Directors (our “Board) provides oversight for various employee initiatives. Eastern values and Code of Business Conduct and Ethics guide our actions, reflect our culture, and drive our performance. We have made and continue to make investments in training, and we have a well-established performance management process.
An engaged, innovative, skilled, and collaborative workforce is critical to our continued leadership in the design and manufacture of unique engineered solutions to industrial markets. We operate globally under policies and programs that provide competitive wages, benefits, and terms of employment. We are committed to efforts to increase diversity and foster an inclusive work environment that supports our global workforce through recruiting efforts and equitable compensation policies.
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The health and safety of our employees is also a top priority. Our focus on the reduction of injuries and illnesses has significantly improved our safety performance. We have attained these improvements by fostering a global safety culture supported with regular training and education that includes robust systems and philosophies centered on personal responsibility and accountability. The Board established an Environment, Health and Safety Committee in 2019. There is a high-level of leadership engagement, ensuring installation and maintenance of appropriate safety equipment at all of our manufacturing sites worldwide combined with vigorous reviews of root causation and systemic corrective actions of any safety incidents that may occur.
In response to the emergence of COVID-19 in early 2020, we implemented a proactive internal procedure and complied with local, federal, and international governmental guidance that has enabled us to operate safely. Each of our facilities continues to adhere to these practices, and we have also adjusted our remote worker safety procedures to ensure that remote employees are better integrated into our safety and health systems.
Employee levels are managed to align with business demand and management believes it currently has sufficient human capital to operate its business successfully. As of January 1, 2022, we employed 1,191 full-time employees: 627 in the United States and 564 in other countries. Approximately 20% of employees in the United States are represented by collective bargaining agreements. We believe that our relations with employees, unions and works’ councils are in good standing.
General
Patent and trademark protection for the various product lines of the Company is limited, but the Company believes the current patents and trademark protection is sufficient to protect the Company’s competitive positions. Patent durations are from 2 to 20 years. No business operation is dependent on any patent, nor would the loss of any patent have any material adverse effect on the Company’s business.
During the second fiscal quarter of 2021, the Company announced plans to sell the companies included in our Diversified Products segment, these assets met the criteria to be treated as held for sale and reported as discontinued operations. Subsequently, in the fourth quarter of fiscal 2021, the Company sold its Greenwald Industries and Frazer & Jones divisions.
The Company’s businesses are not subject to seasonal variations.
Customers for the Company are broad-based by geography and by market, and sales are not highly concentrated by customer. Foreign sales were not significant.
The Company encounters competition in its businesses. Imports from Asia and Latin America with favorable currency exchange rates and low-cost labor have created additional pricing pressure. The Company competes successfully by offering high quality custom engineered products on a timely basis. To compete, the Company deploys internal engineering resources, maintains cost effective manufacturing capabilities through its wholly owned Asian subsidiaries, expands its product lines through product development and acquisitions, and maintains sufficient inventory for fast turnaround of customer orders.
The Company does not anticipate that compliance with federal, state, or local environmental laws or regulations is likely to have a material effect on the Company’s capital expenditures, earnings, or competitive position.
The Company obtains materials from nonaffiliated domestic, Asian affiliated and Asian nonaffiliated sources. Availability and prices of raw materials and outside services were affected by measures taken in response to the COVID-19 pandemic for some of the Company’s businesses during 2020 and 2021. We expect raw materials and outside services to be more readily available in 2022 unless resurgence of the COVID-19 pandemic occurs.
The Company’s ratio of working capital (current assets less current liabilities) to sales was 27.2% in 2021 and 36.0% in 2020. Working capital includes cash held in various foreign subsidiaries. Other factors affecting working capital include our average days’ sales in accounts receivable, inventory turnover ratio and payment of vendor accounts payable. In some cases, the company must hold extra inventory due to extended lead time in receiving products ordered from our foreign subsidiaries to ensure product is available for our customers. The Company continues to monitor working capital needs with the goal of reducing our ratio of working capital to sales.
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Available Information
The Company makes available, free of charge through its Internet website at http://www.easterncompany.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The Company’s reports filed with, or furnished to, the SEC are also available on the SEC’s website at www.sec.gov.