What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-08 compared with 2022-05-09 · 51 added, 53 removed, 132 unchanged (44% 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 April 2, 2022.

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 1, 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 January 1, 2022, which was filed with the Securities and Exchange Commission (the “SEC”) on March 17, 2022 (the “2021 Form 10-K”).

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In a 52-week fiscal year, each quarter has 13 weeks.

References to the first quarter of 2021, the first fiscal quarter of 2021 or the three months ended April 3, 2021, mean the period from January 3, 2021 to April 3, 2021.

References to the first quarter of 2022, the first fiscal quarter of 2022 or the three months ended April 2, 2022, mean the 13-week period from January 2, 2022 to April 2, 2022.

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

References to the second quarter of 2022, the second fiscal quarter of 2022 or the three months ended July 2, 2022, mean the 13-week period from April 3, 2022 to July 2, 2022.

References to the first six months of 2021 or the six months ended July 3, 2021 mean the period from January 3, 2021 to July 3, 2021.

References to the first six months of 2022 or the six months ended July 2, 2022 mean the period from January 1, 2022 to July 2, 2022.

Safe Harbor for Forward-Looking Statements

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COVID-19 Update

The COVID-19 pandemic has affected our businesses, including our supply chain, our operations, the labor force, and rising costs throughout 2021 and into 2022.

The COVID-19 pandemic has affected our businesses, including our supply chain, our operations, the labor force, and costs throughout 2021 and into 2022.

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

As a result of these measures, the COVID pandemic had minimal impact on our capacity utilization at most of our production facilities in the first quarter of 2022.

As a result of these measures, the COVID pandemic had minimal impact on our North American capacity utilization at most of our production facilities in the second quarter of 2022.

Many of the Company’s employees have received COVID-19 vaccinations, and we will continue to encourage our workforce to get vaccinated.

In the second quarter of 2022, we are experiencing interruptions in China of our operations and supply base as a result of another variant of COVID-19 and the response to minimize its spread.

In the second quarter of 2022, we are experienced interruptions in China of our operations and supply base as a result of another variant of COVID-19 and the response to minimize its spread.

A more significant resurgence of the COVID-19 pandemic or development of additional severe or highly contagious variants could cause further disruptions in our business and could adversely affect our financial condition, results of operations and cash flow.

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and providing hand sanitizer and disposable wipes.

We encourage social distancing, limit in-person meetings, eliminated all non-essential workplace travel and continue to seek and implement additional methods to reduce the risk of COVID-19 to our employees.

To the extent our operations will be further affected by COVID-19 in 2022 is dependent on future developments including new COVID variants, effectiveness of vaccines, new medication, and government restrictions.

We encourage social distancing, limit in-person meetings, reduced all non-essential workplace travel and continue to seek and implement additional methods to reduce the risk of COVID-19 to our employees.

the extent to which our operations will be further affected by COVID-19 in 2022 is dependent on future developments including new COVID variants, effectiveness of vaccines, new medication, and governmental restrictions.

All these factors could result in further supply chain shortages and resulting cost inflation, increased operating cost, difficulty in finding workers, continued port congestion, and higher shipping costs.

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The following analysis excludes discontinued operations.

Net sales in the first quarter of 2022 increased 12% to $69.0 million from $61.8 million in the corresponding period in 2021.

Sales increased in the first quarter due to increased demand for truck accessories and automotive returnable transport packaging products as well as from distributors.

Our returnable transport packaging sales benefit from the increase in new automotive product launches, including several electric vehicle launches.

Our backlog as of April 2, 2022 was up 23% to $85.8 million from $69.7 million as of April 3, 2021.

Net sales of existing products increased 4% in the first quarter of 2022 compared to the corresponding period in 2021.

Price increases and new products increased net sales by 8% in the first quarter of 2022 compared to the corresponding period in 2021.

Net sales in the second quarter of 2022 increased by 14% to $69.5 million from $61.2 million in the corresponding period in 2021.

Net sales for the first six months of 2022 increased by 13% to $138.6 million from $123.0 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 and returnable transport packaging products as well as from distributors.

Our returnable transport packaging sales continue to benefit from the increase in new automotive product launches, including several electric vehicle launches.

Our backlog as of July 2, 2022 decreased 0.4% to $82.8 million from $83.2 million as of July 3, 2021.

Net sales of existing products increased 9% in the second quarter of 2022 and 6% for the first six months of 2022 compared to the corresponding periods in 2021.

Price increases and new products increased net sales by 5% in the second quarter and 7% in the first six months of 2022, compared to the corresponding periods in 2021.

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

Price increases primarily reflect our efforts to recover an increase in raw material and freight costs.

Cost of products sold increased $8.2 million, or 18%, in the first quarter of 2022 compared to the corresponding period in 2021.

The increase is primarily due to higher sales volume, as well as increases in the cost of materials and freight rates.

Price increases primarily reflect our efforts to recover increases in raw material and freight costs.

Cost of products sold increased by $6.3 million, or 13%, in the second quarter of 2022 and increased by $14.5 million, or 16% in the first six months of 2022 compared to the corresponding periods in 2021.

The increases are primarily due to higher sales volume and increases in the cost of materials.

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

For example, the cost of most common forms of cold-rolled steel increased 21% between the first quarter of 2021 and the first quarter of 2022;

For example, the cost of most common forms of cold-rolled steel increased 2% between the second quarter of 2021 and the second quarter of 2022;

nickel increased 95%;

and copper and zinc increased 5% and 41% respectively.

Additionally, our freight costs increased $0.4 million, or 18%, in the first quarter of 2022 when compared to the corresponding period in 2021.

This increase is due to increased sales volume as shipping demand has exceeded available carriers’ capacity.

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

Finally, the Company paid tariff costs on China-sourced products of approximately $0.6 million in the first quarter of 2022, compared to $0.6 million in the first quarter of fiscal 2021.

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

Gross margin as a percent of sales was 21% in the first quarter of fiscal 2022 compared to 25% in the first quarter of fiscal 2021.

Our gross margin in the first quarter of fiscal 2022 reflects the rapid increase in raw material prices.

Product development expense increased $0.2 million, or 18% in the first quarter of 2022 when compared to the corresponding period in 2021.

As a percentage of net sales, product development costs were 1.7% for the first quarter of 2022 and 1.6% for the corresponding period in 2021.

Selling and administrative expense increased $0.9 million, or 10%, in the first quarter of 2022 when compared to the corresponding period in 2021 primarily due to increased commissions and other selling costs, payroll-related expenses, and travel costs.

Price increases to our customers recovered a portion of the increase in raw material costs.

Finally, the Company paid tariff costs on China-sourced products of approximately $0.8 million and $1.3 million in the second quarter and first six months of 2022 respectively, compared to $0.8 million and $1.4 million in the second quarter and first six months of 2021 respectively.

A significant portion of 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 22% in the first six months of 2022 compared to 23% in the second quarter and 24% in the first six months of fiscal 2021.

Our gross margins in the second quarter and first six months of 2022 reflect the impact of price increases to customers to recover increases in raw material costs.

Product development expense decreased $0.1 million, or 12% in the second quarter of 2022 and increased $0.1 million, or 2%, in the first six months of 2022 compared to the corresponding periods in 2021.

As a percentage of net sales, product development costs were 1.4% and 1.6% for the second quarter and first six months of 2022, respectively, compared to 1.8% and 1.7% for the corresponding periods in 2021.

Selling, general and administrative expense increased $0.8 million, or 8%, in the second quarter of 2022 and increased $1.7 million, or 9% in the first six months of 2022 when compared to the corresponding periods in 2021 primarily due to increased commissions and other selling costs, payroll-related expenses, and travel costs.

This increase in selling expenses reflect both the increase in sales as well as our investments in sales capabilities.

Interest expense decreased $0.1 million in the first quarter of 2022 compared to the corresponding period in 2021.

Other income was down $1.9 million in the first quarter of 2022 compared to the corresponding period in 2021.

The decrease in other income of $1.9 million in the first quarter was primarily driven by a gain on the sale of the Eberhard Hardware Ltd.

Interest expense increased $0.1 million in the second quarter of 2022 and was flat in the first six months of 2022 compared to the corresponding periods in 2021.

Other income was flat in the second quarter and decreased $2.0 million in the first six months of 2022 compared to the corresponding periods in 2021.

The decrease in other income of $2.0 million in the first six months of 2022 was primarily driven by a gain on the sale of the Eberhard Hardware Ltd.

building of $1.8 million in the first quarter of 2021.

Net income from continuing operations for the first quarter of fiscal 2022 was $2.7 million, or $0.43 per diluted share compared to net income of $5.7 million, or $0.90 per diluted share for the comparable period in 2021.

Net income from continuing operations for the second quarter of fiscal 2022 was $3.7 million, or $0.59 per diluted share compared to net income of $2.8 million, or $0.44 per diluted share for the comparable period in 2021.

In the first six months of 2022 net income was $6.4 million, or $1.02 per diluted share compared to net income of $8.4 million, or $1.35 per diluted share for the comparable period in 2021.

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

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Three Months Ended

April 2, 2022

April 3, 2021

Six Months Ended

Cost of products sold

Product development expense

Selling and administrative expense

Selling, general and administrative expense

Operating Profit

The following table shows the change in sales and operating profit for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 (dollars in thousands):

The following table shows the change in sales and operating profit for the second quarter and first six months of 2022 compared to the second quarter and first six months of 2021 (dollars in thousands):

Operating Profit

Liquidity and Sources of Capital

The Company consumed approximately $3.6 million of cash from continuing operations during the first three months of fiscal 2022 compared to generating approximately $1.3 million during the first three months of fiscal 2021.

Cash flow from operations in the first three months of 2022 was lower when compared to the corresponding period last year primarily 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 a result inventories and accounts payable have increased due to increased shipping time, port congestion, and selective pre-buying of raw materials to ensure availability and mitigate the impact of likely future inflationary price increases.

Cash flow from operations coupled with cash at the beginning of the 2022 fiscal year and the proceeds from the line of credit were sufficient to fund capital expenditures, debt service, and dividend payments for the first three months of 2022.

On April 8, 2022, the Company drew down an additional $5.0 million on its revolving credit facility to support ongoing working capital requirements brought on by current supply chain constraints.

The Company consumed approximately $2.5 million of cash from continuing operations during the first six months of fiscal 2022 compared to generating approximately $4.3 million during the first six months of fiscal 2021.

Cash flow from operations in the first six months of 2022 was lower when compared to the corresponding period last year primarily due to an increase in inventory and accounts receivable.

The effects of the COVID-19 pandemic are continuing to impact the supply chain and as a result inventories have increased due to increased shipping time, port congestion, and selective pre-buying of raw materials to ensure availability and mitigate the impact of likely future inflationary price increases.

The Company has $10.0 million available on its revolving line of credit.

See Note G - Debt for further discussion on the Company’s debt facilities.

Additions to property, plant and equipment for continuing operations were approximately $0.6 million for the first three months of 2022 and $0.6 million for the first three months of 2021.

Additionally, in the first three months of 2022 the company received proceeds of $1.3 million from the sale of one of its properties compared to $2.0 million from the sale of one of its facilities in Canada during the first three months of 2021.

As of April 2, 2022, there were approximately $0.2 million of outstanding commitments for capital expenditures.

Additions to property, plant and equipment for continuing operations were approximately $1.1 million for the first six months of 2022 and $1.8 million for the first six months of 2021.

Additionally, in the first six months of 2022 the Company received proceeds of $1.3 million from the sale of one of its properties compared to $2.0 million from the sale of one of its facilities in Canada during the first six months of 2021.

As of July 2, 2022, 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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Net cash provided by (used in) financing activities

Inventories of $67.8 million as of April 2, 2022, represent an increase of 7.8% as compared to $62.9 million at the end of fiscal year 2021 and an increase of 56.0% as compared to $43.4 million at the end of the first quarter of fiscal 2021.

Accounts receivable, less allowances, were $47.0 million as of April 2, 2022, as compared to $43.2 million at 2021 fiscal year end and $42.2 million at the end of the first quarter of fiscal 2021.

Inventories of $67.7 million as of July 2, 2022, represent an increase of 7.7% as compared to $62.9 million at the end of fiscal year 2021 and an increase of 38.6% as compared to $48.8 million at the end of the second quarter of fiscal 2021.

Accounts receivable, less allowances, were $46.3 million as of July 2, 2022, as compared to $43.2 million at 2021 fiscal year end and $35.1 million at the end of the second quarter of fiscal 2021.

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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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.

As of the end of the fiscal quarter ended April 2, 2022, 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 July 2, 2022, 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

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Adjusted Net Income and EPS from Continuing Operations Calculation

For the Three Months ended April 2, 2022 and April 3, 2021

For the Three and Six Months ended July 2, 2022 and July 3, 2021

Three Months Ended

April 2, 2022

April 3, 2021

Six Months Ended

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

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Adjusted EBITDA from Continuing Operations Calculation

For the Three Months ended April 2, 2022 and April 3, 2021

For the Three and Six Months ended July 2, 2022 and July 3, 2021

Three Months Ended

April 2, 2022

April 3, 2021

Six Months Ended

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

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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