What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-07 compared with 2022-08-08 · 89 added, 62 removed, 121 unchanged (56% 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 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 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.

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

References to the third quarter of 2022, the third fiscal quarter of 2022 or the three months ended October 1, 2022, mean the 13-week period from July 3, 2022 to October 1, 2022.

References to the first nine months of 2021 or the nine months ended October 2, 2021 mean the period from January 3, 2021 to October 2, 2021.

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

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 “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms or variations of those terms or the negative of those terms.

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 scope and duration of the COVID-19 pandemic, including timing of the distribution of COVID-19 vaccines and rates of vaccination, the extent of resurgences,, the emergence of additional virus variants and how quickly and to what extent normal economic activity can resume, and economic effects of the COVID-19 pandemic, including supply chain disruptions, cost inflation, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, and risks associated with employees working remotely or operating with reduced workforce.

These factors include the scope and duration of the COVID-19 pandemic and economic effects of the COVID-19 pandemic, including supply chain disruptions, cost inflation, rising interest rates, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, and the availability, terms and cost of financing, including borrowings under credit arrangements or agreements.

Other factors include, but are not limited to 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;

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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 costs throughout 2021 and into 2022.

The COVID-19 pandemic has affected our businesses, including our supply chain, our operations, the labor force, costs and interest rates throughout 2021 and the first nine months of 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 North American capacity utilization at most of our production facilities in the second 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 third 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 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.

In the second quarter of 2022, we experienced interruptions in China of our operations and supply base as a result of a new 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.

During the past two years and continuing into 2022, the Company implemented a broad range of policies and procedures to ensure that employees at all our locations remain healthy.

During the past two years and continuing through the first nine months of 2022, the Company implemented a broad range of policies and procedures to ensure that employees at all our locations remain healthy.

Steps that we have taken to reduce the risk of COVID-19 to our employees include, among others:

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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.

The extent to which our operations will be further affected by COVID-19 and its lasting economic impact, including supply chain disruptions, cost inflation and rising interest rates, in the fourth quarter of 2022 and fiscal year 2023 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 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.

Net sales in the third quarter of 2022 increased by 12% to $71.6 million from $63.9 million in the corresponding period in 2021.

Net sales for the first nine months of 2022 increased 12% to $210.2 million from $186.9 million in the same period last year.

Sales rose for both the third quarter and nine-month periods due to greater 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.

Our backlog as of October 1, 2022 increased 3% to $85.7 million from $83.1 million as of October 2, 2021.

Net sales of existing products grew by 5% in the third quarter of 2022 and 6% for the first nine months of 2022 compared to the corresponding periods in 2021.

Price increases and new products increased net sales by 7% in the third quarter and 6% in the first nine 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 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.

Cost of products sold increased by $6.4 million, or 13%, in the third quarter of 2022 and increased by $20.9 million, or 15% in the first nine 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 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.

For example, the cost of nickel and zinc increased 30% and 17% respectively between the third quarter of 2021 and the third quarter of 2022.

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.

Finally, the Company paid tariff costs on China-sourced products of approximately $0.8 million and $2.5 million in the third quarter and first nine months of 2022 respectively, compared to $0.6 million and $2.0 million in the third quarter and first nine 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.

Gross margin as a percent of sales was 23% in the third quarter and 22% in the first nine months of 2022 compared to 24% in the third quarter and 24% in the first nine months of fiscal 2021.

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

Product development expense increased $0.1 million, or 5%, in the third quarter of 2022 and increased $0.1 million, or 3%, in the first nine months of 2022 compared to the corresponding periods in 2021.

As a percentage of net sales, product development costs were 1.4% and 1.5% for the third quarter and first nine months of 2022, respectively, compared to 1.5% and 1.6% for the corresponding periods in 2021.

Selling, general and administrative expense increased $0.7 million, or 7%, in the third quarter of 2022 and increased $2.4 million, or 9% in the first nine 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 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 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.

Interest expense increased $0.2 million in the third quarter of 2022 and $0.2 million in the first nine months of 2022 compared to the corresponding periods in 2021.

Other income increased $0.7 million in the third quarter and decreased $1.2 million in the first nine months of 2022 compared to the corresponding periods in 2021.

The increase in other income of $0.7 million in the third quarter of 2022 was primarily driven by a $0.6 million gain on the sale of the Eastern Company corporate office building.

The $1.2 million decrease in other income for the first nine 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, partially offset by increased gains in pension cost adjustments in 2022.

Net income from continuing operations for the third quarter of fiscal 2022 was $4.5 million, or $0.72 per diluted share compared to net income from continuing operations of $3.8 million, or $0.61 per diluted share, for the comparable period in 2021.

In the first nine months of 2022 net income from continuing operations was $10.9 million, or $1.74 per diluted share, compared to net income from continuing operations of $12.3 million, or $1.96 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

Six Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

Cost of products sold

Product development expense

Selling, general and administrative expense

Selling and administrative expense

Operating Profit

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):

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

October 1, 2022

Operating Profit

Liquidity and Sources of Capital

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 Company consumed approximately $0.3 million of cash from continuing operations during the first nine months of fiscal 2022 compared to consuming approximately $3.3 million during the first nine months of fiscal 2021.

Cash flow from operations in the first nine months of 2022 was higher when compared to the corresponding period last year primarily due to a smaller 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.

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 six months of 2022.

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

The Company has $11.0 million available on its revolving line of credit as of October 1, 2022.

On October 21, 2022 the Company used the proceeds from the sale of assets of Argo EMS to pay down an additional $5 million on the 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 $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.

Additions to property, plant and equipment for continuing operations were approximately $1.7 million for the first nine months of 2022 and $2.1 million for the first nine months of 2021.

Additionally, in the first nine months of 2022 the Company received proceeds of $2.1 million from the sale of two of its properties compared to $2.0 million from the sale of one of its facilities in Canada during the first nine months of 2021.

As of October 1, 2022, there were approximately $1.1 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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Total debt to shareholders’ equity

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

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

Cash and cash equivalents

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Net cash (used in) provided by operating activities

Change in working capital impact on net cash used in operating activities

Change in working capital impact on net cash

used in operating activities

Net cash provided by investing activities

Net cash provided by (used in) financing activities

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.

Net cash used in financing activities

Inventories of $67.5 million as of October 1, 2022, represent an increase of 7.4% as compared to $62.9 million at the end of fiscal year 2021 and an increase of 19.1% as compared to $56.7 million at the end of the third quarter of fiscal 2021.

Accounts receivable, less allowances, were $50.9 million as of October 1, 2022, as compared to $43.2 million at 2021 fiscal year end and $41.3 million at the end of the third 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 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.

As of the end of the fiscal quarter ended October 1, 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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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.

GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Diluted 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, diluted earnings per common share, or other measures prescribed by U.S.

GAAP financial measures, such as net sales, net income, diluted earnings per 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 incurred, certain one-time costs arising from the impacts of impairment losses, gains/losses on the sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring costs.

Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, certain one-time costs arising from 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 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 operating performance.

Adjusted Earnings Per Share from Continuing Operations is defined as diluted earnings per share from continuing operations excluding, when incurred, certain per share one-time costs arising from, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, 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 incurred, the impacts of certain one-time costs arising from impairment losses, gains/losses on sale of subsidiaries and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses and restructuring expenses.

Adjusted Earnings Per Diluted Share from Continuing Operations is defined as earnings per diluted share from continuing operations excluding, when incurred, certain per share one-time costs arising from, 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 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.

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 one-time costs arising from 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 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.

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Adjusted Net Income and EPS from Continuing Operations Calculation

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

For the Three and Nine Months ended October 1, 2022 and October 2, 2021

Three Months Ended

Six Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

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

Factory start-up costs, net of tax

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

Gain on sale of Eastern corporate office building, net of tax

Total adjustments (Non-GAAP)

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A) Gain on sale of Eberhard Hardware Ltd building

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

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

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

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

E) Gain on sale of Eastern corporate office building

Reconciliation of Non-GAAP Measures

Adjusted EBITDA from Continuing Operations Calculation

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

For the Three and Nine Months ended October 1, 2022 and October 2, 2021

Three Months Ended

Six Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

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

Factory start-up costs

Loss on sale of Wheeling, IL building

Gain on sale of Eastern corporate office building

Adjusted EBITDA from continuing operations

A) Gain on sale of Eberhard Hardware Ltd building

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

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

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

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

E) Gain on sale of Eastern corporate office building

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