What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-07 compared with 2023-08-08 · 84 added, 64 removed, 110 unchanged (57% 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 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.

References to 2022, the 2022 fiscal year or fiscal 2022 mean the 52-week period ended on December 31, 2022, and references to 2023, the 2023 fiscal year or fiscal 2023 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.

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

References to the third quarter of 2023, the third fiscal quarter of 2023, the third quarter of fiscal 2023 or the three months ended September 30, 2023, mean the 13-week period from July 2, 2023 to September 30, 2023.

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

References to the first nine months of 2023, the first nine months of fiscal 2023 or the nine months ended September 30, 2023 mean the period from January 1, 2023 to September 30, 2023.

Safe Harbor for Forward-Looking Statements

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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;

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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;

domestic and international economic conditions, 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.

the impact of climate change;

military conflict (including the Russia/Ukraine conflict, the conflict in Israel and surrounding areas, the possible expansion of such conflicts and geopolitical consequences) or terrorist threats and the possible responses by the U.S.

and foreign governments;

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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.

Net sales in the third quarter of 2023 decreased 8% to $65.6 million from $71.6 million in the corresponding period in 2022.

Net sales for the first nine months of 2023 decreased 2% to $206.5 million from $210.2 million in the same period last year.

Sales declined in both the third quarter of 2023 and first nine months of 2023 primarily due to lower demand for truck accessories and returnable transport packaging products.

Our backlog as of September 30, 2023 increased 4% to $89.4 million from $85.7 million as of October 1, 2022.

Net sales of existing products declined 14% in the third quarter of 2023 and 5% for the first nine months of 2023 compared to the corresponding periods in 2022.

Price increases and new products increased net sales by 6% in the third quarter of 2023 and 3% in the first nine 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.

Cost of products sold decreased $5.8 million, or 11%, in the third quarter of 2023 and decreased $3.6 million, or 2% in the first nine months of 2023 compared to the corresponding periods in 2022.

The decreases in the third quarter and first nine months of 2023 are primarily due to lower sales volumes.

Additionally, the Company paid tariff costs on China-sourced products of approximately $0.6 million and $1.7 million in the third quarter and first nine months of 2023, respectively, compared to $0.8 million and $2.5 million in the third quarter and first nine 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.

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.

Gross margin as a percentage of sales was 25% in the third quarter and 23% in the first nine months of 2023 compared to 23% in the third quarter and 22% in the first nine months of fiscal 2022.

Our gross margins in the third quarter and first nine months of 2023 reflect the impact of price increases to customers to recover increases in raw material costs.

Product development expense increased $0.4 million, or 41%, in the third quarter of 2023 and increased $1.1 million, or 34%, in the first nine months of 2023 compared to the corresponding periods in 2022 as we continue to invest in new products at Eberhard, Velvac and Big 3.

As a percentage of net sales, product development costs were 2.2% and 2.1% for the third quarter and first nine months of 2023, respectively, compared to 1.4% and 1.5% for the corresponding periods in 2022.

Selling general and administrative expenses decreased $0.4 million, or 4%, in the third quarter of 2023 when compared to the third quarter of 2022 primarily due to lower legal, professional, and selling costs and payroll-related expenses.

Selling general and administrative expenses increased $2.8 million, or 9%, in the first nine months of 2023 when compared to the corresponding period 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 our investments in sales capabilities and change in management personnel.

Interest expense increased $0.4 million in the third quarter and $1.0 million in the first nine months of 2023 compared to the corresponding periods in 2022 due to higher borrowing rates.

Other income decreased $1.3 million in the third quarter of 2023 and decreased $2.6 million in the first nine months of 2023 compared to the corresponding periods in 2022.

The decrease in other income of $1.3 million in the third quarter of 2023 was primarily driven by unfavorable pension costs of $0.3 million in the third quarter of 2023, while in the third quarter of 2022 the Company had a favorable pension cost adjustment of $0.4 million, and a $0.6 million gain on the sale of the Company’s corporate office building in the third quarter of 2022.

The decrease in other income of $2.6 million for the first nine months of 2023 when compared to the corresponding period in 2022 was primarily driven by unfavorable pension costs of $0.9 million for the first nine months of 2023, while in the first nine months of 2022 the Company had favorable pension cost adjustments of $1.3 million, $1.4 million expense associated with the closure of Associated Toolmakers, Ltd.

in the second quarter of 2023, 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 in the second quarter of 2023, while in the first quarter of 2022 the Company had a loss on the sale of the Wheeling, IL building of $0.3 million and a gain of $0.6 million on the sale of the Company’s corporate office building in the third quarter of 2022.

Net income from continuing operations for the third quarter of fiscal 2023 was $3.1 million, or $0.49 per diluted share compared to net income from continuing operations of $4.5 million, or $0.72 per diluted share, for the comparable period in 2022.

In the first nine months of 2023 net income from continuing operations was $5.1 million, or $0.81 per diluted share, compared to net income from continuing operations of $10.9 million, or $1.74 per diluted share, for the comparable period in 2022.

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

September 30, 2023

October 1, 2022

September 30, 2023

October 1, 2022

Cost of products sold

2 unchanged sentences

Operating Profit

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):

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

September 30, 2023

Operating Profit

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.

The Company generated approximately $19.2 million of cash from continuing operations during the first nine months of fiscal 2022 compared to consuming approximately $0.3 million during the first nine months of fiscal 2022.

Cash flow from operations in the first nine months of 2023 was higher when compared to the corresponding period in 2022 primarily due to reductions in inventory and accounts receivable.

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

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.

Additions to property, plant and equipment for continuing operations were approximately $4.7 million and $1.7 million for the first nine months of 2023 and 2022, respectively.

As of September 30, 2023, there were approximately $1.5 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):

Cash and cash equivalents

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):

- Held in the United States

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Net cash provided by (used in) operating activities

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

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

Net cash (used in) provided by investing activities

Net cash (used in) provided by financing activities

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.

Net cash used in financing activities

Inventories of $60.6 million as of September 30, 2023, represent a decrease of 6.2% as compared to $64.6 million at the end of fiscal year 2022 and a decrease of 10.2% as compared to $67.5 million at the end of the third quarter of fiscal 2022.

Accounts receivable, less allowances, were $42.8 million as of September 30, 2023, as compared to $42.9 million at 2022 fiscal year end and $50.9 million at the end of the third quarter of fiscal 2022.

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”), and 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.

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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.

We were in compliance with all our covenants as of September 30, 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 in the short-term (i.e., the next 12 months from September 30, 2023) and separately in the long-term (i.e., beyond the next 12 months).

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.

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.

A decrease in earnings due to the impact of current economic conditions and inflationary pressures or the resulting harm to the financial condition of our customers, 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.

In addition to funding capital requirements, we may use available cash to pay down our indebtedness, to make investments, which may include investments in publicly traded securities, or to make acquisitions that we believe will complement or expand our existing businesses.

As of the end of the third quarter of 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

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Adjusted Net Income and EPS from Continuing Operations Calculation

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

For the Three and Nine Months ended September 30, 2023 and October 1, 2022

Three Months Ended

Six Months Ended

Nine Months Ended

September 30, 2023

October 1, 2022

September 30, 2023

October1,2022

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

1 unchanged sentence

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

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

Severance and accrued compensation, net of tax

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Total adjustments (non-GAAP)

Adjusted net income from continuing operations (non-GAAP)

Adjusted net income from continuing operations

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

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.

A) Loss on sale of building in Wheeling, IL

B) Gain on sale of Eastern corporate office building

C) 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

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

E) Associated Toolmakers, Ltd.

closure costs

1 unchanged sentence

Adjusted EBITDA from Continuing Operations Calculation

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

For the Three and Nine Months ended September 30, 2023 and October 1, 2022

Three Months Ended

Six Months Ended

Nine Months Ended

September 30, 2023

October 1, 2022

September 30, 2023

October1,2022

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

3 unchanged sentences

Loss on sale of Wheeling, IL building

Severance and accrued compensation, net of tax

Gain on sale of Eastern corporate office building

Severance and accrued compensation

Greenwald final sale adjustment

Associated Toolmakers, Ltd.

closure, net of tax

Adjusted EBITDA from continuing operations

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.

A) Loss on sale of building in Wheeling, IL

B) Gain on sale of Eastern corporate office building

C) 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

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

E) Associated Toolmakers, Ltd.

closure costs

2 unchanged sentences

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