UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED April 1, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM to .
Commission File Number: 0-599
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THE EASTERN COMPANY
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(Exact name of registrant as specified in its charter)
Connecticut 06-0330020
----------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
112 Bridge Street, Naugatuck, Connecticut 06770
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(Address of principal executive offices) (Zip Code)
(203) 729-2255
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of April 1, 2006
----- -------------------------------
Common Stock, No par value 3,650,582
-1-
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS April 1, 2006 December 31, 2005
------ ------------- -----------------
Current Assets
Cash and cash equivalents $ 4,874,319 $ 6,345,947
Accounts receivable, less allowances: $297,000 - 2006; $295,000 - 2005 15,678,435 14,825,014
Inventories 22,033,498 20,767,749
Prepaid expenses and other assets 3,177,742 2,391,125
Deferred income taxes 715,321 715,321
-------------- --------------
Total Current Assets 46,479,315 45,045,156
Property, Plant and Equipment 43,528,049 42,468,773
Accumulated depreciation (20,873,514) (20,072,087)
-------------- --------------
22,654,535 22,396,686
Goodwill 10,639,057 10,641,532
Trademarks 110,934 103,498
Patents, technology, and licenses, less accumulated amortization 1,934,232 1,946,502
Interest rate swap asset 116,421 32,081
Intangible pension asset 732,554 732,554
Prepaid pension cost 719,768 723,826
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14,252,966 14,179,993
-------------- --------------
TOTAL ASSETS $ 83,386,816 $ 81,621,835
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities
Accounts payable $ 6,698,824 $ 5,599,260
Accrued compensation 999,756 1,527,640
Other accrued expenses 3,761,344 3,275,159
Current portion of long-term debt 3,446,269 3,420,523
-------------- --------------
Total Current Liabilities 14,906,193 13,822,582
Deferred income taxes 926,181 895,019
Long-term debt, less current portion 11,571,520 12,384,338
Accrued post-retirement benefits 2,036,807 2,078,056
Accrued pension cost 6,677,221 6,270,075
Shareholders' Equity
Preferred Stock, no par value: Authorized and unissued 2,000,000 shares
Common Stock, no par value: Authorized: 25,000,000 shares
Issued: 5,339,308 shares in 2006 and 5,328,417 shares in 2005 17,916,922 17,694,851
Treasury Stock: 1,688,726 shares in 2006 and 2005 (16,655,041) (16,655,041)
Retained earnings 51,079,057 50,335,658
Accumulated other comprehensive income (loss):
Foreign currency translation 897,047 818,566
Additional minimum pension liability, net of taxes (6,042,553) (6,042,553)
Derivative financial instruments, net of taxes 73,462 20,284
-------------- --------------
Accumulated other comprehensive loss (5,072,044) (5,203,703)
-------------- --------------
Total Shareholders' Equity 47,268,894 46,171,765
-------------- --------------
TOTAL LIBILITIES AND SHAREHOLDERS' EQUITY $ 83,386,816 $ 81,621,835
============== ==============
See accompanying notes.
-2-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended
April 1, 2006 April 2, 2005
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Net sales $ 27,860,183 $ 26,267,584
Cost of products sold (21,376,439) (20,797,690)
-------------- --------------
Gross margin 6,483,744 5,469,894
Selling and administrative expenses (4,461,468) (4,053,994)
-------------- --------------
Operating profit 2,022,276 1,415,900
Interest expense (239,576) (246,942)
Other income 29,923 7,502
-------------- --------------
Income before income taxes 1,812,623 1,176,460
Income taxes 668,858 445,878
-------------- --------------
Net income $ 1,143,765 $ 730,582
============== ==============
Earnings per Share:
Basic $ .31 $ .20
======= =======
Diluted $ .30 $ .19
======= =======
Cash dividends per share: $ .11 $ .11
See accompanying notes.
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
Three Months Ended
April 1, 2006 April 2, 2005
------------- -------------
Net income $ 1,143,765 $ 730,582
Other comprehensive income/(loss) -
Change in foreign currency translation 78,481 (42,080)
Change in fair value of derivative financial
instruments, net of income taxes of $42,959
and $41,000 in 2006 and 2005, respectively 53,178 60,948
------------ ------------
131,659 18,868
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Comprehensive income $ 1,275,424 $ 749,450
============ ============
See accompanying notes.
-3-
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended
April 1, 2006 April 2, 2005
------------- -------------
Operating Activities
Net income $ 1,143,765 $ 730,582
Adjustments to reconcile net income to net cash
provided(used) by operating activities:
Depreciation and amortization 855,454 971,229
Provision for doubtful accounts 8,244 1,017
Deferred income taxes - 192,439
Issuance of Common Stock for directors' fees 18,371 24,487
Changes in operating assets and liabilities:
Accounts receivable (911,132) (1,458,138)
Inventories (1,304,646) (28,776)
Prepaid expenses and other (781,380) 476,689
Prepaid pension cost 411,204 (1,028,709)
Other assets (46,540) (48,254)
Accounts payable 1,102,226 801,161
Accrued compensation (481,636) (1,085,011)
Other accrued expenses 522,833 (54,085)
------------- -------------
Net cash provided (used) by operating activities 536,763 (505,369)
Investing Activities
Purchases of property, plant and equipment (983,846) (618,978)
------------- -------------
Net cash used in investing activities (983,846) (618,978)
Financing Activities
Principal payments on long-term debt (856,021) (1,451,478)
Proceeds from issuance of long-term debt - 3,000,000
Proceeds from sales of Common Stock 203,700 -
Dividends paid (400,366) (399,835)
------------- -------------
Net cash (used in) provided by financing activities (1,052,687) 1,148,687
Effect of exchange rate changes on cash 28,142 (1,601)
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Net change in cash and cash equivalents (1,471,628) 22,739
Cash and cash equivalents at beginning of period 6,345,947 4,420,506
------------- -------------
Cash and cash equivalents at end of period $ 4,874,319 $ 4,443,245
============= =============
See accompanying notes.
-4-
THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 1, 2006
Note A - Basis of Presentation
------------------------------
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles in the United States for complete financial statements. Refer to the
Company's consolidated financial statements and notes thereto included in its
Form 10-K for the year ended December 31, 2005 for additional information.
The accompanying condensed consolidated financial statements are unaudited.
However, in the opinion of management, all adjustments (consisting only of
normal recurring accruals) necessary for a fair presentation of the results of
operations for interim periods have been reflected therein. All intercompany
accounts and transactions are eliminated. Operating results for interim periods
are not necessarily indicative of the results that may be expected for the full
year.
Certain prior period amounts have been reclassified to conform to the current
period presentation. These reclassifications had no effect on previously
reported net income.
The condensed consolidated balance sheet as of December 31, 2005 has been
derived from the audited consolidated balance sheet at that date.
Note B - Earnings Per Share
---------------------------
The denominators used in the earnings per share computations follow:
THREE MONTHS ENDED
April 1, 2006 April 2, 2005
------------- -------------
Basic:
Denominator for basic earnings per share 3,643,127 3,634,991
========= =========
Diluted:
Weighted average shares outstanding 3,643,127 3,634,991
Dilutive stock options 216,249 232,422
--------- ---------
Denominator for diluted earnings per share 3,859,376 3,867,413
========= =========
Note C - Inventories
--------------------
The components of inventories follow:
April 1, 2006 December 31, 2005
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Raw materials and component parts $10,532,012 $ 9,917,792
Work in process 4,957,537 4,681,623
Finished goods 6,543,949 6,168,334
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$22,033,498 $20,767,749
=========== ===========
-5-
Note D - Segment Information
----------------------------
Segment financial information follows:
THREE MONTHS ENDED
April 1, 2006 April 2, 2005
------------- -------------
Revenues:
Sales to unaffiliated customers:
Industrial Hardware $12,879,439 $13,020,270
Security Products 11,609,349 10,021,576
Metal Products 3,371,395 3,225,738
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$27,860,183 $26,267,584
=========== ===========
Income Before Income Taxes:
Industrial Hardware $ 1,010,911 $ 1,305,660
Security Products 1,151,667 880,404
Metal Products (140,302) (770,164)
----------- -----------
Operating Profit 2,022,276 1,415,900
Interest expense (239,576) (246,942)
Other income 29,923 7,502
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$ 1,812,623 $ 1,176,460
=========== ===========
Note E - Recent Accounting Pronouncements
-----------------------------------------
The Company adopted FASB Statement of Financial Accounting Standards ("SFAS")
No. 123 (revised 2004), Share-Based Payment, using the modified prospective
method effective January 1, 2006. No stock options were granted in the first
quarter of 2006 and, as all stock options outstanding at December 31, 2005 were
fully vested, the adoption of SFAS No. 123(R) had no impact on the Company's
consolidated financial statements.
The following table approximates the effect on net income and earnings per
share if the Company had applied SFAS No. 123(R) for the period ended April 2,
2005 and had adopted this statement on January 2, 2005:
THREE MONTHS ENDED
April 2, 2005
-------------
Net income, as reported $730,582
Deduct: Total stock-based employee
-------
compensation expense determined
under fair value based method for all
awards granted, net of related tax
effects (438)
--------
Pro forma net income $730,144
========
Earnings per share:
-------------------
Basic-as reported $0.20
Basic-pro forma $0.20
Diluted-as reported $0.19
Diluted-pro forma $0.19
For the purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the stock options' vesting period ranging
from 1 to 5 years. The pro forma effect on net income and related earnings per
share may not be representative of future years' impact since the terms and
conditions of new grants may vary from the current terms.
-6-
The Company adopted SFAS No. 151, Inventory Costs, an amendment of ARB No. 43,
Chapter 4, effective January 1, 2006. The amendments made by SFAS No. 151
clarify that abnormal amounts of idle facility expense, freight, handling
costs, and wasted materials (spoilage) should be recognized as current-period
charges and require the allocation of fixed production overheads to inventory
based on the normal capacity of the production facilities. The adoption of
SFAS No. 151 did not have a material impact on the consolidated financial
statements of the Company.
The Company adopted SFAS No. 154, Accounting Changes and Error Corrections--a
replacement of APB Opinion No. 20 (Accounting Changes) and FASB Statement No.
3 (Reporting Accounting Changes in Interim Financial Statements), effective
January 1, 2006. SFAS No. 154 provides guidance on accounting for and
reporting of accounting changes and error corrections. It requires
retrospective application to prior periods' financial statements, unless it is
impracticable to determine either the specific period effects or the
cumulative effect of the change. The adoption of SFAS No. 154 did not have a
material impact on the Company's consolidated financial statements.
Note F - Debt
-------------
On March 8, 2006, the Company signed a capital lease in the amount of $68,948
with Citicorp Vendor Finance for the purchase of new lighting equipment at its
Greenwald facility in Chester, Connecticut. The lease has a three year term at
0% interest rate. Payments under the lease are $1,915 per month.
Note G - Goodwill
-----------------
The following is a roll-forward of goodwill from year-end 2005 to the end of the
first quarter 2006:
Beginning balance $ 10,641,532
Foreign exchange (2,475)
------------
Ending balance $ 10,639,057
============
Note H - Retirement Benefit Plans
---------------------------------
The Company has non-contributory defined benefit pension plans covering
certain U.S. employees. Plan benefits are generally based upon age at
retirement, years of service and, for its salaried plan, the level of
compensation. The Company also sponsors unfunded nonqualified supplemental
retirement plans that provide certain current and former officers with
benefits in excess of limits imposed by federal tax law. The measurement date
for the obligations disclosed below is September 30 of each year.
The Company also provides health care and life insurance for retired salaried
employees in the United States who meet specific eligibility requirements.
Significant disclosures relating to these benefit plans for the first quarter
of 2006 and 2005 follows:
Pension Benefits Postretirement Benefits
--------------------------- ---------------------------
2006 2005 2006 2005
---- ---- ---- ----
Service cost $ 401,457 $ 336,840 $ 21,641 $ 21,679
Interest cost 620,574 556,605 26,056 29,484
Expected return on plan assets (756,049) (679,006) (21,626) (20,073)
Net amortization and deferral 149,645 96,843 (20,879) (19,737)
--------- --------- -------- --------
Net periodic benefit cost $ 415,627 $ 311,282 $ 5,192 $ 11,353
========= ========= ======== ========
The Company's funding policy with respect to its qualified plans is to
contribute at least the minimum amount required by applicable laws and
regulations. In 2006, the Company is required to contribute $1,403,000 into
its salaried plan and $266,000 into one of its hourly plans. The Company will
make the contributions prior to filing its federal income tax return on
September 15, 2006.
-7-
The Company has a contributory savings plan under Section 401(k) of the
Internal Revenue Code covering substantially all U.S. non-union employees. The
plan allows participants to make voluntary contributions of up to 100% of
their annual compensation on a pretax basis, subject to IRS limitations. The
plan provides for contributions by the Company at its discretion. The Company
made contributions of $42,243 in the first quarter of 2006, and $40,400 in the
first quarter of 2005.
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
Company's financial position and results of operations for the thirteen weeks
ended April 1, 2006. The interim financial statements and this Management's
Discussion and Analysis of Financial Condition and Results of Operations should
be read in conjunction with the Consolidated Financial Statements and Notes
thereto for the fiscal year ended December 31, 2005 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, 2005.
Certain statements set forth in this discussion and analysis of financial
condition and results of operations are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. They use such
words as "may," "will," "expect," "believe," "plan" and other similar
terminology. These statements reflect management's current expectations
regarding future events and operating performance and speak only as of the date
of this release. These forward-looking statements involve a number of risks and
uncertainties and actual future results and trends may differ materially
depending on a variety of factors including changing customer preferences, lack
of success of new products, loss of customers, competition, increased raw
material prices, problems associated with foreign sourcing of parts and
products, changes within our industry segments, in the overall economy,
litigation and legislation. In addition, terrorist threats and the possible
responses by the U.S. government, the effects on consumer demand, the financial
markets, the travel industry, the trucking industry and other conditions
increase the uncertainty inherent in forward-looking statements. Forward-looking
statements reflect the expectations of the Company at the time they are made,
and investors should rely on them only as expressions of opinion about what may
happen in the future and only at the time they are made. The Company undertakes
no obligation to update any forward-looking statement. Although the Company
believes it has an appropriate business strategy and the resources necessary for
its operations, future revenue and margin trends cannot be reliably predicted
and the Company may alter its business strategies to address changing
conditions.
In addition, the Company makes estimates and assumptions that may materially
affect reported amounts and disclosures. These relate to valuation allowances
for accounts receivable and for excess and obsolete inventories, accruals for
pensions and other postretirement benefits (including forecasted future cost
increases and returns on plan assets), provisions for depreciation (estimating
useful lives), and, on occasion, accruals for contingent losses.
Overview
During the first quarter of 2006, the Company experienced a 6.1% increase in
sales as compared to the first quarter of 2005. The Security Products and the
Metal Products segments experienced a 15.8% and 4.5% increase in sales,
respectively, during the period while the sales of the Industrial Hardware
segment declined 1.1% from the comparable quarter of 2005.
Gross margin as a percentage of sales for the three months ended April 1, 2006
was 23.3% compared to 20.8% in the comparable period a year ago. The increase in
gross margin in the first quarter of 2006 is the result of the introduction of
new products with higher margins, favorable product mix at most of our
operations compared to the prior year and production changes and cost savings in
the Metal Products segment.
-8-
Raw material prices have increased sharply during the first quarter of 2006,
mainly in zinc, brass and stainless steel. The Company is recovering these
increases from our customers, wherever possible. Currently, there is no
indication that the Company will not be able to obtain supplies of all the
materials that it requires.
Cash flow from operations in the first quarter of 2006 has improved compared to
the same period in 2005. The Company's line of credit, along with controlling
discretionary expenditures, should provide sufficient cash flow to enable the
company to meet all its existing obligations.
A more detailed analysis of the Company's results of operations and financial
condition follows:
Results of Operations
The following table shows, for the periods indicated, selected line items from
the condensed consolidated statements of income as a percentage of net sales, by
segment:
Three Months Ended April 1, 2006
--------------------------------
Industrial Security Metal
Hardware Products Products Total
-------- -------- -------- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 75.9% 72.5% 94.4% 76.7%
Gross margin 24.1% 27.5% 5.6% 23.3%
Selling and administrative expense 16.3% 17.6% 9.7% 16.0%
Operating profit 7.8% 9.9% -4.1% 7.3%
Three Months Ended April 2, 2005
--------------------------------
Industrial Security Metal
Hardware Products Products Total
-------- -------- -------- -----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of products sold 74.9% 73.0% 115.5% 79.2%
Gross margin 25.1% 27.0% -15.5% 20.8%
Selling and administrative expense 15.1% 18.2% 8.4% 15.4%
Operating profit 10.0% 8.8% -23.9% 5.4%
-9-
The following table shows the amount of change from the first quarter of 2006
compared to the first quarter of 2005 in sales, cost of products sold, gross
margin, selling and administrative expenses and operating profit, by segment
(dollars in thousands):
Industrial Security Metal
Hardware Products Products Total
-------- -------- -------- -----
Net sales $ (141) $ 1,588 $ 146 $ 1,593
Volume -7.3% 14.5% 1.1% 2.1%
Prices 0.0% 0.2% 1.1% 0.2%
New Products 6.2% 1.1% 2.3% 3.8%
---- ---- ---- ----
-1.1% 15.8% 4.5% 6.1%
Cost of products sold $ 19 $ 1,100 $ (540) $ 579
0.2% 15.0% -14.5% 2.8%
Gross margin $ (160) $ 488 $ 686 $ 1,014
-4.9% 18.1% 137.6% 18.5%
Selling and
administrative expenses $ 134 $ 217 $ 56 $ 407
6.9% 11.9% 20.7% 10.1%
Operating profit $ (295) $ 271 $ 630 $ 606
-22.6% 30.8% 81.8% 30.9%
Industrial Hardware Segment
Net sales in the Industrial Hardware segment were down 1.1% in the first quarter
of 2006 compared to the prior year quarter. The sales decrease was mainly the
result of a reduction in sales of both truck accessories and "sleeper boxes" for
the Class 8 trailer truck market compared to the same period in 2005. The
Company expects the sales volume of "sleeper boxes" to improve as the year
progresses. Most of the decrease in sales volume of existing products was offset
by new product sales. All of the new products were developed internally for the
variety of markets we serve. New products included a retro-fit kit for the
military Humvee, a 3 point t-handle assembly and a star wheel rotary assembly
for the truck accessory market, a hidden hinge and a remote magnet alarm for the
service body market and an assortment of handles and latches used in many of the
markets we sell to.
Our Eastern Industrial (Shanghai) Ltd., manufacturing facility located in
Shanghai, China continues to produce products for our U.S. affiliates and in the
first quarter of 2006 also made several shipments of products to non-associated
customers. This subsidiary will be instrumental in helping us to remain price
competitive in North America and will open up the possibility to effectively
pursue global markets.
Cost of products sold for the Industrial Hardware segment increased 0.2% from
the first quarter of 2005 to the first quarter of 2006. Although sales
decreased, there was no corresponding decrease in the cost of products sold
because of increases in costs of raw materials and utility expenses that were
experienced during the quarter.
Gross margin as a percent of net sales decreased from 25.1% to 24.1% due to the
higher manufacturing costs and changes in the mix of products sold.
Selling and administrative expenses increased 6.9% for the first quarter of
2006 compared to the prior year period due to increases in payroll related
charges and travel expenses.
-10-
Security Products Segment
Net sales in the Security Products segment increased 15.8% in the 2006 period
compared to the first quarter of 2005. Sales volume increases were experienced
at all of the segments' operating units and in many of the markets we service
including: automotive accessories, coin operated machines, gaming, electronics,
enclosures and commercial laundry. Sales of new products focused on lock
products such as the Super SesameeTM padlock and an electric car lock set as
well as various other items for the many markets we service.
Cost of products sold for the Security Products segment was up 15% in 2006
compared to the first quarter of 2005. Most of the increase in cost of products
sold was directly proportionate to the increase in sales. Additional factors
affecting this segment were increases in raw material costs and utilities.
Gross margin as a percentage of sales increased from 27.0% to 27.5% due to an
improved mix of products sold during 2006 compared to the same period in 2005.
Selling and administrative expenses increased 11.9% from 2005 levels due to
increased payroll and payroll related charges.
Metal Products Segment
Net sales in the Metal Products segment were up 4.5% in the first quarter of
2006 as compared to the prior year period. Sales of mining products were up 1%
in 2006 compared to the first quarter of 2005 and sales of contract castings
increased 15.7% from the prior year levels. New product sales included a new
mine roof anchor for the Canadian mining market and a large flange nut. The
Company will be installing a new automatic pouring system for ductile iron
during the second quarter to increase efficiency in producing ductile iron
castings and is continuing its marketing efforts for mine roof anchors in the
China mining industry.
Cost of products sold decreased 14.5% in the first quarter of 2006 compared to
the same period in 2005. The decrease is mainly attributable to the mix of
products produced, lower workers compensation costs and lower utility costs
associated with the production of ductile castings which do not require
annealing.
Gross margin as a percentage of net sales improved from -15.5% in the first
quarter of 2005 to 5.6% for the 2006 quarter. The improvement is primarily due
to the mix of products produced and cost savings.
Selling and administrative expenses were up 20.7% in 2006 compared to the same
period in 2005. The increase was related to increases in payroll and payroll
related charges, advertising costs and travel expenses.
Other Items
Interest expense decreased 3.0% in the first quarter of 2006 compared to the
prior year period mainly due to the new swap contract associated with the loan
agreement which was amended in August 2005.
Other income increased from the first quarter of 2005 to the 2006 first quarter
due to higher cash balances in the Company's cash management program, which
resulted in higher interest income.
Income taxes increased in line with the higher earnings level. The effective tax
rate in the first quarter of 2006 was 37% compared to 38% in the first quarter
of 2005. The decrease in the effective tax rate is the result of the Company
deriving a higher percentage of its earnings from countries with lower effective
tax rates.
-11-
Liquidity and Sources of Capital
The Company generated $536,800 from operations for the first three months of
2006 compared to $505,400 used by operations for the same period in 2005. The
change in cash flows was the result of changes in the level of sales and the
associated timing differences for collections of accounts receivable and
payments of liabilities and changes in inventories. Cash flow from operations
coupled with cash on hand at the beginning of the year were sufficient to fund
capital expenditures, debt service, incentive payments, contributions to the
Company's pension plans, and dividend payments.
Additions to property, plant and equipment were $984,000 during the first
three months of 2006 versus $619,000 for the comparable period in the prior
year. Total capital expenditures for 2006 are expected to be in the range of
$2.5 million to $3.5 million.
Total inventories as of April 1, 2006 were $22.0 million, compared to $20.8
million at year-end 2005. The inventory turnover ratio of 3.9 turns at the end
of the first quarter was slightly lower than both the prior year first quarter
and year-end 2005 ratio of 4.1 turns. Accounts receivable increased by
$911,000 from year end 2005, primarily due to increased sales volume. The
average days sales in accounts receivable for the first quarter of 2006 was 51
days compared to 48 days in both the first quarter of 2005 and at year end
2005.
Cash flow from operating activities and funds available under the revolving
credit portion of the Company's loan agreement are expected to be sufficient
to cover future foreseeable working capital requirements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from what was reported in
the 2005 Annual Report on Form 10-K.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
An evaluation was performed under the supervision and with the participation
of the Company's management, including the Chief Executive Officer ("CEO") and
Chief Financial Officer ("CFO"), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures were effective as of the end of the period covered by
this report based on such evaluation.
The Company believes that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the
controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected. The Company's disclosure controls and procedures
are designed to provide reasonable assurance of achieving their objectives,
and the CEO and CFO have concluded that these controls and procedures are
effective at the "reasonable assurance" level.
Changes in Internal Controls
During the period covered by this report, there have been no significant
changes in the Company's internal control over financial reporting or in other
factors that have materially affected, or are reasonably likely to materially
affect the Company's internal controls.
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PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
There are no legal proceedings, other than ordinary routine litigation
incidental to the Company's business, to which either the Company or any of its
subsidiaries is a party or to which any of their property is the subject.
ITEM 1A - RISK FACTORS
There have been no material changes in risk factors from what was reported in
the 2005 Annual Report on Form 10-K.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There have been no sales of unregistered securities by the Company or purchases
of registered equity securities by the Company during the period covered by this
report.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant held its Annual Meeting of the Stockholders at The Eastern
Company, Naugatuck, Connecticut on Wednesday, the twenty-sixth day of
April, 2006. The matters voted on and the voting results were:
FOR AGAINST
1) Election of David C. Robinson as
a director for a three-year term
expiring in the year 2009: 3,211,437 9,558
Election of Donald S. Tuttle III as
a director for a three-year term
expiring in the year 2009: 3,211,447 9,548
Continuing Directors:
Leonard F. Leganza
John W. Everets
Charles W. Henry
FOR AGAINST ABSTENTION
2) Appointment of UHY LLP as
independent registered
public accounting firm: 3,217,992 1,086 1,917
Under Connecticut law, an abstention or broker non-vote is considered to be
present for purposes of determining a quorum, but is not deemed to be a vote
cast. As a result, abstentions and broker non-votes are not included in the
tabulation of the voting results on the election of directors or the other
matters acted upon at the Annual Meeting. There were no broker non-votes in the
current year voting.
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ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS
31) Certifications required by Rule 13a-14(a) of the
Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32) Certifications pursuant to Rule 13a-14(b) and 18 USC
1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99(1)) The Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 2005 is incorporated
herein by reference.
99(2)) Form 8-K filed on April 26, 2006 setting forth the
press release reporting the Company's earnings for the
quarter ended April 1, 2006 is incorporated herein by
reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE EASTERN COMPANY
(Registrant)
DATE: May 1, 2006 /s/Leonard F. Leganza
----------- ---------------------
Leonard F. Leganza
President and Chief Executive Officer
DATE: May 1, 2006 /s/John L. Sullivan III
----------- ------------------------
John L. Sullivan III
Vice President, Secretary and Treasurer
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