THE EASTERN COMPANY The following discussion is intended to highlight significant changes in the
financial position and results of operations of
The Company's fiscal year is a 52-53-week fiscal year ending on the Saturday
nearest to
Safe Harbor for Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q 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. 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, but are not limited to: effects of the
COVID-19 pandemic, vaccination rates, the emergence of virus variants and the
measures being taken to limit the spread and resurgence of COVID-19, including
supply chain disruptions, 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; the scope and duration of
the COVID-19 pandemic, including the extent of resurgences, the development of
variants and how quickly and to what extent normal economic activity can resume;
the timing of the distribution of COVID-19 vaccines and rates of vaccination;
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; restrictions on operating flexibility imposed by the agreement
governing our credit facility; the inability to achieve the savings expected
from global sourcing of materials; the impact of higher raw material and
component costs, particularly steel, plastics, scrap iron, zinc, copper and
electronic components; lower-cost competition; our ability to design, introduce
and sell new products and related components; market acceptance of our products;
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, commercial laundry, mining 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
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Overview
COVID-19 Update
The direct impact of the COVID-19 pandemic has been minimal at most of our
operations through the second quarter of 2021. We continue to follow
During 2020 and continuing into 2021 the Company implemented a broad range of
policies and procedures to ensure that employees at all of our locations remain
healthy. Steps that we have taken to reduce the risk of COVID-19 to our
employees include, among others: protecting employee health by instructing
employees to stay home if they exhibit symptoms of COVID-19; requiring employees
to wear masks upon entry into the workplace; providing standard surgical masks,
unless this conflicts with
Although we sustained delays and disruptions in 2020 to our supply chain and
operations, the majority of our facilities have returned to normal operations
however, one facility experienced an outbreak of COVID-19 among several
employees resulting in closure of the factory for a few days at the end of
General Overview
We have determined that the companies included in our Diversified Products segment no longer fit with our long-term strategy, and we have initiated the process of divesting the companies within the Diversified Products segment. Selling the companies within this segment will allow management to focus on our core capabilities and offerings.
The Diversified Products segment meets the criteria to be held for sale and, furthermore, we determined that the assets held for sale qualify as discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.
The loss recognized in the write-down of the Diversified Products segment to
fair value in the second quarter of 2021 was
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The following analysis excludes discontinued operations.
Net sales in the second quarter of 2021 increased 55% to
Net sales of existing products increased 44% in the second quarter of 2021 and 26% for the first six months of 2021 compared to the corresponding periods in 2020. Price increases and new products increased net sales by 11% in the second quarter of 2021 and 9% for the first six months of 2021, compared to the corresponding periods in 2020. New products included various truck mirror assemblies, truck compression latches, a cable lock, and a mirror cam.
Cost of products sold increased
Gross margin as a percent of sales was 23% in the second quarter and 24% in the first six months of fiscal 2021 compared to 26% in the second quarter and 25% in the first six months of fiscal 2020.
Product development expense increased
Selling and administrative expense increased
Interest expense was flat in the second quarter and decreased
Other income increased
Net income for the second quarter of fiscal 2021 was
A more detailed analysis of the Company's results of operations and financial condition follows:
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Results of Operations
The following table shows, for the periods indicated, selected line items from
the condensed consolidated statements of operations as a percentage of net
sales:
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of products sold 77.2 % 73.9 % 76.0 % 74.6 %
Gross margin 22.8 % 26.1 % 24.0 % 25.4 %
Product development expense 1.8 % 2.3 % 1.7 % 2.0 %Selling and administrative expense 15.3 % 16.6 % 14.9 % 16.1 % Operating Profit
5.7 % 7.2 % 7.4 % 7.3 %
The following table shows the change in sales and operating profit for the second quarter and first six months of fiscal 2021 compared to the second quarter and first six months of fiscal 2020 (dollars in thousands):
Three Months Six Months
Ended Ended
July 3, July 3,
2021 2021
Net Sales $ 21,740 $ 31,667
Volume 44.5 % 25.6 %
Price 2.0 % 1.1 %
New products 8.6 % 8.0 %
55.1 % 34.7 %
Operating Profit $ 656 $ 2,410 Liquidity and Sources of Capital
The Company generated approximately
Additions to property, plant and equipment were approximately
The following table shows key financial ratios at the end of each specified
period:
Second Second Fiscal
Quarter Quarter Year
2021 2020 2020
Current ratio 2.8 3.7 2.8
Average days' sales in accounts receivable 53 58 56
Inventory turnover 3.8 3.2 3.6
Total debt to shareholders' equity 80.8 % 105.8 % 85.0 %
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The following table shows important liquidity measures as of the balance sheet date for each specified period (in millions):
Second Second Fiscal
Quarter Quarter Year
2021 2020 2020
Cash and cash equivalents
- Held in the United States $ 13.4 $ 13.7 $ 10.0
- Held by a foreign subsidiary 5.1 6.3 6.1
18.5 20.0 16.1
Working capital 90.6 67.2 71.1
Net cash provided by operating activities 4.3 6.6 20.7
Change in working capital impact on net cash
provided by (used in) operating activities (5.3 ) (0.6 ) 2.0
Net cash provided by (used in) investing
activities 0.9 0.8 (9.1 )
Net cash used in financing activities (3.5 ) (5.6 ) (13.2 )
Inventories of
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. However, based on current macroeconomic conditions resulting from the uncertainty caused by COVID-19, 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 4.25 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.
Off-Balance Sheet Arrangements
As of the end of the fiscal quarter ended
Non-GAAP Financial Measures
The non-GAAP financial measures we provide in this report should be viewed in
addition to, and not as an alternative for, results prepared in accordance with
accounting principles generally accepted in
To supplement the consolidated financial statements prepared in accordance with
Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, 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 operations.
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Adjusted Earnings Per Share from Continuing Operations is defined as diluted earnings per share from continuing operations excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, 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 they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, 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.
Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business including our business segments, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, GAAP financial measures.
We believe that presenting non-GAAP financial measures in addition to GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.
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Reconciliation of Net Income from Continuing Operations to Adjusted Net Income from Continuing
Operations and Adjusted Earnings Per Share from Continuing Operations Calculation For the Three
and Six Months ended July 3, 2021 and June 27, 2020
($000 's)
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Net income from
continuing operations
as reported per
generally accepted
accounting principles
(GAAP) $ 2,755 $ 2,080 $ 8,449 $ 4,723
Earnings per share
from continuing
operations as
reported under
generally accepted
accounting principles
(GAAP):
Basic $ 0.44 $ 0.33 $ 1.35 $ 0.76
Diluted $ 0.44 $ 0.33 $ 1.35 $ 0.76
Adjustments:
Gain on sale of
Eberhard Hardware Ltd
building, net of tax - - (1,353 )A -
Total adjustments
(Non-GAAP) - - (1,353 ) -
Adjusted net income
from continuing
operations $ 2,755 $ 2,080 $ 7,096 $ 4,723
Adjusted earnings per
share from continuing
operations ;
(Non-GAAP):
Basic $ 0.44 $ 0.33 $ 1.13 $ 0.76
Diluted $ 0.44 $ 0.33 $ 1.13 $ 0.76
A) Gain on sale of
Eberhard Hardware Ltd
building
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Reconciliation of Net Income from Continuing Operations to Adjusted EBITDA from Continuing
Operations calculation For the Three and Six Months ended July 3, 2021 and June 27, 2020
($000 's)
Three Months Ended Six Months Ended
July 3, June 27, July 3, June 27,
2021 2020 2021 2020
Net income from continuing
operations as reported per
generally accepted accounting
principles (GAAP) $ 2,755 $ 2,080 $ 8,449 $ 4,723
Interest expense 434 455 961 1,076
Provision for income taxes 848 625 2,601 1,455
Depreciation and amortization 1,721 1,577 3,531 3,213
Gain on sale of Eberhard
Hardware Ltd Building - - (1,841 )A -
Adjusted EBITDA from continuing
operations $ 5,758 $ 4,737 $ 13,701 $ 10,467
A) Gain on sale of Eberhard
Hardware Ltd building
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