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 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 and how quickly and to what extent normal economic activity can
resume; the timing of the development and distribution of effective vaccine or
treatment of COVID-19; 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 first 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 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. Currently, we do not anticipate further disruption in our operations unless a resurgence of the COVID-19 pandemic occurs, which could cause further disruptions in our business and could adversely affect our financial condition, results of operations and cash flow. The future extent of the effect of the COVID-19 pandemic on our operational and financial performance will depend in large part on the effectiveness of the vaccines, continued mask wearing, social distancing and other developments, that cannot be predicted with confidence at this time. With the inherent uncertainty of the COVID-19 pandemic it is difficult to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations and the extent it could have on our consolidated business, results of operations and financial condition. For a discussion of certain COVID-19-related risks, see Item 1A, Risk Factors, of Part II of this Form 10-Q.
General Overview
Net sales in the first quarter of 2021 increased 12% to
Net sales of existing products increased 5% in the first quarter of 2021 compared to the corresponding period in 2020. Price increases and new products increased net sales by 7% in the first quarter of 2021. New products included various truck mirror assemblies, truck compression latches, a cable lock, and a mirror cam.
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Cost of products sold increased
Raw material costs have increased year-over-year: hot-rolled steel increased
147%, cold-rolled steel increased 103%, nickel increased 38%, scrap iron
increased 168% while copper and zinc increased 51% and 29% respectively, in the
first quarter of 2021 compared to the first quarter of 2020. Additionally, the
Company paid tariff costs on
Gross margin as a percent of sales was 24% in the first quarter of 2021 compared to 22% in the first quarter of 2020.
Product development expense of
Selling and administrative expense increased 5% in the first quarter of 2021 compared to the corresponding period in 2020 primarily due to increased amortization expense, and increased incentive costs, which were suspended in the first quarter of fiscal 2020, offset by reduced travel and other payroll related expenses.
Interest expense of
Other income of
Net income for the first quarter of fiscal 2021 was
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 operations as a percentage of net sales, by segment for the period indicated:
2021 First Quarter
Engineered Diversified
Solutions Products Total
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Products Sold 74.7 % 85.7 % 76.4 %
Gross Margin 25.3 % 14.3 % 23.6 %
Product Development Expense 0.8 % 2.9 % 1.1 %
Selling and Administrative Expense 14.7 % 12.3 % 14.3 %
Operating Profit 9.8 % (0.9 )% 8.2 %
2020 First Quarter
Engineered Diversified
Solutions Products Total
Net Sales 100.0 % 100.0 % 100.0 %
Cost of Products Sold 75.7 % 84.6 % 77.6 %
Gross Margin 24.3 % 15.4 % 22.4 %
Product Development Expense 0.8 % 2.7 % 1.2 %
Selling and Administrative Expense 16.2 % 12.2 % 15.3 %
Operating Profit 7.3 % 0.5 % 5.9 %
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The following table shows the change in sales and operating profit by segment for the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020 (dollars in thousands):
Engineered Diversified
Solutions Products Total
Net sales $ 9,927 $ (2,155) $ 7,772
Volume 11.2% (16.9)% 5.4%
Price 0.4% 0.9% 0.5%
New products 7.6% 0.0% 6.0%
19.2% (16.0)% 11.9%
Operating profit (loss) $ 2,329 $ (170) $ 2,159
2.6% (1.4)% 2.3%
Engineered Solutions
Net sales in the Engineered Solutions segment of
Sales of new products contributed 8% in the first quarter of fiscal 2021. New products include numerous mirror assemblies, compression latches, a cable lock, and a mirror cam.
Cost of products sold increased
Finally, we paid tariffs on
Gross margin as a percentage of net sales in the first quarter of 2021 was 25% as compared to the corresponding period of 2020 of 24%.
Product development expense increased
Selling and administrative expense increased
Diversified Products
Net sales in the Diversified Products segment decreased
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Cost of products sold decreased
We paid minimal tariffs on
Gross margin as a percentage of net sales was 14% in the first quarter of 2021 compared to 15% in the first quarter of fiscal 2020.
Product development expense as a percentage of net sales was 3% in the first quarter of fiscal 2021 compared to 3% in the corresponding period of fiscal 2020. This increase reflects a continuation in the development of GPay, a multi-pay reader and an electronic drop.
Selling and administrative expenses decreased
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:
First First Year
Quarter Quarter End
2021 2020 2020
Current ratio 2.8 3.4 2.8
Average days' sales in accounts receivable 53 57 56
Inventory turnover 4.2 3.6 3.6
Total debt to shareholders' equity 79.0% 92.8% 85.1%
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The following table shows important liquidity measures as of the balance sheet date for each specified period (in millions):
First First Year
Quarter Quarter End
2021 2020 2020
Cash and cash equivalents
- Held in the United States $ 8.0 $ 9.6 $ 10.0
- Held by a foreign subsidiary 9.5 6.9 6.1
17.5 16.5 16.1
Working capital 76.7 81.8 71.1
Net cash provided by operating activities 2.1 1.5 20.7
Change in working capital impact on net cash
provided by (used in) operating activities (4.0 ) (2.7 ) 2.0
Net cash provided by (used in) investing
activities 1.1 (0.4 ) (9.1 )
Net cash used in financing activities (1.9 ) (2.3 ) (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 responses to contain the spread 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.
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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 is defined as net income 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 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.
Adjusted Earnings Per Share is defined as diluted earnings per share excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, factory relocation expenses and restructuring costs. We believe that Adjusted EPS provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis.
Adjusted EBITDA is defined as net income 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 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 to Adjusted Net Income - EPS Calculation
For the Three Months ended
($000 's)April 3 ,March 28, 2021 2020
Net Income as reported per generally accepted accounting principles (GAAP)
$ 5,841 $ 2,896
Earnings Per Share as reported under generally accepted accounting principles (GAAP): Basic
$ 0.93 $ 0.46 Diluted$ 0.93 $ 0.46
Adjustments for one-time items:
Gain on sale of
(1,353 )A -
Total adjustments for one-time items (Non-GAAP) (1,353 ) -
Adjusted Net Income (related for one-time items);
Adjusted earnings per share (related to one-time items); (Non-GAAP) Basic$ 0.72 $ 0.46 Diluted$ 0.71 $ 0.46 _________
A) Gain on sale of
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Reconciliation of one-time items from GAAP to Non-GAAP EBITDA calculation
For the Three Months ended
($000 's)April 3 ,March 28, 2021 2020
Net Income/(loss) as reported per generally accepted accounting principles (GAAP)
$ 5,841 $ 2,896 Interest expense 703 828 Provision for income taxes 1,817 883 Depreciation and amortization 2,193 2,056 Gain on sale of Eberhard Hardware Ltd Building (1,841 )A - Adjusted EBITDA$ 8,713 $ 6,663 ___________
A) Gain on sale of
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