The Eastern Company — Q3 2011 Form 10-Q
Reporting period: Quarter ended October 1, 2011; year-to-date results cover 39 weeks. Comparisons are with the quarter and nine months ended October 2, 2010, unless otherwise noted. The company reports Industrial Hardware, Security Products, and Metal Products segments.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $36.09 million | $33.96 million | $104.80 million | $97.49 million |
| Gross margin | $6.56 million; 18.1% | $6.92 million; 20.4% | $19.80 million; 18.9% | $19.88 million; 20.4% |
| Operating profit | $2.13 million | $2.24 million | $6.15 million | $6.14 million |
| Net income | $1.46 million | $1.49 million | $4.04 million | $3.91 million |
| Diluted EPS | $0.24 | $0.24 | $0.65 | $0.63 |
| Operating cash flow | Not separately provided | Not separately provided | $1.65 million | $6.95 million |
Quarterly sales rose 6.3%, while net income declined about 2%. For the nine months, sales increased 7.5% and net income increased about 3%. Gross margin contracted in both comparisons, primarily because of higher manufacturing and raw-material costs, product mix, and, in Industrial Hardware, start-up costs at the Ontario composite-panel facility. Nine-month operating profit was nearly unchanged despite higher sales.
Segment sales increased 16% in Industrial Hardware, decreased 1% in Security Products, and decreased 2% in Metal Products in Q3. Year to date, sales rose 9%, 7%, and 7%, respectively. Industrial Hardware growth reflected composite panels used in interactive electronic boards; Security Products’ quarterly decline reflected lower commercial-laundry sales; Metal Products’ quarterly decline reflected a prior-year benefit from a competing foundry shutdown.
Cash, debt, and liquidity
- Cash was $9.33 million at October 1, 2011, down from $12.22 million at year-end 2010. Working capital was $50.2 million and the current ratio was 4.3.
- Long-term debt totaled approximately $3.93 million, including the current portion; total debt was 5.4% of shareholders’ equity. The term loan bears fixed interest of 4.98% and matures January 31, 2017. No revolving-credit balance was outstanding.
- Nine-month cash from operations fell to $1.65 million from $6.95 million. Management attributed the decline mainly to working-capital timing and higher sales, including increases in receivables and inventory. Receivables reached $22.2 million and inventory $29.7 million.
- Capital expenditures were $2.93 million year to date; management expected approximately $4–$5 million for 2011, with about $1.4 million of commitments outstanding at quarter-end. Dividends were $0.27 per share year to date, unchanged from 2010.
Management said cash, operating cash flow, and the available revolving facility should cover foreseeable working-capital needs and existing obligations, and support continued quarterly dividends.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance was provided. Management said raw-material costs were expected to continue rising as worldwide economic conditions improved; margin pressure could persist if cost increases cannot be recovered through pricing. The company reported no current indication of a raw-material supply shortfall.
- Industrial Hardware sales to the military were below recent years amid lower government spending. Management said Class 8 truck sleeper-cab sales were expected to remain steady through year-end.
- Risks identified include customer preference changes, new-product execution, customer losses, competition, raw-material prices, foreign sourcing, economic and industry conditions, litigation, and legislation. Management stated that forward-looking results and margin trends cannot be reliably predicted.
- Environmental matters include potential ground contamination at the Wheeling, Illinois plant, where testing and remediation planning were underway; the filing said remediation cost could not yet be estimated. The company also intends to defend against potential EPA liability relating to a Cleveland, Ohio site; no amount was stated.
- The Q3 effective tax rate was 29.9%, versus 31.5% a year earlier, reflecting tax benefits from statute-of-limitations expirations. The prior-year comparison included tax on repatriated foreign earnings. The nine-month rates were 32.5% and 34.1%, respectively.
- Management reported disclosure controls were effective at a reasonable-assurance level and stated there were no material changes in risk factors or internal controls.
Key facts for investors to verify
- Whether sales growth—particularly Industrial Hardware composite-panel demand—continues and offsets weaker military and commercial-laundry demand.
- Whether pricing and product mix can recover higher raw-material and manufacturing costs and stabilize gross margins.
- Whether receivables and inventory convert to cash; operating cash flow weakened substantially as working capital absorbed cash.
- Progress and final costs, if any, for the Illinois environmental review, and the status and potential exposure of the Cleveland site matter.
- Actual 2011 capital expenditures versus the $4–$5 million estimate, and the company’s ability to maintain dividends while funding investment and pension contributions.