The Eastern Company — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 28, 2019. The filing is unaudited. Eastern manufactures and sells products across Industrial Hardware, Security Products, and Metal Products. On August 30, it acquired Big 3 Precision, a maker of custom returnable packaging and blow-mold tools, for approximately $81.2 million.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $60.7 million | $57.4 million | $183.0 million | $177.7 million |
| Gross margin | $14.9 million; 24.6% | $14.2 million; 24.8% | $43.8 million; 23.9% | $44.0 million; 24.8% |
| Operating profit | $5.7 million | $4.7 million | $11.0 million | $13.3 million |
| Net income | $4.2 million | $3.8 million | $8.3 million | $10.1 million |
| Diluted EPS | $0.67 | $0.60 | $1.33 | $1.61 |
| Operating cash flow | — | $12.5 million | $7.1 million |
Third-quarter sales rose 6% and net income rose 11%; nine-month sales rose 3%, while operating profit fell 17% and net income fell 18%. The nine-month results included $2.7 million of restructuring costs before tax; management described the net-of-tax impact on earnings as $2.0 million.
Balance sheet, liquidity, and financing
- At September 28, cash was $12.0 million and working capital was $78.8 million. The current ratio was 3.2.
- Total debt was approximately $100.0 million, versus $28.7 million at year-end 2018; debt-to-equity rose to 96.6% from 29.6%. The company had $94.9 million of long-term debt and $5.2 million current maturities. The $20 million revolving facility was undrawn.
- Cash declined by $1.9 million from year-end. Operating cash flow of $12.5 million and $68.9 million of net financing inflows were outweighed by $83.1 million of investing outflows, principally the acquisition.
- The acquisition was funded primarily with a new $100 million term loan, alongside cash; proceeds also refinanced approximately $19.1 million of prior debt. The new facility matures August 30, 2024, bears variable LIBOR-based rates, and is secured by certain assets. A $50 million interest-rate swap provides a fixed 1.44% rate on that portion.
- Quarterly dividends were $0.11 per share; nine-month dividends paid were $2.1 million. Management said cash, operating cash flow, and revolver availability should cover foreseeable working-capital needs. The company reported covenant compliance at quarter-end.
Material changes and management commentary
- Segments: Q3 Industrial Hardware sales increased 15%, including Big 3 Precision; Metal Products increased 14%; Security Products declined 16%. For the first nine months, the respective changes were +8%, +6%, and -9%.
- Security weakness reflected lower commercial laundry and point-of-sale security demand, a terminated cellphone-tower padlock supply contract, and loss of an RV-market customer. Total sales volume fell 2% in Q3 and 3% over nine months, partly offset by new-product sales.
- Q3 gross margin percentage was approximately flat year over year. Management cited product mix, new Class 8 truck-mirror production costs, and $0.9 million of China tariffs in Q3; most tariff costs had been recovered through price increases. The filing says management expected improved margins on the truck-mirror program in Q4 after supplier-cost changes and approvals.
- Q3 selling and administrative expense increased 12%, including $0.8 million of acquisition costs and higher payroll and amortization. Nine-month expenses decreased 3% year over year.
- Restructuring included closure of the Composites Group facility and discontinuation of Velvac Road IQ development. Nine-month costs included $1.0 million for the consolidation and $3.7 million for Road IQ, partially offset by reversal of a $2.1 million contingent liability; the net Road IQ charge was $1.6 million.
- Big 3 Precision contributed $44.1 million of acquisition goodwill, which the company said is not expected to be tax deductible. Acquisition-related expenses were $1.2 million for the nine months.
Outlook, risks, and contingencies
The filing provides no formal revenue or earnings guidance. Management stated that future revenue and margin trends cannot be reliably predicted. It cited risks including customer demand and concentration, competition, raw-material costs, tariffs, foreign sourcing, economic and industry conditions, and acquisition integration. Ford accounted for 14% of receivables at quarter-end. Variable-rate debt and the possible phase-out or reform of LIBOR after 2021 could affect borrowing costs. Debt covenants restrict certain actions; a default could accelerate repayment. Management reported no material changes to the risk factors in the 2018 Form 10-K.
The company reported no material off-balance-sheet arrangements and no legal proceedings at quarter-end. Environmental remediation remained in progress: estimated costs of approximately $50,000 in Illinois and $430,000 for a New York landfill had previously been accrued; written New York closure-plan approval was anticipated in Q1 2020.
Investor verification priorities
- Verify Big 3 Precision’s post-acquisition contribution to sales, earnings, cash flow, and integration costs; the filing does not isolate its standalone results after closing.
- Monitor leverage, debt repayments, covenant headroom, variable-rate exposure, and the transition away from LIBOR.
- Track whether truck-mirror supplier approvals and expected Q4 margin improvement materialized, and whether tariffs remain largely recoverable through pricing.
- Assess continued Security Products weakness, customer losses, and the impact of the Ford receivables concentration.
- Review restructuring outcomes and the completion and cost of environmental remediation.