The Eastern Company (NASDAQ: EML) — FY2019 Form 10-K
Business context and reporting period. Eastern designs and manufactures engineered products for niche industrial markets across Industrial Hardware, Security Products, and Metal Products. Fiscal 2019 ended December 28, 2019, and comprised 52 weeks; fiscal 2018 was also 52 weeks. The filing also reports fourth-quarter results.
Financial performance
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $251.7 million | $234.3 million | Up 8% |
| Gross profit / margin | $61.9 million / 24.6% | $58.7 million / 25.1% | Margin down 0.5 percentage points |
| Operating profit / margin | $17.5 million / 6.9% | $17.9 million / 7.6% | Profit down 2% |
| Net income | $13.3 million | $14.5 million | Down 9% |
| Diluted EPS | $2.12 | $2.31 | Down 8% |
| Operating cash flow | $23.0 million | $12.9 million | Up $10.1 million |
Fourth-quarter sales rose 21% to $68.7 million, and net income increased to $5.0 million from $4.4 million; diluted EPS was $0.79 versus $0.70. The quarter included three months of Big 3 Precision results. FY2019 included four months following its August 30 acquisition.
Segment results: Industrial Hardware sales rose 17% to $164.5 million, including Big 3 Precision; Security Products sales fell 10% to $58.3 million; Metal Products sales slipped about 1% to $28.9 million. FY2019 operating margins were 6.7%, 9.2%, and 3.5%, respectively.
Cash, liquidity, debt, and capital
- Year-end cash was $18.0 million, including $9.0 million held by foreign subsidiaries; working capital was $83.0 million. The current ratio was 3.6 versus 3.4 in 2018.
- Operating cash flow was $23.0 million. Investing used $85.8 million, including $81.2 million for Big 3 Precision; financing provided $67.0 million, principally reflecting new borrowing.
- Total debt was $98.8 million, compared with $28.7 million in 2018. The new facility comprises a $100 million term loan and a $20 million revolver, which was undrawn at year-end. Scheduled 2020 principal payments are $5.2 million; the remaining balance is due at maturity in August 2024.
- The credit agreement requires a senior net leverage ratio no higher than 4.25:1 and fixed-charge coverage of at least 1.25:1. The company reported compliance at year-end. Total debt to shareholders’ equity rose to 93.7% from 29.6%.
- Dividends declared were $0.44 per share, approximately $2.7 million in total. The company made no share repurchases in 2019.
Material changes and unusual items
- Big 3 Precision was acquired for approximately $81.2 million, substantially increasing Industrial Hardware sales, goodwill, and debt. Acquisition-related expenses were $1.2 million for the year.
- Net income included restructuring charges of $2.65 million before tax. Management described the related after-tax restructuring impact as $3.9 million, associated with discontinuing Velvac’s Road-iQ development operations and consolidating the Composite Panel Technologies facility.
- Interest expense increased 54% to $1.86 million following the increase in debt. A $597,000 gain on sale of headquarters land partly contributed to other income.
- Working capital to sales improved to 28.1% from 30.3%. Average days’ sales in receivables increased to 51 from 44; inventory turnover improved to 4.2 from 3.4.
- Eastern adopted lease accounting in 2019 and recorded right-of-use assets and lease liabilities of approximately $12.3 million.
Outlook, commentary, and risks
Management anticipated continued sales and earnings growth in 2020, primarily from Big 3 Precision, a new Class 8 truck mirror program at Velvac, and product launches at Eberhard and Illinois Lock. It expected these to offset a forecast 25–30% decline in Class 8 truck production and continued softness in recreational vehicles. The filing provides no numeric earnings or revenue guidance.
Management noted that raw-material prices began rising late in the fourth quarter; rapid increases could pressure margins if not recovered through pricing or cost reductions. China-related tariffs remained a risk despite the Phase One trade agreement. Other principal risks include acquisition integration and realizing expected benefits, competition and pricing pressure, customer-market weakness, variable-rate debt and LIBOR transition, and overseas operating and currency exposures. The filing also warned that the novel coronavirus could slow or temporarily suspend operations in China, Hong Kong, and Taiwan.
Environmental remediation work at the Illinois site was completed, with final state documentation pending; approximately $50,000 had already been accrued. New York foundry-landfill remediation and monitoring were estimated at $430,000 and previously accrued. The company reported no material pending legal proceedings. Management and the auditor concluded internal control over financial reporting was effective; the auditor issued an unqualified opinion on the financial statements.
Investor verification priorities
- Assess whether Big 3 Precision delivers expected growth, margins, cash generation, and integration benefits; verify the acquisition’s effect on comparable sales.
- Monitor debt reduction, covenant headroom, the large 2024 maturity, variable-rate exposure, and the transition from LIBOR.
- Track Industrial Hardware margin recovery and the effect of truck production, recreational-vehicle demand, metals, freight, and tariffs.
- Test management’s 2020 outlook against segment demand and the stated Class 8 truck downturn; the filing gives no quantified guidance.
- Review pension funding needs, the approximately $2.7 million planned 2020 pension contribution, and the status and final costs of environmental remediation.