The Eastern Company (NASDAQ: EML) — FY 2018 Form 10-K
Business context and reporting period. The company designs and manufactures engineered products for niche industrial markets across Industrial Hardware, Security Products and Metal Products. Fiscal 2018 ended December 29, 2018 and comprised 52 weeks. This annual filing also reports fourth-quarter results.
Financial performance
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Net sales | $234.3 million | $204.2 million |
| Gross profit / margin | $58.7 million / 25.1% | $49.9 million / 24.4% |
| Operating profit / margin | $17.9 million / 7.6% | $12.1 million / 5.9% |
| Net income | $14.5 million | $5.0 million |
| Diluted EPS | $2.31 | $0.80 |
| Cash from operations | $12.9 million | $11.2 million |
| Capital expenditures | $5.4 million | $2.8 million |
FY 2018 sales rose 15%; excluding Velvac, management reported growth of approximately 6%. Industrial Hardware sales grew 22% (7% excluding Velvac), Security Products 6%, and Metal Products approximately 4%. Metal Products’ mining-product sales declined 13%, while industrial-casting sales increased substantially; the segment’s annual gross margin fell to 12% from 13%.
Fourth-quarter sales increased 5% to $56.6 million. Net income was $4.4 million, or $0.70 per diluted share, versus a reported loss of $0.2 million, or $0.03 per diluted share, in Q4 2017. Fourth-quarter gross margin was 26.0% versus 25.2%, and operating margin was 8.1% versus 7.0%.
Liquidity, debt and capital allocation
- Year-end cash was $13.9 million, down from $22.3 million; $8.3 million was held by foreign subsidiaries. Working capital was $71.0 million and the current ratio was 3.4, compared with 3.2 in 2017.
- Total debt was $28.7 million, down from $35.2 million; the $10 million revolver had no year-end balance. Debt-to-equity declined to 29.6% from 40.5%. The company reported compliance with loan covenants.
- Scheduled principal payments are $2.3 million in 2019, $3.1 million in each of 2020 and 2021, and $20.15 million in 2022. Approximately half the term debt is subject to variable LIBOR-based rates; an interest-rate swap hedges part of the exposure.
- FY 2018 dividends declared were $0.44 per share. The company repurchased 40,000 shares for approximately $1.1 million under a program authorizing up to 200,000 shares.
Outlook, commentary and notable items
- Management anticipated continued sales and earnings growth in 2019, citing a new Velvac Class 8 truck mirror program, the Load N Lock asset acquisition, and product launches at Eberhard and Illinois Lock. No numerical forecast was provided.
- The June 2018 Load N Lock asset acquisition cost approximately $5.0 million and was integrated into Illinois Lock. The 2017 Velvac acquisition contributed a full year of sales in 2018 versus nine months in 2017.
- FY 2017 earnings included a $2.5 million one-time tax charge related to U.S. tax reform and approximately $1.8 million, net of tax, of Velvac acquisition, environmental-remediation and personnel-related expenses. The 2018 effective tax rate was 18%, versus 56% in 2017; comparison is affected by those tax-reform items.
- Management cited raw-material price volatility and potential U.S. tariffs on Chinese imports as margin and demand risks. Most 2018 tariff costs were recovered from customers; proposed increases to 25% in 2019 could not necessarily be passed through.
- Backlog increased to $46.9 million from $35.0 million, partly due to order timing. The company expected approximately $5 million of 2019 capital expenditures.
- Environmental remediation accruals include approximately $430,000 for a New York foundry-sand landfill, with construction and monitoring planned for 2019, and approximately $50,000 for Illinois remediation, pending state sign-off. The company reported no current legal proceedings.
- The defined-benefit pension plans were underfunded by $25.4 million at year-end. The company expected 2019 cash contributions of approximately $600,000 to pension plans and $105,000 to its other postretirement plan.
Important facts for investors to verify
- Whether the anticipated 2019 growth materialized and how much came from the new mirror program, Load N Lock, and other product launches.
- Whether higher steel and other input costs or expanded tariffs affected margins, pricing, or customer demand.
- Debt repayment capacity, covenant headroom, variable-rate exposure, and the large scheduled 2022 maturity.
- Progress and final costs for the New York remediation, including regulatory approval and long-term monitoring.
- Segment trends, particularly continued weakness in mining products and the sustainability of industrial-casting growth.
- The effect of pension funding requirements and 2019 lease-accounting adoption on reported liabilities and cash needs.