The Eastern Company — Q2 2015 Form 10-Q
Business context and reporting period. The Eastern Company manufactures products across Industrial Hardware, Security Products, and Metal Products. This unaudited report covers the quarter and six months ended July 4, 2015; comparisons are to the periods ended June 28, 2014. The company attributes growth principally to new products and the Argo acquisition in Security Products.
Financial performance and position
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $37.0 million, up 6.5% | $73.9 million, up 4.7% |
| Gross margin | $7.9 million; 21.4% of sales versus 22.3% | $15.2 million; 20.6% versus 21.6% |
| Operating profit | $0.9 million versus $2.8 million | $2.2 million versus $5.1 million |
| Net income / diluted EPS | $0.6 million / $0.09 versus $1.7 million / $0.27 | $1.5 million / $0.23 versus $3.2 million / $0.51 |
| Operating cash flow | Not separately presented for the quarter | $1.35 million versus $3.14 million |
Selling and administrative expense rose 42% in the quarter and 28% in the first half, primarily reflecting proxy-contest, reimbursement, legal, and settlement costs. Interest expense declined as debt was lower. Effective tax rates were 29% for the quarter and 32% for the first half, compared with 38% and 36% in 2014.
At July 4, cash was $13.3 million; working capital was $58.3 million and the current ratio was 5.5. Cash included $3.6 million in the U.S. and $9.7 million at a foreign subsidiary. Total reported debt was $3.57 million ($1.07 million current and $2.50 million long-term), down from $4.29 million at fiscal year-end. Debt-to-equity was 4.8%; the company reported compliance with loan covenants. Its $10 million revolving facility was extended to July 1, 2016; the filing does not state the amount drawn at quarter-end. Operating cash flow, capital spending of $1.61 million, debt payments of $0.71 million, and dividends of $1.37 million contributed to a $2.51 million decline in cash during the half.
Material changes and segment trends
- Security Products: Sales rose 24% in the quarter and 18% in the half, including Argo acquisition sales and growth in existing and new products. First-half segment income before taxes was $1.44 million, approximately flat year over year.
- Industrial Hardware: Sales increased less than 1% in the quarter and 2% in the half. Management cited new products, partly offset by weaker composite-panel demand in truck and Mexican markets. The new North Carolina sleeper-cab facility began shipments in March.
- Metal Products: Sales fell 11% in the quarter and 12% in the half as mining-product demand weakened, particularly from a major customer. Segment income before taxes was a loss of $0.43 million in the quarter and $0.58 million in the half, versus profits in the prior-year periods. Lower volume reduced factory utilization.
Consolidated operating margin fell to 2.3% for the quarter from 8.0%, and to 3.0% for the half from 7.2%. Management cited lower Metal Products volume and utilization, product mix, and substantially higher selling and administrative costs. New products increased 9% in the quarter and first half, while existing-product sales declined 2% and 4%, respectively.
Outlook, risks, and unusual items
- Management expects 2015 capital expenditures of approximately $3.2 million; about $0.2 million remained committed at quarter-end. It expects the North Carolina facility to be accretive to fiscal 2015 earnings. No consolidated earnings or revenue guidance is provided.
- Management said cash, operating cash flow, and revolving-credit availability should cover foreseeable working-capital needs and existing obligations, including quarterly dividends. It expected 2015 pension contributions of $3.0 million and postretirement contributions of $150,000; approximately $1.2 million and $57,000, respectively, had been contributed by July 4.
- Raw-material prices had generally increased. The company was seeking to recover higher costs through pricing and productivity; unrecovered increases could pressure margins. Management reported no current indication of a raw-material supply shortage.
- A Barington-related proxy contest and litigation drove significant first-half costs. The court approved a dismissal stipulation on July 13, 2015; the company recorded $320,500 of second-quarter legal and settlement costs for the lawsuit, with excess costs covered by insurance. The filing cites approximately $1.4 million of proxy-related costs in the quarter and $2.0 million in the half.
- Potential contamination at the Wheeling, Illinois plant remained under review through a voluntary remediation program. No remediation-cost estimate was available; management did not expect a material financial impact based on discussions to date.
- Other disclosed risks include customer demand and product acceptance, competition, raw-material costs, foreign sourcing, economic and industry conditions, litigation, and legislation. Management reported no material changes in risk factors from the 2014 Form 10-K and no material changes in market risk.
Important facts for investors to verify
- Whether proxy-contest and litigation expenses are nonrecurring, and their final net cost after insurance and reimbursements.
- How quickly Metal Products mining demand and facility utilization recover, and whether new contract-casting customers contribute as management expects.
- Argo’s continuing contribution to Security Products sales and profitability, and the North Carolina facility’s progress toward expected accretion.
- Revolving-credit utilization and availability, the timing of cash held abroad and any tax costs of repatriation, and pension funding requirements.
- Any eventual Illinois remediation estimate and whether costs remain immaterial.