The Eastern Company — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2011, with fourth-quarter results compared with the 2010 fourth quarter. Each fiscal year comprised 52 weeks. The company manufactures industrial hardware, security products and metal products through U.S. operations and wholly owned foreign subsidiaries.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $142.9 million | $130.1 million |
| Gross margin | $27.4 million; 19.1% of sales | $26.7 million; 20.5% of sales |
| Operating profit | $8.7 million; 6.1% of sales | $8.5 million; 6.5% of sales |
| Net income | $5.5 million; $0.89 diluted EPS | $5.5 million; $0.90 diluted EPS |
| Operating cash flow | $1.4 million | $9.5 million |
| Cash and cash equivalents | $11.1 million | $12.2 million |
| Working capital | $49.2 million | $48.3 million |
| Total debt at year-end | $6.75 million | $4.46 million |
- FY sales rose 10%; net income was essentially flat. Gross margin declined as cost of products sold grew faster than sales, including higher raw-material and purchased-part costs and an unfavorable product mix in Industrial Hardware.
- Segment sales increased approximately 15% in Industrial Hardware, 5% in Security Products and 8% in Metal Products. Industrial Hardware profit weakened; Metal Products returned to profitability, with its operating margin at 1.4% versus a slight loss in 2010.
- Cash from operations fell by about $8.1 million, principally reflecting a $5 million discretionary pension contribution and higher receivables and inventory. Capital expenditures were $3.4 million; cash dividends paid were $2.2 million.
- Year-end current ratio was 4.0, down from 4.9; total debt to shareholders’ equity was 9.8%, up from 6.4%. Shareholders’ equity was $69.2 million.
- Fourth-quarter sales rose 17% to $38.1 million, while net income fell 10% to $1.5 million ($0.24 diluted EPS). Fourth-quarter gross margin was 19.8% and operating margin 6.7%, compared with 20.8% and 7.3% a year earlier.
Material changes, outlook and risks
- Management attributed 2011 growth to improved activity in served markets, new products and selective price increases. Drivers included composite products and Class 8 truck hardware, security products for travel and electronics markets, and mine-roof supports. Lower military sales, raw-material inflation and margin pressure offset some gains.
- In January 2012, the company borrowed an additional $5 million under a new term loan, used with cash to repay the $3 million revolver balance. The new loan bears fixed interest at 3.90%; the original term loan rate is 4.98%. Management said available cash and credit resources were sufficient for the next fiscal year.
- Management expected approximately $4 million of 2012 capital expenditures and cash contributions of about $3.6 million to pension plans and $155,000 to the postretirement plan. No specific earnings or revenue guidance was provided.
- The Board increased the quarterly dividend by 11% beginning in the first quarter of 2012. The company cautioned that future dividends depend on earnings, capital needs, financial condition and loan-agreement restrictions.
- The pension plans remained underfunded: the balance-sheet accrued pension liability was $15.8 million at year-end, and pension benefit obligations exceeded plan assets. The $5 million contribution was a discretionary, unusual cash use.
- Raw-material price increases may pressure margins if they cannot be passed through. Other disclosed risks include foreign currency and overseas sourcing, competition and customer losses, product-development execution, customer credit, acquisition integration, and potential financing needs. A union-contract risk disclosure cites approximately 37% of the workforce, while the contingency note says approximately 15% is covered by agreements expiring in 2012.
- Potential ground contamination at the Wheeling, Illinois plant was under voluntary investigation; remediation cost was not estimable when filed. The company also disputed potential responsibility for an Ohio site; management did not believe pending matters would materially affect results or liquidity.
- Goodwill and trademarks were not impaired in 2011. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Reconcile the disclosed union-contract expiration coverage of 37% versus 15% of the workforce.
- Review the post-year-end $5 million term borrowing, revolver repayment, debt covenants and remaining required pension contributions.
- Assess whether cash generation recovers after the pension contribution and working-capital investment, and whether rising material costs can be offset by pricing or productivity.
- Monitor the Wheeling environmental investigation and any subsequent remediation estimate, as well as the status of the Ohio site matter.
- Track pension funding assumptions and liabilities, and confirm the effect of the 2012 dividend increase on liquidity and covenant headroom.