The Eastern Company — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 29, 2013. The company reports three segments: Industrial Hardware, Security Products, and Metal Products. Comparisons below are with the corresponding 2012 periods unless noted.
Financial results and position
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $39.25 million | $41.56 million | $73.94 million | $82.06 million |
| Gross margin | $8.53 million; 21.7% | $9.25 million; 22.2% | $14.80 million; 20.0% | $17.43 million; 21.2% |
| Operating profit | $3.31 million; 8.4% of sales | $4.14 million; 10.0% | $4.89 million; 6.6% | $7.31 million; 8.9% |
| Net income | $2.17 million | $2.63 million | $3.18 million | $4.68 million |
| Diluted EPS | $0.35 | $0.42 | $0.51 | $0.75 |
| Operating cash flow | Not separately provided for the quarter | $4.53 million | $5.39 million |
Q2 sales fell 5.6%, net income fell 17.4%, and operating profit fell 20.2%. For the first half, sales declined 9.9%, net income 32.0%, and operating profit 33.1%. Q2 gross margin was approximately comparable year over year; first-half gross margin fell from 21.2% to 20.0%, which management attributed mainly to lower production-capacity utilization amid reduced volume.
At June 29, cash and equivalents were $18.17 million, current assets $71.81 million, current liabilities $13.38 million, and working capital $58.4 million. The reported current ratio was 5.4. Total debt was approximately $6.79 million, down from $7.50 million at December 29, 2012; the company had not drawn on its revolving credit line during the quarter or first half. Debt carries fixed rates of 4.98% and 3.90%. The company reported compliance with all loan covenants.
First-half capital expenditures were $2.71 million, versus $2.37 million a year earlier; dividends paid were $1.24 million. Cash declined by $0.32 million from year-end. Cash held by foreign subsidiaries was $8.4 million; the company said it intends to reinvest those earnings abroad indefinitely.
Business changes and segment performance
- Industrial Hardware: Sales declined 8% in Q2 and 14% in the first half. Lower sales across several markets, including distribution, trailer, truck accessory, service body, and military, outweighed strength in Class 8 trucks and fire and rescue. First-half segment income before tax was $2.06 million, down from $4.09 million.
- Security Products: Sales declined 7% in Q2 and 8% in the first half, primarily from lower volume of existing products. First-half segment income before tax was $1.24 million, versus $2.34 million.
- Metal Products: Sales increased less than 1% in Q2 but declined 3% in the first half. Mining-product sales were up 13% in Q2 and 3% in the first half, while contract-casting sales fell 55% and 35%, respectively, largely due to lower railroad tie-plate sales. First-half segment income before tax rose to $1.59 million from $0.88 million, supported by improved product mix, pricing, and production efficiency.
Management said lower existing-product sales drove the overall decline; selective price increases and new products partly offset it. Raw-material prices had risen, and management warned that future margin pressure could result if increases cannot be passed on to customers. It reported no current indication of supply shortages.
Outlook, risks, and contingencies
- No specific sales or earnings forecast was provided. Management expects cash on hand, operating cash flow, and available revolving credit to cover foreseeable working-capital needs and existing obligations.
- Full-year 2013 capital expenditures were expected to be approximately $5–$6 million; outstanding commitments were about $1.1 million at quarter-end.
- A potential work stoppage at a Class 8 truck customer related to union contract negotiations could negatively affect third-quarter Industrial Hardware sales. Mining demand may be affected by EPA clean-air rules; management said the impact was not yet clear.
- The board approved a 10% quarterly dividend increase, effective in Q3 2013, to $0.11 per share.
- Potential ground contamination at the Wheeling, Illinois plant is under voluntary remediation review; the filing provides no cost estimate. The company also disputes potential EPA liability concerning a Cleveland, Ohio site and intends to defend against liability claims.
- The IRS notified the company that it would examine fiscal 2010 and 2011 tax returns; management did not expect a material financial-statement change. Management identified customer preferences, new-product acceptance, customer retention, competition, raw-material costs, foreign sourcing, economic conditions, litigation, and legislation among forward-looking risks.
Important facts for investors to verify
- Whether demand and sales volumes recover, particularly in Industrial Hardware and Security Products, and whether lower utilization continues to weigh on margins.
- Whether price increases offset higher raw-material costs, and whether the customer work stoppage or EPA rules affect sales.
- Progress on capital spending, operating cash flow, pension funding, and compliance with debt covenants.
- Any developments or cost estimates for the Illinois and Ohio environmental matters; the filing gives no estimate for Illinois remediation.
- The foreign-cash balance and potential tax consequences if foreign earnings are repatriated.