The Eastern Company — Q2 2012 Form 10-Q
Business context and period. The Eastern Company reported unaudited results for the quarter ended June 30, 2012, and the six months then ended. Its segments are Industrial Hardware, Security Products, and Metal Products. Comparisons are with the three and six months ended July 2, 2011.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $41.56 million | $35.52 million | $82.06 million | $68.71 million |
| Gross margin | $9.25 million; 22.2% of sales | $6.93 million; 19.6% | $17.43 million; 21.2% | $13.25 million; 19.3% |
| Operating profit | $4.14 million; 10.0% of sales | $2.30 million; 6.5% | $7.31 million; 8.9% | $4.02 million; 5.8% |
| Net income | $2.63 million | $1.48 million | $4.68 million | $2.58 million |
| Diluted EPS | $0.42 | $0.24 | $0.75 | $0.42 |
- Q2 sales rose 17%; six-month sales rose 19%. Q2 net income increased about 78%, and six-month net income about 81%.
- Six-month operating cash flow was $5.39 million, versus cash used of $0.41 million in 2011. Capital expenditures were $2.37 million; cash dividends paid were $1.24 million.
- Cash was $14.48 million at June 30, up from $11.15 million at year-end 2011. Working capital was $55.4 million; the current ratio was 5.0.
- Total debt was approximately $8.21 million, including $1.43 million current and $6.79 million long-term, compared with $6.75 million at year-end. Debt-to-equity was 11.2%. Outstanding debt rates were fixed at 4.98% and 3.90%; the company did not use its revolving credit during Q2.
- Accrued pension cost was $14.73 million. The company reported $1.90 million in accrued postretirement benefits.
Material changes and operating drivers
- All three segments grew sales in Q2: Industrial Hardware 19%, Security Products 8%, and Metal Products 28%. For the first half, growth was 25%, 6%, and 30%, respectively.
- Management attributed growth to higher sales of existing products, selective price increases, and new products. Gross-margin improvement reflected volume, product mix, pricing, and new products.
- Six-month segment income before taxes was $4.09 million for Industrial Hardware, $2.34 million for Security Products, and $0.88 million for Metal Products.
- Interest expense increased 86% in Q2 and 57% in the first half, primarily due to higher debt. The January 2012 loan amendment added a $5 million term loan, fixed at 3.90% and due January 2019; it also extended the revolving facility’s maturity to January 2014.
Outlook, risks, and contingencies
- Management expected 2012 capital expenditures of approximately $4–$5 million; about $350,000 of commitments remained at June 30. Required 2012 contributions were $3.472 million to pension plans and $155,000 to the postretirement plan; $1.881 million and $62,000, respectively, had been contributed by quarter-end.
- Management said cash, operating cash flow, and available revolving credit were expected to cover foreseeable working-capital needs and existing obligations, including quarterly dividends. No specific revenue or earnings guidance was provided.
- Raw-material prices had risen. The company was seeking to recover increased costs through customer pricing, but warned that unrecovered increases could pressure future margins.
- Management cited a possible softening in coal usage beginning in the second half of 2012 following new EPA clean-air rules, which could affect mining-product sales. The company was developing other products to offset potential weakness.
- Environmental matters include potential contamination at the Wheeling, Illinois plant, where remediation testing and planning were underway with no cost estimate available, and an EPA-designated Cleveland, Ohio site for which the company said it intended to defend against liability. The filing gave no clear estimate of exposure.
- Other identified uncertainties include customer demand and preferences, new-product success, competition, foreign sourcing, economic and industry conditions, and litigation or legislation. Management reported disclosure controls were effective at the reasonable-assurance level and no material change in internal controls.
Important facts for investors to verify
- Whether sales growth, especially Metal Products’ mining-related growth, persists amid the anticipated coal-market slowdown.
- Whether price increases and product mix continue to offset raw-material and other manufacturing-cost inflation.
- The eventual cost and responsibility, if any, for the Illinois and Ohio environmental matters; the filing provides no Illinois remediation estimate and disputes potential Ohio liability.
- Progress on required pension and postretirement contributions and the effect of benefit obligations on future cash needs.
- Debt repayment, revolving-credit availability, and the planned $4–$5 million of capital spending.