The Eastern Company (NASDAQ: EML) — Q2 2019 Form 10-Q
Business context and period: The company reported the quarter and six months ended June 29, 2019, compared with the corresponding 2018 periods. Its segments are Industrial Hardware, Security Products, and Metal Products. Results are unaudited; interim results are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $61.4 million | $60.9 million | $122.3 million | $120.3 million |
| Gross margin | $15.0 million; 24.4% | $15.1 million; 24.7% | $28.8 million; 23.6% | $29.7 million; 24.7% |
| Operating profit | $3.0 million | $4.4 million | $5.3 million | $8.6 million |
| Net income | $2.5 million | $3.3 million | $4.1 million | $6.4 million |
| Diluted EPS | $0.40 | $0.52 | $0.65 | $1.01 |
| Operating cash flow | Not separately reported | Not separately reported | $8.7 million | $5.6 million |
At June 29, cash and equivalents were $13.7 million, working capital was about $71.0 million, and the current ratio was 3.5. Debt totaled $22.4 million ($3.1 million current and $19.3 million long-term), down from $28.7 million at December 29, 2018. The company made $6.3 million of principal payments in the first half, including a $5.5 million accelerated payment, and paid another $2.5 million after quarter-end. The $10 million revolving facility had no balance. Total debt to shareholders’ equity was 22.3%, versus 29.6% at 2018 year-end. The balance sheet also included $10.0 million each in operating lease right-of-use assets and lease liabilities, recognized under the new lease standard.
Changes and operating drivers
- Q2 sales rose 1%; first-half sales rose 2%. New products contributed to growth, while existing-product sales volume declined 5% in Q2 and 3% for the first half.
- Industrial Hardware sales increased 5% in both periods, supported by truck, distribution, and specialty-vehicle markets. Security Products sales fell 8% in Q2 and 6% in the first half, reflecting softer commercial laundry demand and the loss of a cellphone-tower access product contract. Metal Products sales increased 5% in Q2 and 2% in the first half.
- Gross margin percentage declined in both periods. Management cited higher costs and launch expenses for the Class 8 truck mirror program, tariffs on China-sourced products, freight and expedited-shipping costs, and under-absorbed fixed costs at lower production levels. Lower raw-material prices partly offset these pressures.
- Product development expense increased 38% in Q2 and 43% in the first half, largely for truck mirror development. Selling and administrative expense decreased 11% and 9%, respectively, primarily due to lower payroll-related costs.
- Other income included a $0.6 million gain from the sale of land at company headquarters. Interest expense declined versus 2018.
Unusual items, outlook, and risks
Reported restructuring costs were $1.8 million in Q2 and $2.6 million in the first half. These reflected the Composites Group facility consolidation and discontinuation of Velvac Road IQ development operations. The filing describes $3.7 million of Road IQ-related costs, partly offset by reversal of a $2.1 million Velvac acquisition contingent liability; management reported net-of-tax restructuring impacts of $1.4 million for Q2 and $2.0 million for the first half.
Management said cash, operating cash flow, and available revolving credit were expected to cover foreseeable working-capital needs. It expected to repatriate $2.5 million from Chinese operations in Q3. The company expected truck-mirror component approvals and sourcing changes to be completed by the end of October 2019, after which related costs should begin to normalize. No formal earnings or revenue guidance was provided.
Key risks discussed include customer demand and loss of customers, new-product execution, competition, raw-material prices, tariffs, foreign sourcing, economic and industry conditions, acquisition integration, and potential LIBOR replacement after 2021. Variable-rate debt and the related swap create interest-rate exposure; the company reported compliance with loan covenants through June 29, 2019. It reported no material changes to previously disclosed risk factors, no legal proceedings as of quarter-end, and ongoing environmental remediation matters with costs previously accrued. Disclosure controls were assessed as effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether truck-mirror component approvals and lower-cost sourcing were achieved on the stated timeline, and whether launch-related costs normalized.
- Whether restructuring charges are substantially complete and whether discontinued Road IQ operations affect future results or cash needs.
- Whether segment demand, especially Security Products and Metal Products, stabilizes, and whether margin pressure from tariffs, freight, and production levels eases.
- Debt repayment pace, covenant headroom, cash held by foreign subsidiaries, and the impact of LIBOR transition on borrowing costs.
- Actual full-year pension contributions and environmental remediation outcomes, including anticipated New York site work and regulatory approval.