The Eastern Company — FY 2012 Form 10-K
Business and period: The company manufactures industrial hardware, security products and metal products through U.S. operations and wholly owned foreign subsidiaries. This annual report covers the fiscal year ended December 29, 2012 (52 weeks); fourth-quarter comparisons are also reported. Fiscal 2011 ended December 31, 2011.
Financial performance
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $157.5 million | $142.9 million |
| Gross margin | $33.4 million; 21.2% of sales | $27.4 million; 19.1% of sales |
| Operating profit | $13.6 million; 8.6% of sales | $8.7 million; 6.1% of sales |
| Net income | $8.6 million | $5.5 million |
| Diluted earnings per share | $1.38 | $0.89 |
| Operating cash flow | $13.6 million | $1.4 million |
| Capital expenditures | $4.2 million | $3.4 million |
| Cash and cash equivalents | $18.5 million | $11.1 million |
| Working capital | $56.9 million | $48.7 million |
| Total debt at year end | $7.5 million | $6.8 million |
Sales rose about 10% and net income about 57% year over year. Improved product mix, new products, selective price increases and higher volume supported margins. Operating cash flow improved substantially, with management citing stronger earnings and tighter control of inventory and receivables. The current ratio was 4.8, compared with 4.0 in 2011. Debt-to-equity was 10.5%, versus 9.8%.
Segments and fourth quarter
- Industrial Hardware: Sales increased 9% to $72.3 million; operating margin improved to 10.5% from 7.4%. Growth included lightweight composite products and Class 8 truck products.
- Security Products: Sales increased 5% to $50.1 million; operating margin improved to 8.2% from 7.1%. Management cited commercial laundry sales and new lock products.
- Metal Products: Sales increased 22% to $35.1 million; operating margin improved to 5.3% from 1.4%. Strong mine-product demand and new contract-casting products contributed.
- Fourth quarter: Sales declined 6% to $35.8 million, mainly due to lower sales of composite panels for electronic white boards. Gross margin increased to 21.6% from 19.8%; net income rose 18% to $1.7 million, or $0.28 per diluted share.
Liquidity, debt and capital allocation
Year-end debt comprised $7.5 million of term loans, with no revolving-credit balance outstanding. Term-loan rates are fixed at 4.98% and 3.90%. The company reported compliance with all loan covenants. Its credit agreement includes limits on leverage, distributions and certain other actions. Cash held by foreign subsidiaries was $8.1 million; the company intends to reinvest foreign earnings abroad indefinitely, and repatriation could result in U.S. income taxes.
The company paid $0.50 per share in dividends during 2012, including a one-time extra $0.10 payment; the regular quarterly dividend was increased 11% effective in 2012. Management expects operating cash flow and available credit to meet foreseeable needs. It expects approximately $4 million of capital expenditures in 2013 and pension and postretirement contributions of approximately $1.9 million and $155,000, respectively.
Outlook, risks and unusual items
- No specific revenue or earnings forecast is provided. Management described demand as strong in mine-support products during 2012 but is developing other products to mitigate possible future coal-market softness from clean-air rules and competition from natural gas.
- Raw-material price increases could pressure margins if they cannot be offset by customer pricing or cost reductions. Other cited risks include competition, customer demand and creditworthiness, new-product execution, foreign operations and currency movements, and access to financing.
- Union contracts covering approximately 19% of the workforce expire during 2013; unsuccessful negotiations could disrupt production.
- Environmental matters include potential contamination at the Wheeling, Illinois plant, where testing and remediation planning are underway; the filing says no remediation cost estimate was available. The company also intends to defend against potential liability relating to a former Cleveland, Ohio site.
- The pension plans remain underfunded: the reported pension liability was $20.2 million, up from $15.8 million. Lower discount-rate assumptions and actuarial losses contributed to increased benefit obligations.
- The company reported no goodwill or trademark impairment in 2012. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor facts to verify
- Whether 2012’s margin and earnings gains are sustainable, particularly if sales weaken or material costs rise.
- Exposure to mine-support products and the pace of diversification in Metal Products.
- Funding needs for pensions, future contributions and the effect of actuarial assumptions on reported obligations.
- Progress and potential costs of the Illinois environmental review and the status of the Cleveland matter.
- 2013 union negotiations, capital spending plans, and compliance with debt covenants and dividend restrictions.