The Eastern Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 30, 2019; comparisons are with the three months ended March 31, 2018 unless otherwise noted. The Eastern Company manufactures products across Industrial Hardware, Security Products, and Metal Products. Financial statements are unaudited.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $60.9 million | $59.4 million | +2% |
| Gross margin | $13.8 million; 22.7% of sales | $14.7 million; 24.8% | Down $0.9 million; 2.1 percentage points |
| Operating profit | $2.3 million; 3.8% of sales | $4.2 million; 7.0% | Down 44% |
| Income before taxes | $2.1 million | $4.1 million | Down 50% |
| Net income | $1.6 million | $3.1 million | Down 49% |
| Diluted EPS | $0.25 | $0.49 | Down $0.24 |
| Cash dividends per share | $0.11 | $0.11 | Unchanged |
| Cash from operations | $1.5 million | $0.1 million | Improved |
Cash and cash equivalents were $13.5 million at March 30, 2019, versus $13.9 million at fiscal year-end 2018. Working capital was $72.8 million and the current ratio was 3.6. Operating cash flow, together with opening cash, funded capital expenditures, debt service, and dividends. Capital expenditures were $0.8 million; approximately $0.3 million of capital-expenditure commitments remained.
Term debt totaled approximately $28.3 million, comprising $2.7 million current and $25.6 million long-term; there was no outstanding revolving-credit balance. Total debt to shareholders’ equity was 28.8%, compared with 34.2% in Q1 2018. The company reported compliance with its debt covenants. The balance sheet also included $10.6 million each in right-of-use assets and lease liabilities following adoption of the new lease standard.
Material changes and operating drivers
- Industrial Hardware sales rose 5% to $38.4 million, driven by Class 8 truck and distribution demand and new products. Segment income before taxes was $1.3 million, versus $2.8 million.
- Security Products sales declined 3% to $14.7 million, primarily from weaker commercial laundry demand and a semiconductor-market decline affecting PC-board sales. Segment income before taxes was $1.0 million, roughly unchanged.
- Metal Products sales were approximately flat at $7.8 million. Lower mining sales were offset by growth in industrial castings. Segment income before taxes fell to $0.1 million from $0.4 million.
- Gross margin pressure reflected higher material and freight costs, under-absorbed production costs, tariffs on China-sourced products, and product mix. Management cited approximately $0.2 million of tariff costs and $0.2 million of additional freight costs. Higher-cost components for a new truck-mirror program were expected to normalize after customer testing and approval, anticipated by mid-June.
- Product-development expense rose $0.9 million, mainly for the new truck-mirror program. Selling and administrative expense fell $0.8 million, largely from lower payroll-related costs.
Outlook, risks, and notable items
The company provided no quantified revenue or earnings guidance. Management said cash, operating cash flow, and available revolving-credit capacity were expected to cover foreseeable working-capital needs. It expected to complete the composite-panel facility consolidation in Q2 2019; Q1 restructuring costs were $0.8 million, including inventory and fixed-asset write-offs, moving, severance, and lease-termination costs.
Management identified risks including customer-demand changes, competition, new-product execution, raw-material prices, tariffs, foreign sourcing, economic and industry conditions, and acquisition integration. Variable-rate borrowings are tied to LIBOR; the filing warned that LIBOR reform or replacement could adversely affect borrowing costs. The company reported no material change to the risk factors in its 2018 Form 10-K.
Environmental matters include an Illinois remediation with estimated costs of approximately $50,000, accrued, and a New York foundry-sand landfill remediation estimated at $430,000, previously accrued. The company reported no other legal proceedings as of quarter-end. On April 23, 2019, it sold undeveloped land in Naugatuck, Connecticut, for $675,000. The filing does not state the sale’s effect on earnings or cash flow.
Important facts for investors to verify
- Whether truck-mirror component approvals and sourcing proceeded as expected and whether related costs normalized after the anticipated mid-June timing.
- Whether the composite-panel consolidation was completed in Q2 and whether additional restructuring costs arose.
- How segment demand and margins developed, especially in Metal Products, commercial laundry, and semiconductor-related sales.
- Debt-covenant headroom, future term-loan amortization, and the effects of variable rates and LIBOR transition on interest expense.
- Final regulatory approval and costs for the environmental remediation projects, and the financial impact of the land sale.