The Eastern Company — FY2017 Form 10-K
Business context and reporting period. The company designs and manufactures industrial hardware, security products and metal products. Fiscal 2017 was the 52 weeks ended December 30, 2017; the filing also reports fourth-quarter results. On April 3, 2017, Eastern acquired Velvac, a commercial-vehicle vision technology and products business, materially expanding Industrial Hardware.
Financial performance and position
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $204.2 million | $137.6 million |
| Gross profit / margin | $50.1 million / 24.5% | $36.3 million / 26.4% |
| Operating profit / margin | $12.3 million / 6.0% | $11.1 million / 8.1% |
| Income before taxes | $11.5 million | $11.2 million |
| Income taxes / effective rate | $6.4 million / 56% | $3.4 million / 31% |
| Net income / diluted EPS | $5.0 million / $0.80 | $7.8 million / $1.25 |
| Operating cash flow | $11.2 million | $12.4 million |
| Capital expenditures | $2.8 million | $2.9 million |
- Sales rose about 48%, reflecting the Velvac acquisition and approximately 14% organic growth. Industrial Hardware sales increased 89% (11% excluding Velvac); Security Products rose 7%; Metal Products rose 45%.
- Fourth-quarter sales were $54.1 million versus $34.1 million; net loss was $0.17 million, or $0.03 per diluted share, versus net income of $2.65 million, or $0.42 per share. Fourth-quarter gross margin fell to 25.6% from 31.8%.
- Velvac contributed $47.3 million of sales and a reported loss of $0.1 million from acquisition through year-end. Eastern cited acquisition-related costs, purchase-accounting inventory charges, product mix and higher material costs as pressures on profitability.
- At year-end, cash was $22.3 million, working capital $68.8 million, and the current ratio 3.2 versus 6.0 in 2016. Total debt was $35.2 million, up from $1.8 million; shareholders’ equity was $86.9 million. The company reported total debt-to-equity of 40.5%.
- Net cash used in investing activities was $42.8 million, primarily reflecting the acquisition; financing activities provided $30.7 million. The credit agreement’s revolving facility had $5.0 million outstanding. Debt carried variable rates, partly hedged by an interest-rate swap; the company reported compliance with its covenants.
- Annual dividends were $0.44 per share. The company expected to continue regular cash dividends, subject to earnings, financial condition and loan restrictions.
Material changes, outlook and risks
- Management anticipated solid sales and earnings growth in 2018, citing Velvac, investment in Illinois Lock and new products, expected Road-iQ returns in the second half, demand in Class 8 trucks and recreational vehicles, and lower U.S. corporate taxes. No specific numerical 2018 sales or earnings guidance was provided.
- The Tax Cuts and Jobs Act contributed significant one-time expense: the company recorded $2.034 million related to foreign earnings and withholding taxes and $0.531 million from remeasuring deferred taxes. The filing’s non-GAAP reconciliation adjusts for these tax effects and other items, reporting adjusted diluted EPS of $1.49 for FY2017 versus GAAP diluted EPS of $0.80. Management said tax accounting estimates could change and adjustments in 2018 could be material.
- Raw-material prices, including steel, zinc, brass and scrap iron, increased and were not fully recovered through customer pricing or cost reductions. The filing also identified proposed U.S. steel and aluminum tariffs as a potential cost risk; they were proposed, not reported as implemented.
- Other principal risks include acquisition integration and earnout uncertainty, competition and imports, foreign exchange and sourcing disruptions, variable interest rates, customer credit deterioration, cybersecurity, environmental obligations, and labor negotiations. Contracts covering approximately 9% of the workforce were due to expire in 2018.
- Environmental matters included an estimated $380,000 to remediate and monitor a New York foundry-sand landfill, accrued in 2017, and an estimated $50,000 for remediation at the Illinois facility. Management said ordinary-course litigation was not expected to have a material adverse effect.
- The company reported a $26.4 million pension liability and expected 2018 cash contributions of approximately $510,000 to pension plans and $105,000 to its other postretirement plan. It also disclosed $26.4 million of estimated future pension contributions in its contractual-obligations table, based on stated assumptions.
Important facts for investors to verify
- Track Velvac’s profitability and Road-iQ sales against the acquisition earnout terms, and assess whether management’s 2018 growth expectations were achieved.
- Reconcile the filing’s cash-flow disclosures: the audited statement reports operating cash flow of $11.2 million and investing cash use of $42.8 million, while parts of MD&A state $13.1 million and $44.7 million, respectively. The source text does not clearly reconcile these differences.
- Monitor debt repayment, interest expense, covenant headroom and the use of cash held overseas; the filing reports approximately $14.4 million of cash at foreign subsidiaries.
- Check subsequent tax filings and disclosures for final Tax Act transition-tax and deferred-tax adjustments; the 2017 amounts were estimates subject to further assessment.
- Assess whether margins recover as raw-material costs, acquisition-related charges and product mix evolve, and follow the pending environmental remediation plans and 2018 labor negotiations.