The Eastern Company — FY2015 Form 10-K
Business context and period. The filing covers the 52-week fiscal year ended January 2, 2016; FY2014 had 53 weeks. Eastern manufactures industrial hardware, security products and metal products through three segments. Fourth-quarter figures are included below where relevant.
Financial results and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $144.6 million | $140.8 million |
| Gross margin | $32.4 million; 22.4% | $32.5 million; 23.1% |
| Operating profit | $8.0 million | $11.7 million |
| Net income | $5.7 million | $7.7 million |
| Diluted EPS | $0.92 | $1.23 |
| Net cash from operations | $9.1 million | $9.3 million |
- Sales grew 2.7%, while net income fell about 25% and operating profit fell about 32%. Gross margin declined from 23.1% to 22.4%; selling and administrative expense rose $3.6 million.
- Cash and cash equivalents were $17.8 million, including $10.9 million held by foreign subsidiaries. Working capital was $60.1 million; the current ratio was 5.0.
- Total debt was $3.2 million, down from $4.3 million; the revolving facility was unused. Total debt to shareholders’ equity was 4.0%. The company reported compliance with loan covenants.
- Investing activities used $2.5 million, including $2.5 million of capital expenditures. Financing activities used $3.9 million, including $1.1 million of debt repayment and $2.8 million of dividends.
- Inventory rose $2.4 million to $36.8 million, contributing to a roughly $2.0 million working-capital cash use. FY2015 dividends were $0.45 per share.
Changes and segment performance
- Industrial Hardware: Sales increased about 5% to $61.3 million, supported by new products and military aftermarket demand. Segment operating profit declined to $4.3 million from $5.1 million; gross margin eased to 25.2% from 25.6%.
- Security Products: Sales increased about 15% to $56.6 million, including a full year of Argo Transdata sales following its December 2014 acquisition. Segment operating profit was $3.8 million versus $4.1 million; gross margin improved to 25.6% from 25.1%.
- Metal Products: Sales fell about 19% to $26.6 million as U.S. coal-mining demand weakened. Segment recorded an $85,000 operating loss versus $2.6 million operating profit in FY2014; gross margin declined to 9.2% from 15.4%.
- Fourth-quarter sales were essentially flat at $34.4 million; net income declined 14% to $1.7 million, or $0.28 per diluted share. Metal Products sales fell 26% year over year in the quarter.
- Management attributed much of the annual earnings decline to proxy-contest costs, which reduced diluted EPS by about $0.21, and weaker Metal Products sales. The 2014 comparison also includes an extra fiscal week.
Outlook, risks and other notable items
- No formal earnings or revenue guidance is provided. Management expected mining markets to remain soft into 2016, was monitoring costs and considering reductions as appropriate, and was developing utility, rail, construction and contract-casting business to offset mining weakness.
- Management expected approximately $4 million of FY2016 capital expenditures and pension and postretirement contributions of about $3.1 million and $118,000, respectively. It stated cash and credit resources should be sufficient for the next fiscal year.
- Key risks include raw-material price increases or supply disruption, competition and customer losses, foreign operations and currency movements, product-development and acquisition execution, pension assumptions, and potential goodwill impairment. The company estimated a 1% currency-rate change would affect reported earnings by about $35,000.
- Argo’s first-year earn-out was reduced after sales goals were not met; Eastern recognized $139,000 of income, and the remaining contingent earn-out liability was $144,000.
- Illinois environmental remediation was estimated at about $30,000, with approximately $26,000 provided at year-end; management did not expect a material financial impact.
- CEO and Chairman Leonard Leganza retired at year-end; August Vlak became CEO and James Mitarotonda became Chairman. Proposed board declassification and majority-vote changes required shareholder approval.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded internal controls were effective.
Important facts for investors to verify
- Whether Metal Products’ continued coal-market weakness is offset by new customers and non-mining products, and what cost actions are ultimately taken.
- How much FY2015 earnings were affected by proxy-contest expenses and whether comparable expenses recur.
- Argo’s ongoing contribution to Security Products results, including earn-out outcomes and integration performance.
- Inventory levels, cash conversion and planned FY2016 capital expenditures and pension contributions.
- Future dividend capacity, loan covenant terms and refinancing or renewal of the revolving facility, whose stated maturity was July 1, 2016.
- Potential effects of raw-material changes, foreign exchange, pension assumptions and the company’s intention to reinvest foreign earnings abroad indefinitely.