The Eastern Company — Q3 2015 Form 10-Q
Business context and reporting period. The company reported the quarter and first nine months ended October 3, 2015; comparable periods ended September 27, 2014. Its segments are Industrial Hardware, Security Products and Metal Products. Results are unaudited.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $36.24 million | $35.80 million | $110.15 million | $106.43 million |
| Gross margin | $9.03 million; 24.9% | $8.64 million; 24.1% | $24.28 million; 22.0% | $23.93 million; 22.5% |
| Operating profit | $3.45 million | $3.75 million | $5.68 million | $8.83 million |
| Net income | $2.53 million | $2.43 million | $3.99 million | $5.63 million |
| Diluted EPS | $0.41 | $0.39 | $0.64 | $0.90 |
| Operating cash flow | Not stated separately | Not stated separately | $3.65 million | $7.01 million |
At October 3, cash was $13.61 million, working capital was approximately $59.7 million and the current ratio was 5.5. Debt totaled approximately $3.21 million, including $1.07 million current and $2.14 million long-term, down from $4.29 million at January 3, 2015. The $10 million revolving facility was unused; its maturity was extended to July 1, 2016. The company reported compliance with loan covenants. Accrued pension cost was $25.82 million.
Material changes versus comparable periods
- Q3 sales rose about 1%, and net income increased about 4%, while operating profit fell about 8%. Nine-month sales rose about 4%, but operating profit declined about 36% and net income about 29%.
- Q3 gross margin improved to 24.9% from 24.1%, with lower commodity prices, product mix and Argo acquisition effects cited. Nine-month gross margin fell to 22.0% from 22.5%, chiefly because lower mining-product volume reduced Metal Products capacity utilization.
- Q3 segment sales rose 9% in Industrial Hardware and Security Products, but fell 25% in Metal Products. For nine months, sales rose 5% and 15%, respectively, while Metal Products declined 16%.
- Selling and administrative expense increased $3.5 million, or 23%, in the first nine months. Approximately $2.0 million related to the Barington proxy contest, reimbursement of its management costs, and legal and settlement costs; the filing says these costs were recorded in the first half.
- Nine-month operating cash flow was lower year over year, with the company citing proxy-related spending, lower earnings and working-capital timing. Inventory rose 6% from year-end to $36.48 million, including increases across all segments.
Outlook, risks and unusual items
- Management expected raw-material prices to remain soft through the rest of 2015 and into 2016, and reported no indication of supply availability problems. It expected approximately $3.0 million of 2015 capital expenditures; about $250,000 remained committed at quarter-end.
- Management said cash, operating cash flow and available revolving credit should cover foreseeable working-capital needs and existing obligations, and support quarterly dividends. It also noted that future revenue and margin trends cannot be reliably predicted.
- Metal Products remains exposed to weak coal/mining demand, including lower sales to major customers serving Appalachian thermal and U.S. metallurgical coal markets. Broader cited risks include customer demand and preferences, competition, raw-material costs, foreign sourcing, economic and industry conditions, litigation and legislation.
- The Barington-related shareholder lawsuit was subject to a court-approved dismissal stipulation in July 2015. The company recorded $320,500 in legal and settlement costs for the suit; amounts above that were paid by insurance. An Illinois environmental remediation plan was conditionally approved; estimated cost was approximately $30,000, with about $26,000 provided, and management did not expect a material financial impact.
- The company expected $3.0 million of pension contributions and $150,000 of postretirement contributions in 2015; by October 3, it had contributed approximately $1.9 million and $90,000, respectively.
Important facts for investors to verify
- Whether Metal Products mining demand and capacity utilization recover, and how continued weakness affects segment profitability.
- Whether the higher sales contribution from new products and Argo persists, and whether Security Products can manage material and labor costs.
- The level and recurrence of proxy-contest, reimbursement and litigation expenses; their effect on operating results and cash flow.
- Inventory growth, receivables collection and working-capital cash use, alongside the decline in operating cash flow.
- Cash availability by location: $3.8 million was held in the United States and $9.8 million by a foreign subsidiary; repatriation of additional foreign earnings may have U.S. tax consequences.
- Ongoing pension funding requirements, covenant compliance, revolver availability and the July 2016 facility maturity.