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EML > SEC Filings for EML > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for EASTERN CO


26-Apr-2013

Quarterly Report


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to highlight significant changes in the Company's financial position and results of operations for the thirteen weeks ended March 30, 2013. The interim financial statements and this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 29, 2012 and the related Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2012.

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Certain statements set forth in this discussion and analysis of financial condition and results of operations are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. They use such words as "may," "will," "expect," "believe," "plan" and other similar terminology. These statements reflect management's current expectations regarding future events and operating performance and speak only as of the date of this release. These forward-looking statements involve a number of risks and uncertainties, and actual future results and trends may differ materially depending on a variety of factors, including changing customer preferences, lack of success of new products, loss of customers, competition, increased raw material prices, problems associated with foreign sourcing of parts and products, changes within our industry segments and in the overall economy, litigation and legislation. In addition, terrorist threats and the possible responses by the U.S. government, the effects on consumer demand, the financial markets, the travel industry, the trucking industry and other conditions increase the uncertainty inherent in forward-looking statements. Forward-looking statements reflect the expectations of the Company at the time they are made, and investors should rely on them only as expressions of opinion about what may happen in the future and only at the time they are made. The Company undertakes no obligation to update any forward-looking statement. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions.

In addition, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and for excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses.

Overview

Sales in the first quarter of 2013 decreased 14% compared to the prior year, which was primarily the result of a decrease of 20% in sales of existing products in many of the markets we serve. The decrease was offset in part by selective price increases to customers of 1% and the introduction of new products which increased sales by 5%. Sales in the first quarter of 2013 decreased in each of the Company's business segments when compared to the first quarter of 2012: the Industrial Hardware segment sales decreased approximately 21%, the Security Products segment sales decreased approximately 9% and the Metal Products segment sales decreased approximately 7%. The decreases in sales of existing products in all three business segments were due to uncertain worldwide general economic conditions.

For the three months ended March 30, 2013, gross margin as a percentage of sales was 18% compared to 20% in the comparable period of 2012. This decrease was primarily the result of lower sales volume causing lower utilization of the Company's production capacity in the 2013 period.

Raw material prices have increased from the prior year period. The Company, through price increases, is recovering these additional costs from our customers, wherever possible. The Company expects raw material prices to continue to increase as worldwide economic conditions improve, which may have a negative impact on future operating margins. Currently, there is no indication that the Company will be unable to obtain supplies of all the raw materials that it requires.

Cash flow from operations in the first quarter of 2013 decreased compared to the same period in 2012. This decrease is primarily due to the lower level of earnings in the 2013 period and the associated timing differences in the collections of accounts receivable, payments of liabilities, and changes in inventories. Cash on hand and cash flow from operations, along with the result of controlling discretionary expenditures, should be sufficient to enable the Company to meet all its existing obligations and continue its quarterly dividend payments.

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A more detailed analysis of the Company's results of operations and financial condition follows:

Results of Operations

The following table shows, for the periods indicated, selected line items from
the condensed consolidated statements of operations as a percentage of net
sales, by segment:


                                    Three Months Ended March 30, 2013

                                    Industrial Security    Metal
                                      Hardware Products Products  Total
Net sales                               100.0%   100.0%   100.0% 100.0%
Cost of products sold                    81.4%    80.4%    84.8%  81.9%
Gross margin                             18.6%    19.6%    15.2%  18.1%

Selling and administrative expense       14.6%    17.3%     6.6%  13.5%
Operating profit                          4.0%     2.3%     8.6%   4.6%


                                    Three Months Ended March 31, 2012

                                    Industrial Security    Metal
                                      Hardware Products Products  Total
Net sales                               100.0%   100.0%   100.0% 100.0%
Cost of products sold                    76.8%    77.6%    89.1%  79.8%
Gross margin                             23.2%    22.4%    10.9%  20.2%

Selling and administrative expense       13.0%    15.8%     6.4%  12.4%
Operating profit                         10.2%     6.6%     4.5%   7.8%

The following table shows the amount of change for the first quarter of 2013 compared to the first quarter of 2012 in sales, cost of products sold, gross margin, selling and administrative expenses and operating results, by segment (dollars in thousands):

                               Industrial      Security        Metal
                                 Hardware      Products     Products         Total
Net sales                       $ (3,992)     $ (1,135)      $ (677)     $ (5,804)

     Volume                        -28.5%        -11.9%       -10.7%        -19.5%
     Prices                          0.1%          0.6%         1.7%          0.6%
     New products                    7.6%          1.9%         1.6%          4.6%
                                   -20.8%         -9.4%        -7.4%        -14.3%

Cost of products sold           $ (2,354)       $ (569)      $ (963)     $ (3,886)
                                   -16.0%         -6.1%       -11.8%        -12.0%

Gross margin                    $ (1,638)       $ (566)       $  286     $ (1,918)
                                   -36.7%        -20.8%        28.5%        -23.4%

Selling and administrative
expenses                         $  (278)        $ (19)      $  (37)      $  (334)
                                   -11.1%         -1.0%        -6.2%         -6.7%

Operating profit                $ (1,360)       $ (547)       $  323     $ (1,584)
                                   -69.3%        -68.7%        79.0%        -50.0%

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Industrial Hardware Segment

Net sales in the Industrial Hardware segment were down 21% in the first quarter of 2013 compared to the prior year quarter. The lower sales in the first quarter of 2013 reflected a decrease in sales of existing products, primarily lightweight composite panels used in an interactive electronic board product, as well as lower sales to the distribution and military markets in the first quarter of 2013 compared to the prior year quarter. The decrease in sales of the lightweight composite panels for the electronic board product was the result of bad raw material received from a vendor, which has been replaced, and we expect to make-up production and sales of this product during the second quarter of 2013. The decrease was reduced by an increase in sales to the Class 8 truck market in 2013 compared to the same period in 2012, selective price increases to customers and the introduction of new products. All of the new products were developed internally and included a rotary lock, a paddle handle, an adjustable rod assembly, a striker pin and a venting line of products for the Class 8 truck market; an escape hatch for the military market; and a trigger latch for the bus market; a frack tank made from lightweight composite panels for the oil and gas market; as well as a variety of locking and latching products for the many markets we serve.

Cost of products sold for the Industrial Hardware segment decreased $2.4 million or 16% in the first quarter of 2013 compared to the first quarter of 2012. The most significant factors resulting in changes in cost of products sold in the 2013 quarter compared to the 2012 quarter included:

a decrease of $1.9 million or 21% in raw materials;
a decrease of $0.2 million or 5% in costs for payroll and payroll related charges;
a decrease of $0.1 million or 40% in costs for supplies and tools;
and a decrease of $0.1 million or 36% from the sale of scrap.

Gross margin as a percentage of net sales for the Industrial Hardware segment decreased from 23% in the first quarter 2012 to 19% in the first quarter of 2013. The decrease in gross margin for the 2013 period reflects the lower volume of sales in 2013, the mix of products produced and the changes in cost of products sold discussed above.

Selling and administrative expenses in the Industrial Hardware segment decreased $0.3 million or 11% from 2012 to 2013. The most significant factor resulting in changes in selling and administrative expenses in the Industrial Hardware segment in the first quarter of 2013 compared to the 2012 quarter was:

a decrease of $0.2 million or 12% in payroll and payroll related charges.

Security Products Segment

Net sales in the Security Products segment decreased 9% in the first quarter of 2013 compared to the first quarter of 2012. The decrease in sales in the first quarter of 2013 in the Security Products segment is primarily the result of lower sales volume of existing products across many of the markets we serve. Selective price increases and the introduction of new products offset a portion of the sales decrease. Sales of new products included a clamp and a tubular slam lock for the vehicular market, a puck lock for the OEM market, luggage locks for the travel market, a round body steel padlock for the retail hardware market and mini "D" ring handle assembly for the storage market.

Cost of products sold for the Security Products segment decreased $0.6 million or 6% in 2013 as compared to the first quarter of 2012. The most significant factors resulting in changes in cost of products sold in the first quarter of 2013 compared to 2012 quarter included:

a decrease of $0.4 million or 5% in raw materials;
a decrease of $0.1 million or 123% in foreign exchange;
and a decrease of $0.1 million or 36% in costs for supplies and tools.

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Gross margin as a percentage of sales for the Security Products segment decreased from 22% to 20% primarily due to the lower sales volume in 2013 compared to the same period in 2012.

Selling and administrative expenses in the Security Products segment were comparable for the first quarter of 2013 and 2012.

Metal Products Segment

Net sales in the Metal Products segment decreased 7% in the first quarter of 2013 as compared to the prior year period. The lower sales in the first quarter of 2013 reflected a decrease in sales of existing products. The decrease was partially offset by selective price increases to customers and the introduction of new products. Sales of mining products were down 8% in 2013 compared to the first quarter of 2012 and sales of contract castings increased 3% from the prior year levels. The decrease in sales of mining products was driven by weaker demand in the first quarter of 2013 in both the U.S. and Canadian mining markets compared to the prior year first quarter. It is too early to determine if this is a temporary reduction in mining business or the result of the new clean air rules enacted by the U.S. Environmental Protection Agency that went into effect in 2012. Mining sales benefited from the introduction of new mining products including a spherical head, a rope thread and a spherical three-hole block. The increase in sales of contract casting was primarily the result of sales of a new rail clamp product for a solar panel application.

Cost of products sold for the Metal Products segment decreased $1.0 million or 12% in the first quarter of 2013 compared to the same period in 2012. The most significant factors resulting in changes in cost of products sold in the first quarter of 2013 compared to the 2012 first quarter included:

a decrease of $0.5 million or 24% in raw materials;

a decrease of $0.3 million or 43% related to costs for maintenance and repairs;

and a decrease of $0.1 million or 12% in costs for supplies and tools.

Gross margin as a percentage of net sales improved from 11% in the first quarter of 2012 to 15% for the 2013 quarter. The increase is due to the mix of products produced, elimination of products with unacceptable profit margins, price increases to customers, and cost reductions related to improved production efficiency resulting from the capital investment made in the operation over the last several years.

Selling and administrative expenses in the Metal Products segment were comparable for the first quarter of 2013 and 2012.

Other Items

Interest expense decreased 4% in the first quarter of 2013 compared to the prior year period due to the decreased level of debt.

Other income for both periods presented was not material to the financial statements.

Income taxes reflected the change in the operating results. The effective tax rate in the first quarter of 2013 was 33.3% and was comparable to the 2012 effective rate which was 33.7%.

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Liquidity and Sources of Capital

The Company provided $706,000 from its operations during the first three months of 2013 compared to $2.1 million during the same period in 2012. The decrease in cash flows in the quarter was primarily the result of the lower earnings in the first quarter of 2013 compared to the 2012 first quarter, as well as the associated timing differences in the collections of accounts receivable, payments of liabilities, and changes in inventories. Cash flow from operations coupled with cash on hand at the beginning of the year was sufficient to fund capital expenditures, debt service, and dividend payments.

Additions to property, plant and equipment were $1.3 million for the first three months of 2013 compared to $1.5 million for the same period in 2012. Total capital expenditures for 2013 are expected to be approximately $7 million. As of March 30, 2013, there is approximately $1.6 million of outstanding commitments for these capital expenditures.

The following table shows key financial ratios at the end of each period:

                                                              First                     First                    Year
                                                             Quarter                   Quarter                   End
                                                              2013                      2012                     2012
Current ratio                                          5.6                   4.8                              4.8
Average days' sales in accounts receivable              49                    47                               47
Inventory turnover                                     3.8                   4.3                              4.2

Total debt to shareholders' equity 9.9 % 12.0 % 10.5 %

The following table shows important liquidity measures as of the balance sheet date for each period below (in millions):

                                                        First      First     Year
                                                      Quarter    Quarter      End
                                                         2013       2012     2012
Cash and cash equivalents
 - Held in the United States                           $  9.2     $  6.2   $ 10.4
- Held by a foreign subsidiary                            7.7        6.8      8.1
                                                         16.9       13.0     18.5
Working capital                                          57.3       54.6     56.9
Net cash provided by operating activities                 0.7        2.1     13.6
Change in working capital impact on net cash
  (used)/provided by operating activities                (1.3 )     (0.8 )    0.3
Net cash used in investing activities                    (1.3 )     (1.5 )   (4.2 )
Net cash (used in)/provided by financing activities      (1.0 )      1.2     (2.3 )

U.S. income taxes have not been provided on the undistributed earnings of the Company's foreign subsidiaries except where required under U.S. tax laws. The Company would be required to accrue and pay United States income taxes to repatriate the funds held by foreign subsidiaries not otherwise provided. The Company intends to reinvest these earnings outside the United States indefinitely.

All cash held by foreign subsidiaries is readily convertible into other currencies, including the U.S. Dollar.

Total inventories as of March 30, 2013 were $29.8 million, compared to $29.4 million at year end 2012 and $30.2 million at the end of the first quarter of 2012. Inventory turns declined in the first quarter of 2013 related to the lower revenue for the period. Accounts receivable remained fairly consistent at $18.4 million compared to $18.4 million at year end 2012 and slightly lower than the $20.7 million at the end of the first quarter of fiscal 2012. The decrease from the first quarter of 2012 is related to lower revenues in the first three months of the current year.

Cash on hand, cash flow from operating activities and funds available under the revolving credit portion of the Company's Loan Agreement are expected to be sufficient to cover future foreseeable working capital requirements.

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