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

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Form 10-Q for EASTERN CO


26-Jul-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 twenty-six weeks ended June 29, 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.

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.

Recent Developments

On July 24, 2013, the Board of Directors of the Company voted to increase the quarterly dividend by 10% effective in the third quarter of 2013. The third quarter 2013 dividend payment at the increased rate of $0.11 per share will represent the 292nd regular consecutive quarterly dividend.

Overview

Sales in the second quarter of 2013 decreased 6% compared to the second quarter of 2012, which was primarily the result of a decrease of 8% 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 1%. In the second quarter of 2013 Industrial Hardware sales decreased 8%, Security Products sales decreased 7% and Metal Products sales were comparable to the prior year period.

Gross margin as a percentage of sales for the three months ended June 29, 2013 was 22% and was comparable to the prior year period.

Sales in the first six months of 2013 decreased 10% compared to the prior year period, which was primarily the result of a decrease of 14% 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 3%. Sales decreased in the first six months of 2013 by 14% in the Industrial Hardware segment, by 8% in the Security Products segment, and by 3% in the Metal Products segment compared to the prior year period.

-12-


Gross margin as a percentage of sales for the six months ended June 29, 2013 was 20% compared to 21% in the comparable period a year ago. 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 compared to the prior year periods. The Company, through price increases, is recovering these additional costs from our customers, wherever possible. The Company expects that raw material prices will continue to increase as worldwide economic conditions improve, which may have a negative impact on future operating margins if not recovered by price increases. 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 six months 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, cash flow from operations, along with the result of controlling discretionary expenditures, should enable the Company to meet all its existing obligations and continue its quarterly dividend payments.

-13-


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 June 29, 2013
                                   Industrial Security    Metal
                                     Hardware Products Products  Total
Net sales                              100.0%   100.0%   100.0% 100.0%
Cost of products sold                   75.3%    77.1%    84.7%  78.3%
Gross margin                            24.7%    22.9%    15.3%  21.7%

Selling and administrative expense      15.8%    15.3%     6.6%  13.3%
Operating profit                         8.9%     7.6%     8.7%   8.4%


                                    Three Months Ended June 30, 2012
                                   Industrial Security    Metal
                                     Hardware Products Products  Total
Net sales                              100.0%   100.0%   100.0% 100.0%
Cost of products sold                   74.1%    74.4%    89.1%  77.8%
Gross margin                            25.9%    25.6%    10.9%  22.2%

Selling and administrative expense      13.9%    14.5%     6.1%  12.2%
Operating profit                        12.0%    11.1%     4.8%  10.0%

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

                               Industrial      Security       Metal
                                 Hardware      Products    Products         Total
Net sales                       $ (1,348)     $ (1,004)      $   40     $ (2,312)

     Volume                         -9.7%         -9.0%       -3.0%         -7.9%
     Prices                          0.0%          1.0%        1.6%          0.7%
     New products                    2.1%          0.8%        1.8%          1.6%
                                    -7.6%         -7.2%        0.4%         -5.6%

Cost of products sold            $  (806)      $  (393)     $ (398)     $ (1,597)
                                    -6.1%         -3.8%       -4.5%         -4.9%

Gross margin                     $  (542)      $  (611)      $  438      $  (715)
                                   -11.8%        -17.1%       40.9%         -7.7%

Selling and administrative
expenses                         $    124      $   (52)      $   50       $   122
                                     5.1%         -2.6%        8.3%          2.4%

Operating profit                 $  (666)      $  (559)      $  388      $  (837)
                                   -31.3%        -36.1%       82.4%        -20.2%

-14-


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

                                     Six Months Ended June 29, 2013
                                   Industrial Security    Metal
                                     Hardware Products Products  Total
Net sales                              100.0%   100.0%   100.0% 100.0%
Cost of products sold                   78.3%    78.6%    84.8%  80.0%
Gross margin                            21.7%    21.4%    15.2%  20.0%

Selling and administrative expense      15.2%    16.2%     6.5%  13.4%
Operating profit                         6.5%     5.2%     8.7%   6.6%


                                     Six Months Ended June 30, 2012
                                   Industrial Security    Metal
                                     Hardware Products Products  Total
Net sales                              100.0%   100.0%   100.0% 100.0%
Cost of products sold                   75.5%    75.9%    89.1%  78.8%
Gross margin                            24.5%    24.1%    10.9%  21.2%

Selling and administrative expense      13.4%    15.1%     6.3%  12.3%
Operating profit                        11.1%     9.0%     4.6%   8.9%

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

                               Industrial      Security         Metal
                                 Hardware      Products      Products         Total
Net sales                       $ (5,339)     $ (2,139)      $  (637)     $ (8,115)

     Volume                        -19.5%        -10.4%         -6.7%        -13.6%
     Prices                          0.1%          0.9%          1.7%          0.7%
     New products                    5.0%          1.3%          1.7%          3.0%
                                   -14.4%         -8.2%         -3.3%         -9.9%

Cost of products sold           $ (3,159)      $  (962)     $ (1,362)     $ (5,483)
                                   -11.3%         -4.9%         -8.0%         -8.5%

Gross margin                    $ (2,180)     $ (1,177)      $    725     $ (2,632)
                                   -24.1%        -18.7%         34.9%        -15.1%

Selling and administrative
expenses                         $  (153)      $   (71)      $     13      $  (211)
                                    -3.1%         -1.8%          1.1%         -2.1%

Operating profit                $ (2,027)     $ (1,106)      $    712     $ (2,421)
                                   -49.6%        -47.2%         80.8%        -33.1%

-15-


Industrial Hardware Segment

Net sales in the Industrial Hardware segment were down 8% in the second quarter of 2013 and 14% in the first half compared to the prior year periods. The decrease in sales in the second quarter and first half of 2013 reflected a decrease in sales of existing products, resulting from lower sales to the distribution, trailer, truck accessory, service body and military markets as well as lightweight composite panels used in an interactive electronic board product in 2013 compared to the prior year periods. The decrease was reduced by an increase in sales to the Class 8 truck and fire and rescue markets in both the second quarter and first half of 2013 compared to the same periods in 2012, selective price increases to customers and the introduction of new products. All of the new products were developed internally and included rotary latches, an adjustable rod assembly, a striker pin, a lever latch, a cab door handle and a venting line of products for the Class 8 truck market; a dual latch rotary and a handle and rod for the fire and rescue market; a door latch assembly for the military market; and a trigger latch for the bus market; a platform and small panels made from lightweight composite material; as well as a variety of locking and latching products for the many markets we serve. Third quarter sales for the Industrial Hardware segment may be negatively impacted by a work stoppage at one of our customers in the Class 8 truck market due to their union contract negotiations.

Cost of products sold for the Industrial Hardware segment decreased $0.8 million or 6% in the second quarter and $3.2 million or 11% in the first half of 2013 compared to the same periods in 2012.

The most significant factors resulting in changes in cost of products sold in the second quarter of 2013 compared to the 2012 second quarter included:

an increase of $0.1 million or 114% in foreign currency exchange;

an increase of $0.1 million or 31% in depreciation expense;

a decrease of $0.2 million or 2% in raw materials;

a decrease of $0.1 million or 63% from the sale of scrap;

a decrease of $0.1 million or 61% in engineering expenses;

a decrease of $0.1 million or 25% in costs for supplies and tools;

and a decrease of $0.5 million or 14% in costs for payroll and payroll related charges.

The most significant factors resulting in changes in cost of products sold in the first half of 2013 compared to the 2012 first half included:

an increase of $0.1 million or 116% in foreign currency exchange;

an increase of $0.2 million or 26% in depreciation expense;

a decrease of $2.1 million or 12% in raw materials;

a decrease of $0.7 million or 10% in costs for payroll and payroll related charges;

a decrease of $0.2 million or 33% in costs for supplies and tools;

a decrease of $0.2 million or 239% in miscellaneous income;

a decrease of $0.1 million or 53% in engineering expenses;

a decrease of $0.1 million or 18% in utility costs;

and a decrease of $0.1 million or 20% related to costs for maintenance and repair.

Gross margin as a percentage of sales in the second quarter decreased to 25% in 2013 from 26% in the prior year period and in the first half to 22% from 25% in the prior year period. The decreases in both the second quarter and first half of 2013 reflect 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 increased $0.1 million or 5% in the second quarter and decreased $0.2 million or 3% in the first half of 2013 as compared to the 2012 periods.

The most significant factor resulting in changes in selling and administrative expenses in the Industrial Hardware segment in the second quarter of 2013 compared to the 2012 second quarter included:

an increase of $0.1 million or 13% in costs for payroll and payroll related charges.

-16-


The most significant factor resulting in changes in selling and administrative expenses in the Industrial Hardware segment in the first half of 2013 compared to the 2012 first half included:

a decrease of $0.1 million or 2% in costs for payroll and payroll related charges.

Security Products Segment

Net sales in the Security Products segment decreased 7% in the second quarter and 8% in the first half of 2013 compared to the 2012 periods. The decrease in sales in both the second quarter and first half 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 decreases. Sales of new products included a clamps 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 $0.4 million or 4% in the second quarter and $1.0 million or 5% in the first half of 2013 compared to the same periods in 2012.

The most significant factors resulting in changes in cost of products sold in the second quarter of 2013 compared to the 2012 second quarter included:

an increase of $0.1 million or 63% in costs for supplies and tools;

and a decrease of $0.6 million or 7% in raw materials.

The most significant factors resulting in changes in cost of products sold in the first half of 2013 compared to the 2012 first half included:

a decrease of $0.1 million or 160% in foreign exchange;

and a decrease of $0.9 million or 6.5% in raw materials.

Gross margin as a percentage of sales in the second quarter decreased to 23% in 2013 from 26% in the prior year period and in the first half to 21% from 24% in the prior year period. The decreases in both the second quarter and first half of 2013 were primarily the result of the mix of products produced and the decreased sales volume.

Selling and administrative expenses in the Security Products segment decreased $0.1 million or 3% in the second quarter and $0.1 million or 2% in the first half of 2013 as compared to the 2012 periods.

The most significant factor resulting in changes in selling and administrative expenses in the Security Products segment in the second quarter of 2013 compared to the 2012 second quarter included:

a decrease of $0.1 million or 5% in costs for payroll and payroll related charges.

The most significant factor resulting in changes in selling and administrative expenses in the Security Products segment in the first half of 2013 compared to the 2012 first half included:

a decrease of $0.1 million or 3% in costs for payroll and payroll related charges.

-17-


Metal Products Segment

Net sales in the Metal Products segment were up less than 1% in the second quarter and down 3% in the first half of 2013 as compared to the prior year periods. The higher sales in the second quarter were primarily the result of selective price increases to customers and the introduction of new products. The decrease in sales in the first half of 2013 was the result of lower sales of existing products to the contract casting market. The decrease was partially offset by selective price increases to customers and the introduction of new products. Sales of mining products were up 13% in the second quarter and up 3% in the first half of 2013 compared to the prior year periods. The increase in sales of mining products was the result of continued demand in 2013 in both the U.S. and Canadian mining markets compared to the prior year periods and the introduction of new mining products. New mining products included a rope thread and a cable head. While the Company experienced a strong first half in sales of products for the coal mining industry, it is too early to determine if the mining business will be impacted by the new clean air rules enacted by the U.S. Environmental Protection Agency that went into effect in 2012. Sales of contract castings decreased 55% in the second quarter and 35% in the first half of 2013 from the prior year levels. The decrease in sales of contract casting was primarily the result of a reduction in sales of a tie plate for the railroad industry. Contract casting sales benefited from the sales of new products including rail clamps for a solar panel application and new beam clamps. The Company is actively trying to develop additional new products to replace any softening in sales volume of mining products that may result from the new EPA clean air regulations.

Cost of products sold for the Metal Products segment decreased $0.4 million or 5% in the second quarter and $1.3 million or 8% in the first half of 2013 compared to the same periods in 2012.

The most significant factors resulting in changes in cost of products sold in the second quarter of 2013 compared to the 2012 second quarter included:

an increase of $0.5 million or 24% in raw materials;

a decrease of $0.5 million or 36% in costs for supplies and tools;

and a decrease of $0.3 million or 8% in costs for payroll and payroll related charges.

The most significant factors resulting in changes in cost of products sold in the first half of 2013 compared to the 2012 first half included:

a decrease of $0.6 million or 26% in costs for supplies and tools;

a decrease of $0.3 million or 5% in costs for payroll and payroll related charges;

and a decrease of $0.3 million or 22% related to costs for maintenance and repairs.

Gross margin as a percentage of net sales increased from 11% to 15% in both the second quarter and first half of 2013 as compared to the 2012 periods. The increases in both the second quarter and first half of 2013 are due to the mix of products produced, elimination of products with unacceptable profit margins, selective 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 second quarter and first half of 2013 and 2012.

Other Items

Interest expense decreased 14% in the second quarter and 9% in the first six months of 2013 compared to the prior year period due to the decreased level of debt in 2013.

Other income was not material to the financial statements.

Income taxes reflected the change in the operating results. The effective tax rates in the second quarter and first six months of 2013 were both 33%, compared to 35% and 34% in the 2012 periods.

-18-


Liquidity and Sources of Capital

The Company provided $4.5 and $5.4 million from its operations during the first six months of 2013 and 2012, respectively. The reduction in cash flows in the quarter was primarily the result of the decreased earnings in the current year over the same period last year and 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. The Company did not utilize its revolving line of credit during the second quarter.

Additions to property, plant and equipment were $2.7 million for the first six months of 2013 compared to $2.4 million for the same period in 2012. Total capital expenditures for 2013 are expected to be approximately $5 to $6 million. As of June 29, 2013, there is approximately $1.1 million of outstanding commitments for these capital expenditures.

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

                                              Second    Second   Year
                                             Quarter   Quarter    End
                                                2013      2012   2012
Current ratio                                    5.4       5.0    4.8
Average days' sales in accounts receivable        46        45     47
Inventory turnover                               4.0       4.4    4.2
Total debt to shareholders' equity               9.2 %    11.2 % 10.5 %

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

                                                       Second     Second    Year
                                                      Quarter    Quarter     End
                                                         2013       2012    2012
Cash and cash equivalents
 - Held in the United States                        $     9.8  $     6.7 $  10.4
 - Held by a foreign subsidiary                           8.4        7.8     8.1
                                                         18.2       14.5    18.5
Working capital                                          58.4       55.4    56.9
Net cash provided by operating activities                 4.5        5.4    13.6
Change in working capital impact on net cash
  used in operating activities                           (0.7 )     (1.1 )   0.3
Net cash used in investing activities                    (2.7 )     (2.4 )  (4.2 )
Net cash (used in)/provided by financing activities      (1.9 )      0.3    (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 June 29, 2013 were $29.7 million, compared to $29.4 million at year end 2012 and $29.6 million at the end of the second quarter of 2012. Accounts receivable increased slightly to $19.5 million from $18.4 million at year end 2012 but declined slightly compared to the $20.4 million at the end of the second quarter of fiscal 2012.

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.

-19-


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