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EML > SEC Filings for EML > Form 10-Q on 25-Jul-2014All Recent SEC Filings

Show all filings for EASTERN CO

Form 10-Q for EASTERN CO


25-Jul-2014

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 28, 2014. 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 28, 2013 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 28, 2013.

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 23, 2014, the Board of Directors of the Company voted to pay an additional one-time extra dividend of four cents ($0.04) per share along with the regular quarterly dividend payment of eleven cents ($0.11) per share in the third quarter of 2014. The third quarter 2014 dividend payment will represent the 296th consecutive quarterly dividend.

Overview

Sales in the second quarter of 2014 decreased 11% compared to the second quarter of 2013, and was primarily the result of a 13% decrease in sales of existing products in the many diverse markets we serve. The decrease was offset in part by selective price increases to customers and the introduction of new products which increased sales by 2%. In the second quarter of 2014 Industrial Hardware sales decreased 8%, Security Products sales decreased 4% and Metal Products sales decreased 26% compared to the prior year period.

Gross margin as a percentage of sales for the three months ended June 28, 2014 was 22% which was comparable to the prior year period.

Sales in the first six months of 2014 decreased 5% compared to the prior year period, and was primarily the result of a 7% decrease in sales of existing products in several of the markets we serve. The decrease was offset in part by the introduction of new products which increased sales by 2%. Compared to the prior year period, sales decreased in the first six months of 2014 by 8% in the Industrial Hardware segment and by 10% in the Metal Products segment, while sales increased by 4% in the Security Products segment.

-12-


Gross margin as a percentage of sales for the six months ended June 28, 2014 was 22% compared to 20% in the comparable period a year ago. This increase was primarily the result of the mix of products produced and cost reductions relating to the lower sales volume.

Raw material prices have generally 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 and productivity improvements. 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 2014 decreased compared to the same period in 2013. This decrease is primarily due to the 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 28, 2014
                                   Industrial Security    Metal
                                     Hardware Products Products  Total
Net sales                              100.0%   100.0%   100.0% 100.0%
Cost of products sold                   74.4%    76.3%    86.7%  77.7%
Gross margin                            25.6%    23.7%    13.3%  22.3%

Selling and administrative expense      15.9%    16.5%     7.5%  14.3%
Operating profit                         9.7%     7.2%     5.8%   8.0%


                                    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%

The following table shows the amount of change for the second quarter of 2014 compared to the second quarter of 2013 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                       $ (1,335)      $ (556)      $(2,577)     $ (4,468)

     Volume                        -10.4%        -5.5%        -26.6%        -12.8%
     Prices                         -0.1%         0.0%         -0.3%         -0.2%
     New products                    2.4%         1.2%          0.8%          1.6%
                                    -8.1%        -4.3%        -26.1%        -11.4%

Cost of products sold           $ (1,147)     $  (523)      $(2,042)     $ (3,712)
                                    -9.3%        -5.2%        -24.4%        -12.1%

Gross margin                     $  (188)     $   (33)      $  (535)      $  (756)
                                    -4.6%        -1.1%        -35.5%         -8.9%

Selling and administrative
expenses                         $  (199)      $    66       $ (103)      $  (236)
                                    -7.7%         3.3%        -15.8%         -4.5%

Operating profit                 $     11     $   (99)       $ (432)      $  (520)
                                     0.8%       -10.0%        -50.3%        -15.7%

-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 28, 2014
                                   Industrial Security    Metal
                                     Hardware Products Products  Total
Net sales                              100.0%   100.0%   100.0% 100.0%
Cost of products sold                   74.6%    77.6%    86.2%  78.4%
Gross margin                            25.4%    22.4%    13.8%  21.6%

Selling and administrative expense      16.6%    16.6%     7.3%  14.4%
Operating profit                         8.8%     5.8%     6.5%   7.2%


                                     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%

The following table shows the amount of change for the first six months of 2014 compared to the first six months of 2013 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                       $ (2,420)     $ 1,010      $ (1,901)     $ (3,311)

     Volume                        -11.1%        2.8%         -12.9%         -7.0%
     Prices                          0.0%        0.2%          -0.2%          0.0%
     New products                    3.4%        1.2%           2.7%          2.5%
                                    -7.7%        4.2%         -10.4%         -4.5%

Cost of products sold           $ (2,966)     $   540      $ (1,377)     $ (3,803)
                                   -12.0%        2.9%          -8.8%         -6.4%

Gross margin                      $   546     $   470       $  (524)       $   492
                                     8.0%        9.2%         -18.7%          3.3%

Selling and administrative
expenses                          $    43     $   262       $    (5)       $   300
                                     0.9%        6.7%          -0.4%          3.0%

Operating profit                  $   503     $   208       $  (519)       $   192
                                    24.4%       16.8%         -32.6%          3.9%

-15-


Industrial Hardware Segment

Net sales in the Industrial Hardware segment were down 8% in both the second quarter and first half of 2014 compared to the prior year periods. The decrease in sales in both the second quarter and first half of 2014 reflected a decrease in sales of existing products, primarily lightweight composite panels which were used in the fracking industry, as well as lower sales to our distributors and military markets in 2014 compared to the prior year periods. The decrease in sales of the lightweight composite panels for the fracking tank was the result of a customer exiting the fracking business. The overall decrease in sales in both the second quarter and first half of 2014 were offset by an increase in sales to several of the markets we sell into, including: the Class 8 truck, truck accessory, off-highway, bus, and trailer markets compared to the same period in 2013 and the introduction of new products. All of the new products were developed internally and included a cab handle and paddle, a rotary and lever arm, a lever assembly, a paddle lock, a striker pin and luggage latch for the Class 8 truck market; a rotary, a mini rotary and a gate lock for the off-highway market; a trigger latch for the bus market; a 3 point compression latch, a stainless steel catch, a trigger latch and a paddle assembly for the distribution market; a trigger latch and a paddle rotary for the industrial 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 $1.1 million or 9% in the second quarter and $3.0 million or 12% in the first half of 2014 compared to the same periods in 2013.

The most significant factors resulting in changes to the cost of products sold in the second quarter of 2014 compared to the 2013 second quarter included:

an increase of $0.1 million or 2% in costs for payroll and payroll related charges;

a decrease of $0.2 million or 35% in depreciation expense;

and a decrease of $1.0 million or 13% in raw materials.

The most significant factors resulting in changes to the cost of products sold in the first half of 2014 compared to the 2013 first half included:

an increase of $0.1 million or 105% in engineering expenses;

a decrease of $2.2 million or 14% in raw materials;

a decrease of $0.4 million or 6% in costs for payroll and payroll related charges;

a decrease of $0.3 million or 31% in depreciation expense;

a decrease of $0.1 million or 16% in freight and shipping expenses;

and a decrease of $0.1 million or 44% in equipment rental.

Gross margin as a percentage of sales in the second quarter increased to 26% in 2014 from 25% in the prior year period and in the first half to 25% from 22% in the prior year period. The increases in both the second quarter and first half of 2014 reflect the mix of products produced and the changes to cost of products sold discussed above.

Selling and administrative expenses in the Industrial Hardware segment decreased $0.2 million or 8% in the second quarter of 2014 as compared to the 2013 period. Selling and administrative expenses were comparable for the first half of 2014 and 2013.

The most significant factor resulting in changes in selling and administrative expenses in the Industrial Hardware segment in the second quarter of 2014 compared to the 2013 second quarter included:

a decrease of $0.2 million or 8% in costs for payroll and payroll related charges.

-16-


Security Products Segment

Net sales in the Security Products segment decreased 4% in the second quarter and increased 4% in the first half of 2014 compared to the 2013 periods. The decrease in sales in the second quarter of 2014 was the result of lower sales volume of existing products primarily to the computer market. The decrease was reduced primarily by increased sales to the commercial laundry market. The increase in sales in the first half of 2014 was also the result of increased sales volume of existing products to the commercial laundry market. Selective price increases and the introduction of new products benefited both the quarter and first half of 2014. Sales of new products included a flush mount handle for tonneau covers, a locking T-handle for truck caps and cable and stud locks for bicycle racks for the vehicular market and a custom brass padlock, a rekeyable padlock for the locksmith market and a passive keyless entry system for the storage market.

Cost of products sold for the Security Products segment decreased $0.5 million or 5% in the second quarter and increased $0.5 million or 3% in the first half of 2014 compared to the same periods in 2013.

The most significant factors resulting in changes in cost of products sold in the second quarter of 2014 compared to the 2013 second quarter included:

an increase of $0.3 million or 20% in costs for payroll and payroll related charges;

an increase of $0.1 million or 230% in utility costs;

an increase of $0.2 million or 117% in freight and shipping expenses;

and a decrease of $1.1 million or 15% in raw materials.

The most significant factors resulting in changes in cost of products sold in the first half of 2014 compared to the 2013 first half included:

an increase of $0.6 million or 18% in costs for payroll and payroll related charges;

an increase of $0.4 million or 148% in freight and shipping expenses;

an increase of $0.2 million or 39% in costs for supplies and tools;

an increase of $0.1 million or 82% in utility costs;

and a decrease of $0.8 million or 6% in raw materials.

Gross margin as a percentage of sales in the second quarter increased to 24% in 2014 from 23% in the prior year period and in the first half to 22% from 21% in the prior year period. The increase in the second quarter of 2014 was the result of the mix of products produced. The increase in the first half of 2014 was the result of the mix of products produced and the increased sales volume compared to the 2013 period.

Selling and administrative expenses in the Security Products segment increased $0.1 million or 3% in the second quarter and $0.3 million or 7% in the first half of 2014 as compared to the 2013 periods.

The most significant factor resulting in changes in selling and administrative expenses in the Security Products segment in the second quarter of 2014 compared to the 2013 second quarter included:

an increase of $0.1 million or 105% in other administrative costs.

The most significant factors resulting in changes in selling and administrative expenses in the Security Products segment in the first half of 2014 compared to the 2013 first half included:

an increase of $0.1 million or 90% in other administrative costs;

and an increase of $0.2 million or 7% in costs for payroll and payroll related charges.

-17-


Metal Products Segment

Net sales in the Metal Products segment decreased 26% in the second quarter and 10% in the first half of 2014 as compared to the prior year periods. The lower sales in both the second quarter and first half were primarily the result of lower sales of existing products to the mining market. The decrease was partially offset by the introduction of new products. New mining products included a cable head, a shell and a small hole flange nut. Sales of mining products were down 33% in the second quarter and 16% in the first half of 2014 compared to the prior year periods. The decrease in sales of mining products was the result of weaker demand in 2014 in both the U.S. and Canadian mining markets compared to the prior year periods. Sales of contract castings increased 36% in the second quarter and 33% in the first half of 2014 from the prior year levels. The increase in sales of contract castings was primarily the result of increased sales of existing products to the solar and vehicular markets. Contract casting sales also benefited from the sales of a new rail clamp product for a solar panel application.

Cost of products sold for the Metal Products segment decreased $2.0 million or 24% in the second quarter and $1.4 million or 9% in the first half of 2014 compared to the same periods in 2013.

The most significant factors resulting in changes in cost of products sold in the second quarter of 2014 compared to the 2013 second quarter included:

a decrease of $1.5 million or 62% in raw materials;

and a decrease of $0.5 million or 16% 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 2014 compared to the 2013 first half included:

an increase of $0.1 million or 11% related to costs for maintenance and repairs

an increase of $0.1 million or 11% in utility costs;

an increase of $0.2 million or 11% in costs for supplies and tools;

a decrease of $1.3 million or 33% in raw materials;

and a decrease of $0.5 million or 8% in costs for payroll and payroll related charges.

Gross margin as a percentage of net sales decreased from 15% to 13% in the second quarter and decreased from 15% to 14% in the first half of 2014 as compared to the 2013 periods. The decreases in both the second quarter and first half of 2014 are primarily due to the lower sales volume in 2014.

Selling and administrative expenses in the Metal Products segment decreased $0.1 million or 16% in the second quarter of 2014 compared to the prior year period. Selling and administrative expenses were comparable for the first half of 2014 and 2013.

The most significant factor resulting in changes in selling and administrative expenses in the Metal Products segment in the second quarter of 2014 compared to the 2013 second quarter included:

a decrease of $0.1 million or 18% in costs for payroll and payroll related charges.

Other Items

Interest expense decreased 24% in the second quarter and 22% in the first six months of 2014 compared to the prior year period due to the decreased level of debt in 2014.

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 2014 were 38% and 36%, respectively, compared to 33% in both the 2013 periods. The higher rates in 2014 also reflect taxes paid on the repatriation of approximately $2.8 million of cash from foreign subsidiaries.

-18-


Liquidity and Sources of Capital

The Company generated $3.1 million of cash from its operations during the first six months of 2014 compared to $4.5 million during the same period in 2013. The decrease in cash flows in the quarter was primarily the result of 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 $1.6 million for the first six months of 2014 compared to $2.7 million for the same period in 2013. Total capital expenditures for 2014 are expected to be approximately $3.5 million. As of June 28, 2014, there is approximately $410,000 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
                                               2014     2013   2013
Current ratio                                   5.5      5.4   5.2
Average days' sales in accounts receivable       49       46    47
Inventory turnover                              3.6      4.0   3.7
Total debt to shareholders' equity              6.4 %    9.2 % 7.4 %

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
                                                 2014       2013      2013
Cash and cash equivalents
 - Held in the United States                    $  11.3    $   9.8  $  10.2
 - Held by a foreign subsidiary                     8.1        8.4      9.8
                                                   19.4       18.2     20.0
Working capital                                    59.2       58.4     57.4
Net cash provided by operating activities           3.1        4.5     11.3
Change in working capital impact on net cash
  provided by operating activities                 (1.9 )     (0.7 )   (0.2 )
Net cash used in investing activities              (1.6 )     (2.7 )   (5.5 )
Net cash used in financing activities              (2.1 )     (1.9 )   (4.0 )

During the first six months of Fiscal 2014, the Company repatriated approximately $2.8 million in cash from its foreign subsidiaries. The impact of this was an increase in the effective tax rate by approximately 2.4%. 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 remained fairly constant at $30.8 million on June 28, 2014 compared to $30.7 million at year end 2013 and $29.7 million at the end of the second quarter of 2013. Accounts receivable was $18.3 million compared to $16.3 million at year end 2013 and $19.5 million at the end of the second quarter of fiscal 2013. The increase from year end is related to a slower collection rate in the second quarter. The Company does not expect this slow-down to result in any increase in bad debts.

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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