The Eastern Co. :EML-US: Earnings Analysis: 2016 By the Numbers : March 21, 2017

The Eastern Co. reports financial results for the year ended December 31, 2016.

We analyze the earnings along side the following peers of The Eastern Co. – CompX International Inc. Class A, Mueller Industries, Inc., NL Industries Inc, Stanley Black & Decker, Inc. and NN, Inc. (CIX-US, MLI-US, NL-US, SWK-US and NNBR-US) that have also reported for this period.

Highlights

  • Gross margins widened from 22.40% to 24.92% compared to the same period last year, operating (EBITDA) margins now 10.86% from 8.27%.
  • Year-on-year change in operating cash flow of 35.93% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2016 2015 2014 2013 2012
Relevant Numbers (Annual)
Revenues 137.61 144.57 140.83 142.46 157.51
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings 7.79 5.73 7.66 6.9 8.63
Earnings Growth (YOY) 35.94 -25.25 11 -19.99 56.69
Net Margin 5.66 3.96 5.44 4.84 5.48
EPS 1.25 0.92 1.23 1.11 1.38
Return on Equity 9.62 7.42 9.79 9.02 12.26
Return on Assets 6.33 4.71 6.52 6.01 7.75

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Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 22.40% to 24.92% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 8.27% to 10.86% compared to the same period last year. For comparison, gross margins were 22.40% and EBITDA margins were 8.27% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

EML-US‘s gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 165.69, compared to last year’s level of 148.90 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

EML-US‘s change in operating cash flow of 35.93% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 5.55% to 8.09% and (2) one-time items. The company’s pretax margins are now 8.16% compared to 5.55% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

The Eastern Co. engages in the manufacture and sale of industrial hardware, security products, and metal products. It operates through the following segments: Industrial Hardware, Security Products and Metal products. The Industrial Hardware segment offers locks, latches, hinges, handles, lightweight honeycomb that are found on automotive industries as well as to the industrial equipment, military and marine sectors. The Security Products segment manufactures electronic and mechanical locking devices, both keyed and keyless, for the computer, electronics, vending and gaming industries. The Metal Products segment includes mine roof support anchors, couplers for railroad braking systems, adjustable clamps for construction and fittings for electrical installations. the company was founded by Eben Tuttle in 1858 and is headquartered in Naugatuck, CT.

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