The Eastern Company — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; both FY2022 and FY2021 comprised 52 weeks. Fourth-quarter comparisons are 13-week periods. Financial results below distinguish continuing operations from discontinued operations.
Business context
Eastern designs and manufactures engineered industrial products through three continuing business groups: Big 3 Precision and related mold businesses, Eberhard access and security hardware, and Velvac truck mirrors and components. The company sold Argo EMS on October 19, 2022, completing the planned exit from its former Diversified Products businesses; Greenwald and Frazer & Jones were sold in 2021.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Continuing-operations sales | $279.3 million | $246.5 million |
| Gross margin | $58.6 million; 21.0% | $56.8 million; 23.0% |
| Operating profit | $14.2 million; 5.1% of sales | $17.4 million; 7.1% of sales |
| Net income from continuing operations | $11.1 million; diluted EPS $1.77 | $16.2 million; diluted EPS $2.58 |
| Total net income, including discontinued operations | $12.3 million; diluted EPS $1.97 | $9.3 million; diluted EPS $1.49 |
| Net cash from continuing operating activities | $7.3 million | $(7.8) million |
| Cash and cash equivalents | $10.2 million | $6.2 million |
| Long-term debt, including current portion | $64.1 million | $71.3 million |
Sales rose 13%, driven by higher truck-accessory, distribution-product, and returnable-packaging demand, alongside pricing and new products. Existing-product volume grew 7%; price increases and new products contributed 6% to sales growth. Cost of products sold rose 16%, outpacing sales, and gross margin contracted by 2.0 percentage points. Higher materials and freight costs, supply constraints, and inventory write-offs pressured margins. Selling and administrative expenses rose 12% to $39.5 million; restructuring costs were $0.7 million.
Continuing-operations net income fell 32%. FY2022 included $0.5 million after-tax restructuring costs and a $0.2 million after-tax loss on a building sale, partly offset by a $0.5 million after-tax building-sale gain. FY2021 included a $1.4 million after-tax property-sale gain, partly offset by $0.5 million of after-tax relocation and start-up costs. The effective tax rate on continuing operations was 23%, versus 15% in 2021. Adjusted EBITDA from continuing operations, a non-GAAP measure, was $24.3 million versus $26.7 million.
In Q4, sales increased 15.8% to $69.1 million, but gross margin fell to 16.6% from 20.2%, and operating margin declined to 0.5% from 6.0%. Continuing-operations net income was $0.2 million, or diluted EPS of $0.03, versus $3.9 million, or $0.62, a year earlier. A $0.7 million warehouse-consolidation charge was recorded in the quarter.
Operating cash flow improved by $15.1 million year over year. Working capital use was $5.2 million, versus $22.9 million in 2021, largely reflecting inventory maintained to support customer demand. The current ratio was 2.7, versus 2.5; working capital was $78.3 million. The company repaid $17.5 million of long-term debt, drew and repaid $10.0 million on its revolver during the year, and ended with $20.0 million of revolver availability. The company paid $0.44 per share in dividends. FY2023 capital expenditures are expected to be approximately $6.9 million.
Changes, outlook, and risks
- Backlog declined to $72.5 million at year-end from $82.8 million, mainly due to lower Eberhard locks-and-hardware and Big 3 mold-services and packaging backlogs; new Velvac truck-mirror programs partially offset the decline.
- Management expected raw materials and outside services to be more readily available in 2023, but cautioned that prices could remain elevated or rise further. No specific revenue or earnings guidance is provided.
- Management cited inflation, rising interest rates, freight expense, labor shortages, supply-chain disruptions, tariffs, and the Russia-Ukraine conflict as pressures on costs, production, demand, and margins. A renewed COVID-19 disruption or economic slowdown could also affect results and cash flows.
- Debt bears variable interest and the term loan is due to mature in August 2024; scheduled principal maturities are $9.0 million in 2023 and $55.1 million in 2024. The company was compliant with its credit covenants at year-end. The LIBOR-to-SOFR transition may affect borrowing costs.
- Approximately 21% of the workforce had union contracts scheduled to expire in 2023, creating potential negotiation and production-disruption risk. One customer represented 14% of year-end receivables.
- A landfill remediation and monitoring program is underway through 2048; the estimated $430,000 remediation cost was accrued previously. The company reported no material pending legal proceedings. Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Key facts for investors to verify
- Track whether sales growth converts into improved gross and operating margins as material, freight, and labor costs evolve.
- Assess the declining backlog, new Velvac program contributions, and customer demand across the company’s end markets.
- Review debt repayment capacity, 2024 maturity refinancing plans, covenant headroom, and exposure to variable rates and benchmark transition.
- Monitor working-capital and inventory levels, cash generation, and the planned increase in FY2023 capital expenditures.
- Distinguish continuing-operations performance from total reported net income, which includes discontinued-operation results and disposal gains or losses.
- Assess customer receivable concentration, 2023 union negotiations, and the durability of the stated expectation for improved material availability.