The Eastern Company (NASDAQ: EML) — Q2 2023 Form 10-Q
Business context and reporting period. The filing covers the 13 weeks ended July 1, 2023, and the six months ended that date. Comparisons are with the corresponding periods ended July 2, 2022. Results reflect continuing operations; the former Diversified Products segment was sold, with Argo’s sale completed in October 2022.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $68.3 million | $69.5 million | $140.8 million | $138.6 million |
| Gross margin | $15.1 million; 22.2% | $16.0 million; 23.0% | $30.6 million; 21.8% | $30.6 million; 22.1% |
| Operating profit | $2.4 million | $4.9 million | $4.6 million | $8.4 million |
| Income from continuing operations | $1.4 million; diluted EPS $0.22 | $3.7 million; diluted EPS $0.59 | $2.0 million; diluted EPS $0.32 | $6.4 million; diluted EPS $1.02 |
| Operating cash flow | Not separately stated for the quarter | $13.6 million | $(2.5) million |
Q2 sales fell about 2% year over year, primarily due to lower demand for returnable transport packaging. First-half sales rose about 2%, principally on demand for truck accessories and from distributors. First-half operating cash flow benefited primarily from a $7.7 million inventory reduction. Cash and equivalents were $13.2 million at July 1, 2023, versus $10.2 million at December 31, 2022; working capital was $77.8 million and the current ratio was 2.9.
At July 1, total debt was approximately $54.4 million, compared with $64.1 million at December 31, 2022. The company also reported operating and finance lease liabilities totaling approximately $17.6 million. First-half capital expenditures were $2.0 million; cash dividends paid were $1.4 million.
Material changes and notable items
- Q2 gross margin declined 0.8 percentage points; first-half gross margin declined 0.3 points. Q2 operating profit fell about 50%, while first-half operating profit fell about 45%.
- Product development expense rose 49% in Q2 and 31% in the first half, reflecting continued investment at Eberhard and Velvac. Selling and administrative expense increased 11% in Q2 and 16% for the first half, including legal, professional, selling, and payroll-related costs. First-half costs included approximately $1.8 million of severance and accrued compensation connected with the elimination of the COO position and the prior CEO’s departure.
- Interest expense increased due to higher borrowing rates. First-half other income was lower year over year, with pension-cost changes, prior-year swap settlement gains, and expenses related to the closure of Associated Toolmakers and the Greenwald sale adjustment contributing to the comparison.
- Q2 2022 and first-half 2022 net income included discontinued-operations gains of $0.3 million and $0.7 million, respectively. No discontinued-operations income was reported in 2023.
- On June 16, 2023, the company refinanced its prior credit facility with a new $60 million term loan and a $30 million revolving commitment. No revolving funds were drawn at quarter-end. The term loan bears variable SOFR-based interest; the stated margin is 1.875%–2.625%, depending on leverage.
- The company acquired certain Sureflex, Inc. assets on June 29, 2023, for tractor-trailer electrical connection cable assemblies. The filing states the acquisition’s actual and pro forma effects were not material; approximately $0.5 million of goodwill was recorded. The company also wrote off approximately $0.5 million of goodwill in connection with Associated Toolmakers’ closure; no Q2 goodwill impairment was recognized.
Outlook, liquidity, and risks
Management provided no specific revenue or earnings guidance and said future revenue and margin trends cannot be reliably predicted. It expects cash, operating cash flow, and available revolver capacity to cover foreseeable working-capital needs, while cautioning that future financing availability and terms are not assured. Backlog was $75.3 million, down 9% from $82.8 million a year earlier, as the company worked to reduce past-due orders, transition customer programs, and increase shipments.
The credit agreement requires a senior net leverage ratio no greater than 3.5:1 and fixed-charge coverage of at least 1.25:1. The company reported compliance as of July 1 and through the filing date. Covenant restrictions can constrain borrowing, dividends, and other actions; a default could accelerate repayment. Key disclosed risks include demand and economic downturns, inflation and raw-material or component costs, supply interruptions, higher interest rates, financing availability, tariffs, foreign-exchange exposure, acquisitions and integration, competition, product development, cyberattacks, and pension funding. Two customers represented 12% and 13% of net receivables at quarter-end.
Important facts for investors to verify
- Whether weaker Q2 demand and the 9% lower backlog persist, and how customer program transitions affect shipments.
- Whether margin and operating-profit pressure eases as price increases, new products, and cost controls offset costs and lower volumes.
- The new facility’s variable-rate exposure, required amortization, covenant headroom, and undrawn $30 million revolver availability.
- The timing and cash impact of the remaining 2023 pension contributions, estimated at approximately $636,000 after $164,000 contributed through July 1.
- The execution and expected benefits of the Sureflex acquisition, and the effect of customer concentration on receivables and collections.