The Eastern Company (NASDAQ: EML) — Q1 2022 Form 10-Q
Reporting period: 13 weeks ended April 2, 2022; comparison is the 13 weeks ended April 3, 2021. Financial statements are unaudited. Unless noted, amounts are U.S. dollars and continuing operations.
Business context
Eastern reported results from its continuing businesses. The former Diversified Products segment is presented as discontinued operations following the decision to sell it; Greenwald Industries and Frazer & Jones were sold in November 2021. Management says it exited mining and is focusing on three core businesses.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $69.0 million | $61.8 million | Up 12% |
| Gross margin | $14.6 million; 21.1% | $15.5 million; 25.1% | Margin down 4.0 percentage points |
| Operating profit | $3.5 million; 5.1% of sales | $5.5 million; 9.0% of sales | Down $2.0 million |
| Income from continuing operations | $2.7 million | $5.7 million | Down 53% |
| Diluted EPS from continuing operations | $0.43 | $0.90 | Down $0.47 |
| Net income, including discontinued operations | $3.0 million | $5.8 million | Down 48% |
| Cash from continuing operating activities | -$3.6 million | +$1.3 million | Decrease of $4.8 million |
Sales growth reflected volume growth of 3.4%, price increases of 2.9%, and new products of 5.4%. Management cited demand for truck accessories and automotive returnable transport packaging, including products associated with new vehicle launches. Backlog was $85.8 million, up 23% from $69.7 million a year earlier.
Cost of products sold rose 18%, faster than sales, reflecting higher volume, raw-material and freight costs. Management cited year-over-year increases in cold-rolled steel (21%), nickel (41%), copper (22%) and zinc (33%); freight costs rose 18%. Price increases recovered part of these added costs. Q1 tariffs on China-sourced products were approximately $0.6 million, similar to the prior-year quarter.
Other income declined by approximately $1.9 million, primarily because Q1 2021 included a $1.8 million gain on the sale of the Eberhard Hardware building. Interest expense was lower year over year. The filing also reports non-GAAP adjusted net income from continuing operations of $2.9 million versus $4.3 million, and adjusted EBITDA from continuing operations of $6.1 million versus $7.9 million.
Balance sheet, debt and liquidity
- At April 2, cash and cash equivalents were $5.1 million on the balance sheet; the cash-flow statement reports $5.2 million including cash classified with assets held for sale. Working capital was $83.2 million and the current ratio was 2.7.
- Inventory was $67.8 million, up 7.8% from fiscal year-end and 56% from Q1 2021. Accounts receivable was $47.0 million. Management attributed working-capital usage partly to supply-chain delays and selective advance purchases of materials.
- Long-term debt was $74.5 million, including $7.5 million current and $67.0 million long-term. The company had drawn $5.0 million on its $20 million revolving facility as of April 2. On April 8 it drew a further $5.0 million; management then reported $10.0 million of revolver availability.
- Debt bears variable interest tied to LIBOR, with a portion hedged through an interest-rate swap. The company was in compliance with its debt covenants through the filing date: senior net leverage ratio no greater than 4.25 to 1 and fixed-charge coverage ratio at least 1.25 to 1.
- Total debt to shareholders’ equity was 63.2%, compared with 79.0% at Q1 2021 and 62.2% at fiscal year-end 2021. The company paid $0.11 per share in dividends and repurchased 30,238 shares for approximately $0.8 million during the quarter.
Investing activities provided $1.0 million, including proceeds from property sales, while capital expenditures were $0.6 million. Financing activities provided $1.6 million, including revolver borrowing, partly offset by debt payments, share repurchases and dividends.
Outlook, risks and notable items
- No specific full-year revenue or earnings guidance is provided. Management said cash, operating cash flow and revolver availability were expected to cover foreseeable working-capital needs, but gave no assurance of future financing availability or terms.
- Management reported China operating and supply-base interruptions in Q2 2022 related to COVID-19 restrictions. Further pandemic disruption could affect supply, labor, costs, customer demand and cash flow.
- Supply constraints, inflation in materials and freight, port congestion and limited carrier capacity remain pressures. Management cautioned that future revenue and margin trends cannot be reliably predicted.
- The company’s variable-rate debt and swap reference LIBOR. The filing warns that the transition to a replacement benchmark, expected after June 2023 for relevant U.S. dollar LIBOR settings, could increase borrowing costs; management was working with its lender on the transition.
- Other disclosed exposures include customer credit concentration (one customer represented 10% of receivables), competition, overseas operations and currency, acquisition integration, cyberattacks, environmental obligations and pension estimates. No material changes to previously disclosed risk factors were reported. No material pending legal proceedings were reported in this quarter’s filing.
Key facts for investors to verify
- Whether pricing and new-product growth can offset continuing material and freight inflation and restore gross margins.
- Whether backlog converts to sales, particularly amid automotive demand and China-related supply interruptions.
- Working-capital trends, especially inventory growth and operating cash flow, and the effect of the additional April 8 revolver draw.
- Debt covenant headroom, borrowing costs and the company’s arrangements for replacing LIBOR.
- Progress and remaining assets or liabilities from discontinued operations and the ongoing divestiture process.