The Eastern Company (NASDAQ: EML) — FY2023 Form 10-K
Business and period. Eastern designs and manufactures engineered products, including returnable transport packaging, access and security hardware, and truck mirrors and related vision products. Its sole reportable segment is Engineered Solutions. Fiscal 2023 was the 52 weeks ended December 30, 2023; comparisons are with the 52 weeks ended December 31, 2022. Fourth-quarter comparisons cover 13-week periods.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Net sales | $273.5 million | $279.3 million |
| Gross margin | $65.0 million; 23.8% | $58.6 million; 21.0% |
| Operating profit | $15.2 million; 5.6% | $14.2 million; 5.1% |
| Continuing-operations net income | $8.6 million | $11.1 million |
| Diluted EPS from continuing operations | $1.37 | $1.77 |
| Net cash from operating activities | $26.5 million | $7.5 million |
| Cash and cash equivalents at year-end | $8.3 million | $10.2 million |
| Long-term debt, including current portion | $43.9 million | $64.1 million |
2022 total net income was $12.3 million, including $1.3 million from discontinued operations; 2023 had no discontinued-operations income. FY2023 operating cash flow benefited from a $9.7 million reduction in working-capital requirements, mainly lower receivables and inventory. Investing activities used $5.4 million, including $6.4 million of capital expenditures; financing activities used $22.9 million, including substantial debt principal payments, dividends, and share repurchases.
At year-end, current assets were $112.2 million and current liabilities $42.7 million; the reported current ratio was 2.6. Working capital was $69.5 million. The company had $30 million available under its revolving credit facility. It paid $0.44 per share in dividends during each year.
Material changes and unusual items
- Sales declined 2% for the year, primarily from lower demand for truck accessories and returnable transport packaging. Existing-product sales fell 6%; pricing and new products contributed a 4% increase. Backlog rose to $80.1 million from $72.5 million, including new truck-mirror program awards at Velvac.
- Annual gross margin improved to 23.8% from 21.0%, mainly due to pricing and lower material and freight costs. Selling and administrative expense increased 12% to $44.2 million, and product-development expense increased to $5.6 million.
- Continuing-operations net income fell 22%. FY2023 included $1.8 million of executive severance/accrued compensation, $1.4 million of Associated Toolmakers closure costs, an unfavorable $1.1 million pension-cost adjustment, and a favorable $1.6 million final settlement of the prior interest-rate swap. FY2022 included a $0.7 million restructuring charge, among other items.
- Fourth-quarter sales fell 3% to $67.0 million, while net income from continuing operations rose to $3.5 million from $0.2 million. Gross margin increased to 26.8% from 16.6%, reflecting lower materials and freight costs, improved pricing, a favorable LIFO adjustment, and prior-year inventory write-offs.
- Eastern acquired certain Sureflex assets in June 2023 for Velvac. It closed its U.K. Associated Toolmakers facility during 2023. It sold Argo EMS in October 2022; 2022 results therefore include discontinued operations.
Debt, outlook, and risks
In June 2023, Eastern refinanced with a new $60 million term loan and $30 million revolver, replacing its prior facility. Term debt bears variable SOFR-based interest; outstanding debt was $43.9 million at year-end. The agreement is secured by certain assets and 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 at year-end. Interest expense rose 54% to $3.5 million, primarily due to higher rates.
Management expects operating cash flow and available credit to meet foreseeable operating, capital, debt-service, and dividend needs over the next 12 months. For 2024, it expects approximately $11.1 million in capital expenditures, $2.1 million in pension contributions, $50,000 in other postretirement contributions, and $2.8 million in dividends. Backlog is not a revenue forecast, and the filing provides no specific sales or earnings guidance.
Key risks include variable interest rates and debt covenants; weaker demand in served industrial and transportation markets; raw-material, tariff, freight, and supply-chain volatility; pricing competition; customer credit exposure; foreign operations and currency or trade risks; pension funding and actuarial assumptions; cybersecurity; and acquisition integration. One customer accounted for 12% of receivables and $29.2 million of 2023 revenue. The company expects 2024 cash needs to be funded from operations and credit availability, but that expectation depends on business and credit conditions.
There were no material pending legal proceedings reported. A previously accrued $430,000 landfill remediation is in its long-term monitoring and maintenance phase, scheduled through 2048. Management reported no goodwill impairment; goodwill was $70.8 million. The independent auditor issued unqualified opinions on the financial statements and internal controls, while identifying goodwill impairment assessment as a critical audit matter. Management reported effective disclosure controls and internal control over financial reporting.
Investor verification points
- Reconcile cost of products sold: the audited income statement reports $208.5 million for 2023, while MD&A also describes it as $208.2 million.
- Assess the durability of the gross-margin improvement, including the contribution from a favorable LIFO reserve adjustment and lower input and freight costs.
- Review the debt’s variable-rate exposure, maturity schedule, covenant headroom, and expected refinancing or repayment needs; $27.9 million of scheduled principal is due in 2028.
- Evaluate whether the higher backlog converts to sales and whether new programs offset weaker existing-product demand.
- Monitor the major customer’s credit quality, pension funding assumptions and contributions, and goodwill valuation assumptions.