The Eastern Company — Q2 2021 Form 10-Q
Business context and period. The filing covers the 13 weeks ended July 3, 2021, and the six months ended that date; comparisons are with periods ended June 27, 2020. The Company now reports continuing operations as one segment, Engineered Solutions. It classified its Diversified Products businesses as held for sale and discontinued operations while pursuing a sale, saying they no longer fit its long-term strategy.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Continuing net sales | $61.2 million | $39.5 million | $123.0 million | $91.4 million |
| Gross margin | $14.0 million; 22.8% | $10.3 million; 26.1% | $29.5 million; 24.0% | $23.2 million; 25.4% |
| Operating profit | $3.5 million; 5.7% of sales | $2.9 million; 7.2% | $9.1 million; 7.4% | $6.7 million; 7.3% |
| Continuing net income | $2.8 million | $2.1 million | $8.45 million | $4.72 million |
| Continuing diluted EPS | $0.44 | $0.33 | $1.35 | $0.76 |
| Net income (loss), including discontinued operations | $(4.47) million | $(1.89) million | $1.38 million | $1.01 million |
| Total diluted EPS, including discontinued operations | $(0.71) | $(0.30) | $0.22 | $0.16 |
- Continuing sales rose 55% in Q2 and 35% in the first half. Management attributed growth to higher demand and volume for truck accessories, automotive returnable packaging, blow-mold tooling and distribution products, as well as pricing and new products. Backlog was $89.2 million, up 61% year over year.
- Gross margin contracted as cost of products sold rose faster than sales. The Company cited higher material and freight costs; it reported substantial year-over-year increases in several raw materials and a 148% Q2 increase in freight costs. Customer price increases recovered some input costs; China-related tariffs were reported as fully recovered through price increases.
- Selling and administrative expense rose 43% in Q2 and 24% in the first half, mainly from commissions and other selling costs, amortization, payroll-related expenses and incentive costs. Other income included a $1.8 million gain on sale of a building in the first half, partly offset by a prior-year sale-leaseback gain.
- Continuing-operations operating cash flow was $4.3 million for the first half, versus $6.6 million a year earlier. Higher inventory and receivables used cash, partly offset by higher accounts payable. Capital expenditures were $1.8 million; proceeds from a facility sale were $2.0 million. The Company paid $1.38 million in dividends.
- At July 3, cash and cash equivalents were $16.9 million on the balance sheet, plus $1.6 million classified with assets held for sale. Current assets were $141.1 million and current liabilities $50.4 million; reported current ratio was 2.8 and working capital $90.6 million.
- Long-term debt was $86.4 million, including $7.7 million current and $78.7 million long-term; no revolving-facility borrowings were outstanding. Total debt to shareholders’ equity was 80.8%. The Company reported compliance with credit covenants.
Material changes, outlook and risks
- The Diversified Products disposal group was recorded as discontinued operations. Q2 included a $10.6 million pre-tax held-for-sale write-down and a $7.2 million after-tax discontinued-operations loss. Management separately described the write-down as $8.1 million net of tax and estimated approximately $25 million of cash flow over the next 12 months, most of which it expected to use to repay debt.
- No formal financial guidance was provided. Management said cash, operating cash flow and available revolving credit were expected to cover foreseeable working-capital needs, but it could not assure future financing availability or terms.
- Management said the direct operational impact of COVID-19 had been limited and most facilities were operating at full capacity where possible. Supply-chain issues, port congestion and labor shortages remained constraints; one facility briefly closed after an employee outbreak. A pandemic resurgence or variants could disrupt operations and cash flow.
- Other stated risks include rising input and freight costs, demand and economic conditions in served industries, customer concentration (one customer represented 15% of receivables), and variable-rate debt. The Company noted uncertainty from LIBOR’s phaseout and the possible effect of replacement rates on borrowing costs. It expected pension contributions of $3.1 million in 2021 and had contributed approximately $1.17 million by July 3.
- A landfill remediation project had an accrued estimated cost of $430,000; construction was expected to be completed in August 2021. The filing reported no material changes to previously disclosed risk factors and no material pending legal proceedings apart from the remediation matter.
Important facts for investors to verify
- Progress, timing, final proceeds and any further disposal adjustments from the sale of Diversified Products; reconcile the filing’s $10.6 million pre-tax loss with management’s $8.1 million net-of-tax description.
- Whether backlog converts to revenue and whether pricing can offset continuing material, freight and labor-cost pressures without further margin erosion.
- Working-capital requirements and cash conversion, particularly inventory and receivables growth, alongside expected disposal proceeds and debt repayment.
- Debt covenant headroom, variable-rate exposure and the transition from LIBOR to a replacement benchmark.
- The filing’s six-month continuing diluted EPS is $1.35 in the financial statements, while MD&A states $1.34; confirm the correct reported figure.