The Eastern Company — Q2 2022 Form 10-Q
Business context and period. The filing covers the 13 weeks ended July 2, 2022, and the six months then ended; comparisons are with the periods ended July 3, 2021. Results below primarily reflect continuing operations. The former Diversified Products segment is reported as discontinued operations following the decision to sell it; Greenwald and Frazer & Jones were sold in November 2021.
Key financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $69.5 million | $61.2 million | $138.6 million | $123.0 million |
| Gross margin | $16.0 million; 23.0% | $14.0 million; 22.8% | $30.6 million; 22.1% | $29.5 million; 24.0% |
| Operating profit | $4.9 million | $3.5 million | $8.4 million | $9.1 million |
| Net income from continuing operations | $3.7 million; $0.59 diluted EPS | $2.8 million; $0.44 diluted EPS | $6.4 million; $1.02 diluted EPS | $8.4 million; $1.35 diluted EPS |
| Net income (loss), including discontinued operations | $4.0 million | $(4.5) million | $7.1 million | $1.4 million |
| Cash from continuing operating activities | Not separately stated for the quarter | $(2.5) million | $4.3 million |
- Sales rose 14% in Q2 and 13% for the first half. Management attributed growth to demand for truck accessories and returnable transport packaging, including products for automotive launches, as well as price increases and new products.
- Q2 continuing-operations earnings improved year over year, while first-half earnings declined. First-half 2021 other income included a $1.8 million gain on a building sale; first-half 2022 included a $0.3 million loss on a building sale.
- Q2 2021 discontinued operations included a $10.6 million loss on classification as held for sale. Discontinued operations contributed $0.3 million of net income in Q2 2022 and $0.7 million in the first half of 2022.
- Cash and cash equivalents were $7.1 million at July 2, 2022, versus $6.2 million at January 1, 2022. The cash flow statement reports $7.2 million at period end including cash held in assets for sale.
- At July 2, 2022, working capital was $89.6 million and the current ratio was 3.0. Debt totaled approximately $77.6 million, comprising $7.5 million current and $70.1 million long term; debt-to-equity was 64.5%. The company had drawn $10.0 million on its revolver and reported another $10.0 million available.
- First-half cash use from continuing operations was driven primarily by increased inventory and accounts receivable. Inventory was $67.7 million, up 7.7% from fiscal year-end; receivables were $46.3 million. First-half capital expenditures were $1.1 million.
Changes, outlook and risks
- Cost of products sold rose 13% in Q2 and 16% in the first half, reflecting higher volume and material costs. The company said customer price increases recovered only part of raw-material cost increases. First-half gross margin fell to 22.1% from 24.0%.
- Backlog was $82.8 million at July 2, down 0.4% from $83.2 million a year earlier. The filing gives no specific revenue or earnings guidance. Management expects cash, operating cash flow and available revolving credit to meet foreseeable working-capital needs, but gives no assurance about future financing availability or terms.
- Management reported COVID-related interruptions to operations and suppliers in China during Q2. Supply-chain disruption, port congestion, inflation, raw-material and freight costs, labor availability, and changes in demand remain risks.
- Borrowings bear variable interest tied to LIBOR; the company warns that transition to a replacement benchmark could increase borrowing costs. Credit-agreement covenants require a senior net leverage ratio no higher than 4.25:1 and fixed-charge coverage of at least 1.25:1. The company reported compliance at July 2 and through the filing date.
- One customer represented 11% of accounts receivable. The company reported no material pending legal proceedings and no material changes to the risk factors in its 2021 Form 10-K.
- Q2 share repurchases totaled 29,762 shares for $0.7 million, at an average $22.06 per share; 70,404 shares remained authorized for repurchase at quarter-end. Dividends were $0.11 per share in Q2.
Investor verification points
- Assess whether pricing can continue to offset materials, freight, tariff and other inflationary costs, and whether first-half margin pressure persists.
- Monitor inventory, receivables and operating cash flow for signs that working-capital demands are easing.
- Confirm debt balances, revolver availability, covenant headroom and the cost and terms of the LIBOR replacement.
- Track China-related operating and supply interruptions, backlog and demand in automotive and other served markets.
- Review the status and expected proceeds and timing of the remaining discontinued-operation asset sales; the filing does not provide a clear expected sale value.