The Eastern Company (NASDAQ: EML) — FY2021 Form 10-K
Reporting period: Fiscal year ended January 1, 2022 (52 weeks), compared with the 53-week year ended January 2, 2021. Fourth-quarter comparisons cover 13 weeks. Unless otherwise stated, operating results below are for continuing operations.
Business context and portfolio changes
Eastern designs and manufactures engineered industrial products, including returnable packaging solutions, access and security hardware, and truck mirrors and vision systems. Its continuing businesses are Big 3 Precision, Hallink Moulds, Eberhard, and Velvac.
In 2021, Eastern sold Greenwald Industries and Frazer & Jones, which were part of its former Diversified Products segment; the segment is reported as discontinued operations. Argo EMS was also included in discontinued operations. The divestitures reflect management’s focus on its core businesses.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Continuing-operations sales | $246.5 million | $197.6 million |
| Gross margin | $56.8 million; 23.0% | $48.1 million; 24.3% |
| Operating profit | $17.4 million; 7.1% | $13.5 million; 6.8% |
| Continuing-operations net income | $16.2 million; diluted EPS $2.58 | $11.0 million; diluted EPS $1.76 |
| Adjusted EBITDA from continuing operations (non-GAAP) | $26.7 million | $24.7 million |
| Cash from continuing operating activities | $(7.8) million | $14.6 million |
Sales rose 25%, reflecting 15% growth in existing-product volume and a 10% contribution from pricing and new products. Demand for truck accessories, distribution products, and automotive returnable packaging strengthened. Backlog increased to $82.8 million from $64.7 million, including new Eberhard and Velvac programs.
Higher material and freight costs pressured margins: cost of products sold increased 27%, faster than sales. Management reported substantial year-over-year increases in several materials, including hot-rolled steel (75%), cold-rolled steel (94%), and aluminum (66%). Product development expense rose to $4.1 million from $2.7 million.
Discontinued operations and total earnings: The company recorded a $6.8 million net loss from discontinued operations, including an $11.8 million loss on sale of businesses. Consolidated net income, including discontinued operations, was $9.3 million (diluted EPS $1.49), versus $5.4 million (diluted EPS $0.86) in FY2020. Continuing-operations performance should therefore be distinguished from reported consolidated earnings.
Liquidity, cash flow and debt
- Cash and cash equivalents were $6.6 million at year-end, down from $16.1 million. Working capital was $74.1 million; the current ratio was 2.5, compared with 2.8.
- Continuing operating activities used $7.8 million, principally reflecting a $22.9 million working-capital cash use as the company built inventory amid supply constraints, alongside a $2.3 million pension contribution. Consolidated cash decreased by $9.5 million.
- Investing activities provided $13.6 million, including $17.0 million in proceeds from business sales; capital expenditures were $3.7 million. Management expects FY2022 capital expenditures of approximately $5.3 million.
- Debt was $71.3 million, down from $88.7 million; debt-to-equity was 62.2%, versus 85.1%. The company made $17.3 million in principal payments, including $11.0 million of accelerated payments, and had no revolver borrowings at year-end.
- On January 11, 2022, Eastern drew $5.0 million on its $20.0 million revolving facility, leaving $15.0 million available. The company reported compliance with its debt covenants at year-end. A substantial $55.1 million term-loan maturity is scheduled for 2024.
- Cash dividends were $0.44 per share, unchanged from FY2020. Management expects operating cash flow and available credit to meet foreseeable operating, capital, debt-service, and dividend needs.
Fourth-quarter results and unusual items
Fourth-quarter continuing-operations sales increased 18% to $59.6 million; net income increased to $3.9 million, or $0.62 per diluted share, from $3.2 million, or $0.50. Gross margin declined to 20.2% from 22.7%, mainly due to materials and expedited freight costs. Prior-year quarter results included goodwill impairment and restructuring charges related to the closure of Eberhard Hardware in Ontario.
FY2021 continuing-operations net income included a $1.4 million after-tax gain related to sale of the Eberhard Hardware property, partly offset by $0.5 million of after-tax factory relocation and start-up costs. Other income included a $1.8 million property-sale gain and a favorable pension cost adjustment. FY2020 included goodwill impairment and restructuring, relocation, and transaction costs.
Outlook, risks and contingencies
Management said product demand and backlog were high, and expected raw materials and outside services to be more readily available in 2022 absent a COVID-19 resurgence. The filing does not provide formal earnings or sales guidance. Management cautioned that the pandemic, supply-chain constraints, inflation, labor shortages, and elevated shipping costs could continue to affect operations and margins.
- Key risks include raw-material availability and price increases, freight and port disruption, inability to recover cost increases through pricing, and competition-driven pricing pressure.
- Variable-rate debt and the transition from LIBOR to replacement reference rates may affect interest expense, cash flow, and liquidity. The credit agreement matures in August 2024 and includes financial covenants and restrictions.
- Other disclosed risks include acquisition integration, customer credit, foreign operations and currency exposure, cyberattacks, environmental obligations, and pension assumptions. One customer represented 11% of accounts receivable in both 2021 and 2020.
- No material pending legal proceedings were reported. A previously accrued $430,000 foundry-landfill remediation is complete; annual groundwater monitoring and site maintenance are expected to continue through 2048.
- The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Goodwill impairment assessment was identified as a critical audit matter; no goodwill impairment was recorded in 2021.
Important facts for investors to verify
- Reconcile continuing-operations growth and earnings with consolidated results, particularly the $6.8 million discontinued-operations loss and $11.8 million loss on business sales.
- Assess whether pricing and new-product growth can offset elevated materials, labor, and freight costs, and whether the $82.8 million backlog converts to sales and cash flow.
- Monitor working-capital recovery, inventory levels, receivable collection, and the effect of the January 2022 revolver draw on liquidity.
- Review the 2024 debt maturity, refinancing plans, covenant headroom, and LIBOR transition terms.
- Confirm the final proceeds and working-capital adjustment for divestitures, and the expected costs and obligations associated with remaining discontinued operations.