The Eastern Company — Q1 2021 Form 10-Q
Business context and reporting period. The company reported its unaudited 13-week quarter ended April 3, 2021, compared with the 13 weeks ended March 28, 2020. It operates through Engineered Solutions and Diversified Products. Results are interim and not necessarily indicative of the full year.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $73.1 million | $65.3 million |
| Gross profit / margin | $17.3 million / 23.6% | $14.7 million / 22.4% |
| Operating profit / margin | $5.9 million / 8.1% | $3.9 million / 5.9% |
| Net income | $5.8 million | $2.9 million |
| Diluted EPS | $0.93 | $0.46 |
| Cash from operating activities | $2.1 million | $1.5 million |
| Capital expenditures | $0.9 million | $0.8 million |
Adjusted net income, excluding the after-tax gain on the building sale, was $4.5 million, or $0.71 diluted EPS, versus $2.9 million and $0.46 in the prior-year quarter. Adjusted EBITDA was $8.7 million versus $6.7 million; both are non-GAAP measures.
Liquidity and debt. At April 3, cash was $17.5 million, working capital $76.7 million and the current ratio 2.8. Total debt was approximately $87.5 million, excluding lease liabilities; the company had not drawn on its $20 million revolving facility. Debt to shareholders’ equity was 79.0%. Operating cash flow funded capital spending, debt service and dividends, alongside cash on hand. The company was in compliance with its credit covenants.
Changes and operating drivers
- Sales rose 12% overall. Engineered Solutions sales increased 19% to $61.8 million, driven by truck accessories, automotive returnable packaging, blow-mold tooling and distribution products. Diversified Products sales fell 16% to $11.3 million, reflecting business disposals and weaker commercial laundry demand, partly offset by mining products and industrial castings.
- Company-wide gross margin improved to 23.6% from 22.4%. Engineered Solutions margin increased to 25.3% from 24.3%; Diversified Products margin declined to 14.3% from 15.4%.
- Raw-material inflation and freight costs pressured costs. The company cited sharp year-over-year increases in steel, nickel, scrap iron, copper and zinc; tariffs on China-sourced products were $0.7 million, and were recovered through price increases.
- Net income included $2.3 million of other income, principally a $1.8 million gain on sale of the Eberhard Hardware Ltd. building and a favorable pension-asset return. Proceeds from the facility sale were approximately $2.0 million.
Outlook, risks and contingencies
No quantified revenue or earnings guidance was provided. Management expected cash, operating cash flow and available revolver capacity to cover foreseeable working-capital needs, but cautioned that COVID-19-related uncertainty could affect financing availability and terms. Most facilities had returned to normal operations; supply-chain issues, port congestion and labor shortages remained constraints. A pandemic resurgence could disrupt operations and demand.
Other key risks include continued raw-material and component-cost inflation, freight disruption, competition, acquisition integration and variable-rate debt. The credit agreement requires a senior net leverage ratio no higher than 4.25:1 and fixed-charge coverage of at least 1.25:1. LIBOR transition could increase borrowing costs; management was working with its lender on the transition. One customer represented 12% of accounts receivable.
The company expected to contribute $3.1 million to pension plans and $50,000 to its postretirement plan in fiscal 2021; approximately $521,000 and $5,000, respectively, had been contributed by quarter-end. A landfill remediation project had a previously accrued estimated cost of $430,000, with construction anticipated in May 2021. No material subsequent events or material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- How much of the earnings increase is sustainable after excluding the building-sale gain and other pension-related income.
- Whether higher material, freight and labor costs can be offset by pricing, and whether margin improvement continues across both segments.
- Receivables collection and inventory trends as sales grow, including exposure to the customer representing 12% of receivables.
- Debt covenant headroom, variable-rate exposure and the terms of the eventual LIBOR replacement.
- Progress and final costs of the landfill closure work, and actual pension contributions versus the fiscal-year estimate.