The Eastern Company (NASDAQ: EML) — Fiscal 2020 Form 10-K
Business context and period: The filing reports the 53-week fiscal year ended January 2, 2021, compared with the 52-week year ended December 28, 2019. Eastern designs and manufactures engineered products for industrial markets. Its reportable segments are Engineered Solutions and Diversified Products.
Financial performance
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $240.4 million | $251.7 million | Down 4.5% |
| Gross margin | $53.7 million; 22.3% | $61.9 million; 24.6% | Margin down 2.3 percentage points |
| Operating profit | $7.0 million; 2.9% of sales | $17.5 million; 6.9% of sales | Down 59.9% |
| Net income | $5.4 million | $13.3 million | Down 59.3% |
| Diluted EPS | $0.86 | $2.12 | Down 59.4% |
| Operating cash flow | $20.7 million | $23.0 million | Down $2.3 million |
Engineered Solutions sales rose 5.8% to $197.6 million, reflecting a full year of Big 3 Precision sales and Hallink Moulds acquisition, while sales excluding Big 3 Precision fell 13%. Diversified Products sales fell 34.1% to $42.8 million, reflecting weak demand and the sale of Canadian Commercial Vehicles (CCV). Segment income before taxes was $14.6 million for Engineered Solutions and a $7.6 million loss for Diversified Products.
Fourth-quarter sales declined 12% to $60.4 million; net income fell 72% to $1.4 million, or $0.23 diluted EPS. Fourth-quarter gross margin was 21.6%, versus 26.3% a year earlier.
Liquidity, debt and capital
- Cash and equivalents were $16.1 million at year-end, down from $18.0 million. Working capital was $71.1 million versus $83.0 million; current ratio was 2.8 versus 3.6.
- Long-term debt was $88.7 million, down from $98.8 million. The $20 million revolving facility was undrawn; the company reported compliance with credit covenants. Scheduled principal maturities include $66.0 million in 2024, with the remaining term loan due August 2024.
- Net cash used in investing was $9.1 million, including $7.2 million for Hallink Moulds. Net cash used in financing was $13.2 million, including $10.0 million of debt payments, $2.8 million of dividends and $0.4 million of share repurchases.
- Fiscal 2020 dividends were $0.44 per share. Management said it expects operating cash flow and available credit to meet foreseeable operating, capital expenditure, debt-service and dividend needs. Expected 2021 capital expenditures are approximately $5.0 million.
Material changes and unusual items
- The company estimated COVID-19 reduced fiscal 2020 sales by approximately $26.8 million and reduced profit by approximately $5.7 million, net of tax. Shutdowns, delayed shipments, lower customer demand and reduced facility utilization affected results.
- Fiscal 2020 included $5.0 million of goodwill impairment, $2.2 million loss on disposition of subsidiaries, and $1.0 million of restructuring costs. Impairments included approximately $4.0 million at Greenwald and $1.0 million related to closing the Ontario Eberhard facility.
- Management reported $6.8 million of total non-recurring costs, net of tax, including impairments, restructuring, factory relocation and transaction costs, and disposition losses. Adjusted diluted EPS was $1.95 versus $2.73 in 2019; this is a company-defined non-GAAP measure.
- Eastern acquired Hallink Moulds for approximately $7.2 million in August 2020 and sold CCV in June and Sesamee Mexicana in November as part of its effort to streamline the composite panels business.
- Backlog increased to $85.0 million from $71.2 million, supported by blow-mold tooling, hardware, truck-mirror programs and mining orders.
Outlook, risks and contingencies
The filing provides no quantified earnings or sales guidance. Management expected most facilities to continue operating, but warned that COVID-19 resurgences could disrupt supply, production, demand, earnings and cash flow. Raw-material prices rose sharply in the fourth quarter, pressuring margins; the company warned it may not recover future cost increases through pricing or savings. Other material risks include customer demand and creditworthiness, global competition and tariffs, acquisition integration, foreign exchange, variable-rate debt and the transition from LIBOR. Management expected approximately $3.1 million of pension contributions in 2021; pension funded status is sensitive to discount rates and investment returns.
The company had accrued $430,000 for remediation and monitoring of a foundry-sand landfill in New York. Construction of closure remedies was anticipated in May 2021, followed by a closure report. No material pending legal proceedings were reported. The independent auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Whether the higher backlog converts to sales and earnings, and whether demand recovers across the segments.
- Whether raw-material inflation, facility utilization and pricing actions improve or further pressure gross margins.
- Debt repayment capacity, covenant headroom and refinancing or rate-transition implications, particularly the $66.0 million scheduled for 2024.
- Whether Greenwald and other reporting units avoid additional impairment, and whether divestitures and restructuring deliver expected benefits.
- Progress and final costs for the New York landfill closure, and the effect of pension assumptions and contributions on cash and equity.