The Eastern Company — Q1 2023 Form 10-Q
Business context and period: The company reported unaudited results for the 13 weeks ended April 1, 2023, compared with the 13 weeks ended April 2, 2022. Results below are from continuing operations unless noted. The former Diversified Products segment, including Argo EMS, was sold before the current quarter; its prior-period results are classified as discontinued operations.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Net sales | $72.5 million | $69.0 million | Up 5%; volume +3.3%, price +0.8%, new products +0.9% |
| Gross profit / margin | $15.5 million / 21.4% | $14.6 million / 21.1% | Gross profit increased; margin improved 0.3 percentage points |
| Operating profit / margin | $2.2 million / 3.0% | $3.5 million / 5.1% | Down $1.4 million |
| Net income from continuing operations | $0.6 million | $2.7 million | Diluted EPS $0.10 vs. $0.43 |
| Adjusted net income from continuing operations (non-GAAP) | $2.2 million | $2.9 million | Adjusted diluted EPS $0.36 vs. $0.46 |
| Adjusted EBITDA from continuing operations (non-GAAP) | $5.5 million | $6.1 million | Decreased year over year |
| Cash from operating activities | $6.9 million | Cash used: $3.6 million | Improved principally because inventory declined |
Expenses and unusual items: Selling and administrative expense rose 21% to $11.9 million, including $1.8 million of severance and accrued compensation associated with eliminating the COO role and the former CEO’s departure. Product development expense rose 17% to $1.4 million. Interest expense increased to $0.7 million from $0.4 million. Other expense was $0.6 million, versus other income of $0.5 million a year earlier; the change primarily reflected a $0.4 million unfavorable final Greenwald sale working-capital adjustment and $0.3 million in pension cost, compared with a favorable pension adjustment in the prior period. The prior-year quarter also included $0.3 million of after-tax discontinued-operations income.
Financial position and liquidity
At April 1, 2023, cash and cash equivalents were $13.1 million, current assets $122.1 million, and current liabilities $45.3 million. Working capital was $76.7 million and the current ratio was 2.7. Inventory was $57.7 million, down 10.8% from year-end 2022. Operating cash flow less $1.2 million of capital expenditures was approximately $5.7 million. The company paid $0.7 million in dividends; dividends were $0.11 per share.
Total debt was approximately $59.0 million, including $9.4 million current and $49.7 million long-term; cash less debt implies net debt of approximately $46.0 million. The company made $4.9 million in principal payments during the quarter and had no revolving-credit borrowings. Its term loan and revolver mature August 30, 2024. The term loan has variable-rate exposure, partly offset by an interest-rate swap. The company reported compliance with its credit-agreement covenants as of April 1 and through the filing date.
Material changes, outlook, and risks
- Management attributed sales growth mainly to stronger truck-accessory, automotive returnable-transport-packaging, and distributor demand, including activity tied to new automotive and electric-vehicle launches. Price increases were intended in part to recover higher material and freight costs.
- Backlog fell 16% year over year to $72.0 million. Management cited efforts to reduce past-due orders, transition between customer programs, and increased shipments.
- Management said cash, operating cash flow, and available revolver capacity were expected to cover foreseeable working-capital needs, while noting it could not assure future financing availability or terms. No specific earnings or revenue guidance was provided.
- As a subsequent event, on April 25, 2023, the board approved closing the Associated Tool Makers facility in Farndon, U.K., citing long-standing profitability issues. The plan includes about 10 job reductions and is expected to be substantially completed by the end of Q3 2023. Estimated pretax charges are $3.5–$4.5 million, mostly noncash, with the majority expected in Q2.
- Risks discussed include inflation and supply-chain disruption, demand and economic conditions in served markets, variable interest rates and the LIBOR-to-SOFR transition, covenant compliance, foreign-exchange exposure, and customer credit concentration. One customer represented 15% of accounts receivable at quarter-end. The filing reported no material changes to the risk factors in the 2022 Form 10-K and no material pending legal proceedings.
Important facts for investors to verify
- Whether sales momentum and the lower backlog translate into continued orders and shipments, particularly as customer programs transition.
- How much of Q1 operating cash generation came from inventory reduction and whether inventory levels remain appropriate.
- The timing, cash component, and realized savings from the Farndon closure and its estimated $3.5–$4.5 million charge.
- Debt repayment capacity, refinancing arrangements ahead of the August 2024 maturity, interest-rate exposure, and ongoing covenant headroom.
- The extent to which severance and Greenwald adjustment exclusions affect interpretation of the non-GAAP results; compare those measures with GAAP earnings.