The Eastern Company (NASDAQ: EML) — Q3 2021 Form 10-Q
Business context and reporting period
Unaudited results cover the 13 weeks and nine months ended October 2, 2021, compared with periods ended October 3, 2020. The prior-year third quarter was 14 weeks, which affects comparability. The company reports continuing operations as one segment, Engineered Solutions; the Diversified Products segment is presented as discontinued operations while being divested.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Continuing-operations sales | $63.9 million | $55.7 million | $186.9 million | $147.1 million |
| Gross margin | $15.2 million; 23.8% | $13.4 million; 24.0% | $44.7 million; 23.9% | $36.6 million; 24.9% |
| Operating profit | $4.8 million | $4.3 million | $13.9 million | $10.9 million |
| Income from continuing operations | $3.8 million; $0.61 diluted EPS | $3.2 million; $0.51 diluted EPS | $12.3 million; $1.96 diluted EPS | $7.9 million; $1.26 diluted EPS |
| Consolidated net income | $6.0 million | $3.0 million | $7.3 million | $4.0 million |
| Cash from continuing operating activities | Not separately stated for the quarter | $(3.3) million | $19.4 million |
At October 2, cash and cash equivalents were $8.7 million on the balance sheet, plus $1.3 million classified within assets held for sale. Working capital was $95.0 million and the current ratio was 2.7. Debt was approximately $84.3 million, comprising $7.5 million current and $76.8 million long-term; debt-to-equity was 75%. The company had not drawn on its $20 million revolving facility and reported compliance with its debt covenants.
Changes versus prior periods
- Continuing sales increased 15% in Q3 and 27% year to date, supported by demand for truck accessories, automotive returnable packaging, blow mold tooling and distribution products. Backlog rose 44% year over year to $83.1 million.
- Gross margin declined year to date from 24.9% to 23.9%, as higher material and freight costs partly offset price increases. Management cited sharp year-over-year increases in several metals and freight expense increases of 110% in Q3 and 99% year to date.
- Continuing-operations income increased, helped year to date by $2.4 million more other income, including a $1.8 million gain on a building sale and a $0.6 million favorable pension-asset return.
- Continuing operating cash flow fell to a $3.3 million use from $19.4 million provided in the prior-year period. The company attributed the change mainly to increased receivables and inventory, partly offset by higher payables. Inventory was up 31.5% from fiscal year-end; receivables were $41.3 million.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects cash, operating cash flow and available revolving credit to cover foreseeable working-capital needs, but cautions that financing availability and terms are uncertain.
- The company initiated the sale of Diversified Products to focus on its core business. The segment’s held-for-sale write-down was $8.1 million, net of tax, in Q2; a $1.0 million net-of-tax gain was recorded in Q3. Management estimated approximately $25 million of cash flow from the divestitures over the following 12 months, with most expected to reduce debt. Greenwald Industries was sold on November 3, 2021 for $8.0 million, subject to a final working-capital adjustment.
- Management said the direct operational impact of COVID-19 had been limited, but cited supply-chain disruption, port congestion and labor shortages. Further pandemic resurgence could disrupt operations and adversely affect results and cash flow.
- Other key exposures include volatile input and freight costs, customer demand and concentration, variable-rate debt, and the transition away from LIBOR. The filing warns that a replacement benchmark could increase borrowing costs; the company may need to renegotiate its credit facilities. Debt covenants require a senior net leverage ratio no higher than 4.25:1 and fixed-charge coverage of at least 1.25:1.
- A landfill closure remedy at the New York facility was completed September 29, 2021; a closure report and maintenance plan were expected in Q4. The company reported no material pending legal proceedings beyond this matter, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether divestiture proceeds and timing, including Greenwald’s final working-capital adjustment, match the company’s plans and are used to reduce debt.
- Whether sales growth and the $83.1 million backlog convert to revenue while margins withstand material, freight and labor-cost pressures.
- Whether working-capital investment moderates and operating cash flow recovers from the year-to-date use of cash.
- Debt repayment, covenant headroom, interest-rate exposure and the planned transition from LIBOR to a replacement benchmark.
- How discontinued operations and related held-for-sale gains or losses affect reported consolidated earnings versus continuing operating performance.