UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report:
(Date of earliest event reported)
(Exact name of Registrant as specified in its charter) |
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(State or other jurisdiction |
| (Commission |
| (IRS Employer |
of incorporation) |
| File Number) |
| identification No.) |
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(Address of principal executive offices) |
| (Zip Code) |
(
(Registrant’s telephone number, including area code)
____________________________________________
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
ITEM 2.02 – Results of Operations and Financial Condition
Press Release dated May 9, 2023, announcing the first quarter earnings for 2023 is attached hereto.
Earnings Call Transcript dated May 10, 2023, detailing review of first quarter earnings for 2023 is attached hereto.
ITEM 7.01 – Regulation FD Disclosure
On May 9, 2023, The Eastern Company released the first quarter earnings of 2023. A copy of the Press Release dated May 9, 2023, announcing the first quarter earnings for 2023 is attached hereto.
ITEM 9.01 – Financial Statements and Exhibits
(d) Exhibits
Exhibit No. |
| Title |
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| Press Release dated May 9, 2023 announcing the first quarter earnings for 2023. | |
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| Earnings Call Transcript dated May 10, 2023, detailing review of first quarter earnings for 2023. | |
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104 |
| Cover Page Interactive Data File (cover page XBRL tags are embedded within the Inline XBRL document) |
| 2 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized.
| The Eastern Company |
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Date: August 7, 2023 | By: | /s/Nicholas Vlahos |
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| Nicholas Vlahos Chief Financial Officer |
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| 3 |
EXHIBIT 99.1
FOR IMMEDIATE RELEASE
THE EASTERN COMPANY REPORTS FIRST QUARTER 2023 RESULTS
|
| · | Net sales from continuing operations rose 5% to $72.5 million compared to last year’s period. |
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| · | Inventory down 11% compared to December 31, 2022; working capital also reduced quarter over quarter. |
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| · | New leadership team focusing on efficient operations that consistently deliver strong results. |
SHELTON, CT – May 9, 2023 - The Eastern Company (“Eastern”) (NASDAQ:EML), an industrial manufacturer of unique engineered solutions serving commercial transportation, logistics, and other industrial markets, today announced the results of operations for the first fiscal quarter ended April 1, 2023.
President and CEO Mark Hernandez commented, “The first quarter was a period of significant change for The Eastern Company as our new leadership team began taking a series of actions to enhance operating efficiency, reduce costs and intensify the company’s focus on delivering value to shareholders. Our team’s top priority in 2023 is efficient operations that consistently deliver strong results. Our approach is based on four key pillars: 1) disciplined operations; 2) optimum capital utilization; 3) focused commercial business; and longer term, 4) value-adding acquisitions.
“We will be taking actions that support our goals throughout the first half of the year and believe they will have a quick impact on The Eastern Company’s financial performance and set us on a sustainable path for growth. We have already completed a full review of Eastern’s businesses and products and streamlined the company’s organizational reporting structure. We are also taking steps to further reduce working capital and improve profitability through portfolio optimization, improved pricing, effective cost recovery actions and other measures. Our companies now have a clear mandate to improve profitability and grow, in that order.”
Mr. Hernandez continued, “Eastern’s first-quarter results reflect the initial benefits of our operational improvement initiatives, with inventory as of April 1, 2023 down 11% compared to year-end 2022 and working capital as a percent of sales down to 22.1% compared to 26.1% for the fourth quarter of 2022. As a result, operating cash flow increased $10.4 million from the first quarter of 2022 to a source of cash of $6.9 million for the first quarter of 2023, enabling us to further reduce our long-term debt by $4.9 million and increase cash by $2.9 million as of April 1, 2023 compared to December 31, 2022, further strengthening our balance sheet. Our backlog as of April 1, 2023 was $72.0 million compared to $85.8 million as of April 2, 2022 as we continued transitioning from old to new programs with our commercial vehicle and automotive customers and increased shipments to customers, demonstrating that Eastern is well positioned to benefit from industry trends to electrification, digitization, and automation.”
First Quarter 2023 Financial Results
Net sales in the first quarter of 2023 increased 5% to $72.5 million from $69.0 million in the corresponding period in 2022. Sales increased in the first quarter due to increased demand for truck accessories and automotive returnable transport packaging products as well as from distributors. Our returnable transport packaging sales benefited from the increase in new automotive product launches, including several electric vehicle launches.
Net sales of existing products increased 3% in the first quarter of 2023 compared to the corresponding period in 2022. Price increases and new products increased net sales by 2% in the first quarter of 2023 compared to the corresponding period in 2022. New products included various truck mirror assemblies, rotary latches, electronic latches and locks, D-rings, and mirror cams. Price increases primarily reflect our efforts to recover an increase in raw material and freight costs.
Cost of products sold increased $2.6 million, or 5%, in the first quarter of 2023 compared to the corresponding period in 2022. The increase is primarily due to higher sales volume. Additionally, the Company paid tariff costs on China-sourced products of approximately $0.6 million in the first quarter of 2023, compared to $0.6 million in the first quarter of fiscal 2022. Most tariffs on China-sourced products have been recovered through price increases.
3 ENTERPRISE DRIVE, SUITE 408, SHELTON, CONNECTICUT 06484
PHONE (203) 729 - 2255 * FAX (203) 723 - 8653 * WWW.EASTERNCOMPANY.COM
Gross margin as a percentage of sales was 21% in the first quarter of fiscal 2023 compared to 21% in the first quarter of fiscal 2022.
Product development expenses increased $0.2 million, or 17% in the first quarter of 2023 when compared to the corresponding period in 2022 as we continue to invest in new products at Eberhard and Velvac. As a percentage of net sales, product development costs were 1.9% for the first quarter of 2023 and 1.7% for the corresponding period in 2022.
Selling and administrative expense increased $2.1 million, or 21%, in the first quarter of 2023 when compared to the corresponding period in 2022 primarily due to severance and other accrued compensation expenses of $1.8 million related to the elimination of the Chief Operating Officer position and the departure of our previous Chief Executive Officer and other selling costs and payroll-related expenses. The increase in selling expenses reflects both the increase in sales as well as our investments in sales capabilities.
Interest expense increased $0.3 million in the first quarter of 2023 compared to the corresponding period in 2022.
Other income was down $1.1 million in the first quarter of 2023 compared to the corresponding period in 2022. The decrease in other income of $1.1 million in the first quarter was primarily driven by an unfavorable final working capital adjustment of $0.4 million related to the sale of the Greenwald business and an unfavorable pension cost adjustment of $0.3 million in the first quarter of 2023, while in the first quarter of 2022 the Company had a favorable pension cost adjustment of $0.4 million, partially offset by a loss on the sale of the Wheeling, IL building of $0.2 million.
Net income from continuing operations for the first quarter of fiscal 2023 was $0.6 million, or $0.10 per diluted share, compared to net income from continuing operations of $2.7 million, or $0.43 per diluted share, for the comparable period in 2022. Adjusted net income from continuing operations (a non-GAAP measure) for the first quarter of fiscal 2023 was $2.2 million, or $0.36 per diluted share compared to adjusted net income from continuing operations of $2.9 million, or $0.46 per diluted share, for the comparable period in 2022. Adjusted EBITDA from continuing operations (a non-GAAP measure) for the first quarter of fiscal 2023 was $5.5 million compared to adjusted EBITDA from continuing operations of $6.1 million for the first quarter of 2022. See “Non-GAAP Financial Measures” below and the reconciliation table accompanying this release.
Conference Call and Webcast
The Eastern Company will host a conference call to discuss its results for the first quarter of 2023 and other matters on Wednesday, May 10, 2023, at 11:00 AM Eastern Time. Participants can access the conference call by phone at 888-506-0062 (toll-free in the US and Canada) or 973-528-0011 (international), using access code 645693. Participants can also join via the web at https://www.webcaster4.com/Webcast/Page/1757/47956.
About The Eastern Company
The Eastern Company manages industrial businesses that design, manufacture and sell unique engineered solutions to markets. Eastern’s businesses operate in industries that offer long-term macroeconomic growth opportunities. The Company operates from locations in the U.S., Canada, Mexico, U.K., Taiwan, and China. More information on the Company can be found at www.easterncompany.com.
| 2 |
Safe Harbor for Forward-Looking Statements
Statements in this document about our future expectations, beliefs, goals, plans, or prospects constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and the rules, regulations, and releases of the Securities and Exchange Commission. Any statements that are not statements of historical fact, including statements containing the words “would,” “should,” “could,” “may,” “will,” “believes,” “estimates,” “intends,” “continues,” “reflects,” “plans,” “anticipates,” “expects,” “potential,” “opportunities,” or similar terms or variations of those terms or the negative of those terms, should also be considered to be forward-looking statements. Readers should not place undue reliance on these forward-looking statements, which are based upon management’s current beliefs and expectations. These forward-looking statements are subject to risks and uncertainties, and actual results might differ materially from those discussed in, or implied by, the forward-looking statements. The risks and uncertainties that could cause actual results or events to differ materially from those indicated by such forward-looking statements include the impact of the COVID-19 pandemic and resulting economic effects, including supply chain disruptions, cost inflation, rising interest rates, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, the potential impact of bank failures on our ability to access financing or capital markets, and the impact of market conditions on pension plan funded status. Other factors include, but are not limited to: the effect on interest rates of the replacement of the London Interbank Offered Rate (LIBOR) with a Secured Overnight Financing Rate (SOFR), risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability; restrictions on operating flexibility imposed by the agreement governing our credit facility; the inability to achieve the savings expected from global sourcing of materials; the impact of higher raw material and component costs, including the impact of supply chain shortages and inflation, particularly steel, plastics, scrap iron, zinc, copper and electronic components; lower-cost competition; our ability to design, introduce and sell new or updated products and related components; market acceptance of our products; the inability to attain expected benefits from acquisitions or the inability to effectively integrate such acquisitions and achieve expected synergies; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, and general industrial markets; costs and liabilities associated with environmental compliance; the impact of climate change or terrorist threats and the possible responses by the U.S. and foreign governments; failure to protect our intellectual property; cyberattacks; materially adverse or unanticipated legal judgments, fines, penalties or settlements. There are important, additional factors that could cause actual results or events to differ materially from those indicated by such forward-looking statements, including those set forth in our reports and filings with the Securities and Exchange Commission. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions. Also, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses. We undertake no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise, except as required by law.
Non-GAAP Financial Measures
The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S. GAAP.
To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income from continuing operations, diluted earnings per share from continuing operations, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.
Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis across periods by removing the impact of certain items that management believes do not directly reflect our underlying operating performance.
Adjusted Earnings Per Share from Continuing Operations is defined as earnings per share from continuing operations excluding, when incurred, certain per share gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs. We believe that Adjusted Earnings Per Diluted Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis from period to period.
| 3 |
Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses. Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.
Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, U.S. GAAP financial measures.
We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.
Investor Relations Contacts
The Eastern Company
Mark Hernandez or Nicholas Vlahos
203-729-2255
| 4 |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
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| Three Months Ended |
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| April 1, 2023 |
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| April 2, 2022 |
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| Net sales |
| $ | 72,495,367 |
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| $ | 69,014,648 |
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| Cost of products sold |
|
| (56,997,668 | ) |
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| (54,438,968 | ) |
| Gross margin |
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| 15,497,699 |
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|
| 14,575,680 |
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|
|
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| Product development expense |
|
| (1,401,199 | ) |
|
| (1,197,008 | ) |
| Selling and administrative expenses |
|
| (11,937,637 | ) |
|
| (9,865,614 | ) |
| Operating profit |
|
| 2,158,863 |
|
|
| 3,513,058 |
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|
|
|
|
|
|
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| Interest expense |
|
| (726,006 | ) |
|
| (434,335 | ) |
| Other (expense) income |
|
| (630,699 | ) |
|
| 488,520 |
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| Income from continuing operations before income taxes |
|
| 802,158 |
|
|
| 3,567,243 |
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|
|
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|
|
|
|
|
|
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| Income tax expense |
|
| (194,845 | ) |
|
| (881,125 | ) |
| Net income from continuing operations |
|
| 607,313 |
|
|
| 2,686,118 |
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|
|
|
|
|
|
|
|
|
|
| Discontinued Operations |
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|
|
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|
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| Gain from operations of discontinued operations |
|
| - |
|
|
| 471,187 |
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| Income tax expense |
|
| - |
|
|
| (126,867 | ) |
| Gain from discontinued operations |
|
| - |
|
|
| 344,320 |
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|
|
|
|
|
|
|
|
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| Net income |
| $ | 607,313 |
|
| $ | 3,030,438 |
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| Earnings per share from continuing operations: |
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| Basic |
| $ | 0.10 |
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| $ | 0.43 |
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| Diluted |
| $ | 0.10 |
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| $ | 0.43 |
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| Earnings per share from discontinued operations: |
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| Basic |
| $ | - |
|
| $ | 0.06 |
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|
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|
|
|
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| Diluted |
| $ | - |
|
| $ | 0.05 |
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|
|
|
|
|
|
|
|
|
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| Total earnings per share: |
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|
|
|
|
|
|
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| Basic |
| $ | 0.10 |
|
| $ | 0.49 |
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|
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|
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|
|
|
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| Diluted |
| $ | 0.10 |
|
| $ | 0.48 |
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|
|
|
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|
|
|
|
|
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| Cash dividends per share: |
| $ | 0.11 |
|
| $ | 0.11 |
|
| 5 |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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| April 1, 2023 |
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| December 31, 2022 |
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| (unaudited) |
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| ASSETS |
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| Current Assets |
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| Cash and cash equivalents |
| $ | 13,071,017 |
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| $ | 10,187,522 |
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| Accounts receivable, less allowances: 2023 - $676,000; 2022 - $677,000 |
|
| 44,481,853 |
|
|
| 42,886,250 |
|
| Inventories |
|
| 57,652,961 |
|
|
| 64,636,591 |
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| Current portion of notes receivable |
|
| 214,780 |
|
|
| 1,006,421 |
|
| Prepaid expenses and other assets |
|
| 6,639,228 |
|
|
| 6,598,774 |
|
| Total Current Assets |
|
| 122,059,839 |
|
|
| 125,315,558 |
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|
|
|
|
|
|
|
|
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| Property, Plant and Equipment |
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| 57,318,367 |
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| 56,112,889 |
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| Accumulated depreciation |
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| (30,877,891 | ) |
|
| (30,000,797 | ) |
| Property, Plant and Equipment, Net |
|
| 26,440,476 |
|
|
| 26,112,092 |
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|
|
|
|
|
|
|
|
|
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| Goodwill |
|
| 70,788,971 |
|
|
| 70,777,459 |
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| Trademarks |
|
| 5,514,888 |
|
|
| 5,514,886 |
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| Patents and other intangibles net of accumulated amortization |
|
| 17,987,968 |
|
|
| 18,819,897 |
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| Long term notes receivable, less current portion |
|
| 905,851 |
|
|
| 2,276,631 |
|
| Deferred Income Taxes |
|
| 488,989 |
|
|
| 488,989 |
|
| Right of Use Assets |
|
| 11,564,607 |
|
|
| 12,217,521 |
|
| Total Other Assets |
|
| 107,251,274 |
|
|
| 110,095,383 |
|
|
|
|
|
|
|
|
|
|
|
| TOTAL ASSETS |
| $ | 255,751,589 |
|
| $ | 261,523,033 |
|
| 6 |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
| April 1, 2023 |
|
| December 31, 2022 |
| ||
|
|
| (unaudited) |
|
|
|
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| LIABILITIES AND SHAREHOLDERS’ EQUITY |
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| Current Liabilities |
|
|
|
|
|
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| Accounts payable |
| $ | 26,643,423 |
|
| $ | 27,638,317 |
|
| Accrued compensation |
|
| 2,233,923 |
|
|
| 3,327,832 |
|
| Other accrued expenses |
|
| 3,900,764 |
|
|
| 3,944,964 |
|
| Current portion of operating lease liability |
|
| 3,030,116 |
|
|
| 3,059,547 |
|
| Current portion of finance lease liability |
|
| 150,773 |
|
|
| - |
|
| Current portion of long-term debt |
|
| 9,375,000 |
|
|
| 9,010,793 |
|
| Total Current Liabilities |
|
| 45,333,999 |
|
|
| 46,981,453 |
|
|
|
|
|
|
|
|
|
|
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| Other long-term liabilities |
|
| 754,762 |
|
|
| 754,762 |
|
| Operating lease liability, less current portion |
|
| 8,556,037 |
|
|
| 9,195,205 |
|
| Finance lease liability, less current portion |
|
| 846,547 |
|
|
| - |
|
| Long-term debt, less current portion |
|
| 49,661,128 |
|
|
| 55,136,231 |
|
| Accrued postretirement benefits |
|
| 664,293 |
|
|
| 666,222 |
|
| Accrued pension cost |
|
| 23,134,787 |
|
|
| 22,174,465 |
|
| Total Liabilities |
|
| 128,951,553 |
|
|
| 134,908,338 |
|
|
|
|
|
|
|
|
|
|
|
| Shareholders’ Equity |
|
|
|
|
|
|
|
|
| Voting Preferred Stock, no par value: |
|
| - |
|
|
| - |
|
| Authorized and unissued: 1,000,000 shares |
|
|
|
|
|
|
|
|
| Nonvoting Preferred Stock, no par value: |
|
| - |
|
|
| - |
|
| Authorized and unissued: 1,000,000 shares |
|
|
|
|
|
|
|
|
| Common Stock, no par value, Authorized: 50,000,000 shares |
|
| 33,536,918 |
|
|
| 33,586,165 |
|
| Issued: 9,066,057 shares in 2023 and 9,056,421 shares in 2022 |
|
|
|
|
|
|
|
|
| Outstanding: 6,231,612 shares in 2023 and 6,221,976 shares in 2022 |
|
|
|
|
|
|
|
|
| Treasury Stock: 2,834,445 shares in 2023 and 2,834,445 shares in 2022 |
|
| (22,544,684 | ) |
|
| (22,544,684 | ) |
| Retained earnings |
|
| 138,908,874 |
|
|
| 138,985,852 |
|
| Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
| Foreign currency translation |
|
| (804,393 | ) |
|
| (1,140,978 | ) |
| Unrealized gain on interest rate swap, net of tax |
|
| 1,172,067 |
|
|
| 1,449,754 |
|
| Unrecognized net pension and postretirement benefit costs, net of tax |
|
| (23,468,746 | ) |
|
| (23,721,414 | ) |
| Accumulated other comprehensive loss |
|
| (23,101,072 | ) |
|
| (23,412,638 | ) |
| Total Shareholders’ Equity |
|
| 126,800,036 |
|
|
| 126,614,695 |
|
| TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 255,751,589 |
|
| $ | 261,523,033 |
|
| 7 |
THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
|
|
| Three Months Ended |
| |||||
|
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
| Operating Activities |
|
|
|
|
|
| ||
| Net income |
| $ | 607,313 |
|
| $ | 3,030,438 |
|
| Less: gain from discontinued operations |
|
| - |
|
|
| 344,320 |
|
| Income from continuing operations |
|
| 607,313 |
|
|
| 2,686,118 |
|
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
| Depreciation and amortization |
|
| 1,814,749 |
|
|
| 1,830,427 |
|
| Unrecognized pension and postretirement benefits |
|
| 880,421 |
|
|
| 247,133 |
|
| Loss on sale of equipment and other assets |
|
| - |
|
|
| 268,770 |
|
| Provision for doubtful accounts |
|
| 3,269 |
|
|
| 19,740 |
|
| Stock compensation (benefit) expense |
|
| (49,246 | ) |
|
| 221,468 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Accounts receivable |
|
| (1,585,976 | ) |
|
| (3,951,314 | ) |
| Inventories |
|
| 7,212,179 |
|
|
| (4,902,631 | ) |
| Prepaid expenses and other |
|
| (37,330 | ) |
|
| (1,075,545 | ) |
| Other assets |
|
| (155,055 | ) |
|
| (89,366 | ) |
| Accounts payable |
|
| (1,031,704 | ) |
|
| 3,526,499 |
|
| Accrued compensation |
|
| (1,104,186 | ) |
|
| (1,858,898 | ) |
| Other accrued expenses |
|
| 305,824 |
|
|
| (478,878 | ) |
| Net cash provided by (used in) operating activities |
|
| 6,860,258 |
|
|
| (3,556,477 | ) |
|
|
|
|
|
|
|
|
|
|
| Investing Activities |
|
|
|
|
|
|
|
|
| Payments received from notes receivable |
|
| 2,233,192 |
|
|
| 175,220 |
|
| Proceeds from sale of equipment |
|
| - |
|
|
| 1,371,073 |
|
| Purchases of property, plant, and equipment |
|
| (1,151,205 | ) |
|
| (572,047 | ) |
| Net cash provided by investing activities |
|
| 1,081,987 |
|
|
| 974,246 |
|
|
|
|
|
|
|
|
|
|
|
| Financing Activities |
|
|
|
|
|
|
|
|
| Proceeds from short term borrowings (revolver) |
|
| (268,249 | ) |
|
| 5,000,000 |
|
| Principal payments on long-term debt |
|
| (4,858,000 | ) |
|
| (1,852,107 | ) |
| Financing leases, net |
|
| 723,254 |
|
|
| (92,111 | ) |
| Purchase common stock for treasury |
|
| - |
|
|
| (766,889 | ) |
| Dividends paid |
|
| (684,293 | ) |
|
| (687,180 | ) |
| Net cash (used in) provided by financing activities |
|
| (5,087,288 | ) |
|
| 1,601,713 |
|
|
|
|
|
|
|
|
|
|
|
| Discontinued Operations |
|
|
|
|
|
|
|
|
| Cash used in operating activities |
|
| - |
|
|
| (396,936 | ) |
| Cash used in discontinued operations |
|
| - |
|
|
| (396,936 | ) |
|
|
|
|
|
|
|
|
|
|
| Effect of exchange rate changes on cash |
|
| 28,538 |
|
|
| (22,903 | ) |
| Net change in cash and cash equivalents |
|
| 2,883,495 |
|
|
| (1,400,357 | ) |
|
|
|
|
|
|
|
|
|
|
| Cash and cash equivalents at beginning of period |
|
| 10,187,522 |
|
|
| 6,602,429 |
|
| Cash and cash equivalents at end of period 1 |
| $ | 13,071,017 |
|
| $ | 5,202,072 |
|
|
|
|
|
|
|
|
|
|
|
| Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
| Interest |
| $ | 716,763 |
|
| $ | 463,080 |
|
| Income taxes |
|
| (59,681 | ) |
|
| 110,917 |
|
|
|
|
|
|
|
|
|
|
|
| Non-cash investing and financing activities |
|
|
|
|
|
|
|
|
| Right of use asset |
|
| (652,914 | ) |
|
| 292,097 |
|
| Lease liability |
|
| (328,721 | ) |
|
| (226,903 | ) |
1 includes cash from assets held for sale of $0.1 million as of April 2, 2022
| 8 |
| Reconciliation of Non-GAAP Measures | ||||||||
| Adjusted Net Income and Adjusted Earnings per Share from Continuing Operations Calculation | ||||||||
| For the Three Months ended April 1, 2023 and April 2, 2022 | ||||||||
| ($000's) |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
|
|
| Three Months Ended |
| |||||
|
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
| Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 607 |
|
| $ | 2,686 |
|
|
|
|
|
|
|
|
|
|
|
| Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
| $ | 0.10 |
|
| $ | 0.43 |
|
| Diluted |
| $ | 0.10 |
|
| $ | 0.43 |
|
|
|
|
|
|
|
|
|
|
|
| Adjustments: |
|
|
|
|
|
|
|
|
| Loss on sale of Wheeling, IL building, net of tax |
|
| - |
|
|
| 202 | A |
| Severance and accrued compensation, net of tax |
|
| 1,349 | B |
|
| - |
|
| Greenwald final sale adjustment, net of tax |
|
| 293 | C |
|
| - |
|
| Total adjustments (non-GAAP) |
| $ | 1,642 |
|
| $ | 202 |
|
|
|
|
|
|
|
|
|
|
|
| Adjusted net income from continuing operations |
| $ | 2,249 |
|
| $ | 2,888 |
|
|
|
|
|
|
|
|
|
|
|
| Adjusted earnings per share from continuing operations (non-GAAP): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic |
| $ | 0.36 |
|
| $ | 0.46 |
|
| Diluted |
| $ | 0.36 |
|
| $ | 0.46 |
|
| A) | Loss on sale of ILC building in Wheeling, IL |
| B) | Severance expenses associated with accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the Chief Executive Officer |
| C) | Final settlement of working capital adjustment associated with Greenwald sale |
| 9 |
| Reconciliation of Non-GAAP Measures | ||||||||
| Adjusted EBITDA from Continuing Operations Calculation | ||||||||
| For the Three Months ended April 1, 2023 and April 2, 2022 | ||||||||
| ($000's) |
|
|
|
|
|
| ||
|
|
|
|
| |||||
|
|
| Three Months Ended |
| |||||
|
|
| April 1, 2023 |
|
| April 2, 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Net income from continuing operations as reported per generally accepted accounting principles (GAAP) |
| $ | 607 |
|
| $ | 2,686 |
|
|
|
|
|
|
|
|
|
|
|
| Interest expense |
|
| 726 |
|
|
| 434 |
|
| Provision for income taxes |
|
| 195 |
|
|
| 881 |
|
| Depreciation and amortization |
|
| 1,815 |
|
|
| 1,830 |
|
| Loss on sale of Wheeling, IL building |
|
| - |
|
|
| 269 | A |
| Severance and accrued compensation |
|
| 1,799 | B |
|
| - |
|
| Greenwald final sale adjustment |
|
| 390 | C |
|
| - |
|
| Adjusted EBITDA from continuing operations |
| $ | 5,532 |
|
| $ | 6,100 |
|
| A) | Loss on sale of ILC building in Wheeling, IL |
| B) | Severance expenses associated accrued compensation and severance related to the elimination of the Chief Operating Officer position and the departure of the Chief Executive Officer |
| C) | Final settlement of working capital adjustment associated with Greenwald sale |
| 10 |
EXHIBIT 99.2
The Eastern Company (EML) Q1 2023 Earnings Call Transcript
May 10, 2023 11:00 AM ET
Company Participants
Ernie Hawkins - Corporate Controller
Mark Hernandez - President and CEO
Nicholas Vlahos - Chief Financial Officer
Conference Call Participants
Ross Davisson - Banneton Capital
Operator
Greetings. And welcome to The Eastern Company’s First Quarter Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions]
Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Ernie Hawkins. Sir, you may begin.
Ernie Hawkins
Good morning. And thank you everyone for joining us this morning for a review of Eastern’s results for the first quarter of 2023. With me on the call are Eastern’s President and CEO, Mark Hernandez; and CFO, Nicholas Vlahos.
We issued an earnings press release yesterday after the market closed. If anyone has not yet seen the release, I invite you to visit the Investors section of the company’s website, www.easterncompany.com, where you will find the release under Financial News.
Please note that some of the information you will hear during today’s call will consist of forward-looking statements about the company’s future financial performance and business prospects, including, without limitation, statements regarding revenue, gross margin, operating expenses, other income and expenses, taxes, and business outlook.
These forward-looking statements are subject to risks and uncertainties that could cause actual results or trends to differ significantly from those projected in these forward-looking statements. We undertake no obligation to review or update any forward-looking statements to reflect events or circumstances that occur after the call.
For more information regarding these risks and uncertainties, please refer to risk factors discussed in our SEC filings, including Form 10-K filed with the SEC on March 14, 2023, for the fiscal year 2022 and Form 10-Q filed with the SEC on May 9, 2023.
In addition, during today’s call, we will discuss non-GAAP financial measures that we believe are useful as supplemental measures of Eastern’s performance. These non-GAAP measures should be considered in addition to and not as a substitute for or in isolation from GAAP results. A reconciliation of each of the non-GAAP measures discussed during today’s call to the most directly comparable GAAP measure can be found in the earnings press release.
With that, I will turn the call over to Mark.
Mark Hernandez
Thank you, Ernie. And good morning to those who have joined us by phone or participating via the web. It’s a pleasure to speak with all of you today. I am going to begin the call today with some high-level observations about our first quarter performance. Then I will turn the call over to Nick, who will take you through the detailed review of our financial results. After that, I will come back and share with you many of the initiatives we have underway to improve our operational performance and enhance our return to our shareholders and the goals this management team intends to achieve in 2023.
When I accepted the appointment as Eastern CEO four months ago, I saw a company with capable people in three promising businesses, each which faced a very challenging market environment.
As you know, frequent supply chain disruptions and increases in freight and material costs were the order of the day in 2022. As a result of these severe headwinds, our businesses did not perform to their full potential and our 2022 financial results suffered.
Clearly, we needed to immediately change the way we were running our businesses. To that end, during the quarter, we undertook a thorough review of our businesses and products and began to implement an action plan consisting of several operational initiatives.
We have set quantitative goals for these initiatives and are tracking performance to completion. I am pleased to report that we began to see the initial benefits of these operational improvement initiatives during the first quarter.
Inventory declined 11% from the end of the fourth quarter, particularly at Velvac and working capital as a percentage of sales declined to 22.1% from 26.1% for the fourth quarter as we flushed out a portion of our lower-margin orders from our backlog.
Supply chain bottlenecks are easing, and raw material and freight costs are moderating. Our backlog at quarter end was $72 million, compared with $85.8 million as of April 1, 2022, when backlog was artificially inflated, because of supply chain constraints that delayed shipments.
We continue to see pricing improvements at Velvac, which are resulting in the addition of higher margin orders to our backlog. At Big 3, backlog levels remain within favorable levels assuring us of optimized order turnaround and order fulfillment.
| -2- |
On the demand side, we continue to transition from old to new programs within our commercial vehicle and automotive customers and remain well positioned to capitalize on industry trends in electrification, digitization, and automation.
At Velvac, demand remains strong, and we are receiving orders for new products introduced last year to serve several new truck mirror programs and orders on existing programs as commercial vehicle customers get closer to producing at planned capacity.
Eberhard’s electromechanical business is gaining momentum and has won sizable orders. Big 3 Precision Products is generating increased quote activity and winning awards for returnable transport packaging solutions designed for new automotive model launches, primarily in the electric vehicle space.
With that, I will now turn the call over to Nick.
Nicholas Vlahos
Thank you, Mark, and good morning, everyone. Net sales from continuing operations increased 5% to $72.5 million from $69 million in the first quarter of 2022, reflecting increased shipments of truck accessories and automotive returnable transport packaging products. Returnable transport packaging sales benefited from new automotive product launches, including several electric vehicle launches.
Sales of existing products increased 3.3%. Price increases and sales of new products contributed 1.7% in sales growth for the first quarter when compared to the first quarter last year. New products included various truck mirror assemblies, rotary latches, electronic latches and locks, D-rings, and mirror cams.
Gross margin as a percentage of sales was 21%, unchanged from the first quarter of 2022, reflecting improved price/cost alignment and the easing of some raw material and freight costs.
Product development expenses were $1.4 million, up $0.2 million, reflecting increased investment in new products at Eberhard and Velvac. As a percentage of net sales, product development expenses were 1.9%, compared to 1.7% for the first quarter of 2022.
Selling and administrative expenses were $11.9 million, compared to $9.9 million for the first quarter of 2022, an increase of $2 million, $1.8 million of the $2 million year-over-year variance relates to onetime severance expenses associated with the elimination of the COO position and the departure of our previous CEO. The remaining $0.2 million increase reflects higher sales and investments in sales capabilities.
Other expense of $0.6 million for the first quarter of 2023 includes $0.4 million, reflecting the final working capital adjustment related to the sale of the Greenwald business.
Net income from continuing operations was $0.6 million or $0.10 per share, compared to $2.7 million or $0.43 per share for the first quarter of 2022. Adjusting for the severance expenses and working capital adjustment, net of tax, which totaled $1.6 million or $0.26 per share, adjusted net income from continuing operations was $0.36 per share. Adjusted EBITDA from continuing operations was $5.5 million, compared to $6.1 million for the first quarter of 2022.
| -3- |
Net cash provided by operating activities swung $10.4 million to $6.9 million, compared to net cash used in operating activities of $3.6 million for the first quarter last year. The improvement reflects a reduction in cash used to support working capital, primarily a $7.2 million decrease in inventory.
By comparison, in the first quarter of 2022, cash was used to ensure availability of inventory to meet customer demand in light of supply chain constraints. As a result, inventory turnover improved to 4 times compared to 3.2 times for the first quarter of last year.
Operating cash flow was used primarily to fund capital expenditures of $1.2 million, repay $4.9 million of long-term debt and paid dividends of $0.7 million. At quarter end, our net leverage ratio was 2.05, down from 2.76 at the end of the first quarter last year and 2.27 at the end of fiscal 2022. Cash increased $2.9 million to $13.1 million at quarter end.
That completes my financial review. I will now turn the call back to Mark.
Mark Hernandez
Thank you, Nick. Our team strategy falls into four categories; disciplined operations that deliver consistent results; strong commercial business focus; effective capital allocation and utilization; and value-adding acquisition.
Our priority this year is to ensure that all facets of Eastern operations, our pricing strategy, cost structure, working capital management, meet profitability and return on invested capital thresholds that each business contributes to building overall shareholder value.
As you have heard during the first quarter, we improved working capital significantly to a record low of 22.1% of sales. We are now sharpening our focus on profitability. With operations optimized, we will be in good shape to move forward with the fourth category, bolstering growth through acquisitions.
As I mentioned in my opening remarks, our action plan and initiatives we are implementing this year are expected to have a quick impact on the company’s financial performance and be apparent in our results in the second half of the year.
I will start with a review of the first category, disciplined operations that deliver consistent results. With more efficient operations, we will be much better positioned to deal with market challenges and in addition to take advantage of growth opportunities. We are scrubbing the cost side of the business, making sure that the cost of goods sold, and operating expenses meet internal profitability targets.
Let me give you a couple of examples of initiatives we are implementing. We are addressing supply chain inefficiencies, reducing lead times from our Asian suppliers and leveraging near shoring capabilities. We are also leveraging our Mexico operations to overcome labor shortfalls in the U.S. and taking steps to reduce manufacturing costs.
| -4- |
Finally, we have implemented a hiring freeze throughout our businesses, and we are cutting nonessential expenses and looking for ways to realize cost synergies across our three businesses.
The second leg of our four-pronged strategy is effective capital allocation and utilization. Here, we are instilling discipline in our working capital management process to improve utilization and enhance return on invested capital.
We are allocating capital expenditures to projects that will generate the highest return on investment. As part of our inventory reduction effort, we have calculated aspirational targets for turn rates and as the great Vince Lombardi once said, perfection is not attainable, but if we chase perfection, we can catch excellence.
The third category is a strong commercial business focus. In this area, we are focusing on improving return on invested capital through pricing actions and margin discipline. During the first quarter, we completed an evaluation of the margin of each product as part of our overall portfolio optimization exercise and determined that we are missing opportunities to enhance margins through pricing and that we needed to change our approach.
An example, we are engaging in conversations with our customers about contract terms, shifting the conversations to a real-time pricing model in order to ensure we are recovering cost increases driven by macroeconomic pressures. Going forward, bids on new business must meet predetermined return on invested capital and return on sales targets.
We are also leveraging business growth opportunities from the automotive sector in Mexico and the upfit opportunity led by the Australian off-road and commercial vehicle markets. We are pursuing activities to reduce lead times by 50% in our mold business.
Finally, our strategy contemplates value-added acquisitions. As we work to bring Eastern’s debt-to-EBITDA ratio down, we will continually be on the lookout for companies that fall into two different categories.
Those that can be absorbed in one of our existing divisions to complement operations. And second, those that will be added to the Eastern level and operated separately. Either way, we will make sure that they augment income, EBITDA, return on capital employed, return on invested capital before we pursue them.
In summary, what I want you to take away from my remarks today is that we are laser focused on execution and creating value for our stakeholders. While we have many initiatives in process, we are not yet at a stage where we are prepared to share with you forward financial metrics. What I can share with you however is, in my view on what defines a successful automotive OEM supplier, which is our ambition for Eastern.
Based on my 30-plus years in commercial vehicle space, I learned that successful OEM suppliers proactively respond to changes in cyclical demand while returning a 10% to 12% return on sales and working capital to sales ratios of less than 22%.
| -5- |
In addition to focusing on execution, I want to bring cohesion and commonality to our organization. We can do that by sharing best practices and ideas across businesses and locations, crafting sets of common methods, and optimizing processes in the pursuit of perfection.
As a leader, I believe in working together in a collaborative manner, reaching out to our employees for input and then making decisions expeditiously and executing on those decisions. I am asking employees to make changes in their business practices, and I appreciate that this could be unsettling to an organization.
Having said that, I am seeing employees adopt these new business practices openly and I sincerely want to thank them for accepting the challenge and working together to optimize Eastern operations.
Finally, as you know, improving a business is not a race with a finish line. It’s an ongoing continual process. No industry is static and customer needs are always changing. Unlike a baseball game bound by the rules of today for a nine-inning game, a successful business is an infinite game where we are not only playing today’s game by today’s rules, but we are looking forward to anticipate how the rules may change tomorrow. We continue to engage because we like to play the game and the better we get at playing the game, the better our results will be in the long-term.
With that, I’d like to open up the floor for questions.
Question-and-Answer Session
Operator
Thank you.
Ernie Hawkins
Okay. Go ahead.
Operator
Sorry, sir. Thank you. [Operator Instructions]
Ernie Hawkins
Okay. We do have a few questions submitted via the web and we will go over those now. First question, why did operating income adjusted for onetime expenses decline quarter-over-quarter?
Mark Hernandez
I will take that, Nick. In the first quarter, we took the challenge of reducing working capital and lower our working capital ratios. This action had additional effects, primarily around capitalize freight. The reduction of inventory within recovering logistics market caused us to recognize this value as an operating -- operational loss of income. The long-term logistics market is stabilizing and will minimize the effect going forward.
| -6- |
Ernie Hawkins
Okay. Second question, how much improvement in gross margin do you think is possible in 2023?
Mark Hernandez
Well, I can’t give you an exact answer. But through our strategy, we intend to return historical margin performance to Eastern.
Ernie Hawkins
And last question from the web, how should I measure success for Eastern in 2023 and longer term?
Mark Hernandez
Well, I look at the longer term in 2023 in this way, consistent and stable results quarter-by-quarter is our first objective, solidifying EBITDA and return on invested capital. In the future, it will be driven by EBITDA growth with solid underlying metrics. Any other questions?
Ernie Hawkins
Okay. Operator, do we have any other questions on the line?
Operator
Yes, sir. We have a question from Ross Davisson with Banneton Capital. Sir, you may go ahead.
Ross Davisson
Hi, Mark and Nick. Thanks for taking the question. Actually, a quick follow-up on something you just said, could you just explain a bit more, you said there’s I think you said capitalized freight costs that were more sort of one-time in nature as you clean things up in -- there in SG&A, is that where they are?
Mark Hernandez
No. They are in cost of goods sold and what happens is when the freight rates coming from Asia, particularly, the container costs were over $10,000 per container, where we normally see about $3,000 per container, the freight is capitalized at the higher level. Therefore, when we reduce inventory, we have to reduce at the higher level, which hits our income -- reduces our income.
Ross Davisson
Okay. Yeah. Okay. That makes sense. Sorry. Thanks for clarifying. And then the other question I wanted to ask was just around the growth rate. So Q1’s growth rate and revenue specifically decelerated as a percentage compared to, say, Q4 or just all of last year and it wasn’t just price, it looks like volume decelerated, too. Anything going on there that you could sort of provide some color around kind of what’s leading to the slowdown? You are obviously still seeing growth, but curious if there’s sort of underlying dynamics, especially since it sounds like things are still pretty robust in terms of demand and wins across the business?
| -7- |
Mark Hernandez
Yeah. Yeah. Last year we were fighting the headwinds. We are heavily into commercial vehicles. We are fighting the headwinds as the commercial vehicle companies try to produce, but they were unable due to supply chain constraints. Now those constraints are somewhat freed up, but the incremental -- the organic growth is not 10%, we are looking at potential growth in revenues of 3% to 4% throughout this year.
Ross Davisson
Yeah. Okay. That make sense. Thanks so much. Appreciate it.
Operator
Thank you. We currently have no further questions in queue. So I will hand it back to Mr. Hernandez for any closing comments you may have.
Mark Hernandez
Thanks again for joining us today. To sum up today’s discussion, I am confident that our determined focus on disciplined operations, optimum capital utilization, focused commercial business and value adding acquisitions will bring positive changes and improved results in 2023 and put us on a path for sustained growth. Our markets have many favorable trends we can leverage, and we look forward to sharing our progress with you after the second quarter.
Operator
Thank you. This concludes today’s conference and you may disconnect your lines at this time. We thank you for your participation.
| -8- |
Cover |
May 09, 2023 |
|---|---|
| Cover [Abstract] | |
| Entity Registrant Name | The Eastern Company |
| Entity Central Index Key | 0000031107 |
| Document Type | 8-K |
| Amendment Flag | false |
| Entity Emerging Growth Company | false |
| Document Period End Date | May 09, 2023 |
| Entity Incorporation State Country Code | CT |
| Entity File Number | 001-35383 |
| Entity Tax Identification Number | 06-0330020 |
| Entity Address Address Line 1 | 3 Enterprise Drive |
| Entity Address Address Line 2 | Suite 408 |
| Entity Address City Or Town | Shelton |
| Entity Address State Or Province | CT |
| Entity Address Postal Zip Code | 06484 |
| City Area Code | 203 |
| Local Phone Number | 729-2255 |
| Written Communications | false |
| Soliciting Material | false |
| Pre Commencement Tender Offer | false |
| Pre Commencement Issuer Tender Offer | false |
| Security 12b Title | Common Stock, No Par Value |
| Trading Symbol | EML |
| Security Exchange Name | NASDAQ |