Ladies and gentlemen, and welcome to The Eastern Company Second Quarter Fiscal Year 2021 Earnings Call. At this time, it is my pleasure to turn the floor over to your host, Chris Moulton, Head of Corporate Development. Sir, the floor is yours.
Thank you. Good morning and thank you for joining us today. Speaking today will be Eastern's President and CEO, Gus Black and CFO, John Sullivan. After that, we'll open the call for questions. Please note that some of the information you'll hear during our discussion today 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 expense, 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. For more information regarding these risks and uncertainties, please refer to risk factors discussed in our Form 10 Q filed yesterday on Thursday rather. 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. With that, I'll turn the call over to Gus for opening remarks.
Thanks, Chris, and good morning to those of you who have joined us on the phone and those participating via the web. We released Eastern's Q2 2021 results on our earnings press release and our Form 10 Q last Thursday afternoon. The Q2 capped off a historic 12 months. Over this period, we've delivered record sales and record sales growth. I want to emphasize how proud we are of the collective effort of the approximately 2,000 people in each of our businesses.
We thank them for their resilience and dedication and their agility to cut through many of the challenges associated with executing during a global pandemic. The way they've stepped up is impressive, taking care of our customers, Our people and our communities, they have a lot to be proud of. We can summarize our quarter with 3 points: Strong sales and even stronger demand, margin pressure from raw material and shipping costs, And a commitment to continue to streamline our Company and focus on our best core businesses. 1st, Sales from our continuing operations grew by more than 55% compared to the last year, following a solid start in the Q1. Strong sales were the result of the economic recovery across a broad range of commercial vehicle and industrial markets, as well as the impact of our product launches, Including a new integrated cable lock that we produce for the incredibly popular Kua bike rack, A new copper locking system for retracts tonneau covers, as well as the ramp up of several new Class 8 truck mirror programs.
According to FGR, North America Class A net orders for June were up 13% month over month and 71% year over year With Class A orders now totaling 431,000 units for the previous 12 months. Across all commercial vehicle markets, Demand continues to strengthen with strong GDP growth, capacity constraints across multiple shipping modes, atnearrecordtruckfreightratesandrecordusedequipmentvaluations. As a result, order rates were red hot in the 2nd quarter and the ending backlog remained near record levels. Our backlog at the end of the quarter reached $89,000,000 that's an increase of 61% over the end of the Q2 last year. We're excited about the full potential of these opportunities to support strong revenue growth in the back half and beyond.
We believe that the growth in our sales could have been even more robust, if not for delays. OEM production delays related to Electronic component shortages, supplier shipping delays to our own facilities and OEM delays of new passenger car vehicle launches. Yes, despite these challenges, we posted strong sales in the Q2. In the quarter, we also experienced a continuation And in many cases, an acceleration in the cost of key raw materials and freight rates, which pressured our margins. Just to provide you with some perspective of the magnitude of these the rising costs.
Over the last 12 months, the price of Hot rolled steel increased by 2 36% and the price for cold rolled steel grew by 174%. These are examples of key raw materials that we use in many of our products. Similarly, Spot shipping rates between several Asian and U. S. Ports increased from approximately $5,000 per container in May To more than $18,000 per container in July.
Our businesses have been able to pass on some of these price increases to our customers, We've had to absorb or share some of these costs, and there's frequently a lag in the realized price increases relative to the rapid escalation in costs. As a result, we estimate that our margins in the second quarter were compressed by several 100 basis points. That said, although the supply chain remains disrupted and many material prices are still volatile, We are cautiously optimistic that we're beginning to see signs of moderation in the rate of price increases across many of our key raw materials. And we're working with our customers and suppliers to ensure that we return to more stable normalized margins in the coming quarter. Finally, we continue the execution of our long term strategy to drive growth in our core businesses.
And therefore, we're now reporting our diversified product segment as discontinued operations. As these legacy businesses are no longer aligned with our strategy and as such, We're exploring strategic alternatives for each of them. We believe that this change of reporting signals our commitment To focus 100% of our time and resources to ensure that each of our core businesses, the resources that they require and the people and capabilities in place to drive growth and profitability for years to come. With that, I'll turn the call over to John to go over the details of our financial results.
Thank you, Gus. My remarks this morning will focus on eSIM's results for the Q2 of 2021. As Gus had just noted, We recognize that the companies within the Diversified Products segment no longer align with our strategy. And as such, We're exploring strategic alternatives for each of them. And in light of this, the diversified product segment meets the criteria to be held for sale.
And furthermore, we determined that the assets held for Spano qualify as discontinued operations. Therefore, The financial results of the diversified product segment are reflected in our consolidated financial statements as Discontinued operations for all periods presented. Additionally, current and non current assets and liabilities The discontinued operations are reflected in the unaudited balance sheets for the periods presented. The loss recognized in the write down of the Diversified Products segment to fair value in the Q2 was $8,100,000 net of tax. With anticipated cash flow over the next 12 months for approximately $25,000,000 should we successfully divest each business.
The majority of the cash would be allocated to debt reduction. I'll now focus on the Q2 of 2021 as compared to the Q2 of 2020 from continuing operations. For the Q2 of 2021, net sales increased 55 percent to $61,200,000 Compared to $39,500,000 for the Q2 2020. Sales increased largely due to increased demand for truck accessories, Automotive returnable packaging, global tooling and distribution products. Net sale of existing products increased 44% In the Q2 compared to the same period in 2020, price increases in new products increased net sales by 11% in the Q2 of 2021 compared to the same period in 2020.
New products, including various truck mirror assemblies for compression latches, cable locks Gross margin as a percent of sales was 23% in the 2nd quarter Compared to 26% in the Q2 of 2020, the decline in gross margin was due in large part Unprecedented increases in prices of many of the raw materials as well as freight rates. For example, Price of hot rolled steel increased 2 36 percent year over year from the Q2 of 2020 to the Q2 of 2021, cold rolled steel increased 174%, Nickel increased 42%, scrap iron increased 178%, copper and zinc increased 81% and 49%, respectively, All freight costs increased $1,400,000 or 148 percent and $2,100,000 or 97 percent For the 3 6 months ended July 31, 2021, as compared to the corresponding period in 2020, Price increases to customers were only able to offset a portion of these increases. Product development expenses increased $200,000 or 19 percent in the Q2 compared to the same period in 2020. As a percentage of sales, product development expenses was about Selling and administrative expenses increased $2,800,000 or 43 percent in the Q2 compared to the same period in 2020, primarily due to increased commissions, other selling expenses, Amortization expenses, payroll related expenses and incentive costs, which were suspended in the Q2 of 2020.
Net income for the Q2 was $2,800,000 or $0.44 per diluted share compared to Net income of $2,100,000 or $0.33 per diluted share for the same period in 2020. Now for a quick summary of our cash flow and balance sheet highlights. Cash flow from operations was $2,200,000 for the 2nd quarter, Lower when compared to the same period last year due to an increase in inventory and accounts receivable. This was primarily the result of significant increases Sales partially offset by an increase in accounts payable. Inventories of $48,800,000 as of July 3, 2021, Represents an increase of 13% as compared to $43,100,000 at the end of fiscal year 2020 And an increase of 12% as compared to $43,700,000 at the end of the Q2 of 2020.
In certain of our businesses, in anticipation of increased prices and material shortages, we selectively Purchase or prepurchase key raw materials. Accounts receivables were $35,100,000 as of July 3, 2021, as Compared to $31,800,000 at 2020 fiscal year end and $28,400,000 at the end of the Q2 of 2020. As of July 3rd, we had cash and cash equivalents of 18,500,000 And untapped $20,000,000 revolving line of credit. Our net leverage ratio was 2.3 times And our fixed charge ratio is 2.7 times, both of which are well within our bank covenants of 4.25 and 1.25 respectively. With that, I'll now turn the call over to the operator for questions.
Thank you. The floor is now open for questions. For those of you who have joined by webcast, you can submit your questions through the webcast tool by clicking on the ask and button on the left side of your screen.
Thank you, operator. We do have some questions that have come in via the webcast. So let's start with those. So let's go to the first question. Claim the $10,000,000 restructuring charge that we took this quarter.
Yes. Every quarter, we continuously evaluate All our reporting units for impairment, and we do this by comparing the estimated fair value of each reporting unit with its And if the carrying amount of the assets exceed the fair value, then we have an impairment and we have a write In this last quarter, we determined that the discontinued operations do not fit our long term strategy. So We wanted to focus on our core business. And as a result, we reevaluated the fair value of these legacy businesses, And we recorded an impairment. As part of this, we recognized a goodwill write off of approximately 5,900,000 And to the discontinued operations when we classified the disposal group as held for sale.
Okay. And second question, when will you have completed the sale of the discontinued operations?
Well, reporting these as discontinued operations now means that we're confident that we'll be able to complete these within the next 12 months. We expect that the net cash proceeds of these sales is somewhere in the area of $25,000,000 and we I intend to use these proceeds primarily to reduce our outstanding debt, which will help us continue to strengthen our balance sheet and sets us up to support the growth of our core businesses.
And we have a third question. How much EBITDA did the discontinued operations contribute in the first half and second quarter of 2021?
Well, actually, we haven't reported those numbers. And we did report the net income from the discontinued operations in Note B of our latest 10 Also, if you reviewed our 10 Q for 2020 1st 6 months, We reported adjusted EBITDA. And in our 10 ks for 2020, note 12, we reported our segment reports, Which identified the diversified products segment. With those, you can kind of compute what the EBITDA would have been contributed from the But it would not have been material relative to the total EBITDA from the company.
We have a 4th question. What is the impact of raw material prices on your earnings?
Well, I think as we mentioned, raw material prices and shipping costs have increased at Unprecedented rates. And although we have passed on these costs to our customers, there's often a lag. And In the past, I would say the impact of the live was barely noticeable because we were able to raise prices more in line with higher costs. But because of the rapid sustained, I would just say the sheer scale of the cost increases, We have not yet been able to fully recover these in the past quarter. As a result, we estimate that our gross margins fell by several 100 basis points.
Our ability to recover will improve as we work with our customers Has the rate of price increases slows down in the coming quarters?
Question number 5, how is the integration of Big 3 Precision going?
So, we acquired Big 3 Precision in August of 2019, and we're very pleased with the acquisition. It's one of our core businesses. We've taken a number of steps to help drive growth. In January, we brought on a new leader for the business and we've hired and promoted several other senior leaders inside the business. On the transfer packaging side of the business, we believe that with this team, we're well positioned to capitalize on the increase In the number of new vehicle launches that are scheduled for the next 4 to 5 years, including the launch of many electric vehicles.
So, BofA SMH said in 2021, there will be roughly 34 new vehicle launches. They also estimate that the average for 2022 to 2025 is 60 new vehicles per year. The other thing this team will be able to do for us is help us diversify our customer base going after some new markets and also integrate new bolt on acquisitions That will help us expand our product offering and geographic market coverage. On the tooling side of Big 3 Precision, we had an exceptional 2020, driven in part by the demand for our hygiene packaging. And 2021 is just as strong through the 1st 6 months.
You may also recall that we added HayLink based in Ontario, Canada to this business was last July. Haley expanded our offering Big three Precision to include 2 step global tooling and it's been a very strong addition to overall to the organization. On the commercial side, Halink is fully integrated and really we couldn't be more pleased with this addition. While I'm on the topic of integration, I'll note that we're also working on the combination of our Everhart and Illinois Lock businesses, And this is progressing extremely well. Through this combination, Ever Heart not only benefits from The consolidation synergies and they're currently working on streamlining their manufacturing footprint.
But more importantly, it can drive the adoption of electromechanical and digital products into many of our markets. In the past few years, Eleonore Lock has invested in many of these capabilities, including the acquisition of Load and Lock, which we completed in 20 18. With the combination now of Everheart and Eleonor Lock, We can bring these products and these capabilities to many of our best bodybuilding, service body and truck accessories customers. We believe that by 2025 more than a third of total Everhart sales will come from electromechanical and digital products.
It looks like we have one more question. How does the sale of discontinued operations impact your goal
Far and away, I think as John mentioned, most of our EBITDA comes from our continuing operations, so or the core businesses. So from A purely mathematical perspective, I would say the impact is minimal. But more importantly, What this will allow us to do is allocate all of our capital to our highest return businesses. And as a result, We should see faster top line and bottom line growth from these businesses. And we're going to have more capital for accretive bolt on acquisitions.
I'm not seeing any further questions via the webcast. So operator, can we open the lines for questions?
There appear to be no questions over the phone.
Okay. Thank you. With that, I'll turn the
call over to Gus for closing remarks.
Thank you. There are many signs for continued optimism as we enter into the back half of the year. Despite some of the supply chain difficulties and the raw material price volatility, our backlog is strong. We're making progress on pricing And we're confident that our focus on our core businesses, Big 3 Precision, Everhart and Velvac Will translate into material sales, earnings and cash flow growth throughout the remainder of 2021 and beyond. Thank you.
Thanks, Gus. I'll now hand the call back to the operator.
Thank you. Ladies and gentlemen, this does conclude today's teleconference. We thank you again for your participation. You may disconnect your lines at this time and have a great day.