The Eastern Company (EML) Q2 2020 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to your Eastern Company Second Quarter Fiscal Year 2020 Earnings Conference Call. [Operator Instructions] At this time, it is my pleasure to turn the floor over to; Chris Moulton, Head of Corporate Development. Sir the floor is yours.

Good morning and thank you everyone for joining us today. Speaking today will be Eastern's President and CEO, Gus Vlak; and our CFO John Sullivan. After that we'll open the call for questions. Please note that some of the information you will 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. These risks include, but are not limited to the effects of the COVID-19 pandemic and the measures being taken to limit the spread of COVID-19. For more information regarding these risks and uncertainties please refer to risk factors discussed in our Form 10-Q filed yesterday. 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 second quarter results last week and the full Form 10-Q yesterday afternoon. I would first like to take a moment to thank our employees around the world once again for their continued hard work, incredible resiliency and dedication during what continues to be a very uncertain time. The extraordinary people in our factories, warehouses and in their homes took a leap of faith and trusted that we could operate continuously safely and successfully. We're grateful for their continued commitment. To be sure we started this quarter with some significant challenges. Demand for our products across nearly all our businesses was severely impacted by the temporary closures of many of our largest customers. We added up all the days during which a customer was closed and during which we could not ship products to them. In total slightly more than 18 customers temporarily closed their doors. And together they were closed for more than 100 -- or 1500 days primarily in April and May of this year. But the scope depth and speed of our response to these challenges underscores the resilience of our business. We addressed the impact of customer closures by pivoting to opportunities. For example Big three Precision manufactured frames for emergency hospital beds that were deployed to field hospitals across the country. Big three Precision also ramped up sales to manufacturers of electric vehicles, while other customers remain closed. Our Security Products segment took advantage of growth in outdoor recreational equipment a market in which we've invested in recent years. The market for outdoor recreational products boomed during the second quarter as people looked for safe activities near home. For example domestic cycling sales reached $1 billion in April of this year a new record according to the NPD group. Similarly the Industrial Hardware segment benefited from recent investments in military and government business which remained strong throughout the quarter. At the end of the quarter, we began to see other bright spots including renewed strength in the recreational vehicle market and the return of the Class eight truck market. According to recent Ipsos findings, 46 million Americans plan to take an RV trip in the next 12 months. And according to the RVIA an industry association shipments of motorhomes grew from 694 in March to 3023 in June. Moreover as you've seen according to ACT an industry group, preliminary North American year-over-year net Class eight truck orders rose 23% to 16,000 which is the first year-over-year rise since January. At the same time, we responded to the decline in demand in the second quarter by significantly reducing our fixed costs both in our factories and in offices across the company. We started to implement these measures in late March and early April. We eliminated all discretionary spending, reduced staff and salaries saved significantly by cutting nearly all travel. Moreover, we carefully managed our collection and use of cash to generate $5.9 million in cash from operations in the quarter. In part in response to the economic conditions resulting from the COVID-19 pandemic, we accelerated our work on portfolio optimization to ensure that we emerge from the current economic prices a stronger and more competitive company. This work has resulted in four bold actions during the second quarter. First, we completed the divestiture of the Canadian Commercial Vehicle company, that's our Canadian-based operation that manufacture composite panels. The decision to divest CCV, reflects our ongoing efforts to streamline our portfolio of businesses. Second, we took advantage of a unique opportunity to purchase assets from Hallink RSB a Canadian-based provider of blow molds and change parts to the food, beverage, healthcare and chemical industry. Hallink's business has performed remarkably well throughout the COVID-19 pandemic as those industries it serves are deemed essential. Hallink's business and capabilities are complementary to our existing Big three Precision Mold business and offers an opportunity to deepen our relationships with our core customers and drive growth. Third this quarter we decided to combine our Eberhard Manufacturing and Illinois Lock businesses into a single company. The combined company will build critical mass in our target markets deepen our presence with key customers. And accelerate growth by taking advantage of the complementary markets and differentiated products, into a single leading business. The combination will also allow us to optimize our manufacturing footprint, streamline our supply chain and capture synergies, across the operations. We expect to complete this combination by the second quarter of 2021. And believe that, the savings from this combination will contribute significantly to our bottom-line in 2021. Jeff Fleming, who today runs the Illinois Lock Company, will become the Managing Director of the combined company, effective September 8. And Jim Woidke, who leads Eberhard today, will become Eastern's new Chief Operating Officer, working closely with me. Finally, upon our review, of our Greenwald Industries business, we determined that as a result of recent industry developments, we needed to write-down $4 million of goodwill, that was booked in 2000, at the time of the acquisition of this business. John will tell you more about this, later in this call. Of course the economic environment remains uncertain, as a result of the COVID-19 pandemic. And the financial impact that the measures to respond to it are having. We believe that, each of these actions will position Eastern to emerge from the current economic crisis, a stronger, more competitive, and more profitable company. Let me now turn to the financial highlights for the quarter. Net sales in the second quarter were $48.8 million a decrease of 21%, compared to the second quarter of 2019. Earnings per fully diluted share in the second quarter, declined to a loss of $0.30. As mentioned, we incurred a $4 million goodwill impairment charge, related to Greenwald Industries and a onetime restructuring charge of $280,000, related to the sale of Canadian Commercial Vehicles. Adjusted for these two charges, net income per share was $0.23, in the second quarter. Our balance sheet remains strong. As mentioned in the second quarter of 2020, we generated $5.9 million in cash from operations. And we grew our cash balance by $3.5 million to $20 million. Based on our extensive scenario planning, we believe that Eastern has a solid balance sheet with ample resources to navigate the current business environment. As of June 27th, our current ratio was 3.8 times. Importantly, our net leverage ratio the ratio of debt minus cash to our adjusted EBITDA is 2.9 times. And our fixed charge coverage ratio which measures our ability to meet fixed charge obligations, such as interest expenses is 2.3 times. Both measures are well within our bank covenants of not more, than 4.25 times and not less than 1.25 times, respectively. I'd like to 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, Eastern's results for the second quarter of 2020. For the second quarter of 2020, net sales decreased 21% to $48.8 million from $61.4 million, in the second quarter of 2019. The decline in sales was primarily due to decisions made by many of our industrial and consumer goods customers to close operations in addition to a steep decline and demand for mining-related products driven by the COVID-19 pandemic. Net sales of existing products decreased 24% in the second quarter, compared to the second quarter of 2019. Price increases and new products contributed to a 3% increase in net sales, during the second quarter. New products included numerous mirror assemblies; compression latches, handle and finger pull assemblies, canopy lock assemblies and hospital Bed frames, for use in field hospitals established due to COVID-19. Sales in the Industrial Hardware segment decreased, 10% to $33.9 million in the second quarter, compared to the second quarter of 2019. Excluding Big three Precision sales decreased 42%, in the Industrial Hardware segment in the second quarter. Lower sales were primarily attributed to temporary customer closures, in April and May 2020. Many of the industrial transportation and consumer discretionary product manufacturers closed their facilities for more and more weeks during the quarter. Sales in the Security Products segment decreased 33% in the second quarter, compared to the second quarter of 2019. Lower sales were attributable to temporary customer closures as well as lower demand across the majority of the markets we serve, including distribution, industrial, vehicular, accessories and commercial laundry. Sales in the Metal Products segment decreased 48% in the second quarter, compared to second quarter of 2019. Mining products decreased 56% and sales of industrial casting products decreased 36%, as compared to second quarter of 2019. Mining sales in the second quarter were impacted by a combination of growing renewable energy capacity and extremely low natural gas prices, which led utilities to cut back on coal usage, in addition to COVID-19, which forced many mine closures, resulting in further losses of sale. Sales of industrial castings in the second quarter were also negatively impacted by the loss of customer that had temporally sourced products from us, in 2019. Cost of products sold decreased $8.4 million or 18% in the second quarter, primarily the result of a reduction in sales. Gross margin as a percent of sale was 22% in the second quarter, compared to 24% in the second quarter of 2019. Product development expenses decreased $1.4 million, or 65%, in the second quarter, compared to the second quarter of 2019. The reduction in this expense relates to the closure of our development operation in Bellingham, Washington, that took place in the second quarter of 2019, which was a strategic decision that we made in order to adopt a leaner approach to development of new vision products. Selling and administrative expenses decreased $0.1 million, or 1%, in the second quarter, compared to the second quarter of 2019. However, excluding Big 3 Precision, selling and administrative expenses decreased 22% in the second quarter, compared to the second quarter of 2019. Restructuring costs were $0.3 million in the second quarter, which are related to the divestiture of Canadian Commercial Vehicle Corporation, compared to the restructuring cost of $1.8 million during second quarter of 2019, which were related to the discontinuation of our development operation in Bellingham, Washington and the relocation cost of composite panel technology division in Salisbury, North Carolina to the Canadian Commercial Vehicle division in Kelowna, British Colombia. Goodwill impairment expenses of $4 million, was incurred in the second quarter. The company determined that it was more likely than not that the estimated fair value of remod industry was below the fair value we carried on the balance sheet. The factors that led to this determination included additional competition, industry movement away from our legacy electronic products to new mobile payment apps. Net loss for the second quarter was $1.9 million or $0.30 per diluted share, compared to net income of $2.5 million or $0.40 per diluted share. For the second quarter of 2019 -- I'm sorry, was $0.40 per diluted share compared to the second quarter of 2019. Adjusted for one-time expenses, net income was $1.4 million or $0.23 per diluted share. Now for a quick look at our balance sheet, cash flow highlights. Cash generated by operating activities was $5.9 million during the second quarter, compared to $7.2 million generated during the second quarter of 2019. Capital expenditures was approximately $0.4 million for the second quarter, compared to $0.5 million for the second quarter of 2019. As of June 27, 2020, there was approximately $0.2 million of outstanding commitment for capital expenditures. In light of the current uncertainties, we made the strategic decision to limit capital expenditures to those critical for maintenance, safety and regulatory projects, for 2020. As of June 27, 2020, we had a total cash balance of approximately $20 million and total debt of about $96.1 million. Our loan covenants under our credit agreement require us to maintain a senior net coverage ratio, not to exceed 4.25 to 1. In addition, we're required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. As Gus noted earlier, we are in compliance with all of our covenants under the credit agreement at June 27, 2020, and through the date of filing of our Form 10-Q. I'll turn it over now to Chris for questions.

Thank you, John. Operator, I'd like to open the line for questions.

Thank you. The floor is now open for questions. [Operator Instructions] And I'm showing no questions from the phone lines at this time.

All right. And I'm not seeing anything as well through the webcast. So, with that, I'll turn the call over to Gus for closing remarks.

Thank you, Chris. We'd like to add that throughout this crisis, we have remained focused on our key COVID-19 pandemic priorities, which we shared have reviewed earlier this year, assuring the health and safety of our employees and maintaining business continuity and make sure the financial strength and stability, all while we're doing our part to help mitigate the impact of this virus. Our number one priority has been and continues to be the health and safety of our employees. We continue to take significant measures to protect our employees in our factories and our offices. We established a mandatory mapped policy, or taking people's temperature and enforce social distancing by modifying our facilities and production lines, that were necessary. We believe the focus on the health and safety of our employees has enabled us to regain stability in our business. We are clearly seeing bright spots, but we must remain vigilant and closely monitor conditions and developments across our businesses, with our customers and our supply chain. That said, I must say that we are more confident than ever in our strategy to deliver significant long-term shareholder value. Our businesses are resilient and are increasingly well positioned to execute as economic activity revamps. As I mentioned in our earnings release, once conditions normalize, understanding that it could take some time, given the uncertain nature of the COVID-19 pandemic, we believe that our earnings power will be robust. I believe that the pro forma earnings per share of $3.09, which we shared at the time of our acquisition of Big 3 Precision, remains appropriate for our company. The actions that we've taken recently and we will continue to take should strengthen our earnings power going forward. As always, please feel free to reach out to us with any questions you may have. Thank you.

Thanks Gus. With that, I'll hand the call back to the operator.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and have a great day.