The Eastern Company (EML) Q3 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to The Eastern Company Third Quarter Fiscal Year 2020 Earnings Call. [Operator Instructions] 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, 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 third quarter results and a full Form 10-Q yesterday afternoon, and we'll discuss the quarter this morning. First, I would like to take a moment to thank our teams around the world once again for their hard work, incredible resilience and dedication during what continues to be a very uncertain time. The extraordinary people in our factories, warehouses and offices continue to demonstrate tremendous commitment to the health and safety of their coworkers. They are doing this by steadfastly maintaining the safety protocols at work and in their communities. Moreover, the agility of our teams and their ability to navigate, collaborate and manage successfully through the dramatic shifts in our end markets during this period was a true differentiator for us. During the third quarter, we took advantage of a strong recovery in many markets, following a deep contraction in the second quarter, and importantly, the quarter demonstrated the positive impact that acquisitions have had on our performance. This past quarter saw an acceleration of a recovery that began at the end of the second quarter. The bounce was especially strong with certain of our Class 8 truck, light truck and recreational vehicle customers as well as our plastic packaging customers. In the Class 8 truck market, our sales rallied as a result of the dual impact of increasing demand and the launch of new mirror programs. According to FTR, an industry research organization, new Class 8 truck preliminary orders exceeded 30,000 in September. That's the highest monthly total since October of 2019. September bookings for heavy-duty trucks were also 55% higher than in August. Class 8 truck net orders for the last 12 months now stand at a total 197 units -- 197,000 units. We believe that these green shoots suggest that fleets are feeling more confident and that the economy has entered into a period of normalization. As for the market for recreational vehicles, RVIA, an industry association, estimates that RV manufacturers shipped 42,000 units in September. That's an increase of 31% compared with September of last year. Our RV shipments are expected to surpass 400,000 wholesale units by the end of 2020 and see continued growth into 2021 to more than 500,000 units according to RVIA. Further, our precision packaging business has benefited from a rapid growth of personal care and hygiene products and demand for in-home foods as well as a shift to online shopping in the third quarter, all boosting demand for plastic packaging. In keeping with our strategy to optimize our portfolio of businesses, we made significant progress in this quarter. First, on August 6, we announced the strategic reorganization of our Eberhard Manufacturing and Illinois Lock businesses. We are proud of the fact that these 2 businesses bring a cumulative 230 years of technical sales, engineering, design and manufacturing experience. This combination will build critical mass with our target markets, deepen our presence with key customers and accelerate growth by integrating the complementary markets and differentiated products into one industry-leading business. Importantly, this reorganization will also allow us to optimize our manufacturing footprint, streamline our supply chain and capture synergies across our current operations. We expect to and we're still on track to complete the combination by the second quarter of 2021 and believe that the synergies from this combination will contribute significantly to our bottom line in 2021. Also, on August 11, we closed on the acquisition of Hallink RSB. Hallink is a Canadian-based provider of blow molds and change parts for the food, beverage, health care and chemical industry. As mentioned on our prior call, we were well positioned to leverage our strong cash position and overall stability across our portfolio of businesses to acquire the assets of Hallink. The acquisition of Hallink is an important step in expanding the product offerings, service capability and geographic reach of our Big 3 Precision mold business. Hallink's complementary products and capabilities offer significant synergies and can create material incremental value through shared know-how and strong relationships across an even broader customer base. We're especially pleased that Hallink's highly committed and talented team had been fully integrated into our operations. Finally, we believe that this acquisition will be accretive to fiscal earnings 2020, and that's before onetime transaction costs. Turning to the financial highlights for the quarter. Net sales climbed to $65.8 million. That's a sequential increase of 35% compared to the second quarter of 2020 and an increase of 8% compared to the third quarter of 2019. Third quarter 2020 earnings rebounded to $0.48 per diluted share from the second quarter loss of $0.30 per diluted share and more than doubled from the adjusted earnings per diluted share before onetime items in the second quarter of 2020. Our balance sheet remains strong. In the third quarter of 2020, we generated $9.3 million in cash from operations. Based on our extensive scenario planning, we believe that Eastern's balance sheet has ample resources to navigate the current business environment. As of October 3, 2020, our net leverage ratio is 2.9x and our fixed charge coverage ratio is 2.2x, both well within our bank covenants of 4.25x and 1.25x, respectively. Although there continues to be uncertainty in the macro environment as a result of the COVID-19 pandemic and the financial impact that measures to respond to it continue to have on Eastern, we are optimistic that a more sustainable recovery is underway. We remain confident that as markets strengthen, we are well positioned to rebound. I'll turn it over to John to go over the details of our financial results.

Thank you, Gus. My remarks this morning will focus on results for the third quarter of 2020. For the third quarter 2020, net sales increased 8% to $65.8 million from $60.7 million in the third quarter of 2019. Excluding Big 3 Precision, sales in the third quarter would have declined by $5 million or 9% to $51 million compared to $56 million in the third quarter of 2019. The decline in sales in the third quarter of 2020 was primarily due to the divestiture of Canadian Commercial Vehicles Corporation, which we closed in the second quarter of 2020; and a continuation of softness across many markets we serve. Helping to partially offset this weakness, we experienced robust sales of military products, which were up 14%; off-highway products, which were up by 18%; and truck and recreational vehicle mirror products, which are up by 18% and 14%, respectively. Net sales of existing products increased 3% in the third quarter while price increases and new products increased net sales by 5%. New product sales include numerous mirror assemblies, compression latches, finger pull assemblies, mount plate latches, canopy lock assemblies, handle assemblies and crossbar lock assemblies. Turning to segment results. Sales in the Industrial Hardware segment increased by 20% to $47.1 million in the third quarter from $39.4 million in the third quarter of 2019. Again, excluding Big 3 Precision, sales in the third quarter of 2020 decreased 7%. The decrease in sales was primarily due to the divestiture of Canadian Commercial Vehicles Corporation, which we closed in the second quarter of 2020; and the continued softness in many of our markets. Sales in the Security Products segment were $14.2 million in the third quarter, comparable to sales in the third quarter of 2019. Sale of existing products decreased 3.1% while price increases and new product sales contributed 3.2%. New product sales included the canopy lock assembly, handle assembly and crossbar lock assembly. Sales in the Metal Products segment decreased by 37% to $4.5 million in the third quarter from $7.1 million in the third quarter of 2019. Sale of mining products decreased 40%, and sale of industrial casting products decreased 36%. Mining sales in the third quarter were impacted by a combination of the continuation and growing renewable energy capacity; extremely low natural gas prices, which led to utilities to cut back on coal usage; and COVID-19, which led to numerous mine closures. However, mines began to reopen in the third quarter, and sales of mining products improved 24% from the second quarter of 2020. Cost of products sold increased $5.3 million or 12% in the third quarter, primarily as a result of the increase in sales from Big 3 Precision. Gross margin as a percent of sales was 22% in the third quarter compared to 25% in the third quarter of 2019. Product development expenses was comparable to the third quarter of 2019 at approximately $900,000, and selling and administrative expenses increased $1.2 million or 14% in the third quarter compared to the third quarter of 2019, primarily a result of the inclusion of Big 3 Precision in 2020. Net income for the third quarter was $3 million or $0.48 per diluted share compared to net income of $4.2 million or $0.67 per diluted share for the third quarter of 2019. And now for a quick look at our balance sheet and cash flow highlights. Cash generated by operating activities was $9.3 million in the third quarter of 2020 compared to $3.8 million generated in the third quarter of 2019. Capital expenditures was approximately $800,000 for the third quarter of 2020 compared to $600,000 for the third quarter of 2019, with a balance of approximately $100,000 of outstanding commitments. As of October 3, 2020, we had total cash and cash equivalents of approximately $19.6 million and total debt of approximately $95 million. And as Gus has noted earlier, we're in compliance with all our covenants under the credit agreement at October 3, 2020, and through the data filing of our Form 10-Q. I'll now turn the call over to Chris for questions.

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

[Operator Instructions] There appear to be no questions over the phone at this time.

Okay. We do have one question via webcast. Do you feel in 2021 that all divisions can be profitable?

I'll take that. Thanks, Chris. We in -- as you can see from our reporting, the profitability in our Metal Products business was under pressure this year because of the decline in mining activity and the -- in part due to lower economic activity and in part due to the natural gas prices. We don't believe that those 2 factors will continue to impact our business to the same degree. And we also believe that we are building momentum in our efforts to diversify that business into the industrial -- more diversified industrial customer base. So as a result, we think that business will continue to -- will return to its performance that we saw in the prior years.

Okay. All right. I'm not seeing anything else via the webcast. So with that, I'll turn the call over to Gus for closing remarks.

So thanks, Chris. Throughout the COVID-19 pandemic, we have remained focused on our key priorities, which we shared with you earlier this year. These include: one, ensuring the health and safety of our employees; two, maintaining business continuity, financial strength and stability; and three, doing our part to help mitigate the impact of this virus. Our #1 priority has been and continues to be the health and safety of our employees. We remain vigilant in our measures to protect them in our factories and our offices. And these include, among others, mandatory mask policy, measuring employees' temperatures and enforcement of social distancing. We are encouraged by the acceleration in demand for our products and services across many of our businesses as well as the impact of our new product launches. I would just like to reiterate that we are more confident than ever in our strategy to deliver long-term shareholder value. Our businesses are incredibly resilient and able to take advantage of rebounding economic activity. Look, it has been an eventful year so far. Going into 2020, we did expect some volatility and uncertainty. However, no one could have anticipated the ups and downs and twists and turns that this year would take, and there are still 2 months to go. Still, it looks like we will end the year stronger and well positioned for 2021. As always, please feel free to reach out to us with any questions that you may have. Thank you.

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

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.