The Eastern Company (EML) Q3 2021 Earnings Report, Transcript and Summary

Good morning. Welcome to the Third Quarter Fiscal Year 2021 Earnings Call. At this time all participants have been placed on a listen-only mode. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Chris Moulton, Head of Corporate Development. Sir, the floor is yours.

Good morning and thank you everyone for joining us. Speaking today will be Eastern’s President and CEO, Gus Vlak; and our CFO, John Sullivan. After that, we’ll open the call up for questions. Please note that some of the information we 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. 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 will 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 also those participating by the web. We released Eastern’s third quarter of 2021 results on our earnings press release and Form 10-Q, which we filed yesterday. Our third quarter results reflect strengthening financial performance across each of our three core businesses. And we’re proud of the tremendous commitment to agility and creativity from everyone at Eastern given the extra effort required to achieve these outstanding results while operating in an unusually complex supply chain environment. Eastern is clearly a stronger and more focused company today as a result of the changes that we’ve made to our portfolio over the last year. Changes that include the consolidation of Eberhard and ILC, which materially reduces our fixed costs and provides a sound platform for growth and innovation. As well as the addition of hailing a strategic bolt-on business to Big 3 Precision that expands our offering to core customers. And of course the divestitures of Canadian Commercial Vehicles, Sesamee Mexicana, and most recently Greenwald Industries. In the third quarter, our performance is driven by continued strong sales and clear improvement in gross margins. Sales from continuing operations were up 15% compared to the third quarter of 2020 and 4% over the second quarter of this year, although demand was strong. Our sales weren’t impacted by the supply chain issues. We are staffing some of our customers production levels. Big 3 Precision, our returnable transport packaging business with significant contributor to sales growth in the third quarter, primarily as a result of the wrap-up of plan new vehicle and truck model launches in 2022 and 2023, including a wide range of electric vehicles. According to IHS market, a market research organization, automotive OEMs will launch 55 new vehicle models in 2022 and 63 new vehicle models in 2023. That compares to just 42 new vehicle models in 2020 and 34 new vehicle models in 2021, when numerous new product launches were postponed as a result of the COVID pandemic and a subsequent supply chain constraints. In the third quarter sales at our Eberhard and Velvac businesses also continues to strengthen due to robust demand across a broad range of commercial vehicle and industrial markets, as well as our new product launches. In the third quarter, we ramped up our shipments of a new Class-8 mirror program, and we expect demand for this program to remain strong. According to FDR, U.S. Class-8 truck deliveries will reach 700 – sorry, 274,000 units this year before jumping to 335,000 next year and 360,000 in 2023. There was already tremendous pent up demand for trucks coming out of the economic restart, but with the current supply chain environment, for even more pent up demand and we believe that this is going to keep OEM build rates elevated into 2023 and maybe into 2024. The industry will clearly be in catch-up mode for awhile, which we expect will benefit sales, that both at Eberhard and Velvac. We also expect that new products will benefit Eberhard. Last week, Eberhard launched several new electromechanical products at the Annual SEMA Show in Las Vegas, including our new electronic rotary latch that lets customers electrify access security with a power efficient design using both Bluetooth and wired activation. We now offered a comprehensive portfolio of electromechanical products for a broad range of applications. Our ability to bring more innovative products to market is the direct result of the combination of Eberhard and Velvac into one industry leader. In the third quarter, our margins improved as a result of many of the actions that we took to mitigate the impact of cost increases. And these actions are starting to take effect. Specifically third quarter gross margins improved by a 100 basis points over the second quarter as we successfully pass on increases in the cost of raw materials and shipping to our customers. Encouragingly during the quarter, we began to see a slowdown into rate of price increases of hot-rolled steel and certain resins. And in fact, we’ve seen some declines and while we believe that these trends bode well for continued margin recovery, some raw material costs and shipping rates remain at historically high levels. We’re also pleased with the divestiture of Greenwald part of our ongoing work to streamline our portfolio businesses. The Greenwald team was part of Eastern for over 20 years, and we’re grateful for their contributions during this time, and all the hard work that they put in this year to get this transaction done. We wish the Greenwald team much success as they continue to run their business under new ownership. If you might recall at August this year, we announced our intent to divest our non-core businesses. And we began reporting these businesses as discontinued operations. We’re very pleased to complete this transaction within three months of our announcement and with the sale of Canadian commercial vehicles Sesamee Mexicana, which we completed last year, this transaction further strengthens our focus on our three core businesses public has to build scale, accelerate growth, and strengthen operating margins. As we mentioned in our press release, we plan to allocate the majority of the proceeds from the sale to debt reduction and share repurchases, or putting a new 10b5-2 plan in place under, which we’ll be able to repurchase shares in accordance with a share repurchase program adopted in 2018. With those comments, I’ll turn it over to John to go over the details of our financial results.

Thank you, Gus. My remarks this morning, we’ll focus on Eastern’s results for third quarter 2021. For the third quarter of 2021 net sales increased 15% to $63.9 million compared to $55.7 million for the third quarter of 2020. Sales increase actually due to demand for truck accessories, automotive, returnable packaging, global tooling and distribution products. Net sales of existing products increased 4% in the third quarter compared to the same period in 2020. Price increases in new products increased net sales by 10% in the third quarter of 2021 compared to the same period in 2020. New products include various truck mirror assemblies, rotary latches, D-rings and mirror cams. Gross margin as a percent of sales was 24% in the third quarter, compared to 24% in the third quarter of 2020. Product development expenses increased $0.4 million or 73% in the third quarter, compared to the same period in 2020. As a percentage of net sales product development expenses was 1.5%. Selling and administrative expenses increased $0.9 million or 11% in the third quarter compared to the same period in 2020. Primarily due to increase commissions, other selling costs, amortization expense, payroll-related expenses and incentive costs, which were suspended in 2020. Net income from continuing operations for the third quarter was $3.8 million or $0.61 per diluted share compared to net income of $3.2 million or $0.51 per diluted share for the same period in 2020. Adjusted for one-time expenses related to the move of certain operations from Illinois to Mexico earnings per share were $0.64 per diluted share compared to $0.57 for the same period in 2020. Adjusted EBITDA from continuing operations for the third quarter was $7.1 million compared to $6.8 million for the same period in 2020. And for a quick summary of our cash flow and some balance sheet highlights. To address the various supply chain challenges, which added weeks to our in transit materials and volatile raw material prices. We’ve strategically managed our working capital, including intentionally building up certain inventory item levels to avoid future shortages. In addition, we experienced a very large increase in our accounts receivable due to the rapid acceleration in our sales, both of these impacted our operating cash flow during the third quarter in light of this cash decreased $8.2 million in the third quarter. We expect cash flow to improve in the coming quarters, as we manage down our working capital. As of October 2, 2021, our cash balance was $10 million. And with an untapped $20 million revolving line of credit, we have sufficient liquidity to meet our cash requirements. Our net leverage ratio and our fixed charge coverage ratios were 2.5 times, both of which comfortably comply with the bank covenants of four in a quarter and one in a quarter respectively. With that, I’ll turn the call over to Chris for questions.

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

[Operator Instructions]

And I’m not seeing any questions via the webcast.

We have no questions from the phone lines at this time.

Okay. So, with that I’ll turn it to your Gus for closing remarks.

Thanks, Chris. We remain optimistic that the economic recovery, which we’ve been seeing within our business is sustainable and we’re confident that our performance will continue to improve in the coming quarters. The demand remains strong and the impact of the supply chain challenges on us and our customers abate. Moreover, we believe that the resilience of each of our core businesses will not allow – not only allowing to prevail, but thrive as they continue to insignificant new business. Importantly, our backlog at the end of the third quarter, which $83 million, and that’s an increase of $25 million or 44% over the backlog at the end of the third quarter in 2020. On a separate note, for those of you who may be attending or considering attending this Sidoti Microcap Virtual Conference on December 8 and 9, we will be presenting and conducting one-on-one. We’d be glad to speak with you there. And as always, we welcome any opportunity to speak with you or answer any questions that you may have.

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

Thank you, ladies and gentlemen, this concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.