The Eastern Company (NASDAQ:EML) Q3 2023 Earnings Call Transcript

The Eastern Company (NASDAQ:EML) Q3 2023 Earnings Call Transcript November 12, 2023

Operator: Greetings. And welcome to The Eastern Company’s Third Quarter of Fiscal Year 2023 Earnings Call. At this time, all participants are in a listen-only mode. 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, Ernie Hawkins, Corporate Controller at The Eastern Company. 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 third quarter of 2023. With me on the call are Eastern’s President and CEO, Mark Hernandez; and Eastern’s CFO, Nicholas Vlahos. We issued an earnings press release yesterday after the market closed. If anyone has not yet seen the release, please 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 November 7, 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.

A research engineer surrounded by hardware, demonstrating the company’s secure container offerings.

These non-GAAP measures should be considered, in addition to and not as a substitute for or an 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 introduction, I will turn the call over to Mark.

Mark Hernandez: Thank you, Ernie. Good morning to those who joined us by phone and those participating via the web. As is our practice, I am going to begin today’s call with some high level observations about our performance and market conditions during the past quarter. I will then turn the call over to Nick, who will provide more detailed review of the quarter’s financial results. After that, I will come back and update you on the progress we have made with various additional activities to transform Eastern’s operations and enhance shareholder value. All these build on four basic pillars I have described to you in earlier calls, disciplined operations, effective capital allocation and utilization, a strong commercial business focus and value adding acquisitions.

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Q&A Session

Today, I am pleased to announce the second consecutive quarter of improved financial performance with the improvements in working capital, margin and earnings per share from continuing operations. We have been moving ahead quickly with the implementation of our operational improvement plan and cost reduction efforts. And as we expected, these results became increasingly evident as the year progressed. All these — all of the changes we have been making are based on a ground-up review of Eastern’s businesses, products and markets that we undertook shortly after I became CEO in late January. I am delighted that our improvement initiatives are making so much progress, and just as important, I remain confident that our team’s hardware work will become more apparent in coming quarters.

Let’s take a quick look at some key developments. For the nine months ending September 30, 2023, cash flow from operations increased by almost $20 million compared to the same period in 2022. As Nick will discuss in more detail, our balance sheet continues to strengthen due to our operational improvements, enabling us to pay down another $5 million in debt during quarter three and positioning us well for the future actions to create bigger, better and more profitable company. On a sequential basis, our gross margins continue to rise reaching 25% in this year’s third quarter from 22% in the second quarter of 2023 and helping us achieve earnings per share of $0.49 from continuing operations. Our unwavering commitment to discipline operations and commercial business focus drove this result.

Over the past nine months, we systematically worked on resetting our commercial relationships to those that are mutually beneficial. We completed this initiative in the third quarter and now have fully transitioned to our new commercial structure for our legacy products. We believe establishing a sound foundation for earnings growth — earnings and growth in the future. As I mentioned in our Q2 call, we expected some headwinds from macroeconomic factors in the third quarter and also saw a pause in orders related to new product launches in the automotive industry. In addition, the global supply chain finally returned to pre-pandemic state. Our customers reduced the number of excess orders they have previously placed as a precautionary measure.

Nonetheless, our backlog increased 4% year-over-year as of quarter end. In addition, more recently, with the fears of deep recession put to rest, the automotive market has strengthened along with Eastern’s order flow and we expect 2023 to end on a solid note for our company. With that backdrop, I will turn the call over to Nick.

Nicholas Vlahos: Thank you, Mark, and good morning, everyone. I will provide a quick review of the quarter’s financial results. Net sales from continuing operations declined 8% to $65.6 million from $71.6 million in the third quarter of 2022, primarily due to lower demand for truck accessories and returnable transport packaging products. Price increases and sales of new products contributed 6%. New products included various truck mirror assemblies, rotary latches, D-rings and mirror cams. Price increases primarily reflect our program to recover increases in raw material and freight costs. Gross margin as a percentage of sales was 25% in the third quarter, compared to 23% in last year’s period and up from 22% in the second quarter of 2023.

The quarter-over-quarter increase reflected improved price cost alignment, particularly with respect to increases in raw material costs. As a percentage of net sales, product development expenses were 2.2%, compared to 1.4% for the third quarter of 2022. Selling, general and administrative expenses were $9.7 million, compared to $10.1 million for the third quarter of 2022, a decrease of $0.4 million or 4%, primarily due to lower legal, professional selling costs and payroll related expenses. Other income decreased $1.3 million to negative $0.1 million in the third quarter of 2023 compared to the corresponding period in 2022. This decrease primarily reflected unfavorable pension costs of $300,000 in this year’s third quarter. While in the prior year period, the company had a favorable pension cost adjustment of $400,000 and a gain on the sale of our corporate office building for $600,000.