The Eastern Company

Good day, ladies and gentlemen, and welcome to your Eastern Company second quarter fiscal year 2020 earnings conference call. All lines have been placed in a listen only mode and the floor will be open for your questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero. At this time, it is my pleasure to send 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 Black, 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 outlooks. 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 our 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 80 customers temporarily closed their doors, and together they were closed for more than 1,500 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 address 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 remained closed. Our security product segment took advantage of growth in outdoor and recreational equipment, a market in which we've invested in recent years. The market for outdoor recreation products boomed during the second quarter as people looked for safe activities near home. For example, domestic cycling sales reached a billion dollars 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 A 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 3,023 in June. Moreover, as you've seen, according to ACT, an industry group, preliminary North America year-over-year net Class 8 truck orders rose 23% to 16,000 to 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 crisis 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 manufactures 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 Halink RSV, a Canadian-based provider of blow molds and change parts to the food, beverage, healthcare, and chemical industry. Halink's business has performed remarkably well throughout the COVID-19 pandemic, as those industries it serves are deemed essential. Halink'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 Everhard Manufacturing and Eleanor Locke 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 Eleanor Locke Company, will become the Managing Director of the Combined Company, effective September 8th. And Jim Wojtke, who leads Emahar 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 Greenville Industries and a one-time 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 27, our current ratio is 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 4.3%. 25 times and not less than 1.25 times respectively. I'll now turn the call over to John to go over the details of our financial results.