Eastern Company (The)

Good morning, ladies and gentlemen, and welcome to the Eastern Company first quarter fiscal year 2021 earnings event. At this time, all participants have been placed on a listen-only mode, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Chris Moulton. 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 Flack, as well as our CFO, John Sullivan. After that, we'll open the call for questions. Please note that some of the information we'll 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'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 first quarter numbers on our Forum 10Q yesterday afternoon. Before John Sullivan reviews the detailed results with you, I'd like to take a few moments to reflect on the quarter. I'm pleased to report that we had a strong start to the year with sales of $73 million. That's a high in Eastern's 163-year history. Obviously, We benefited from the economic recovery and improvement in demand across the majority of the markets we serve. We position our portfolio in these markets because we believe in the underlying demand for growth for the products we make. That certainly proved correct in the first quarter. Demand was strong across a broad range of commercial vehicle markets, including Class A trucks, service bodies, light trucks, recreational vehicles, electric vehicle manufacturers, and our industrial distribution. According to ACT research, Class A truck orders in March were 40,000 units. That's up fourfold from March of 2020. And this March marked the sixth straight month that orders topped 40,000 units, well above the replacement demand, which is roughly around 19,000 per month. ACT research expects North America Class A production to be about 302,000 units this year, and that's an increase of 40% over last year. Also, sales of lightweight and midsize trucks rebounded in the first quarter. For example, Ford's F-Series sales were up 9% year over year. A new midsize truck owners drive demand for many of our components for truck accessories and tonneau covers and truck caps. We also delivered margin expansion across many of our businesses. Our unadjusted net income grew to 8% in the first quarter of 2021. That's compared to 4% in the prior year. And adjusted EBITDA was 12% compared to 10% last year. This increase partly reflects the changes in our portfolio of businesses, including the contribution of packaged billable tooling business and the addition of Haylink, which we acquired in August of 2020. Our margins also benefited from strong organic growth in our core businesses and the impact of the consolidation of Eberhardt and Eleanor Lock. In the first quarter, our businesses demonstrated exceptional resilience in the face of significant disruptions in our supply chain and increases in raw material prices. All our businesses were impacted to varying degrees by the interruption in transportation. causing delays in shipments of finished products and critical components. Moreover, freight costs and prices of certain raw material, including steel and resins, rose throughout the quarter, and certain locations struggled to find sufficient manpower. We believe that these trends, including the sustained increases in raw material prices and freight costs, may pressure margins this year, but fortunately many of our businesses have been able to pass some of these cost increases to our customers or have mitigated the impact through advanced buying of primarily steel. And with that, I'll turn the call over to John to go over the details of our financial results.

Thank you, Gus. This morning, I'll focus on Easton's results for the first quarter of 2021. For the first quarter of 2021, net sales increased 12% to $73.1 million, from 65.3 million a year earlier. On a segment-level basis, net sales increased in the engineered solution segment in the first quarter by 19 percent to 61.8 million from 51.8 million in the first quarter of 2020 due to increased demand for truck accessory, automotive returnable packaging, mold tooling, and distribution products. Sales in the diversified product segment decreased 16% to $11.3 million in the first quarter, compared to $13.5 million in the first quarter of 2020, due to the sale of Canadian commercial vehicle and Sesame Mexicana in June and November 2020, respectively, and lower demand for commercial laundry products, partially offset by increased demand for mining and industrial casting products. Sales of existing products increased 5% in the first quarter compared to the first quarter of 2020. Price increases and new product increased net sales by 7%. New products included various truck mirror assemblies, truck compression latches, cable lock, and mirror cams. Gross margin as a percent of sales was 24% in the first quarter compared to 22% in the first quarter of 2020. The increase in gross margin was due in part for higher sales and our success in passing on most of the raw material price increases in many of our businesses. Product development expenses of 0.8 million increased 0.1 million or 8 percent in the first quarter compared to the first quarter of 2020. As a percentage of net sales, product development expenses were 1.1 percent and 1.2 percent for the first quarter of 2021 and 2020 respectively. Selling and administrative expenses increased 5% in the first quarter compared to the first quarter of 2020, primarily due to increased amortization expenses related to the HALIC acquisition in the third quarter of 2020, and increased incentive costs, which were suspended in the first quarter of 2020, offset by reduced levels of travel expenses and related payroll expenses. Net income for the first quarter was $5.8 million, or $0.93 per diluted share, compared to $2.9 million, or $0.46 per diluted share, for the first quarter of 2020. Adjusting for a gain that we realized on the sale of our Eberhard hardware facility related to the consolidation of our Illinois and Eberhard lock businesses, net income was $0.71 per diluted share. EBITDA for the first quarter was approximately 10.6 million. However, adjusting for the gain we realized on the sale of the Everhart hardware facility, EBITDA was 8.7 million. Now for a quick look at our cash flow and balance sheet highlights. Our cash flow from operations remains strong at 2.1 million for the first quarter, which is an increase of 40% over the first quarter of 2020. This, despite an increase of $4 million in working capital, primarily in accounts receivable due to the increased sales. As of April 3, 2021, we had cash and cash equivalents of $17.5 million. Our net leverage ratio is 2.8 times, and our fixed coverage ratio is 2.4 times, both of which comfortably comply with our bank covenants of 4.25 and 1.25, respectively. With this, I will turn it over to Chris for questions.

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

Certainly. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone at this time. We do ask that while posing your question, please pick up your handset if you're listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone. Please hold while we poll for questions. There are no questions in the queue at this time.

Okay, thank you. I'm also not seeing any questions via the webcast. So with that, I'll turn the call over to Gus for closing remarks.

Thanks, Chris. And thanks, everyone, for joining us this morning. We're encouraged by the continued acceleration in demand for our products and services across the majority of our businesses. The strength in our backlog at the end of fiscal 2020 has continued into 2021. The value of our backlog of orders at the end of the first quarter was $98 million. That's an increase of 15%. We're $13 million over the $85 million at the end of fiscal 2020. I want to highlight that this is the company's highest ever level of backlog. This growth in backlog reflects the continuation in the rebound in demand for truck accessories at Eberhardt, the launch of large new mirror programs for Class A trucks, and strong demand for our products and services in our blow mold tooling business. At this time, there are many signs for continued optimism as we progress into the year, despite lingering supply chain difficulties and quite extreme raw material price volatility. Much of this uncertainty and disruption stems directly from the growth in demand and the impact of last year's measures to control the spread of the COVID-19 pandemic, which are still reverberating across global supply chains. We remain cautiously optimistic that these issues will abate. However, we're planning for these challenges to linger to varying degrees throughout the remainder of the year. We believe that our focus on our three core businesses, Big Three Precision, Everhart, and Velvac, will continue to translate into material sales, earnings, and cash flow growth throughout 2021 and beyond. John described to you our robust balance sheet, and we are committed to both reducing our debt and capturing attractive bolt-on acquisition opportunities to accelerate our growth. In sum, we remain confident in our goal of becoming a $100 million EBITDA company. Thank you.

I'll turn it back over to Chris. Thanks, Gus. With that, I'll turn the call back to the operator.

Certainly. Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.