Eastern Q3 2024 Earnings Report

Eastern EPS Results

• Actual EPS: $0.75
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Eastern Revenue Results

• Actual Revenue: $71.27 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Eastern Announcement Details

• Quarter: Q3 2024
• Date: 11/5/2024
• Time: After Market Closes
• Conference Call Date: Wednesday, November 6, 2024
• Conference Call Time: 11:00AM ET

Eastern (NASDAQ:EML) (NASDAQ:EML), based in West Haven, Connecticut, is a diversified industrial manufacturer specializing in secure hardware and metal finishing services. The company operates through two primary segments: Industrial Hardware Products and Security Products, complemented by a Metal Coatings division. Its Industrial Hardware Products segment produces cold-headed fasteners, forgings, hinges and precision components for heavy commercial vehicles, hydraulic cylinders and industrial machinery.

The Security Products segment designs and manufactures a wide range of lock and latch solutions, including padlocks, door hardware, cabinet locks and rental security towers for commercial and institutional applications. Through its Metal Coatings division, Eastern offers anodizing, electroplating, powder coating and painting services to enhance corrosion resistance and surface appearance. These finishing solutions serve customers in the automotive, aerospace, defense and general industrial markets.

Eastern supports its global customer base with manufacturing facilities in the United States and Mexico and distribution channels extending into North America, Asia and Europe. The company’s leadership focuses on operational efficiency, product innovation and strategic acquisitions to drive growth. Emphasizing long-term partnerships, Eastern delivers customized engineering support and reliable supply chain solutions tailored to the evolving needs of industrial and security end markets.

Eastern Q3 2024 Earnings Call Transcript

Key Takeaways

• Eastern delivered 15% year-over-year sales growth to $71.3 million in Q3, with backlog up 13% to $97.2 million, gross margin rising to 25.5%, and net income of $4.7 million ($0.75 per share).
• The company reclassified its Big 3 mold business as discontinued operations, recognizing a $19.2 million after-tax write-down, to focus on higher-growth returnable packaging and assembly operations.
• Eastern appointed Ryan Schroeder as its new CEO, citing his track record leading manufacturing firms like PlascoLite and IMI Norgen to drive long-term growth.
• For the first nine months, Eastern generated $8.3 million of operating cash, invested $7.6 million in capital expenditures, paid $2.1 million in dividends, and repurchased 50,000 shares (110,000 total) under its buyback program.
• Selling & administrative expenses rose 22% due to higher payroll and professional fees, while product development spending fell to 1.5% of sales and other income improved on lower pension costs.

Presentation

[Operator]

Good morning, and welcome to The Eastern Company's Third Quarter Fiscal Year 2024 Earnings Call. At this time, all participants are in a listen-only mode, and we will open for questions following the presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Marianne Barr, Treasurer of The Eastern Company. Marianne, over to you.

[Marianne Barr, Treasurer and Corporate Secretary at The Eastern Company]

Good morning, and thank you everyone for joining us this morning for a review of The Eastern Company's results for the third quarter of 2024. With me on the call are James Mitarotonda, Chair of Eastern's Board of Directors, and the company's CFO, Nicholas Vlahos. The company issued an earnings press release yesterday after the market closed. If anyone has not yet seen the release, please visit the investor 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.

[Marianne Barr, Treasurer and Corporate Secretary at The Eastern Company]

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 12, 2024, for the fiscal year 2023, and Form 10-Q filed with the SEC on November 5, 2024. 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.

[Marianne Barr, Treasurer and Corporate Secretary at The Eastern Company]

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'll turn the call over to Jim.

[James Mitarotonda, Chairman of the Board of Directors at The Eastern Company]

Thank you, Marianne, and good morning to those who are joining us by phone, as well as those participating via the web. Operationally, the third quarter was a strong period for The Eastern Company, with substantial year-over-year improvements in top and bottom-line results. Actions were taken to improve pricing and strengthen gross margins. At the same time, Eastern's Board of Directors believes that there are more actions to be taken and significant progress to be made, and we have appointed a new leader to take Eastern to the next level. Before I go into details of our new CEO appointment, I'll talk about another significant step recently taken at Eastern. As discussed during our Q2 earnings call in August, we have been continuing the process of evaluating all of the company's businesses for long-term performance and growth potential.

[James Mitarotonda, Chairman of the Board of Directors at The Eastern Company]

During that process, we determined that the Big 3 Mold business, one of the two businesses within the Big 3 Precision Products, no longer fits our long-term business and financial strategy. Accordingly, we recently began taking steps to sell Big 3 Mold and reclassified it as discontinued operations. Unlike Big 3's returnable packaging business, which holds excellent potential for Eastern, Mold is a complex niche business that, especially given today's market dynamics, offers many fewer opportunities for synergy and requires significant capital investment to remain competitive. The sale of Mold will put Eastern in a better position to play to the company's strengths. In addition, we will now be able to focus all of our resources on Eastern's best-in-class manufacturing and assembling capabilities in the commercial vehicle, automotive, and other industrial end markets.

[James Mitarotonda, Chairman of the Board of Directors at The Eastern Company]

With that introduction, I'll turn the call over to Nick for a more detailed review of our Q3 financial results. Nick.

[Nicholas Vlahos, CFO at The Eastern Company]

Thank you, Jim, and good morning, everyone. As Jim noted in his opening comments, we recently made the decision to sell Big 3 Mold business and determined that it met the criteria for classification for held-for-sale accounting and discontinued operations. The loss recognized in the write-down of the Big 3 Mold business to fair value in the third quarter was $19.2 million net of tax. I'll focus my review today on Eastern's financial results from continuing operations for the third quarter. For the third quarter, net sales increased 15% to $71.3 million from $62 million in the 2023 period, primarily due to increased demand for returnable packaging products and truck mirror assemblies and truck accessories. Our backlog as of September 28, 2024, rose 13% to $97.2 million compared to $86.2 million as of September 30, 2023.

[Nicholas Vlahos, CFO at The Eastern Company]

The increase was primarily driven by increased orders for various truck mirror assemblies and returnable transport packaging products. Gross margin as a percentage of sales in the third quarter was 25.5% compared to 24.9% in the 2023 period. The increase in margin primarily reflected improved price-cost alignment and other cost savings initiatives. As a percentage of net sales, product development costs were 1.5% for the third quarter of 2024 compared to 2.3% for the 2023 period. Selling administrative expenses increased $1.9 million, or 22%, for the third quarter of 2024 compared to last year's period. The increase was primarily due to higher payroll-related and legal and professional expenses. Other income and expense for the third quarter of 2024 increased $0.1 million compared to the 2023 period. The increase in other income of $0.1 million was primarily driven by lower pension expense when compared to the prior year period.

[Nicholas Vlahos, CFO at The Eastern Company]

Net income for the third quarter of 2024 was $4.7 million, or $0.75 per diluted share, compared to the net income of $3.5 million, or $0.55 per diluted share for the 2023 period. Adjusted net income from continuing operations, a non-GAAP measure, for the third quarter of 2024 was $4.7 million, or $0.75 per diluted share, compared to adjusted net income from continuing operations of $3.5 million, or $0.55 per diluted share for the prior year period. Adjusted EBITDA from continuing operations, a non-GAAP measure, for the third quarter of 2024 was $8.7 million compared to $6.7 million for the 2023 period. At the end of the third quarter, our senior net leverage ratio was 1.4 compared to 1.2 to 1 at the end of the second quarter.

[Nicholas Vlahos, CFO at The Eastern Company]

In addition, we invested $7.6 million in capital expenditures and paid dividends of $2.1 million for the first nine months of fiscal 2024. We generated $8.3 million from operations during the first nine months of fiscal 2024 compared to $18.2 million during the first nine months of fiscal 2023. Cash flow from operating activities in the 2024 period was lower compared to last year's period, primarily due to increases in accounts receivable of $11.7 million due to increases in revenue in the third quarter of 2024 compared to the corresponding period in 2023, and approximately $3 million in accounts receivable due to pre-billing to cover material costs on a specific job. As of September 28, 2024, inventories totaled $58.1 million, down $0.3 million from the end of fiscal year 2023, and a decrease of $1.9 million from the end of last year's third quarter.

[Nicholas Vlahos, CFO at The Eastern Company]

During the third quarter of 2024, we repurchased 50,000 shares of common stock under the share repurchase program our board authorized in August 2023, bringing us to a total of approximately 110,000 shares repurchased under the buyback program. That completes my financial review. I'll now turn the call back to Jim.

[James Mitarotonda, Chairman of the Board of Directors at The Eastern Company]

Thank you, Nick. At this point, I'd like to provide further details on Eastern's newly appointed Chief Executive Officer. As we announced yesterday, we're pleased to have Ryan Schroeder join us as CEO effective today. Ryan is a seasoned executive with a strong record of leading manufacturing companies to peer-beating sustained long-term growth. Ryan brings a history of growing businesses both organically and through acquisition. Most recently, he served as CEO of Plaskolite LLC, a global leader of acrylic and polycarbonate sheet with more than 120 production lines and 2,000 employees worldwide. Prior to that, Ryan was president of IMI Norgren, a leader in industrial automation with some 2,200 employees across 17 facilities. And before that, Ryan spent 12 years at the engineering firm Parker Hannifin in a variety of roles, including General Manager of Global Valves, Plant Manager, and Supply Chain Manager of the company's Mobile Cylinders division.

[James Mitarotonda, Chairman of the Board of Directors at The Eastern Company]

Ryan has extensive background in sales, lean operations, finance, and supply chain management, all of which will be valuable to Eastern. Ryan will share his vision for achieving long-term sustained growth in our next quarterly call, so we hope you'll join us for that discussion. Operator, I'd now like to open the floor to questions. We will take questions from the web first, but before we do that, please provide directions to those on the phone about how they can ask questions.

[Operator]

No problem. We will be conducting our question-and-answer session. If you would like to ask a question via the phone lines, please press star one on your phone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For any participants using speaker equipment, it may be necessary to pick up your phone before you press the keys. So that's star one if you'd like to ask a question on the phone lines.

[Nicholas Vlahos, CFO at The Eastern Company]

All right. So the first question we have via the web is, "Congratulations to the new CEO. Where do you want the company to be in six months?

[James Mitarotonda, Chairman of the Board of Directors at The Eastern Company]

We have pretty ambitious long-term plans, and certainly we have shorter-term plans, quarterly, yearly, and the short-term plans, we don't comment on specifically as far as the numbers or our ambitious long-term plans, but short-term plans include, of course, actions to achieve the long-term plans, so you can rest assured that we look at all of the ways to achieve the long-term plans, which, as I stated, are pretty ambitious.

[Nicholas Vlahos, CFO at The Eastern Company]

Thank you, Jim. Operator, there are no further questions via the web. Do you have any questions on the conference call?

[Operator]

I'm not seeing anyone in the queue at the moment, but just a reminder to those on the lines, you can press star one if you would like to ask a question. I'm not seeing anyone in the queue just yet. Nope, I'm not seeing any questions at the moment.

[Nicholas Vlahos, CFO at The Eastern Company]

Okay. Thank you, Operator. Jim, there are no further questions. I'll turn the call over to you for closing remarks.

[James Mitarotonda, Chairman of the Board of Directors at The Eastern Company]

Thank you all for your time today. As you've heard, the third quarter was a productive period for Eastern. We've now advanced the most important elements of the company's business transformation and believe it's much better positioned to grow and prosper. We look forward to introducing you to Ryan Schroeder on our next earnings call. If there's any information you need in the meantime, please reach out to Nick or me. Thank you.

[Operator]

Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.

Participants

Executives

• Marianne Barr, Treasurer and Corporate Secretary
• James Mitarotonda, Chairman of the Board of Directors
• Nicholas Vlahos, CFO