The Eastern Company (EML) Earnings Call Transcript & Summary

Good morning. Welcome to the Eastern Company's 2020 Annual Meeting of Shareholders. [Operator Instructions] Please note this meeting is being recorded. I would now like to turn the meeting over to your host, James Mitarotonda, Chairman of Eastern Company. Mr. Mitarotonda. Please go ahead.

Thank you very much. Good morning. And welcome to the 162nd Annual Meeting of the shareholders of the Eastern Company. It is also the first virtual annual meeting of the company. I'm James Mitarotonda, I'm Chairman of the Board of the Eastern Company, and I will act as the Chairman of today's meeting. Clearly, we are holding this meeting in a novel manner at an unusual time in the history of our country, and Eastern. We're glad that you have joined us for this webcast and look forward to hearing from you this morning. At this time, I am calling this meeting to order. I would like to introduce Gus Vlak, President and Chief Executive Officer of the Eastern Company. Mr. Vlak is also on the Board of Directors. The Eastern Company's Board members are also in attendance remotely. They are Mr. Fredrick D. DiSanto; Mr. John Everets, Mr. Charles Henry, Mr. Michael McManus; and Mrs. Peggy Scott. Also in attendance by phone are Kevin Donovan, Matthew Soroka, Justin Wilcox and Yana Reiser from Fiondella, Milone & LaSaracina, FML, the company's independent registered accounting firm. We will be filing the final reports of the voting on a Form 8-K with the SEC in accordance with SEC rules. Mr. John Sullivan, the Chief Financial Officer of the Eastern Company, is in attendance as well. I would like to introduce the Corporate Secretary, Mrs. Terry Dews. I have appointed Terry Dews to serve as our inspector of elections. I declare the polls now open for each matter to be voted on today, April 29, 2020. If you have not yet voted your shares by proxy or wish to change your vote, please go to the Ask a Question section which is located on the lower left portion of the webcast screen and write your name, your address, your control ID found on the proxy materials sent to you and indicate how you would like your shares voted. Again, you can now vote your shares by proxy or change your vote by going to the Ask a Question section, which is located on the lower left portion of the webcast screen. There, you can write your name, your address, your control ID found on the proxy materials sent to you. You can also indicate how you would like your shares voted. Since everyone appears to have cast their ballots, I am declaring the polls closed. Mrs. Dews, would you please provide a quorum report for this meeting?

Mr. Chairman, the total number of shares entitled to vote were 6,240,705 shares. The total number of shares represented are 5,731,582 or 92%. Accordingly, under the bylaws of the corporation, a quorum is present.

Mrs. Dews, as Secretary of this annual meeting, please read the call to meeting.

The annual meeting of shareholders of the Eastern Company is being virtually held on April 29, 2020, at 11:00 a.m. Eastern time for the following purposes: to elect 7 directors, to approve and adopt the Eastern Company 2020 stock incentive plan, to cast a nonbinding advisory vote to approve the compensation of the named executive officers and to ratify the Audit Committee's recommendation and the Board of Directors' appointment of the Fiondella, Milone & LaSaracina LLP as the independent registered public accounting firm to audit the consolidated financial statements of the company and its subsidiaries for fiscal year of 2020.

Thank you, Mrs. Dews. We will now proceed to our stated business of the meeting. These items have been described in the proxy materials previously made available to all shareholders of record for this meeting. Does anyone have any questions or comments? Okay. The first item on which we are voting today is the election of 7 directors to serve for a 1-year term set to expire at the 2021 annual meeting of Shareholders. The Board's nominees are Mr. Fredrick DiSanto; Mr. John Everets, Mr. Charles Henry, Mr. Michael McManus Jr.; myself, James Mitarotonda; Mrs. Peggy Scott; and Mr. August Vlak.

80% or more of votes cast by proxy were voted in favor of all nominee directors, Mr. DiSanto, Everets, Henry, McManus, Mitarotonda, Vlak and Mrs. Scott for 1 year term expiring 2021.

I declare the nominees elected as directors for the terms specified or until such time as their successors are elected and qualified. The second item on which we are voting today is to approve and adopt the 2020 stock incentive plan.

74% of the votes cast by proxy were voted in favor of the approval and adoption of the Eastern Company's 2020 stock incentive plan.

Thank you, Mrs. Dews. The third item on which we are voting today is to approve the compensation of the named executive officers.

Mr. Chairman, 98% of the votes cast by proxy were voted in favor of the compensation of the named executive officers.

I declare the resolution to be adopted for the nonbinding vote for compensation of our named executive officers. The fourth item on which we are voting today is the ratification of the appointment of the independent registered public accounting firm, Fiondella, Milone & LaSaracina LLP.

Mr. Chairman, 98% of the votes cast by proxy were voted in favor of the appointment of Fiondella, Milone & LaSaracina LLP, as the independent registered public accounting firm to audit the consolidated financial statements of the company for the fiscal year 2020.

I declare the resolution adopted. I will now hand the floor to Gus Vlak, who will share the annual report and statement for the year 2019.

Thank you, Jim. And thank you to everyone who has joined us today for our first webcast of Eastern's annual meeting. Although I'll miss seeing everybody and the opportunity to have lunch together in Naugatuck, I am glad that we are able to include shareholders and visitors from many more remote locations at this meeting. Before I start my remarks, I want to let you know that we issued a press release this morning and refer you to the safe harbor and forward-looking statements that are part of that press release. I also want to say that I am really honored to lead your company, Eastern. I am now in my fifth year as Eastern's President and CEO and this is certainly going to be one of our most challenging years yet. I'm truly fortunate to work with a strong team of leaders across all of our businesses as well as here in Naugatuck, and equally as important, I'm grateful for our incredibly dedicated employees, nothing that we do would be possible without them. I'm confident that together, we are up to the challenges that are ahead of us and that we will ultimately come out of this crisis stronger than we came into it. 2019, now seems like a long time ago. At the beginning of last year, we were just getting used to how to manage the escalating trade war with China. Yet we're very proud of the results and the progress that our teams delivered in 2019. In the next 20 minutes, I will review Eastern's performance in 2019, I'll share with you the results of our first quarter, give you an outlook on how we're managing in the current environment, and then we'll close with questions. You've heard me say before that our strategy for creating long-term shareholder value includes optimizing our portfolio of businesses, maximizing the performance of all our best businesses and maintaining a strong balance sheet. Together, we believe that these actions will help us achieve our vision of becoming a $100 million EBITDA company. In 2019, we made progress in each of these areas. In August of '19, we acquired Big 3 Precision. It's a leader in providing turnkey packaging solutions. Big 3 is really comprised of 2 businesses: Big 3 Precision Products and Big 3 Precision Mold. Big 3 Products works with leading manufacturers to design, engineer and manufacture custom returnable packaging that integrates with their assembly processes. And Big 3 Mold is a leader -- leading designer and manufacturer of blow mold tools. This acquisition provides Eastern with a substantial new growth business, which will help us achieve our long-term goal. This transaction, which is the third acquisition in 3 years, represents another and an important step in our vision of building a larger company that has an even stronger presence with our key customers in our key markets. Big 3 is a fundamentally strong business, and it's become a very solid contributor to our top line, our earnings and our cash flow. We financed this acquisition and refinanced our existing debt last year through $120 million credit facility, which includes $100 million term loan and a $20 million revolver. The revolver provides us with ample access, credit and borrowing capacity. Importantly, we also expanded our lending relationships that include Santander and TD Bank, both of whom, coupled with the United, are proving to be excellent partners for our company. We also continue to optimize the performance of our existing businesses, including through the launch of new products. Last year, we launched a new hood mount truck mirror, a modular toolbox latching system, and an electronic activated latching system. And in the fourth quarter last year, sales of new products accounted for 5% of our sales growth. And in Industrial Hardware segments, new products accounted for 15% of sales growth in that quarter. Increasingly, new products are driving our sales growth and should help us deal with some of the challenges in some of our end markets like Class 8 truck and recreational vehicles, which are facing a tougher 2020. At the same time, we consolidated our composite panel company in Salisbury, North Carolina with our Kelowna facility and adopted a leaner approach in developing some of the enhanced vision products at Velvac where we made the strategic decision to discontinue our Road-iQ operations. Importantly, we generated $23 million in operating cash last year, which is a 78% increase compared to the prior year 2018. And our strong balance sheet as well as our focus on working capital reductions have positioned us well in this challenging time. For the year then, our sales and net income were up. The increase in sales in 2019 of 8% reflects 4 months of sales from Big 3 Precision, which we closed in -- on August 30. Sustained growth in the demand for many of our products, especially Industrial Hardware segment, which grew by 2%, excluding the acquisition of Big 3, and then the launch of significant new programs across both Industrial Hardware and Security Products, which were partly offset by a decline in some of our legacy markets. Our net income in 2019 came in at a $13.3 million or $2.12 per diluted share. That's a decline from the prior year. But net income, as you might recall, as adversely impacted by a number of nonrecurring restructuring costs, which were associated with the discontinuation of Road-iQ and the consolidation of our Composite Panel Technology facilities. As well as an increase in M&A expenses relating to the acquisition of Big 3 Precision. Together, these nonrecurring expenses equaled roughly $3.9 million or about $0.62 per diluted share in in 2019. Return to our first quarter. This morning, we issued the -- our press release for the first quarter of 2020. Our quarterly impact -- our quarterly performance was clearly impacted by the COVID-19 pandemic, first in China, and then in the U.S. but despite the impact, we generated solid results. Sales grew 7% over last year, primarily due to the addition of Big 3 Precision. Sales growth from our businesses and the acquisition was partly offset by COVID-19. When we spoke in February, I mentioned that our Chinese operations were closed for several weeks, following the Chinese New Year as a result of the outbreak in China and then ramped up back later that month. But then in mid-March, several of our largest U.S. customers began to close as the pandemic spread to the United States. Income per share grew in the first quarter, primarily as a result of the addition of Big 3 Precision. But as you might recall, in the first quarter of 2019, earnings were impacted by the -- by roughly $800,000 of nonrecurring charges that related to the consolidation of our Composite Panel Technology facilities. And that $800,000 charge took the net income in the first quarter down to $1.6 million. At the end of the first quarter, we believe that based on these results, our balance sheet remain strong, and we comfortably meet our bank covenants. We're in a strong net working capital position with current assets, which include about $17 million in cash, exceeding current liabilities by a factor of 3.4. Our capital structure remains healthy with debt-to-equity of 0.9, and our net debt is 2.6x our EBITDA. That is pro forma, assuming the full year impact from Big 3 Precision. That's through the first quarter of 2020. Now our bank covenants are at 4.25, so we're well below that. We believe our balance sheet at the end of the first quarter remains very robust. I now want to turn to discuss the remainder of the year. Needless to say, COVID-19 has affected everyone at Eastern, and we recognize the health impact and the economic challenges caused by this pandemic. At this time, our top priorities have been to protect the health and welfare of our employees, to continue serving our customers and to navigate today's challenges so that we're in a strong position when the environment improves. I'd like to tell you a little bit more about what we've done in each of these 3 areas. First, we focus on workplace safety. It is imperative that we protect the health of our employees, and we've been aggressively implementing the guidelines from the CDC, OSHA and the states, but we've also benefited from the experience we gained from our facilities in China, where health measures have been remarkably effective. So some of the things that we have done include giving people masks, doing temperature screening, we have found ways to implement social distancing, and we now clean our facilities. And in fact, in some locations, we have rented private buses, where -- which we can clean to provide safe transportation to and from work. All of the sites are learning, sharing and working together to protect everyone who shows up to work. Our second priority has been serving our customers. As of today, all the -- 2 of our locations are operating and serving customers. In February, our Asian locations were closed. And in April, we closed 6 of our U.S. locations and both of our Mexican locations. All the 2 of which have now reopened. Our customers are coming back to work. As of this week, many of our customers have begun to open up. And by the end of next week, we expect that more than 90% of all customers who have closed will have resumed operations at some level. Importantly, until now, disruption in our supply chain has been minimal, and we're continuously working with our suppliers to make sure that we stand ready to meet our customers' needs. It's worth adding that while many of our customers stopped manufacturing products, engineering departments have continued to work on new products, and our engineers have kept pace to support with this new product development, which will help us launch new products later on in the year. At the same time, we've had to make some difficult decisions to sustain our strength through this challenging time. We have temporarily reduced spending across many parts of the business and are monitoring demand very closely, determine what other actions may be necessary. Many of our employees are making real sacrifices through furloughs and wage reductions at this time, and we look forward to bringing everybody back and seeing them back at work. We have been able to bring people back to work in order to support our fight against COVID-19. One of our businesses has been manufacturing frames for emergency and disaster relief beds. These beds have been used all over the country, including in the field hospital in the Boston Convention Center, which you see here on the right. Another one of our businesses has begun making molds for COVID-19 test tubes that are going to be part of testing kits. You can see a diagram of what those molds look like on the right-hand side of this page. And many of our businesses are supporting their communities by distributing masks and PPE. I'm really proud of watching our employees step-up in this way. In summary, all of Eastern, everybody across our businesses recognizes that these are extraordinary times. We are responding to the challenge, while keeping our eye on our plan to create long-term shareholder value. We continue to optimize our portfolio, putting our scarce resources to work where we get our best returns, maximize results from our businesses to generate cash that we need to get through this difficult period and obviously, protecting our balance sheet to preserve shareholder value and position us for future growth. We believe that this strategy will not only get us through this very difficult period, it will also position us well to achieve our vision of building a $100 million EBITDA company. I would like to close with another example of how Eastern is contributing to fighting the current pandemic. At this time, our products are being used to protect the people in California, since Monday, March 13, one of our products is Sesamee brand of lock, hangs on the center gate between the turnstiles of the entrance to Disneyland in Anaheim, California, while the entire Disneyland resort is shut down due to the COVID-19 outbreak. It pays to be the manufacturer of locks at the time of a national lockdown. With that, I would like to hand it -- floor back to Jim Mitarotonda and open it up for questions.

Thank you, Gus. At this time, I'd like to invite any shareholder who has questions regarding the general company matters. Again, please type your question in the Ask a Question section, which is located on the lower left portion of the webcast stream. Does anyone have any questions? So seeing none, all items of business have now been completed. There being no further business, I will entertain a motion to adjourn this annual meeting.

Mr. Chairman, I would...

Mr. Chairman, I would second that -- go ahead.

I move that the annual meeting be adjourned.

Is there a second?

Mr. Chairman, I would second that -- yes, I would second that motion.

Thank you. I would like to express my appreciation to the shareholders who attended this virtual annual meeting as well as those who submitted their proxies but were not able to attend this virtual meeting. Clearly, these are challenging times for all of us and the Eastern Company. But your company has thrived for more than 160 years because it remains fundamentally strong, resilient and acts decisively. I'm confident that we will all emerge from this crisis stronger. The annual meeting of shareholders of the Eastern Company is now adjourned. Thank you very, very much.

Ladies and gentlemen, this concludes the Eastern Company's 2020 Annual Meeting of Shareholders. You may disconnect your line at this time. Thank you for your participation.