Eastern Company (the) (NASDAQ:EML)

EML Q4 2023

• Sales of $67.0 million vs $69.10 million
• EPS of $0.56 vs $0.11

EML at one point held a position in our model portfolios. Now, under a new CEO, progress is being made towards the focus on core product offerings, as he continues to unwind some of the negative fallout from acquisitions consummated by prior management. At one point, it appeared that the company was on track to generating earnings per share of well over $3.00. If they can get back to that run rate, we can easily see the stock eclipsing over $40. The stock is definitely worth closely tracking again.

Eastern Company  (NASDAQ:EML) ($21.10; $131.1M market cap), an industrial hardware manufacturer announced Q3 2022 results:

• Sales of $71.6  million vs $63.8 million in the prior year 

• Non-GAAP EPS of $0.61 vs $0.54 in the prior year

“This is the third time this year that we set a record quarterly sales level for Eastern. We believe this sustained growth demonstrates that our businesses are effectively executing on the very favorable long-term demand trends across our core markets. Strong orders and deliveries of returnable transport packaging at Big 3 Precision account for most of the growth in the quarter, compared to the same period last year. Growth in our transport packaging business is the result of our recent investments in this business and the increase in new vehicle launches by OEMs. According to Bank of America, OEMs expect to launch 245 new models during 2023-26, or an average of 61 per year. This rate of vehicle launches is more than 50% above the average number of models launched per year between model years 2003 and 2022.”

Balance sheet and buyback 

“We repaid nearly $3 million of debt and repurchased over 10,000 shares of our common stock in the third quarter of 2022, both of which also reflect on our confidence in our strong liquidity. Moreover, we believe that we are prepared for a rising interest rate environment, with nearly 55% of our term debt locked in at a fixed interest rate of 3.19% through an interest rate swap agreement."

Eastern Company  (NASDAQ:EML) ($19.46; $120.9M market cap), an industrial hardware manufacturer, announced it has sold its Argo EMS business. Terms of the transaction were not disclosed.

“In August of last year, we announced our intent to divest our non-core businesses and began reporting these businesses as discontinued operations. With the transaction announced today, we have completed the sale of all non-core businesses…

… the divestiture of Argo will further streamline our portfolio of businesses and build scale in our largest businesses, which we believe will accelerate Eastern's growth and strengthen our operating margins. With the sale of Greenwald Industries and Frazer & Jones, which we completed last year, this transaction further strengthens our focus on our three core businesses."

Eastern Company  (NASDAQ:EML) ($24.25; $152.1M market cap), an industrial hardware manufacturer announced Q4 2021 results:

• Sales of $59.6 million vs $50.6 million in the prior year
• Non-GAAP EPS of $0.65 vs $0.76 in the prior year

“While the war in Ukraine is once again driving up the cost of some raw materials, we are not yet seeing costs increase to 2021 levels. Moreover, we believe that the actions we took in 2021 will mitigate some of the impact of higher raw material prices. We also moderated late deliveries through active sourcing and supply chain management, and we maintained production levels with creative recruiting and retention practices. In all, I believe our execution in 2021 underscores the quality of the leadership team we have built…

… We expect to reduce the current level of working capital in the coming quarters and believe that our solid balance sheet, proceeds from divestitures, and ample liquidity will fuel an acceleration in the growth of our three largest businesses.

Our backlog at the end of 2021 reached $82.8 million, an increase of $18.1 million, or 28% over the backlog at the end of 2020. The increase in backlog was primarily the result of increased demand from our commercial vehicle and truck accessories customers and reflects a return to strong demand for our products.”

Eastern Company  (NASDAQ:EML) ($24.8; $155.8M market cap), an industrial hardware manufacturer announced Q1 2021 results:

• Sales of $73.1 million vs $65.3 million in the prior year

• Non-GAAP EPS of $0.71 vs NG EPS of $0.46

Over the last several months we have been saying we think an inflection point of growth is just around the corner for EML. Well, it looks like the company may have turned the corner as COVID-19 woes are dissipating and previous acquisitions intended to expand the company's market for its legacy products and introduce new products are paying off.  We continue to believe that the upside potential for EML shares is significant

“Sales in the first quarter of 2021 increased 12% compared to the first quarter of 2020, primarily due to product launches at Big 3 Precision and Velvac, as well as strong demand across a broad range of commercial vehicle markets, including class 8 trucks, service bodies and light trucks, recreational vehicles, and electric vehicle manufacturers. Additional sales from the acquisition of Hallink, completed in the second quarter of 2020, partly offset the loss of sales from the divestitures of Canadian Commercial Vehicles Corporation and Sesamee Mexicana in the second and fourth quarters of last year, respectively. As a result of strong demand across many of our markets, our backlog at the end of the first quarter 2021 remains strong at $98.0 million, an increase of $24.4 million, or 33% over the backlog at the end of the first quarter 2020."

You can see our full coverage on EML here.

Eastern Company  (NASDAQ:EML) ($26.49; $165.3M market cap), an industrial hardware manufacturer announced Q4 2020 results:

• Sales of $60.4 million vs $68.7 million in the prior year 
• Non-GAAP EPS of $0.74 vs $0.79 in the prior year

During the fourth quarter, demand across the vast majority of our product and service offerings accelerated, marking two quarters of strong sequential growth from the severe contraction during the second quarter. Coupled with this recovery in demand, our recent acquisitions and divestitures expedited growth in our adjusted earnings per share and cash flow. The majority of our markets rebounded to prior year sales levels in the fourth quarter, with noticeably strong growth within our Class-8 truck, motorhomes, truck accessories, and consumer packaging markets. In addition, we were awarded new sales opportunities with several manufacturers of electric vehicles. We continue to believe that the rapidly growing electric vehicle market will provide us with material growth opportunities. In the fourth quarter, sales growth in these markets was not sufficient to offset the delay in many new automotive launches, lower sales to mining customers, and the loss of sales from divestitures.

The strength in our backlog at the end of the year and heading into 2021 indicates sustained growth of our businesses and we are off to a strong start in 2021. The value of our backlog of orders was $85.0 million at the end of fiscal 2020, as compared to $71.2 million at the end of fiscal 2019.”

You can see our full coverage on EML here.

Eastern Company  (NASDAQ:EML) ($24.6; $153.5M market cap), an industrial hardware manufacturer announced a new appointment at Big 3 Precision to capitalize on growth opportunities. The company announced the hiring of Nick Lentine to the position of president:

“Nick brings more than 25 years of commercial and operational experience in the automotive and commercial vehicle markets, including the last 10 years at Faurecia, a top ten global automotive supplier of technologies for sustainable mobility…

Big 3 Precision's markets are entering into a transformational stage as a result of the accelerated introduction of electric vehicles, continued adoption of manufacturing automation, and exponential growth in product digitization,"

You can see our full coverage on EML here.

Eastern Company  (NASDAQ:EML) ($22.59; $140.9M market cap),  an industrial hardware manufacturer, announced Q3 2020 results:

• Sales of $65.8 million vs $60.6 million in the prior year
• Non-GAAP EPS of $0.54 vs $0.79 in the prior year

“These past two quarters have demonstrated the resilience of our businesses through challenging economic conditions, and our business is recovering from the impact of the Covid-19 pandemic on the broader economy. While navigating the short-term operational and demand challenges, we remain focused on our vision to build long-term shareholder value. For example, we closed on the acquisition of Hallink in the third quarter of 2020, and we started the combination of our Eberhard and Illinois Lock Company operations, building on the strengths of both organizations to create a leaner, more innovative, and more competitive business. The combination will also affect our fourth quarter 2020 reporting. We currently have three reportable segments, but, starting in the fourth quarter of 2020, we will report in two segments: Engineered Solutions and Diversified Products."

Eastern Company  (NASDAQ:EML) ($19.44; $121.1M market cap),  an industrial hardware manufacturer, announced Q1 2020 results:

• Sales of $65.3 million vs $60.9 million in the prior year
• Non-GAAP EPS of $0.46 vs $0.43 in the prior year

“Despite ongoing uncertainty across our end markets and the macro-environment, we believe that our businesses are well positioned and will prove to be resilient once economic activity rebounds” said Mr. Vlak.  As of April 29, all but two production facilities are operating and, at this time, the majority of our customers are expected to re-open as soon as May 4.  Our backlog remained robust at the end of the first quarter.  We are confident that the numerous actions that we have taken to control expenses position our businesses to withstand a significant and potentially more prolonged economic downturn.  Actions that we have taken to date include the suspension of all hiring of salaried positions, cessation of discretionary spending, temporary reduction in work hours, initiation of furloughs, cancellation of certain merit-based salary increases, and a limitation on capital spending to only critical maintenance, safety, and regulatory projects,” remarked Mr. Vlak.”

Eastern Company  (NASDAQ:EML) ($28.19; $178.8M market cap),  an industrial hardware manufacturer announced Q4 2019 results:

• Sales of $68.7 million vs $56.6 million in the prior year

• EPS of $0.79 vs $0.70 in the prior year

We brought the year to a strong close and are pleased with Eastern’s accomplishments in 2019. Our acquisition of Big 3 Precision in August 2019 is an important step toward our long-term goal of building a larger and stronger company with a significant presence with key customers. It also made a substantial contribution to our fourth quarter results.

Despite ongoing uncertainty in the macro-environment, we are confident that we can deliver on our plan and achieve our goals.  Our backlog is robust, totaling $72.2 at the end of fiscal 2019. The growth in fiscal 2019 reflects both our acquisition of Big 3 Precision and a strong flow of orders at Eberhard Manufacturing.  Certain of our businesses are experiencing supply chain disruption in China as a result of the coronavirus (COVID-19), but, at this time, local conditions appear to be improving.”

Eastern Company  (NASDAQ:EML) ($26.15; $162.9M market cap),  an industrial hardware manufacturer, announcedQ1 2019 results:

• Sales of $60.9 million vs $59.4 million in the prior year
• Non-GAAP EPS of $0.43 vs $0.49 in the prior year

“our backlog is healthy and we expect sales to remain strong for the rest of 2019, due to continued demand for our products in Class 8 trucks, truck accessories, and other core markets, as well as a number of new product launches. We continue to look for opportunities to expand our portfolio through acquisitions. We are confident that our three-part strategy of optimizing our portfolio of businesses, improving execution and building our balance sheet will generate long-term results for our shareholders.”

GB Eastern (NASDAQ:EML) ($30.50; $191.0M market cap), an industrial hardware manufacturer announced the acquisition of certain assets of Load N Lock, a leader in innovative truck cap and tonneau cover locks that keep truck contents safe and secure.  The company did not disclose the terms of the transaction but stated it expects the acquisition to be immediately accretive to earnings.   Quotes from management:

“we are excited about this transaction and believe it is a big win for all our customers. We believe that, together, ILC and Load N Lock can bring additional capabilities to our customers and take our relationships to a new level”.

“this transaction further strengthens and builds scale in our ILC business and reflects our strategy for creating long-term shareholder value by investing in our best businesses through targeted acquisitions. Moreover, we believe that the acquisition will be immediately accretive, excluding the impact of one-time expenses”

Eastern (NASDAQ:EML) ($24.60; $154.0M market cap) industrial hardware manufacturer EML announced Q4 2017 results:

• $54.1 million vs $34.1 million in the prior year

• Non-GAAP EPS of $0.38 vs $0.42 in the prior year

Quotes from management:

“we anticipate increased earnings and cash flow as a result of the reduction in our income taxes starting in 2018. We intend to deploy incremental capital to fund the growth of our best businesses, make targeted acquisitions to strengthen our portfolio, and continue to build up our balance sheet by paying down debt and funding our pension and retirement plan obligations. We believe that the addition of Velvac strengthens our portfolio of businesses, and we continue to look for acquisition opportunities that have strong economics and help us build scale in attractive end-markets. In addition, we believe our businesses are well-positioned to benefit from strong underlying growth in several core markets in 2018.”

EML ($27.25) reported Q1 2017 results:

• Sales of $36 million vs $33.1 million in the prior year

• EPS of $0.24 vs $0.10 in the prior year

Quotes from management:

“The Company is making solid progress with the execution of its three-part strategy, including optimizing our portfolio, strengthening execution in each of our businesses, and building our balance sheet,” said August Vlak. He stated that “the acquisition of Velvac Holdings, which we announced on April 4, 2017, represents a significant step towards building a portfolio of larger, higher-growth businesses that are well-positioned in attractive markets. We believe Velvac and several of our existing businesses will be able to benefit from our shared customer relationships and combined market strength.

The transaction is expected to be breakeven including purchase accounting expenses but before one-time transaction costs, in the current fiscal year. The transaction is projected to be accretive to Eastern’s earnings in fiscal 2018.”

EML ($19.45) reported Q4 2016 results:

• Sales of $34.1 million vs $34.4 million in the prior year

• EPS of $0.42 vs $0.28 in the prior year

Quotes from management:

“The Company is starting to see the benefits of our three-part strategy, including optimizing our portfolio, strengthening execution in each of our businesses, and building our balance sheet,” said August Vlak. He stated that “we remain committed to organic growth and acquisitions to accelerate growth and improve returns of our best businesses.”

“Our decision to freeze our Salaried Employees Retirement Plan in May 2016 not only strengthened our balance sheet but also contributed $0.21 per diluted share in the fiscal year 2016, compared to the prior year. At the same time, we substantially enhanced our employee 401(k) plan. The elimination of one-time costs of $1.4 million, net of tax, associated with the proxy contest in the first half of 2015, similarly contributed to an improvement for the full fiscal year 2016 over the fiscal year 2015.”

Dear fellow shareholders:

This is an exciting time at The Eastern Company.  With a new Chief Executive Officer and new members on our Board of Directors, the Company’s senior leaders and dedicated associates are energized and eager to begin a new chapter in the Company’s history.  We are focused on accelerating value creation for our customers and our shareholders.

Throughout its 158-year history, Eastern has periodically reinvented itself to meet the needs of a changing world.  In each of these new eras, the Company has thrived by staying true to its core mission and core strengths.  Eastern excels when it works closely with its customers to provide uniquely engineered products that meet their design and product specifications.  Our core strengths include our engineering know-how, insight into customer needs, international manufacturing base, and access to a global supplier network.  These advantages have enabled us to consistently deliver significant value to our customers.  For example, we introduced a unique Whale Tail T-handle (the handle appears on the cover of this annual report).  Our Eberhard engineering team developed this value-added design with input from a core customer and support from the Cleveland Institute of Art.

2015 Financial Results

Despite headwinds in several end markets, our total sales grew by 3% in 2015, to $144.6 million from $140.8 million in 2014.  Sales from new products grew by 9%.  Net income, however, decreased by 25% to $5.7 million from $7.7 million in 2014.  Earnings per share fell by the same percentage, to $0.92 from $1.23.  The decline in profitability was due to one-time expenses related to our 2015 annual meeting of shareholders as well as to lower capacity utilization in our Metal Products segment.  Return on invested capital1 declined to 6.6%% percent in 2015 from 8.7% percent in 2014, primarily because of the decline in earnings and a 4%increase in working capital.  We paid regular quarterly dividends of $0.44 per share in 2015 plus an additional $0.01 per share redemption fee related to the termination of the 2008 Shareholder Rights Agreement.

In March 2015, our new composite panel facility in North Carolina made its initial shipments of lightweight sleeper cabs for the Class 8 truck market.  We hired a new leader for this location and anticipate that our investment in the North Carolina facility will open new opportunities for its products.  Eastern now has four panel-making facilities in North America.

Also in 2015, we completed the integration of Argo Transdata, which we acquired in December 2014.  An assembler of printed circuit boards, Argo contributed $4.9 in incremental sales during 2015. In December, the prior owner and leader of Argo retired. We hired a new leader with the expertise and relevant experience to help grow the business.

The mining industry continues to be affected by lower natural gas prices, excess coal inventories and stricter EPA regulations. As a result, sales in our Metal Products segment declined throughout 2015.  Our largest customer in the U.S. mining industry serves a significant portion of the coal mining market in the Eastern (i.e., Appalachian) region.  Of all U.S. mining regions, this one has seen the sharpest drop in its production because of its higher mining costs, which have made it difficult for the region to compete with natural gas and even coal mined in other areas of the U.S.  Growth in our sales to other U.S. mining regions and to the Canadian mining market partially offset the drop in our sales to the Eastern region.  In addition, our introduction of new products (including a shell and a small hole flange nut) helped offset some of the overall decrease in our sales of mining products.

At the Company’s annual shareholders meeting on May 20, 2015, shareholders elected James Mitarotonda and Michael McManus Jr. to the Company’s Board.  The Board quickly began to make positive changes: It terminated the Company’s “poison pill” shareholder rights agreement, and also took steps to declassify the Board   and adopt a majority-vote standard for the election of directors.  At the end of the year, the Board named James Mitarotonda as its Chairman and appointed August (Gus) Vlak to serve as President and Chief Executive Officer of the Company, effective January 1, 2016.

The Board has proposed adding a new independent director, nominating Fred DiSanto for election at the 2016 annual meeting.  Mr. DiSanto is the Chairman and Chief Executive Officer of The Ancora Group, a registered investment advisor.  He is currently on the boards of Axia NetMedia Corporation and LNB Bancorp Inc.  Mr. DiSanto was recommended to the Board by GAMCO Investors, Inc., the Company’s largest shareholder.

A New Chapter

Looking ahead, we are focusing on accelerating value creation and growth.  We are developing a plan for optimizing our diverse portfolio of businesses and for improving our capital allocation.

Our plan seeks to take advantage of our engineering capabilities, enduring brands and strong position in selected markets by pursuing new end markets and finding more ways to go to market.  We are also taking advantage of our combined strengths by increasing collaboration between our businesses.

We are simultaneously exploring merger and acquisition opportunities, including complementary acquisitions that further strengthen our high-return, high-potential businesses which can benefit from greater scale.  We have developed a disciplined approach for identifying potential acquisition targets and for evaluating the strategic benefits and return on capital of potential transactions.

Finally, we are improving our allocation and management of capital in order to increase our return on invested capital.  We have introduced new capital investment guidelines and have increased our emphasis on working capital.

Our plan relies on the hard work of everyone at Eastern, and we are thankful for the talent and unwavering commitment of our associates, senior operating executives and directors.

Looking ahead to the rest of 2016, we anticipate that increasingly challenging economic conditions in many of our end markets will likely further affect the performance of some of our businesses.  As a result, we believe that it is more important than ever to implement our plan for the future.  We look forward to reporting to you on our progress as we write the next chapter in the history of The Eastern Company.
 

Yours sincerely,

/s/August M. Vlak

August M. Vlak

President and Chief Executive Officer

/s/James A. Mitarotonda

James A. Mitarotonda

Chairman of the Board