Good day, ladies and gentlemen, and thank you for joining us for The Eastern Company First Quarter 2019 Earnings Call. [Operator Instructions] And now to get us started with opening remarks and introductions, I am pleased to turn the floor to Head of Corporate Development and Investor Relations, Mr. Chris Moulton. Please go ahead, sir..

Thank you. Good morning and thank everyone for joining us. Speaking today will be Eastern’s President and CEO, Gus Vlak and CFO, John Sullivan. After that, we will 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 a 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 last night and our most recent 10-K. With that, I would like to turn the call over to Gus for opening remarks..

Thank you, Chris and good morning to those joining us on the phone and via the web. This morning, we will review our sales and earnings for the first quarter of 2019. Net sales for the first quarter were $60.9 million compared to $59.4 million for the same period in 2018.

Sales growth in the first quarter was primarily the result of the launch of several new truck programs and a continuation in the underlying strength of the medium-duty and heavy-duty truck market, which continues to drive demand for many of our products.

The commercial vehicle outlook by ACT forecasts that production of Class 5 to 8 commercial vehicles in 2019 will remain at a cyclical high up slightly from 2018. In addition, our sales benefited from investments we made in modular locking systems last year with strong sales growth to the truck accessories market.

Partially offsetting this strength was a decline in sales to recreational vehicle OEMs. Net income for the first quarter of 2019 was $1.6 million or $0.25 per diluted share compared to $3.1 million or $0.49 per diluted share for the first quarter of 2018.

The decline in our first quarter 2019 earnings reflects approximately 800,000 of onetime restructuring costs associated with the consolidation of facilities within our Composite Panels business.

Although this negatively impacted our earnings for the quarter, we believe this is a prudent move to optimize the performance of this business and realize cost savings going forward. Consolidation is also a good example of our ongoing work to optimize our portfolio of businesses.

In addition, we incurred approximately $300,000 in non-recurring startup costs associated with one new program in the first quarter. Although startup costs are an ordinary part of our business, these costs relate to a particularly large Class 8 truck hood mount mirror program that had a disproportionate impact in the quarter.

The ability to win these large programs is an excellent illustration of our success in maximizing the performance of our best businesses. Furthermore, our balance sheet continues to strengthen. Our debt as a percent in shareholder equity continued to decline.

We generated more cash from operations in the first quarter of ‘19 compared to the same period in 2018 by reducing our inventory levels, and we increased inventory turns since last December. John will provide you additional details on the quarter and walk us through the results..

Thank you, Gus. On a consolidated basis, net sales in the first quarter of 2019 increased 2% to $60.9 million from $59.4 million a year earlier. The increase was driven by strong sales growth in the Industrial Hardware segment, which Gus mentioned. It continues to be favorably impacted by a strong Class 8 truck market.

On a segment level basis, net sales in the Industrial Hardware segment increased 5% in the first quarter of 2019 compared to the first quarter of 2018. Sales increased in the Class 8 truck to distribution market where an increased volume accounted for 1% of the growth, while new products contributed 4%.

New products including the Class 8 truck hood mount mirror and a thermal protected power actuator for the specialty vehicle market. Net sales in the Security Products segment decreased by 3% in the first quarter of 2019 compared to the first quarter of 2018.

Sales volume of existing products declined 5% on lower demand for commercial laundry product and an overall decline in the semiconductor market effecting sales of our printed circuit boards. New product sales contributed 2% to growth which included a modular power lock for the vehicle market and a miniature tubular lock to the medical industry.

Net sales in the Metal Products segment in the first quarter of 2019 were comparable to the first quarter of 2018. However, sales of mining products decreased by 6%, while sales to industrial casting customers increased by 12%.

Sales volume decreased 9% on new products and price increases contributed 9% during the first quarter of 2019 as compared to the first quarter of 2018. New product sales included various industrial castings to the agricultural market.

On a consolidated basis, gross margin as a percent of sales in the first quarter of 2019 was 23% compared to 25% in first quarter of 2018. Cost of products sold in the first quarter increased $2.3 million or 5% as compared to the first quarter of 2018.

Material cost increased $1.8 million due to higher sales volume and higher material costs incurred in producing a new Class 8 truck mirror program awarded in 2018. Many of the components we used were at a higher-than-normal material cost. Not all of the related components have been resourced to more favorable cost suppliers.

Once all components are tested and approved by our customer, which is expected to be completed by mid-June, cost should normalize.

Also impacting the first quarter was increased freight cost of $0.2 million as compared to the first quarter of 2018, a slowdown at the Port of Long Beach California supplier quality issues and forecasting business resulted in expedited shipping costs to our customers at the company’s expense.

In addition, lower production levels resulted in operating cost not being fully absorbed in the amount of $0.4 million during the first quarter as compared to the first quarter of 2018. Also, we experienced tariff cost on China sourced products of approximately $0.2 million, which were not incurred in the first quarter of 2018.

Prior development expenses increased $0.9 million or 61% in the first quarter of 2019 compared to the first quarter of 2018. The majority of the increase relates to ongoing development of the new truck mirror program awarded in 2018.

Selling and administrative expenses decreased $0.8 million or 8% in the first quarter of 2019 compared to the first quarter of 2018, primarily due to lower payroll and payroll-related expenses.

Restructuring costs of $0.8 million were incurred in the first quarter of 2019 as we consolidated our sales in North Carolina composite panel operation into our Canadian operation in Kelowna, British Columbia. We incurred several costs, including the write off of inventory and fixed assets, moving severance and lease terminations expenses.

The closure is expected to be completed in the second quarter. Net income for the first quarter decreased to $1.6 million or $0.25 per diluted share from $3.1 million or $0.49 per diluted share in the first quarter of 2018.

As discussed, we have significant one-time costs associated with compositive panel business restructuring as well as projects startup cost for the new Class 8 truck mirror program. Eastern generated approximately $1.5 million of cash from operations during the first 3 months of 2019 compared to approximately $0.1 million during same period in 2018.

Our cash flow from operations coupled with cash at the beginning of the year were sufficient to fund capital expenditures, debt service and dividend payments. At this time, I’d like to turn it back to Gus for a few closing comments..

Thank you, John. Looking ahead, our backlog is healthy, and we expect our sales to remain strong for the remainder of 2019 due to continued demand for our products in Class 8 trucks, truck accessories and several other core markets as well as a number of new product launches.

As you know, we continue to look for opportunities that expand our portfolio through acquisitions and we remain committed to and are confident that our three-part strategy of optimizing our portfolio businesses, improving execution and building our balance sheet will generate long-term returns for our shareholders.

With that, I will turn the call back to Chris for questions..

Alright.

Operator, do we have any questions that have come in over the telephone?.

[Operator Instructions] And Chris, I do not see any signals from the phones.

Do we have any questions waiting from the web?.

Okay. Yes, we do have one question.

And the question is can we assume that with the $800,000 and the $300,000 one-time expense that we might have earned about $0.43?.

Well, I believe that’s correct. For those of you who have been following the company for a while, you know that our first quarter is generally a little slower.

Several of our businesses are affected by the December shutdown of some of our major customers as well as the Chinese New Year, but I would say as important we believe these one-time costs will help us generate earnings growth in the future..

Alright. I don’t think we have any other questions. And with that....

[Operator Instructions] And we have no questions from the phone set, Chris..

Alright. With that, it appears that we have no further questions. Thank you for joining us today. I’ll now turn the call back to the operator..

Ladies and gentlemen, this does conclude today’s earnings conference, and we do thank you all for your participation. You may now disconnect and we hope that you enjoy the rest of your day..