Q4 2023 Eastern Company Earnings Call
Participants
Mark Hernandez; President & CEO, Director; Eastern Company
Nicholas Vlahos; Chief Financial Officer, Vice President; Eastern Company
Ernie Hawkins; Moderator; Eastern Company
Ross Davisson; Analyst; Banneton Capital LLC
Presentation
Operator
At this time, all participants are on a listen-only mode and a question and answer session will follow the formal 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, Mr. [Ernie Hawkins]. Sir, you may begin.
Ernie Hawkins
Thank you. Good morning, and thank you, everyone, for joining us this morning for a review of Eastern's results for the fourth quarter and full year 2023. With me on the call are Eastern's President and CEO, Mark Hernandez, and Eastern CFO, Nicholas license. We issued an earnings press release yesterday after the market closed. If anyone has not yet seen the release please visit the Investors section of the Company's website, w. w. w. dot Eastern Company.com. 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. 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 12th, 2020 form for the fiscal year 2023.
In addition, during today's call, we will discuss non-GAAP financial measures 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. 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 Mark.
Mark Hernandez
Thank you, Ernie, and good morning to both those who are joining us by the phone and those participating via the web. It's an absolute pleasure to be speaking with you today after a year of realignment and continuous improvement during which we focused on our core operations for long-term growth and shareholder value creation. As you know, since I became CEO in January of 2023, we've been following four fundamental strategies, disciplined operations, effective capital utilization, focused commercial business and value adding acquisitions to those four pillars we recently added a key overlying component we call one Eastern to help us capture the many synergies that exist between our three business operations during 2023. Our determined application of these strategies produced increasingly strong results as '23 progressed. For the full year, we boosted our gross margins by 280 basis points from 21% in 2022 to [28 or] 23.8% in 2023 through onshoring pricing increases and cost recovery actions. Earnings from operations improved continuously each quarter, culminating in earnings per share of $0.57 in the fourth quarter of 2023 compared to $0.03 in last year's period.
We achieved these results while dealing with the lingering impacts of troubled supply chains with customers reducing their inventory levels as global supply chain finally returned to its pre-pandemic state and with high inflation that hadn't been experienced for several decades. In addition to improving quality and consistency of our earnings, we brought down past due deliveries and past to order backlog. And we ended the year with working capital as a percentage of sales of 25.6% compared with 26.1% in 2022.
By reducing working capital requirements and generating cash flow from continuing operations, we brought down debt by more than $20 million. Cash flow from operations improved to $26.5 million in 2023 compared to $7.4 million last year. And our balance sheet strengthens commensurately. While achieving these results, we continued investing in our company and returning capital to shareholders during 2023, we streamlining operations, consolidating our focus on North America and in an example of vertical integration. We bought certain assets of Shore Flex, Inc. to expand valve that production capabilities. We also maintained its long-standing dividend program and repurchased 40,000 shares or approximately 0.6% of the company stock.
In 2023, our transformation strategy delivered strong early results, and we expect to drive further improvements in 2024. We now have a solid operational foundation. We need to consider revenue-enhancing acquisitions that will help Eastern grow and vertical integration initiatives that will support gross margin improvement.
Before I outline our approach for this year, I'll turn the call over to Nick for a quick review of the fourth quarter of 2023 financial results. Nick?
Nicholas Vlahos
Thank you, Mark, and good morning, everyone. As Mark said, I'll run through our financial results for the fourth quarter 2023 for the period.
Net sales decreased 3% to $67 million from $69.1 million in the 2020 period, primarily due to lower demand for truck accessories and returnable transport packaging products amidst the normalization of the global supply chain. In the fourth quarter, we strengthened our backlog as a whole, while at the same time reducing our past due back.
Our backlog as of December 30th, 2023, increased 10.5% to $80 million from $72.5 million on December 31st, 2022, reflecting an increase at Big Three for home services and returnable packaging and increase related to the launch of a new mirror program for Class 8 trucks at Belvac gross margin as a percentage of sales in the fourth quarter was 26.8% compared to 16.6% in the 2022 period. The increase and margin primarily reflects lower material, freight costs, improved pricing and a favorable adjustment to [LIFO] reserve in the fourth quarter of 2023, combined with other inventory write-offs in the 2022 period.
As a percentage of net sales, price development expenses were 2% compared to 1.5% for last year's fourth quarter. Selling and administrative expenses increased $1.9 million or 19.9% for the fourth quarter of 2023. The increase was primarily due to higher payroll and payroll-related expenses, legal and professional and selling costs. Other income and expense in the fourth quarter of 2023 decreased $3.2 million compared to the 2022 period. The decrease primarily reflected a favorable $1.1 million pension adjustment and various other items.
Net income for the fourth quarter of 2023 increased to $3.5 million or [$0.5] $0.56 per diluted share from $0.2 million or $0.03 per diluted share in the 2022 period. In the fourth quarter of 2022, net income was negatively impacted by restructuring costs of $0.5 million, net of tax related to a warehouse consolidation into Eberhard.
Adjusted EBITDA from continuing operations, a non-GAAP measure for the fourth quarter of 2023 was $7.2 million compared to $3.3 million for the fourth quarter of 2022. In 2023, we include increased our cash flow from operations by $19 million when compared to 2022. The improvement reflects a reduction in cash used to support working capital, primarily a $5.3 million decrease in inventory. In 2023, we reduced our accounts receivable days to 48 days from [66] days in 2022. By comparison last year, cash was primarily used to ensure the availability of inventory to meet customer demand in light of the supply chain constraints.
With this cash flow, we paid down $5 million of debt during the fourth quarter and $20 million for the full year. This is a record level of debt paydown for Easter. At the end of the fourth quarter, our senior net leverage ratio was 1.41:1, down from [2.27] at the end of 2022. In addition, we invested $6.4 million in capital expenditures and paid dividends of $2.8 million in 2023.
That completes my financial review. I'll now turn the call back.
Mark Hernandez
Thanks, Nick. At this point, I'll turn our plans for 2024 and be turned to our plans for 2024 and beyond. First and foremost, we continue going and we're going to focus on delivering consistent performance through our proven strategy of disciplined operations, effective capital utilization, focus, commercial business and value-added acquisitions all under the umbrella of what is the difference between today and our fourth quarter call last year. And it's important. One is that we now have a solid foundation of reliable earnings from operating activities to build on the foundation, positions us to continue driving earnings and cash flow paying down debt. And as I mentioned earlier, to seriously, consider us seriously considering and pursuing M&A opportunities that accelerate our objectives while continuing to focus on vertical integration to drive margin increases.
In 2024, we expect our goals to be aligned by aided by continued strong sales. Demand in the automotive and commercial vehicle markets are growing organic growth activities through new products and market share and market share improvements as well as acquisitions. Our core competence is supported by our $7.6 million increase in backlog as of year end 2023 to $80.1 million. This increase took place even as the global supply chain normalized customers cut back on excess inventory, and we reduced our past-due backlog. It is a strong indication of the new orders we're generating, including DeltaX launch of a new mirror program for Class 8 trucks and for Big Three's mold services and returnable packaging. We have many initiatives underway to enhance our gross margins even further through reductions in product costs, concentrating on total landed costs through our vertical integration make versus buy strategies and spending rationalization efforts. In addition, we've taken steps to ensure we have the right culture and opportunities in place to enable our teammates are Eastern's greatest resource to drive the Company forward every day, we've created achievable plans for each of the three businesses, changed our structure to realize synergies across our disparate companies and strengthening our incentive system. So it properly rewards cross-functional collaboration through these efforts, we're working to achieve more of more than what any one division is capable. We are also repositioning or all three of our businesses and reviewing our global footprint, analyzing how to improve our assets and optimize Eastern's sufficiency at Eberhard. For example, we are enhancing our portfolio of electromechanical products, focusing on new geographies and sectors, including government, where we can expand our business at Belvac. We're expanding our solutions for aftermarket in ways that will augment existing relationships. At Big three. We're taking steps to leverage our metal fab metal fabrication and machining capabilities to increase performance.
To sum up, we are committed to achieving operational excellence by focusing on Eastern's operating costs, quality, on-time delivery, and especially employee safety. We expect our company to continue to play a unique role in the industry, embraces the move toward electrification, the rejuvenation of internal combustion engine market, digitization and automation. We believe our capabilities are closely aligned with sustainable mobility, whether it be internal combustion engine or electric and through sustainable returnable packaging and commercial vehicle accessories that increase improvement in miles per gallon, but will result in increased miles per gallon by reducing wind resistance.
With that overview, let's open the floor to questions.
Question and Answer Session
Ernie Hawkins
Okay. So I think we'll go ahead, go ahead operator.
Operator
Sorry, sorry, I interrupted you, please Continue.
Ernie Hawkins
We will take questions from the web. First, we do have a few questions. First question, you grew both gross margin by 280 basis points in 2023, how should we think about margin expansion in 2024? Is another 280 basis point expansion possible?
Mark Hernandez
As I mentioned in our previous calls, we have aspirational goals to always increase gross margins as far as we can extend them. And this is supplemented by our cost improvement efforts through Eastern utilizing one Eastern to lower our strengthen our position for purchasing as well as vertical integration activities where we're bringing stuff in-house that we would normally pay outside services to other companies. So yes, I believe that we can continue this effort to grow gross margins.
Ernie Hawkins
And next question, as you get more active in M&A, what are your criteria in terms of size and profitability, which business offers the most attractive opportunities.
Mark Hernandez
Both. Let started with Shore offshore Flex. We want to take the crawl, walk run strategy going forward. We're looking for things first on the vertical acquisition space, that are smaller in nature, but can help our operations currently buy that currently exist today and improve our gross margins as well as we're always looking for acquisitions that can add to our revenue enhancing capabilities and leverage. The one is through strategy as we fold them into the Eastern Company.
Ernie Hawkins
Next question, Mark. You've been CEO of Eastern for nearly a year can you share any learnings from the past year that you'd like to implement in the coming year?
Mark Hernandez
Well, it's been a year of learning for me personally, but putting strategies on paper or just what just half the story is actually the easier have to put a strategy on paper. What's the challenge that I've seen in learning I have is getting everybody on the same page to pull towards one eastern. And we continue that effort. We've made significant progress, and that's what led to the launch of the one Eastern strategy now all of our companies, we're not only looking to win for themselves, but looking to win for Eastern.
Ernie Hawkins
Revenue was down when compared to the prior year quarter and prior year while earnings have strengthened. How do you see this going forward?
Mark Hernandez
While I look at this and TI in to a level, break it up into two pieces. One is as supply chains normalize. There was a reduction in getting a call just in case inventory where our customers were buying extra inventory to protect themselves against the unreliable supply chains. So we see that resulted in our revenue as they cut back on their orders. I also see it as some some headwinds that we know happened in the commercial vehicle industry as suppliers struggle to enhance the supply chain so that the OEMs can increase their production levels to normal. And then that was coupled with some of the packaging solutions projects that are happening in our Consumer Packaging side, not to be as robust as in previous years.
Ernie Hawkins
Okay. And our final question from the web, were there any one-time items in Q4 selling and administrative expenses?
Nicholas Vlahos
So I'll take that question, I think. And so yes, there were onetime expenses and selling and administrative expenses for recruiting and consulting fees. And then comparing on a prior year basis, as well, there was a positive adjustment in the prior year due to the removal of bonus accrual.
Ernie Hawkins
Okay. So with that, operator, we'll turn it back to you for any further questions.
Operator
(Operator Instructions)
Ross Davison with Banneton Company.
Ross Davisson
Hi Mark. Thanks for taking the question. I'm just picking up on the gross margin question earlier and the information you provided. It sounds like as always, there are some puts and takes on gross margin in the quarter with some things that are clearly ongoing, like improved pricing that you've worked hard to change in the material and freight costs, I'm getting more favorable or less negative, but there's also things like the life adjustment as you think through those puts and takes what should our expectation be for gross margin. I know and you just reiterated like a long term goal always to step that up, but in the short term is a 26.8% from this quarter, unusually high because some of those more temporary things like [LIFO] or is that a target you think you can keep attaining as we look ahead to 2024?
Mark Hernandez
As I stated earlier, earnings calls that our aspirational targets to get to 30% gross margins, and that is a stake in the ground of what we hold ourselves to. The life of adjustments you are things that are I kind of call them outside of operational control. So we'll continue to take those those those adjustments as they come However, from the operations side, we do believe that there's significant opportunity to grow our margins up. We're not giving up on pricing, but as we have new products come to market obviously, we're going to we're going to position them with focused commercial business strategy that yields us a gross margin that is acceptable to us and that we deserve.
And then on the second piece that that pulls our whole point towards vertical acquisitions or CapEx investment that that improves our ability instead of paying your outside services companies or direct material companies to produce products that we are able and capable of producing ourselves through capital tied to capital allocation or through mergers and acquisitions.
On the vertical acquisition side, we're very active in that space right now. And we see that there's a significant opportunity to to get to that 30%, which is the first hurdle that we're trying to achieve.
Ross Davisson
Great. That makes sense. And I guess just a quick follow-up on that. I mean just to put a finer point on it, is the [LIFO] adjustment in this quarter like a pretty meaningful piece of what allows you to hit that 26.8% or is it not like I'm just trying to get a sense of magnitude like should we should we not be surprised if it is if we don't have that in Q1, presumably on Yes, there's a big step down.
Mark Hernandez
It won't be as a meaningful impact in the future.
Ross Davisson
Okay. Thank you.
And then on the backlog, I'm sorry, go ahead, Jennifer.
Mark Hernandez
Yes, I was just going to add as a percentage of gross margin, it's not as significant as either opportunities that we're pursuing.
Ross Davisson
Got it. Okay. On the backlog, I understand it's up year over year on, but it was down sequentially. And I don't remember sort of the seasonality pattern. You usually see. Is the decline from Q3 or from Q3. Is that just seasonal or is that the past due backlog that you talked about or that you have capacity backlog going down? Is it something else like, I just want to double check if there's anything else that I should take away from the backlog ticking down like that from Q3?
Mark Hernandez
I have a lot of experience in commercial vehicles since Q3 tends to be the strong strong quarter for most of our commercial vehicle customers, and they focus on production to get units off of the assembly line, and then they focus the fourth quarter on getting those units out of the factories to recognize revenue. So it would make sense and there's less working days in the fourth quarter. So there's not a need and for to order parts to start up in 2023 as companies tried to rationalize their expenses to improve their their earnings. So it had a little bit of a cycle to it, but I didn't see it as significant. It has been in the past in my in my career.
Ross Davisson
Okay. So yes, it sounds like I mean, the items are normal and nothing massive necessarily read into. And then just on the revenue, just to close it out here. I was just thinking about sort of the some of the things you work through in 2023 ways on the normalization in orders as your customers start and sort of stocking having a buffer inventory, if you will. And also what you said about the truck OEMs not able to grow these are we are at a point now where on there's headwinds like on a quarterly basis are gone, are you still kind of anniversarying some some of that as you go into 2024, if that makes administering the kinds of like you obviously have a headwind as you kind of normalize in 2023. I'm curious, does that headwind persisting in 2024 just because of timing or we sorted of through that?
Mark Hernandez
I would answer it this way, Ross, is that the headwinds aren't increasing. They're actually kind of stable, and that's primarily driven by interest rates that would the falling of interest rates. We see that that headwinds will drop significantly from because commercial vehicles, the smaller commercial vehicle consumers will be able in the better position to replace their trucks. So I think I think it's what I would say right now. It's not increasing. The headwinds are steady, and we see positive signs through macroeconomic factors that will continue through 2024 to 2025.
Ross Davisson
Okay, great. Appreciate the added color and congrats on the year.
Mark Hernandez
Thank you.
Operator
Thank you. (Operator Instructions) Okay. As we currently have no further questions, I will hand back to Mr. Hernandez for any closing comments.
Mark Hernandez
Okay. I'd like to say thank you for joining us today. We are confident in our strategy, which for us brought consistently improved results in 2023 provides an excellent foundation for the future. We are looking forward to giving you an update on our progress after Q1. In the meantime, if you need additional information, please reach out to us. And thanks again for joining us today.
Operator
Banking.
This concludes today's conference call and you may disconnect your lines at this time. We thank you for your participation.
