The Eastern Company (EML) Q2 2026 Earnings Report, Transcript and Summary

Good day, everyone. Welcome to The Eastern Company Second Quarter Fiscal Year 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Vice President and Chief Financial Officer, Nicholas Vlahos. The floor is yours.

Good morning, everyone, and thank you for joining us for a review of The Eastern Company's results for the Second Quarter of 2026. With me on the call is Ryan Schroeder, Chief Executive Officer. The company issued its press release yesterday after market close. If anyone has not yet seen the release, please visit the Investor Information 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'll 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 margins, 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. 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 those risks and uncertainties please refer to risk factors discussed in our SEC filings, including our most recent annual report on Form 10-K and our quarterly reports on Form 10-Q. 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. A reconciliation of each non-GAAP measure discussed today to the most directly comparable GAAP measure can be found in the earnings press release. With that introduction, I will turn the call over to Ryan.

Thank you, Nick, and good morning, everyone. Welcome to The Eastern Company's Second Quarter 2026 Earnings Conference Call. Following my prepared remarks, Nick will walk through the financial results in greater detail. We will then open the call for your questions. I want to begin with our view of the quarter and the direction of the business as we move into the second half of 2026. The quarter included several moving pieces, but the sequential improvement in our results and the strength of our order book gives us increasing confidence of the underlying trajectory of the business. Our bottom line results included a onetime bargain purchase gain of approximately $6.5 million associated with the acquisition of Sungear and Crown Precision. The transactions became effective on June 1, so the quarter includes one month of contribution from those businesses. Net sales from continuing operations were $61.8 million, below the prior year period by 11.9%. On a sequential basis, however, net sales, gross margin and adjusted EBITDA from continuing operations all improved. We believe that this sequential improvement together with the marked increase in our backlog is a better indication of where our business is headed. More in backlog in a moment. Gross margin increased approximately 60 basis points sequentially even as we absorb the final effect of the below margin rack contract at Big 3. That operating improvement is separate from the bargain purchase gain. The forward indicators strengthened as well. Backlog increased across every business, with the most notable sequential gains at Velvac and Eberhard, where backlog increased by 29% and 19%, respectively, over the quarter. As we discussed last quarter, Big 3 accepted a block of rack orders at margins below our minimum threshold in an effort to fill capacity during a softer demand period. We addressed the root cause by tightening the quoting process and strengthening the review and accountability around how work is priced and accepted. That work has now run off, and the margin challenge is completely behind us. New businesses being booked at normal margins and the disciplines we put in place will remain permanent features of the business. Consequently, we saw a meaningful improvement in Big 3's gross margin during the final month of the quarter, with further improvement realized in July. Backlog also increased positioning the business for a much better performance over the balance of the year. The improvement extends beyond Big 3. The recovery we have been anticipating is now evident in our order book and the demand environment heading into the second half of 2026 is more constructive than it was a year ago. At quarter end, backlog was $126 million, up 45% year-over-year. Roughly half of the increase came from our existing businesses, with the balance coming from the orders added through the new aerospace and defense platform. We expect the majority of the current backlog to convert to revenue over the balance of the year, providing better second half visibility than we had at this point in 2025. Within the existing portfolio, the largest driver is the recovery of the heavy truck build rates. That is benefiting Velvac and Eberhard, while demand is also improving across several of our other end markets. At Eberhard, our largest work truck body customers emerging from a prolonged trough. Our new door and actuation program from a customer's next-generation side-by-side ATV also remains on schedule. At Velvac, the team is managing the increase in demand while stabilizing the new ERP system. Importantly, the business continued to ship product and closed the quarter on schedule through that transition. We are also seeing progress in returnable racks, where Big 3 has broadened its customer base. The combination of improving end markets and a more diversified order book gives us greater confidence as we have entered the second half. During the quarter, we expanded into the aerospace and defense markets through the acquisition of two precision manufacturers of high-tolerance components. The acquisitions of Crown Precision and Sungear were made at what we believe is an opportune time. These 2 California-based businesses manufacture high tolerance components for commercial aerospace and defense applications. Both our embedded and long-cycle programs and have exposure to multiyear procurement tailwinds at leading customers. Their customers are signaling a higher output requirements in the coming years creating a meaningful opportunity for us to support that growth. This was a disciplined and opportunistic use of our capital. These businesses diversify Eastern by adding exposure to different end markets, longer-cycle programs and mission-critical applications. We moved quickly to acquire these high-quality businesses at an attractive valuation. And I want to recognize Nick and his team for executing both transactions quickly and thoughtfully. Our initial priorities are to invest in the people, processes and equipment needed to increase throughput and shortened lead times while maintaining the quality standards these applications require. Our long-term ownership model and operating discipline are well suited for these businesses. Over time, we see the potential to build a differentiated precision manufacturing platform through both organic investment and disciplined acquisitions. Our capital allocation strategy remains unchanged, maintain a strong balance sheet, invest in our businesses, pursue acquisitions that strengthen the portfolio and return capital through our quarterly dividend and opportunistic share repurchases. Our liquidity remains strong, giving us the flexibility to support organic growth while continuing to evaluate strategic opportunities. The 2 acquisitions completed during the quarter demonstrate the disciplined approach we intend to maintain. Eastern has now paid a quarterly dividend for 344 consecutive quarters. During the second quarter, we also repurchased 19,529 shares bringing first half repurchases to just over 40,000 shares. As of July 4, 256,000 shares remain available under the current authorization. With that, I'll turn the call over to Nick to review our second quarter financial results in greater detail. Nick, over to you.

Thank you, Ryan. Net sales for the second quarter of 2026 decreased 12% to $61.8 million from $70.2 million in the second quarter of 2025. The decrease was driven by lower shipments of truck mirror assemblies, returnable transport packaging and latch and handle assemblies of $5.7 million, $3.4 million and $0.9 million, respectively. The decrease was partially offset by a $1.7 million increase in aerospace sales from our newly acquired businesses. Our backlog as of July 4, 2026, was $126.2 million, an increase of $39 million or 45% from $87.1 million a year ago and up from $82.2 million at the end of the first quarter. The increase in backlog reflects broad-based order strength across our legacy businesses layered on top of the acquired aerospace book, and it underpins the momentum we are seeing going into the second half. Specifically, backlog was driven by $19 million of acquired aerospace orders together with higher truck orders for truck mirror assemblies of $11.7 million, returnable transport packaging of $4.7 million and latch and handle assemblies of $3.6 million. Gross margin as a percentage of net sales was $20.6 million or $12.8 million in the second quarter compared to 23.3% or $16.4 million in the prior year period. The year-over-year decline reflects lower volume across a smaller revenue base with a runoff of below-margin Big 3 Precision contracts Ryan described and tariffs costs on China-sourced products of approximately $1.9 million in the quarter compared to approximately $2.4 million a year ago, most of which we recovered through price. Those below-margin contracts are now largely behind us. New orders are booking at healthier margins, and we expect gross margin to build as the second half volume comes through. As a percentage of sales, product development costs were consistent with the prior year quarter. We continue to invest in new products across our businesses while maintaining cost discipline relative to our revenue base. Selling and administrative expenses decreased $2.1 million or 17.5% in the second quarter compared to the prior year period. The decrease was primarily driven by $1.9 million of lower restructuring charges along with lower personnel and amortization costs, partially offset by higher computer expenses. Operating profit for the second quarter was $1.7 million or 2.7% of net sales compared to $3.1 million or 4.5% in the prior year period. The item that stands out this quarter is a bargain purchase gain. In connection with our acquisition of Sungear and Crown Precision, we recorded a onetime noncash bargain purchase gain of $6.5 million. Under GAAP, we record the assets we require and the liabilities we assume at their fair values. When the fair value of the net assets acquired exceeds the consideration that we pay, the difference is recognized as a gain. That's what happened here. This game is nonoperating and noncash. We exclude it from our adjusted measures, so it does not obscure the underlying performance of the business. Other income and expense for the second quarter was $0.1 million of expense compared to $0.1 million of income in the prior year period. Interest expense was $0.6 million in the second quarter, down modestly from the prior year. Income tax expense for the second quarter was $1.9 million compared to $0.5 million in the prior year period. The increase reflects higher pretax income, including the tax effects associated with the acquisition and the bargain purchase gain. Net income from continuing operations for the second quarter was $5.6 million or $0.94 per diluted share compared to $2 million or $0.33 per diluted share in the prior year period. The GAAP figure includes the $6.5 million onetime noncash bargain purchase I described above. Excluding that gain and other items, we do not view as reflective of ongoing operations, adjusted net income from continuing operations was $0.9 million or $0.15 per diluted share compared to adjusted net income of $3.5 million or $0.57 per diluted share a year ago. The adjusted figure is a cleaner read on the quarter. It reflects the volume and margin pressure we have discussed, and we expect that pressure to ease as the recovery in our order book reaches the income statement. Adjusted EBITDA from continuing operations for the second quarter was $3.4 million compared to $6.7 million a year ago, a decrease of approximately 49%. The compression reflects lower volume and margin factors I described, and we expect it to recover as the second half volume and mix improves. Turning to the balance sheet and cash flow. We generated $12 million of cash from operations in the first 6 months, a substantial improvement from $1.9 million a year ago. Total assets were $245 million. We ended the quarter with $15.1 million of cash, inventories of $66 million and accounts receivable of $36.8 million. On debt and liquidity, long-term debt was $41.7 million at quarter end, up from $33.9 million at year-end, reflecting borrowings to fund the $7.85 million acquisition of Sungear and Crown Precision. We had $59 million of availability under our $100 million revolving credit facility with Citizens Bank as of our filing date, and we are in compliance with all covenants. That capacity gives us the flexibility to fund organic growth and to continue pursuing disciplined strategic acquisitions. Our capital allocation priorities are unchanged. We continue to deploy capital with discipline. During the quarter, we paid a dividend of $0.11 per share. We repurchased 19,000 shares under our existing authorization with 256,000 shares remaining available, and we invested $1.5 million in capital expenditures across the first half of the year. That completes my financial review. I will now turn the call back to Ryan.

Thank you, Nick. Before we open the call for questions, I want to leave you with one takeaway. Eastern enters the second half of 2026 in a significantly stronger position than it began the year. Our order book provides improved visibility. Our margin trajectory is moving in the right direction and our new aerospace and defense platform expands our long-term growth opportunity. Our job now is to execute, convert the backlog into profitable shipments make the investments that support organic growth and remain disciplined as we evaluate additional opportunities. With that, operator, please open the line for questions.

[Operator Instructions] Your first question is coming from Jake Patterson with Talanta Investment Group.

I've got a couple. I don't know if you can see how many people are in queue or not. I know last time, there's no one on here, so I was hoping to run through a few of these. But just curious, I know, obviously, the truck builds being a pretty big driver of the business, and those are set to improve about 26% or so second half run rate versus first, but even second quarter builds were up like 24% versus first quarter and your guys' revenue was kind of down a little -- or I mean, obviously, up a little bit sequentially. But kind of just curious like as we think about builds accelerating, kind of how that flows through the P&L because I know you guys kind of deal with customer inventory and their order rates and whatnot. So kind of just curious, can you kind of frame expectations for level of revenue increase you can maybe expect second half given what's going on in the end markets?

Yes. So from a truck build rate standpoint, we are feeling that in both of those 2 businesses, but most notably within Velvac Eberhard as well. So we expect it to continue to trend upwards a bit. And as we work through the second quarter, certainly, we saw the improvement in the top line for those customers, most notably PACCAR and DP&A improve fairly significantly as you had noted. So we felt that most notably in June, and we expect that in July, and we expect that to continue for the remainder of the year and well into 2027.

Got you. Okay. And then too, I know you guys mentioned on your call last quarter that a lot of your customers are adding capacity. I was kind of curious how we should maybe think about that if you guys are going to have like a higher revenue per build, I guess, you could look at it like that. But I was curious if that was implying like any maybe upside to where you guys have historically been within that Class 8 heavy truck market?

Yes. We're expecting a very strong second half, no doubt about it. And last quarter, when we spoke about it, we mainly spoke about the impending increase. And then over the quarter, that transitioned to firm orders. So that is a major driver to the significant increase in our order backlog. And our backlog on our legacy business increased something like 26% from the beginning of the quarter to the end of the quarter, and that's primarily resulting from -- or coming from that heavy truck build increase as well as some of the other major end markets that have been quite soft in the first half of this year and really the second half of last year.

Okay. And then too, I know you guys mentioned in the Q and on the call about the tariff cost paid, $5 million year-to-date versus $3 million in first half last year. I was curious like -- I know you said you recovered that with pricing, but has that pricing flowed through the P&L yet? Or is that to be recovered in future quarters?

It's mostly flowed through the P&L. I mean we were able to capture that for those pricing increases needed pretty live and accurate. And then when tariffs changed here a couple of months ago, our prices with our customers reduce some. So we really -- we as much as we'd love to hold on to all of that, we really have for our major customers, that tariffs are impacting them significantly. We manage those prices as tariffs have changed in a live manner throughout. So it's currently -- there's certainly going to be some that's coming in future quarters, but it's mostly been close to within 30 days of the change in tariffs.

Okay. I mean the reason I ask that, I guess, because you're looking at gross margins here compared to your fiscal '24 period, you're kind of running at mid-20s, we're down to 20.8%. And now you have this acquisition that looks like it's going to be a drag on gross margin just based on that one month, if you quarterize it, I suppose, it's like a 5% gross margin. So kind of just -- I know, obviously, volume is a huge driver of margin expansion, but just kind of trying to get an idea of like the magnitude of the increase we should see off these kind of trough levels, but obviously, you've got some other moving parts in there. So I'm just curious, maybe if you could touch on -- if you can frame any expectations around the magnitude of the margin increase or kind of maybe some expectations on this acquisition margin and maybe what the plan is there to get them up to profitability?

Yes. So there is a bit of a mix impact to our gross margins, setting aside the acquisition, I'll come back to that here in a second, but there is a bit of a mix impact where some of our -- some of the tighter margin businesses but more. That being said, we feel strongly that the volume benefit that we're going to get from those products being up is going to outweigh the negative gross margin impact. So we feel confident that, that's going to be a favorable -- it's going to be a win in the whole scheme of things once it all comes out in the wash. As it pertains to the acquisition, yes, there's there's some pricing work that's going to need to happen there. And then there's some cost improvement, really operational improvements that we feel are going to bring that business along nicely. That being said, so maybe in the short term, it weighs a little bit on our overall gross margin. But by nature of the size of that business, it's not overly material from my standpoint. Nick, I don't know if you have more to add beyond that, but that's sort of my take would be it's not overly material.

I agree with you, Ryan. Yes, it looks like I mean like 120 basis points, give or take. So not a huge deal, but I mean, I'm looking at your April '26 investor presentation. What we look for in M&A 15% plus EBITDA margin, EBITDA earnings, demonstrating history profitability. obviously, there's not not a huge portion of the business, but I was kind of surprised to see a profitless aerospace company being acquired. So maybe like strategically, I know they have some future business that is supposed to ramp. I saw in the Q, their backlog is like $19 million. So obviously, it's not in there yet, but it's kind of surprised to see us. I don't know if you can maybe touch on how you view growth opportunities there, cross-selling synergies or just anything to kind of frame what the strategy is?

Yes. So our overall thesis is that there is a massive need in the Tier 2 aerospace market in terms of suppliers that currently exist within that market. There's a multitude of suppliers that maybe not all of them, I'm not trying to paint too broad of a picture here. But supply chain shortages and challenges are the bottleneck, the sole bottleneck for aerospace and defense markets. The demand significantly outweighs the ability to supply and it mainly falls upon the Tier 2 segment Tier 2 or Tier 3 segment and their inability to supply. We think we bring an operating scheme and long-term view that uniquely positions us to acquire and improve businesses very similar to Crown and Sungear. So this is -- hopefully, it's us step 1 and 2 of many, but we believe we can significantly grow our business as a whole, diversify Eastern. We love the truck segment, but diversify us away from the truck segment some while at the same time bringing long-term shareholder value from this acquisition and hopefully others to combat fit within this Aerospace and Defense segment.

Got you. Okay. I mean is there anything you can share like customer base or maybe like were they profitable at all in any of the last fiscal years? Or is this going to be kind of a longer-term runway to profitability?

No, they're going to be profitable. They're going to be profitable this year. They were profitable for the first half of this year after taking some pricing action last year, and we think there's more to be done there, and we intend for this acquisition to be accretive to our overall efforts this year. So this -- yes, there's going to be long-term things to do to improve it further, but we intend for this to be accretive now.

Okay. Cool. I don't know if there's anybody else behind me. I can squeeze one more, if I can. So I think last time you talked in March, I believe the model launch schedule for '27 was supposed to be kind of higher than historical levels. I know '25 was pretty low. It sounds like '26 is expected to be low. Just kind of curious maybe if you guys have any insight on kind of how '26 has looked from a changeover perspective and that impact on your packaging business and then maybe kind of some outlook for second half and if '27 is still expected to be pretty solid on that front?

Yes, '26 is going to be significantly better than '27. We're seeing that in our active backlog. And I'm sorry, '26 significantly better than '25 and '27 is going to be even higher than that. So there's a number of high-value automotive model launches that are well underway right now. And for Big 3, our -- at least as it pertains to our rack business, our backlog is pretty well full through almost the remainder of the year. There might be a little bit of room in the fourth quarter, but we've filled up significantly based on those model launches. So it's pretty much coming to fruition as we had spoken about in past quarters.

Okay. Cool. And I think you guys said you had to kind of win those on a project-by-project basis. So it sounds like you've had some success there.

Yes.

Your next question is coming from Mike Hughes.

Just a couple of follow-ups on the acquisitions. I know it's only one month, so maybe it's not representative, but taking the one month on a quarterly basis, about $5 million a quarter in revenue. Is that a good run rate?

I would hope it's going to be a little more than that. I mean it would be maybe $5 million and maybe $6 million a quarter or even a little bit above that is where we would hope for it to be. The first month out of the whole was a bit soft. So we think it's going to be -- has the potential, the 2 of them combined to be close to $20 million a year or something of that nature.

Okay. And then the gross margins were effectively breakeven for that 1-month period. Was there an inventory step-up on the acquisitions, meaning it was taken at the market level? And if so, I would assume that, that would carry forward until you burn through the revenue -- I'm sorry, the inventory that was acquired. Is that right? Or?

So yes, that is correct.

That is correct, yes.

Okay. So that will -- if you're doing a little more than $5 million a quarter in revenue, and it operates at roughly gross margin of around breakeven for a -- it's going to be a few quarters before we see a more reasonable level of gross margin out of that business. Is that fair?

That's correct. It's [indiscernible]. You got it exactly, right.

Okay. And what would be a targeted gross margin for that business.

Ryan, do you want me to address that one?

Nick, maybe you have this more in front of you. Yes. Yes, go ahead.

Yes. I think our targeted gross margin over time is going to be in a 20% to 30% range. There is actions that we have to do to improve some of the throughput process to get us there. And then we'll also be taking pricing actions as necessary as well.

Okay. And their backlog, what is their total backlog at this point?

It's just over $18 million.

And will you burn through most of that over the next few quarters, meaning the pricing could start to kick in, in '27? Or is there a carryover into '27 of that backlog that's going to be at a lower margin?

We're hopeful, it probably half of that is going to be suitable for '26. I would -- I don't believe we are going -- I can say we're not going -- for some of the products that are in the backlog and priced inappropriately, we're going to deal with those now and not wait for the next order to come. it's not going to be massive, but there's a few of these projects that we need to deal with in a sooner period of time. That being said, the vast majority of the backlog is priced at appropriate and healthy levels. And these are prices that the previous owners had gotten across the line and subsequently received orders at the new prices. So the backlog is priced differently than I'd say the business has historically performed. And as we go further and deeper into the backlog, we'll see those margin -- the margin targets Nick referenced become more of a reality and not just because of additional pricing and go gets we need to do right now, but from prices that have been realized in the latter part of last year.

Okay. And then on material cost inflation, what did you see in the quarter on a year-over-year basis? And then I believe you're on a LIFO basis for the vast majority of your business. Is that correct?

Ryan, do you want me to take that one?

Go ahead Nick?

So the material cost increases was minimal, a couple of percent. And I'm sorry, what was the second half of your question that you had, Mike.

You're on LIFO for most of your business. Is that correct? .

So only one of our businesses is on LIFO. That's our Eberhard business. The newer businesses do not have -- are not on LIFO.

Okay. Okay. And then just last question. I think on the last call, you mentioned an ERP implementation in one of your business lines. Can you just update us on how that's going and if there are any additional plans for other divisions for ERP rollouts?

Yes. Thanks, Mike. Yes, I touched on it quickly. So I know it was a very quick touch in my prepared statements, but we did go live in the ERP changeover at Velvac, and we did that April 1. There's still some things that we're working through, but I'm happy to report we're taking, making and shipping orders. We're -- the business has been able to close each month and the quarter on time. So I'm not going to say it's without any issues to still be resolved, but I'll say that the team has done a nice job getting it to where it's at. And we expect it to be completely normalized and not something we're going to even be talking about within this quarter. So it's -- we're getting there. It's -- I know it's one of the toughest things to go and do and we've been able to get that across the line. And no, we don't have any other ERP upgrades or changes on the docket for any of the businesses, including the 2 that we just acquired.

Okay. And I did have 1 last question for you, actually. Do you have a tariff refund amount, rough -- maybe a ballpark number?

No, it's not overly significant at this point in time that each of the businesses is mostly Eberhard and Velvac, that are working through that. So -- right now, it's not anything overly significant and they're still working on that. We might have more to report in that regard at the next quarter presentation.

There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Ryan Schroeder for closing remarks.

Thank you, and thank you, everyone, for joining us today. We are encouraged by the direction of the business and is focused on translating that momentum into stronger financial performance and long-term shareholder value. Thank you for your continued support of The Eastern. Please reach out to Nick or I if you have any additional questions. We look forward to updating you next quarter. Thank you, and goodbye.

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