Given $5 million in tariff costs year-to-date vs. $3 million last year, and claims of recovery through pricing, has this pricing flowed through the P&L, or is it expected in future quarters?

Management stated that tariff-related pricing has mostly flowed through the P&L, often within 30 days of tariff changes. They adjust prices with major customers as tariffs change. While some future flow-through is expected, most has already occurred. “It's 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.”

Expressed surprise at acquiring a "profitless aerospace company" given Eastern's M&A criteria, asking for clarification on growth opportunities, cross-selling, and strategy, especially given the 1-month contribution showed effectively breakeven gross margins.

Management clarified that the acquired businesses (Crown and Sun Gear) are profitable and expected to be accretive this year, having taken pricing action last year. The strategic thesis is to address a "massive need" in the Tier 2 aerospace market, where supply chain bottlenecks exist. They aim to grow this platform through operational improvements and further acquisitions, diversifying Eastern away from the truck segment. “Now they're going to -- they'll be profitable. They're going to be profitable this year... we intend for this acquisition to be accretive to our overall efforts this year.”

Inquired about the impact of model launches scheduled for '26 and '27 on the packaging business, especially regarding the '26 changeover and the solid outlook for '27.

Management confirmed that '26 will be significantly better than '25, and '27 is expected to be even higher. The packaging business's backlog is largely filled for the remainder of '26 due to high-value automotive model launches, confirming previous expectations. “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. '27 is going to be even higher than that.”

EML

EASTERN (EML) Q2 FY26 earnings call: guidance and Q&A

Earnings call· Jun 2026 (Q2 FY26)· Industrials· Aug 12, 2026

Source: earnings call transcript

Executive summary

The Eastern Company Q2 FY26 — Backlog Growth and Aerospace Expansion Drive Confidence

The Eastern Company reported a mixed Q2 FY26, with year-over-year declines in sales and adjusted profitability, but significant sequential improvements and strong forward indicators. A substantial increase in backlog, driven by both legacy business recovery and strategic aerospace and defense acquisitions, underpins management's confidence for the second half of 2026. The company successfully navigated an ERP implementation and resolved prior low-margin contract issues, positioning it for improved financial performance.

Highlights

Backlog increased to $126.2 million, up 45% year-over-year, with existing businesses contributing roughly half of the increase.
Gross margin improved approximately 60 basis points sequentially, with further improvement realized in July.
Successful expansion into aerospace and defense markets through the acquisition of Crown Precision and Sun Gear, adding $19 million in acquired aerospace orders to backlog.
Big 3's below-margin RAC contract issues are resolved, with new business booking at normal margins.
Generated $12 million of cash from operations in the first 6 months, a substantial improvement from $1.9 million a year ago.

Concerns

Net sales from continuing operations decreased 11.9% year-over-year to $61.8 million.
Adjusted net income from continuing operations decreased to $0.9 million or $0.15 per diluted share, down from $3.5 million or $0.57 per diluted share a year ago.
Adjusted EBITDA from continuing operations decreased approximately 49% to $3.4 million compared to $6.7 million a year ago.
Acquired aerospace businesses (Crown Precision and Sun Gear) had effectively breakeven gross margins in their first month of contribution due to inventory step-up, expected to weigh on overall gross margin for a few quarters.
Tariff costs on China-sourced products were $1.9 million in the quarter, largely recovered through price but still a cost factor.

Guidance & targets

Category	Target	Timeline	Confidence
Acquired aerospace businesses annual revenue	close to $20 million a year medium materiality	FY26	Medium
Acquired aerospace businesses profitability	profitable this year medium materiality	FY26	High
Acquired aerospace businesses backlog conversion	probably half of that is going to be suitable for '26 low materiality	FY26	Medium
Acquired aerospace businesses targeted gross margin	20% to 30% range medium materiality	long-term	High

Orderbook & backlog

Total backlog $126.2M 2026-07-04

up $39M or 45% YoY from $87.1M; up from $82.2M at Q1 end

majority expected to convert to revenue over the balance of the year

Acquired aerospace orders $19M 2026-07-04

roughly half suitable for FY26

Legacy business backlog increase 26% Q2 FY26

sequential increase

primarily from heavy truck build increase and other improving end markets

Velvac backlog up 29% Q2 FY26

sequential increase

Eberhard backlog up 19% Q2 FY26

sequential increase

Truck mirror assemblies orders $11.7M Q2 FY26

higher

Returnable transport packaging orders $4.7M Q2 FY26

higher

Latch and handle assemblies orders $3.6M Q2 FY26

higher

Acquired aerospace businesses total backlog just over $18M Q2 FY26

probably half suitable for '26

Deals & partnerships

Crown Precision and Sun Gear Acquisition of two precision manufacturers of high-tolerance components for commercial aerospace and defense applications. $7.85M

Transactions became effective June 1. Acquired at an attractive valuation to diversify Eastern and build a differentiated precision manufacturing platform.

Risks & headwinds

Lower volume and margin pressure Q2 FY26

Adjusted EBITDA decreased approximately 49% to $3.4 million from $6.7 million YoY. Adjusted net income decreased to $0.9 million from $3.5 million YoY.

Mitigation:Expected to ease as recovery in order book reaches income statement and second half volume and mix improves.

Below-margin RAC contract at Big 3 Q2 FY26 (final effect)

Contributed to year-over-year decline in gross margin.

Mitigation:Contract has run off and is completely behind the company. Root cause addressed by tightening quoting process and strengthening review/accountability. New business booked at normal margins.

Tariff costs on China-sourced products Q2 FY26 and H1 FY26

$1.9 million in Q2 FY26 compared to $2.4 million in Q2 FY25. Year-to-date $5 million vs $3 million in H1 FY25.

Mitigation:Mostly recovered through price. Prices managed live as tariffs change.

Inventory step-up impact on acquired aerospace businesses' gross margin Expected for "a few quarters"

Effectively breakeven gross margins for the first month of contribution.

Mitigation:Management plans pricing work and operational improvements to bring gross margin to a targeted 20-30% range over time.

What to watch in Q3 FY26

Gross margin trajectory

Next quarter (Q3 FY26)

Current 20.6% in Q2 FY26, up 60 bps sequentially; further improvement in July

Target Continued build as H2 volume comes through

Why it matters

Indicates the effectiveness of pricing disciplines and volume recovery on profitability.

New orders are booking at healthier margins, and we expect gross margin to build as the second half volume comes through.

Find out whether EML delivers this. Inve re-checks your case every morning.

Q&A highlights

How will accelerating truck builds, which were up 24% sequentially in Q2, translate into revenue for Eastern in the second half, considering customer inventory and order rates?

Management confirmed they are feeling the impact of increased truck build rates, especially at Velvac and Eberhard, and expect the upward trend to continue into 2027. The increase in legacy business backlog (26% from Q1 to Q2) is primarily due to this heavy truck build increase and improving demand in other soft end markets.

“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.”

asked by Jake Patterson · answered by Ryan Schroeder

2 min read 6 chapters

Detailed narrative

Sequential Business Improvement and Outlook

The company experienced sequential improvement in net sales, gross margin, and adjusted EBITDA from continuing operations in Q2 FY26, which management views as a better indicator of business trajectory than year-over-year declines. This improvement, coupled with a significant increase in backlog, provides greater confidence for the second half of 2026. The demand environment is described as more constructive than a year ago.

Resolution of Big 3 RAC Contract Issues

The below-margin RAC contract at Big 3, which had impacted gross margins, has now run off and is completely behind the company. Management implemented tighter quoting processes and strengthened review and accountability for pricing. New business is being booked at normal margins, and the disciplines are permanent, leading to meaningful gross margin improvement at Big 3 in the final month of the quarter and further in July.

Aerospace and Defense Market Expansion

Eastern expanded into the aerospace and defense markets by acquiring Crown Precision and Sun Gear, two precision manufacturers of high-tolerance components. These acquisitions, effective June 1, add exposure to long-cycle programs and multi-year procurement tailwinds. The company aims to build a differentiated precision manufacturing platform through organic investment and further disciplined acquisitions in this sector.

Impact of Heavy Truck Build Rates

The recovery in heavy truck build rates is a major driver benefiting Velvac and Eberhard, contributing significantly to the increase in the legacy business backlog. Demand is also improving across several other end markets, including Eberhard's largest work truck body customers emerging from a prolonged trough and a new door and actuation program for a side-by-side ATV.

Capital Allocation Strategy

The company's capital allocation strategy remains consistent: maintain a strong balance sheet, invest in businesses, pursue accretive acquisitions, and return capital to shareholders. During the quarter, Eastern paid its 344th consecutive quarterly dividend and repurchased 19,529 shares, with 256,000 shares remaining under authorization. The recent acquisitions demonstrate a disciplined approach to capital deployment.

ERP System Implementation at Velvac

Velvac successfully went live with its new ERP system on April 1. While some issues are still being resolved, the business continued to ship products and closed the quarter on schedule through the transition. Management expects the system to be fully normalized within the current quarter, with no other ERP upgrades planned for other divisions, including the newly acquired businesses.

Summary of the company's earnings call; see how call summaries are prepared. Not investment advice.