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    EML
    Earnings call· Jun 2026(Q2 FY26)

    EASTERN Q2 FY26 earnings call EML

    Aug 12, 2026 Source

    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

    5

    • 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

    5

    • 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

    4
    CategoryTargetConfidence
    Acquired aerospace businesses annual revenue
    close to $20 million a year
    medium materiality
    Medium
    Acquired aerospace businesses profitability
    profitable this year
    medium materiality
    High
    Acquired aerospace businesses backlog conversion
    probably half of that is going to be suitable for '26
    low materiality
    Medium
    Acquired aerospace businesses targeted gross margin
    20% to 30% range
    medium materiality
    High

    Operational metrics

    20
    Net sales growth
    -11.9%YoY
    Q2 FY26

    Driven by lower shipments of truck mirror assemblies ($5.7M decrease), returnable transport packaging ($3.4M decrease), and latch and handle assemblies ($0.9M decrease), partially offset by $1.7M increase in aerospace sales.

    Gross margin
    20.6%down from 23.3% YoY
    Q2 FY26

    Sequentially improved by 60 bps. Expected to build as second-half volume comes through.

    Gross margin sequential improvement
    60sequential
    Q2 FY26

    Improvement is separate from the bargain purchase gain.

    Tariff cost impact
    $1.9Mdown from $2.4M YoY
    Q2 FY26

    Year-to-date tariff costs were $5 million vs $3 million in H1 FY25.

    Selling and administrative expenses decrease
    $2.1Mdown 17.5% YoY
    Q2 FY26
    Operating profit margin
    2.7%down from 4.5% YoY
    Q2 FY26

    Includes a $6.5 million bargain purchase gain.

    Bargain purchase gain (non-cash, non-operating)
    $6.5M
    Q2 FY26

    Associated with the acquisition of Sun Gear and Crown Precision. Excluded from adjusted measures.

    Adjusted net income
    $0.9Mdown from $3.5M YoY
    Q2 FY26

    Excludes the $6.5 million bargain purchase gain and other non-operating items. Reflects volume and margin pressure.

    Adjusted EBITDA
    $3.4Mdown 49% YoY from $6.7M
    Q2 FY26

    Compression reflects lower volume and margin factors, expected to recover in H2.

    Cash balance
    $15.1M
    Q2 FY26
    Long-term debt
    $41.7Mup from $33.9M at year-end
    Q2 FY26
    Revolving credit facility availability
    $59M
    Q2 FY26

    With Citizens Bank, as of filing date.

    Dividend per share
    $0.11
    Q2 FY26

    Paid during the quarter.

    Shares repurchased
    19,000
    Q2 FY26

    Under existing authorization.

    Share repurchase authorization remaining
    256,000
    Q2 FY26
    Capital expenditures
    $1.5M
    H1 FY26

    Invested across the first half of the year.

    Acquired aerospace businesses revenue
    a bit soft
    June 2026

    First month of contribution.

    Acquired aerospace businesses gross margin
    breakeven
    June 2026

    Expected to remain low for a few quarters.

    Material cost increases
    a couple of percentYoY
    Q2 FY26

    Minimal impact.

    ERP implementation status
    expected to be completely normalized
    Q3 FY26

    Team has done a nice job, still some issues to resolve but business is shipping orders and closing on time.

    Industry KPIs

    3
    MetricValueDetails
    Tariff cost impact$1.9MUSD
    Order backlog order intake by segment$126.2MUSD
    Industry production market size forecastsup 24%%

    Orderbook & backlog

    9
    Total backlog$126.2M2026-07-04

    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$19M2026-07-04

    roughly half suitable for FY26

    Legacy business backlog increase26%Q2 FY26

    sequential increase

    primarily from heavy truck build increase and other improving end markets

    Velvac backlogup 29%Q2 FY26

    sequential increase

    Eberhard backlogup 19%Q2 FY26

    sequential increase

    Truck mirror assemblies orders$11.7MQ2 FY26

    higher

    Returnable transport packaging orders$4.7MQ2 FY26

    higher

    Latch and handle assemblies orders$3.6MQ2 FY26

    higher

    Acquired aerospace businesses total backlogjust over $18MQ2 FY26

    probably half suitable for '26

    Deals & partnerships

    1
    Crown Precision and Sun GearAcquisition 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

    4
    Lower volume and margin pressureQ2 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 3Q2 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 productsQ2 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 marginExpected 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

    4

    Gross margin trajectory

    Next quarter (Q3 FY26)
    Current20.6% in Q2 FY26, up 60 bps sequentially; further improvement in July
    TargetContinued 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.

    Q&A highlights

    5

    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 read6 chapters

    Detailed Narrative

    01

    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.

    02

    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.

    03

    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.

    04

    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.

    05

    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.

    06

    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.

    AI-generated summary of the company’s earnings call. Not investment advice.