Eastern Company 2026 Q2 Earnings Call

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 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 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 one-time bargain purchase gain of approximately $6.5 million associated with the acquisition of Sungear, LLC and Crown Precision. The transactions became effective on June 1st, 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 on backlog in a moment. Gross margin increased approximately 60 basis points sequentially, even as we absorbed 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 business is being booked at normal margins, and the disciplines we put in place will remain permanent features of the business. Consequently, we saw 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 customer is 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 close 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 two California-based businesses manufacture high-tolerance components for commercial aerospace and defense applications. Both are embedded in long-cycle programs and have exposure to multi-year procurement tailwinds at leading customers. Their customers are signaling 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. 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 shorten 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 two 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 4th, 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 4th, 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% 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, the 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 were 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, LLC and Crown Precision, we recorded a one-time non-cash bargain purchase gain of $6.5 million.