The Eastern Company (EML) Earnings

Management highlights

### Overall Business Trajectory - Sequential improvement in net sales, gross margin, and adjusted EBITDA, paired with broad-based backlog growth, indicates an improving underlying business trajectory entering the second half of 2026. - End-demand in core truck markets is more constructive than one year ago, with heavy truck build rate recovery driving order growth across legacy businesses. ### Core Legacy Business Updates - The prior below-margin RAC contract issue at Big Three is fully resolved: all low-margin work has run off, permanent quoting and pricing review disciplines have been implemented, and new orders are booked at normal margins, with meaningful margin improvement already seen in June and July 2026. - Backlog grew 29% sequentially at Belvac and 19% at Eberhard, driven by rising heavy truck build rates. Eberhard's largest work truck body customer is exiting a prolonged demand trough, and its new ATV product program remains on schedule. - Velvac completed its ERP system transition on April 1, and continued to ship product and close the quarter on schedule despite transition disruption; full normalization is expected by the end of Q3 FY2026. No additional ERP rollouts are planned for other segments. - Big Three's returnable rack business has seen growing demand tied to new automotive model launches, with backlog nearly full for the remainder of 2026 after winning projects on a competitive basis. ### Aerospace & Defense Acquisition - Eastern acquired California-based precision component manufacturers Sun Gear and Crown Precision (high-tolerance parts for commercial aerospace and defense) during the quarter, entering the aerospace and defense end market for the first time. - A one-time non-cash bargain purchase gain of $6.5 million was recorded on the acquisition, as the fair value of acquired net assets exceeded the $7.85 million purchase price. - These acquired businesses are embedded in long-cycle programs with multi-year growth tailwinds from major aerospace and defense customers, and address a market bottleneck where Tier 2/3 supplier capacity cannot meet current demand. - This is the first step in building a differentiated precision manufacturing aerospace and defense platform through organic investment and further disciplined acquisitions, diversifying Eastern away from its heavy truck exposure. ### Capital Allocation - Capital allocation priorities remain unchanged: maintain a strong balance sheet, invest in organic growth, pursue value-accretive acquisitions, and return capital to shareholders via dividends and opportunistic share repurchases. - Liquidity remains strong, with $59 million of availability under the $100 million revolving credit facility, and the company is in full compliance with all debt covenants. - Eastern has now paid a consecutive quarterly dividend for 344 quarters. In Q2, the company repurchased 19,529 shares, bringing first-half repurchases to just over 40,000 shares, with 256,000 shares remaining under the current repurchase authorization.

Guidance

- Management expects the majority of the current $126.2 million total backlog (45% year-over-year growth) to convert to revenue over the second half of 2026, providing much stronger revenue visibility than existed at the same point in 2025. - Gross margin is expected to improve sequentially through the second half of 2026 as lower-margin legacy work is fully behind the company, higher backlog volume converts to revenue, and tariff cost pass-through is already mostly complete. - Revenue from the combined Sun Gear and Crown Precision acquisition is expected to reach ~$20 million annual run rate, with the acquisition expected to be accretive to earnings starting in FY2026. Long-term targeted gross margin for the aerospace segment is 20% to 30%, to be achieved through throughput improvements and selective pricing actions. - New automotive model launch activity for the returnable rack business will increase in 2027, with backlog already growing substantially ahead of this activity. Heavy truck demand growth is expected to continue through the remainder of 2026 and into 2027. - No formal full-year financial guidance was revised or reaffirmed in the call, but management explicitly expects stronger second half 2026 performance compared to the first half and the year-ago second half.

Segment performance

Eastern Company reports net sales from continuing operations of $61.8 million for Q2 FY2026, a 11.9% year-over-year decrease. Breakdown by product segment: 1. Truck mirror assemblies: Lower shipments drove a $5.7 million year-over-year revenue decrease, with a $11.7 million increase in backlog. This segment benefited from recovering heavy truck build rates, driving sequential order growth. 2. Returnable transport packaging (Big Three segment): Lower shipments led to a $3.4 million year-over-year revenue decrease, with a $4.7 million increase in backlog. The segment has broadened its customer base, and below-margin RAC contracts have fully run off, with margin improvement realized in the final month of the quarter. 3. Latch and handle assemblies: Lower shipments drove a $0.9 million year-over-year revenue decrease, with a $3.6 million increase in backlog. 4. New Aerospace & Defense segment (acquired Sun Gear and Crown Precision, effective June 1 2026): Contributed $1.7 million in revenue in Q2, with $19 million in acquired backlog. The two businesses combined are expected to hit ~$20 million in annual revenue once fully ramped. Overall gross margin for the quarter was 33.3% (20.6 million on $61.8 million sales), down from 23.3% in the prior year period due to lower overall volume, runoff of below-margin contracts, and temporary break-even margins from the new acquisition in its first month of operation.

Risks & headwinds

- Current temporary break-even margins for the newly acquired aerospace businesses will pressure consolidated gross margins for the next few quarters until acquired lower-margin inventory is burned through and pricing improvements are implemented for existing backlog. - ERP transition at Velvac continues to have unresolved operational issues, though core business functions have remained uninterrupted. - Tariff changes require ongoing price adjustments with major customers, creating potential near-term margin volatility if adjustments do not align with cost changes. - All forward-looking statements are subject to general market and macroeconomic risks that could cause actual results to differ materially from projected outcomes, as detailed in the company's SEC filings (Form 10-K and Form 10-Q).

Analyst Q&A

• Q: With heavy truck build rates accelerating in the second half, what magnitude of revenue and margin improvement can be expected, and how will the new aerospace acquisition impact consolidated margins? /

  A: Management confirmed that rising truck build rates have already translated to firm orders, which is the main driver of the large backlog increase. They note that while the faster-growing truck business has slightly tighter margins, the volume benefit of higher builds will outweigh any mix impact on consolidated margins. The one-month break-even margin from the aerospace acquisition only creates a ~120 basis point drag on consolidated margins, which is not material to overall results. The acquisition is expected to be accretive to full-year FY2026 earnings, and will reach targeted 20%-30% gross margins over time.

• Q: What is the long-term strategic rationale for acquiring Sun Gear and Crown Precision, given they are currently running very low margins? /

  A: Management explains that aerospace and defense currently faces a major capacity bottleneck, with insufficient Tier 2/3 supplier capacity to meet rising demand. Eastern's long-term ownership model and operating discipline position the company to acquire and improve these small suppliers to meet unmet demand. This acquisition is the first step in building a diversified aerospace and defense platform, which reduces Eastern's reliance on the heavy truck market while creating long-term shareholder value.

• Q: What is the expected revenue run rate for the new aerospace businesses, and when will margins reach target levels? /

  A: The combined businesses are expected to reach ~$20 million in annual revenue, up from the ~$5 million quarterly run rate implied by the first partial month of operation. The current break-even margin is partially due to a fair value step-up on acquired inventory, which will pressure margins until this inventory is sold through over the next few quarters. Roughly half of the acquired $18 million backlog will be fulfilled in 2026, and most of the backlog already has updated pricing that aligns with target margins, with only a small number of low-margin projects needing immediate adjustment.

• Q: When will tariff cost changes flow through to the P&L, and how significant is any potential tariff refund? /

  A: Management notes that almost all tariff cost changes have already been passed through to customers via pricing adjustments within 30 days of tariff changes, so almost all impact has already hit the income statement, with only minor amounts remaining to flow through in future quarters. Any potential tariff refund is not material at this point, and the company will provide an update if that changes in future quarters.