Eastern Q3 2026 Earnings Call Transcript

Eastern (NASDAQ:EML) reported third-quarter financial results on Wednesday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

The Eastern Company reported a 36% year-over-year increase in net sales to $75 million, driven by higher shipments and contributions from recently acquired businesses, Sungear and Crown Precision.

Gross margin expanded to 23.9%, aided by improved pricing strategies and cost recovery, while net income from continuing operations rose to $3.4 million, or $0.57 per diluted share, compared to $0.10 a year ago.

The company highlighted a strong backlog of $126 million, reflecting a 70% year-over-year increase, providing visibility through the first half of 2027.

Eastern’s acquisitions in the aerospace and defense sectors are expected to offer substantial growth opportunities, although current margins are below desired levels due to production complexities.

The company prioritized debt reduction, repaying $2 million in long-term debt, and maintained a conservative capital allocation strategy focused on organic growth, debt reduction, dividends, and strategic acquisitions.

Management expressed confidence in continued profitability and growth, emphasizing operational improvements and a strong customer response in the aerospace and defense segments.

Full Transcript

OPERATOR

Good day, everyone, and welcome to the Eastern Company’s third quarter fiscal year 2026 earnings call. At this time, all participants are placed on listen-only mode. If you have any questions or comments during the presentation, you may press star one on your phone to enter the question queue at any time, and we will open the floor for your questions and comments after the presentation. It is now my pleasure to hand the floor over to your host, Mary Ann Barr. Mary Ann, the floor is yours.

Mary Ann Barr (Investor Relations)

Good morning, and thank you, everyone, for joining us this morning for a review of the Eastern Company’s results for the third quarter of 2026. With me on the call are Ryan Schroeder, Chief Executive Officer, and Nicholas Vallejos, Chief Financial Officer. The Company issued its earnings press release yesterday after market close. If anyone has not yet seen the release, please visit the Investors 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 in these forward-looking statements.

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 these risks and uncertainties, please refer to risk factors discussed in our SEC filings, including Form 10-K filed with the SEC on March 3, 2026, for the fiscal year 2025. 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 of the non-GAAP measures discussed during today’s call to the most directly comparable GAAP measure can be found in the earnings press release.

With that introduction, I’ll turn the call over to Ryan.

Ryan Schroeder (Chief Executive Officer)

Thank you, Mary Ann, and good morning, everyone. Welcome to the Eastern Company’s third quarter 2026 earnings conference call. Following my prepared remarks, Nick will walk through the financial results in greater detail. We’ll then open the call for your questions. This is the quarter we have been pointing to since the beginning of the year and the one we have been working that we have been preparing for considerably longer over the last five quarters. We did the work to be ready for it. We built out the leadership teams across the businesses. We streamlined operations, reduced our cost base and positioned our businesses for profitable growth. We sharpened accountability and put operating discipline in place company wide.

This quarter is the first in which improving demand combined with these proactive changes and the results show the benefit when they come together. Net sales, gross margin and adjusted EBITDA were each the highest they’ve been in the last five quarters and operating profits more than tripled from a year ago. The improvement came as predicted, primarily from two places: volume returning to our existing businesses and a first full quarter of contribution from our recently acquired businesses, Sungear and Crown Precision. Pricing actions taken over the past year, including recovery of tariff costs related to China-sourced products, contributed as well.

Net sales increased 36% year over year to $75 million and gross margin expanded to 23.9%. Net income from continuing operations was $3.4 million, or 57 cents per diluted share compared with 10 cents a year ago. Adjusted EBITDA more than doubled to $7.6 million. One line moved the other way. Cash came down from elevated levels at the end of the second quarter and receivables built as shipments ramped. I’ll come back to why we viewed this as the cost of growth.

Two things drove the quarter: volume and Sungear and Crown Precision making their first full quarter contribution of revenue from the aerospace and defense markets. First, volume returns. Shipments rebounded across our existing businesses, led by truck mirror assemblies at Velvac and returnable transport packaging at Big 3. But they were not alone. We saw materially better end market response across the vast majority of our businesses. The Class 8 fleet replacement cycle is underway, driven in part by rising fuel costs that favor newer, more efficient engines.

And the truck manufacturers are building to take share. Mirror shipments were up $7.4 million year over year and returnable packaging was up $5.7 million. Order intake at Velvac has settled back to a normal cadence after the second quarter surge, which is why backlog was flat sequentially rather than up. Second, aerospace and defense is now in our numbers. This was the first full quarter with Sungear and Crown Precision in our results and they contributed $5.4 million to net sales.

I’ll say more about those businesses in a moment. Margins followed. Gross margin of 23.9% was up roughly 330 basis points sequentially and 160 basis points year over year. This was the first quarter in which our commercial vehicle volume came back and a test of our Big 3 remediation actions. As I have shared previously, the unprofitable RACC contracts at Big 3 that impacted us in the first half are completely behind us and we have substantially improved our quoting practices to ensure that issue never returns.

Those changes are now contributing to stronger margins as volumes recover. The number I’d point you to is our consolidated margin, which expanded even as we absorbed a full quarter of aerospace and defense at margins that are not yet where we want them to be. Returnable packaging demand is supported by a heavy vehicle launch calendar at the automakers, and over the last 24 months Big 3 has also broadened its customer base with intention. We have also seen dividends from the new products developed at Eberhard. New products added roughly 2% to consolidated net sales in the quarter, almost entirely from Eberhard. What you see in the third quarter is the front end of programs won 12 to 24 months ago. Eberhard is perhaps our most durable growth story and is worth spending a moment on it.

Eberhard’s model is new product development, whether customer directed or internal, and the cycle is long. A program we win today may not ship meaningful volume for 12 to 24 months on the customer’s launch timing rather than ours, so its contribution shows as steady growth from smaller releases with step ups when a larger program reaches production. The programs shipped today are the ones we told you about over the last year plus, and the pipeline behind them is larger than it was then.

We closed on the acquisition of Sungear and Crown Precision on June 1st and I have three observations from our first full quarter of ownership. First, the opportunity is substantial. Since closing we have a very encouraging amount of inbound interest both from the Southern California aerospace supply base and from customers looking for capacity. The prior owners had signaled to customers that they intended to wind down these businesses, so part of the work in the quarter was reestablishing those customer relationships.

They have come back. Second, margins are not where we want them to be, but the path to improving them is clear. The current mix is weighted towards high complexity, low volume, first run parts which does not provide the throughput needed to support margins. We knew that going in and it is why we were able to buy two well positioned businesses at a price that produced a bargain purchase gain. Third, our principal job now is operational, not commercial.

Business development at Sungear and Crown is strong. What the businesses need is operational depth, process discipline, shorter lead times and the management layer a larger operation requires. That is what Eastern brings. Over time we see the opportunity to build a differentiated precision manufacturing business in aerospace and defense through organic investment and through disciplined acquisitions that add scale and capabilities. That is a multi-year effort and we will report on it as we progress.

Our capital allocation priorities have not changed: maintain a conservative balance sheet, invest in our businesses, pursue acquisitions and strengthen the portfolio, and return capital through our quarterly dividend and share repurchases. During the quarter we repaid $2 million of long-term debt, bringing the balance to $39.7 million, and we continue to pay down the borrowings used to fund that June acquisition. We paid our regular quarterly dividend of $0.11 per share.

We did not purchase any shares in the third quarter. Debt reduction was the primary use of cash. Cash ended the quarter at $7.9 million, in line with where it has historically run with this business. Our borrowing capacity and the earnings power you saw in the quarter gives us the flexibility to fund organic growth, continue reducing debt, and act on acquisitions when they meet our criteria. With that, I’ll turn the call over to Nick to review our third quarter financial results in greater detail. Nick, over to you.

Nicholas Vallejos (Chief Financial Officer)

Thank you, Ryan. Net sales for the third quarter of 2026 increased 36% to $75 million from $55.3 million in the third quarter of 2025. The increase was driven by higher shipments of truck mirror assemblies, returnable transport packaging, and latch and handle assemblies of $7.4 million, $5.7 million and $1.1 million, respectively. It also included $5.4 million of aerospace and defense sales from Sungear and Crown Precision, which we acquired on June 1.

Sales of existing products increased 14.2% in the quarter and new products added 2.3%, including various latch and handle assemblies. Our backlog as of October 3, 2026 was $126 million, an increase of $51.8 million, or 70% from $70 million a year ago. Backlog was essentially unchanged from $126 million at the end of the second quarter. The year-over-year increase was driven by higher orders for truck mirror assemblies of $19.6 million, returnable transport packaging of $8.4 million, and latch and handle assemblies of $8.4 million, together with $15.4 million of acquired aerospace and defense orders.

Gross margin as a percentage of net sales was 23.9%, or $17.9 million in the third quarter, compared to 22.3%, or $12.4 million in the prior-year period. Material cost as a percentage of net sales declined approximately 300 basis points year over year. Tariff costs on China-sourced products were approximately $2.3 million in the quarter compared to approximately $4 million a year ago. We mostly recovered these costs through pricing actions. Gross margin in the quarter also absorbed $0.2 million of non-cash expense from the step-up of acquired inventory to fair value, which we exclude from our adjusted numbers.

As a percentage of net sales, product development costs were 1.5% in the third quarter compared to 1.8% in the prior-year period. In dollar terms, product development expense increased $0.1 million as we continue to invest in new products across our businesses while maintaining cost discipline relative to our revenue base. Selling and administrative expenses were $11.3 million in the third quarter compared to $9.6 million in the prior-year period, an increase of $1.6 million or 16.9%.

The increase reflects $1.8 million of higher compensation costs, partially offset by $0.2 million of lower severance costs. As a percentage of net sales, selling and administrative expenses improved to 15% from 17.4% a year ago as the increase in expense was more than absorbed by the higher revenue base. Operating profit for the third quarter was $5.6 million or 7.4% of net sales compared to $1.7 million or 3.1% in the prior-year period, an increase of $3.8 million. Turning to net income and adjusted net income, the GAAP and adjusted figures tell the same story this quarter. The volume recovery in the core businesses reached the income statement and the third quarter was the first full quarter of consolidated results for the acquired businesses. Net income from continuing operations for the third quarter was $3.4 million or $0.57 per diluted share, compared to $0.6 million or $0.10 per diluted share in the prior-year period.

Adjusted net income from continuing operations, which excludes $0.2 million of acquired inventory step-up expense and acquisition-related costs, net of tax, was $3.6 million or $0.60 per diluted share. This compares to adjusted net income of $0.8 million or $0.13 per diluted share a year ago. The prior-year adjusted figure excludes restructuring charges of $0.3 million or $2 million net of tax. Adjusted EBITDA from continuing operations for the third quarter was $7.5 million, or 10.2% of net sales, more than double the $3.5 million or 6.3% of net sales we reported a year ago.

Turning to the balance sheet, the third quarter was a working capital quarter. Supporting a 21% sequential increase in net sales required investment in receivables, and the first-half timing benefits in payables and accruals began to reverse. Working capital was $79.3 million and our current ratio was 2.7 times. Cash from operations was $8.9 million in the first nine months of 2026 compared to $5 million in the first nine months of 2025. With that, the third quarter used approximately $3.2 million of operating cash.

Cash, as receivables grew with shipments and the first-half build in payables and accrued expenses partially unwound. We ended the quarter with $7.9 million of cash. The $15.1 million balance at the end of the second quarter reflected first-half timing benefits in payables and accrued expenses. In the third quarter, cash was used to fund receivable growth on higher shipments, to repay $2 million of debt, and for capital expenditures and for the dividend.

Our current cash position is consistent with normal operating levels. Capital expenditures were $2.4 million in the first nine months of 2026 compared to $1.6 million in the prior-year period, and we had approximately $0.1 million of outstanding capital commitments at the end of the quarter. Long-term debt was $39.7 million at the end of the quarter, down $2 million from $41.7 million at the end of the second quarter, as we began repaying the revolver borrowings used to fund the June acquisition. Year to date we have funded the acquisition and recovery in volume with $5.8 million of net incremental borrowing.

We had $61 million of availability under our $100 million revolving credit facility with Citizens Bank. As of October 3, we were in compliance with all covenants and total debt to shareholders’ equity was 29.9% at quarter end. Our capital allocation priorities are unchanged: fund organic growth, continue to pay down acquisition borrowings, return capital to shareholders, and pursue disciplined strategic acquisitions. During the quarter we paid a dividend of $0.11 per share. We did not repurchase any shares during the third quarter and we have 256,000 shares remaining available under our existing authorization for future share repurchases. That completes my financial review.

I will now turn the call back to Ryan.

Ryan Schroeder (Chief Executive Officer)

Thanks, Nick. Before we open the call for questions, I wanted to give you our view over the next several quarters. Backlog supports the balance of 2026 and the first half of 2027. Backlog ended the quarter at $126.1 million, an increase of 70% year over year. We expect most of it to convert over the next two to three quarters. That is better visibility than we had a year ago. The shape of the conversion will follow our normal seasonal pattern. Our customers typically reduce production during the fourth quarter holiday season and the first quarter is generally our slowest.

Over the past two years, market conditions have disrupted these normal seasonal patterns. This year we expect a return to more typical seasonality, although from a much higher base. There are several items we are monitoring closely. First, input costs. Like other industrial companies, we are navigating rising material, freight and logistics costs well. There is a timing gap between when costs rise and when our pricing catches up. We are working through the normal commercial process with our customers to bring pricing in line with current input costs and expect to recover these costs over the coming quarters. Second, OEM build rates.

With truck production running at a high rate as manufacturers compete for share, we are keeping a close eye on the possibility that it moderates next year. The longer-term driver is different. Velvac’s largest contracts come from new truck platform awards which come along only every several years. Between platforms, the business grows with production. Third, working capital. The receivables we built in the quarter are the shipments you saw in the results and they convert to cash as they are collected.

That is the cost of growth and we are comfortable carrying it. Let me leave you with this. Eastern exits the third quarter larger, more profitable and more diversified than it was a year ago. The volume we said would return has returned. The margin remediation we said was complete is in the results. The programs we said were in tooling are shipping, and the aerospace and defense businesses we acquired in June give us growth opportunity that is not tied to the commercial vehicle cycle. Our focus from here is on execution, delivering on our backlog, sustaining our improved profitability, building on the opportunity that Sungear and Crown, and maintaining disciplined capital allocation.

With that, operator, please open the call for questions.

OPERATOR

Certainly. Everyone, at this time we will be conducting a question-and-answer session. If you have any questions or comments, please press star-one on your phone at this time. We do ask that while posing your question, please pick up your handset if you’re listening on speakerphone to provide optimum sound quality. And once again, if you have any questions or comments, please press star-one on your phone. Your first question is coming from Bill Duzellem from Teton.

Your line is live.

Bill Duzellem (Analyst)

Thank you. Congratulations on a solid quarter. Would you please update us after the conference call last quarter? On the conference call last quarter you talked about efforts to improve pricing on the Sungear and Crown Precision acquisitions. Some of those contracts were simply not priced correctly. Would you update us on your efforts there, please?

Ryan Schroeder (Chief Executive Officer)

Yeah. So it’s been a very active portion of the quarter in terms of trying to get our long-term agreements with a couple key customers in place and updated, and in the process of doing that, getting unfavorable business priced accordingly. Customers have, largely speaking, been supportive. Obviously nobody likes price increases—understandable—but largely speaking, have been supportive of our efforts and supportive of our long-term intentions. That’s probably the bigger part of it from their standpoint. So it’s an ongoing thing. I can’t say that we’re all the way there with it, but we have made meaningful progress in the quarter and we intend to make much more progress over the next, say, three to six months. These things sort of do take some time. Thank you. Thanks, Bill.

Bill Duzellem (Analyst)

And Ryan, when you make reference to your customers are supportive of your long-term intentions, walk us through what that means from the customer’s perspective. How are they viewing your long-term intention and how is that beneficial to them?

Ryan Schroeder (Chief Executive Officer)

Yeah, so without naming any names or getting too specific here—I’ll respect that—I’ll say this. If you look at the aerospace and defense market, the tier 2 or tier 3 position in the market, and that’s essentially where Crown and Sungear reside, in many cases it’s been challenging for the OEs to ramp up to the levels that they have orders for, that they have demand for, and very often, almost always, it’s because of suppliers’ inability to ramp up with them.

Our ability to invest in these businesses and our intentions to build, whether it’s organic capacity or inorganically be able to bring more options to those customers, I think—I know—they value that. And that’s central to our thesis of growing our aerospace and defense segment over time.

Bill Duzellem (Analyst)

That’s very helpful. And I have a couple more questions if time allows here.

Ryan Schroeder (Chief Executive Officer)

Sure, go ahead.

Bill Duzellem (Analyst)

So first of all, and you alluded to this in your opening remarks, but would you please provide some more detail on the opportunities to accelerate the acquisitions’ revenues? And, you know, originally as I thought about the question, I was thinking because they were no longer constrained from a financial perspective, but, you know, maybe in addition to that they’re no longer constrained by the idea they were being shut down. So maybe, maybe a little bit of both, please.

Ryan Schroeder (Chief Executive Officer)

Yeah, that’s part of it. You’ve got it exactly right. So part of it is being a going concern and the customers knowing they’re a going concern. Part of it is operational in nature, meaning there are some key choke points within, particularly within Sun Gear, that we are actively working to open up using lean techniques and operational excellence and continuous-improvement efforts. And then part of it is also broadening our customer base. So from an outreach standpoint, growing with other customers in addition to our core ones.

I will say this with respect to, just like Eberhard—you know, I touched on it specifically with Eberhard—that some of these programs take a long time from start to production. It’s a similar story and in some cases even a longer story. So as you can imagine, you think the next-generation fighter is being developed right now as we speak, but realistically, my understanding is it’s really not going into production until 2035. Well, we’re working on that project as an example, so we’re working on that project. So it’s one of those ones where it’s an extreme example, but it’s an example where winning new business starts with low volumes and sometimes challenging, and it compresses our margins, as I touched on in my earlier remarks.

But once when it’s in production, it’s usually a very good thing and goes for years and years and years.

Bill Duzellem (Analyst)

And maybe that’s a great segue to helping us understand the lead time between winning business and it converting to commercial revenue. In your opening remarks, you referenced Velvac. You know, we’re talking 12 months or maybe even more for some of those wins to convert. What’s the, what’s the way to think about that for Sun Gear and Crown Precision?

Ryan Schroeder (Chief Executive Officer)

It really is a mixed bag. I’d say a lot of what we’re running after is product that’s in production already. So in those cases it can take up to a year, but usually less than that—so six, seven months, something like that from start to finish for those. The example I gave earlier I’d say is the most extreme. I’d say that’s the most extreme version of we’re working on something that’s seven years out or whatever. So yeah, it’s longer for the new programs, but there’s a lot of need for additional capacity on existing production.

And in those cases, we start working on it now and it will contribute to 2027.

Bill Duzellem (Analyst)

That’s helpful. Thank you for taking all the questions and again, congratulations on a great quarter.

Ryan Schroeder (Chief Executive Officer)

Thanks, Bill. Nice to talk to you again. We have a couple of questions that came in through the system from Roger Brooks. The question—one question—had to do with backlog and how backlog changed through October, if I’m understanding the question properly. And for the quarter it was, there are puts and takes obviously across all of the businesses. In general, from quarter to quarter, it was largely flat, but at a much higher level than it’s historically been.

I’d say we are right near sort of a backlog historical record for the company. And it increased slightly in October. I wouldn’t call it an overly material increase. We saw some reduction in backlog for Crown and an increase for Eberhard and Velvac. Those are kind of the two biggies, a little bit for Big 3 as well. So that’s that question. And then there’s also a question regarding Crown and Sun Gear and the profitability of the companies within the quarter. And I’d phrase it like this. Obviously it contributed on the top line; it did not contribute meaningfully on the bottom line. Cash flow-wise, it’s positive. It’s not pulling cash or cash resources from Eastern to speak of or anything materially. But we do need to work on the margin profile for, for those businesses, certainly, as I touched on earlier.

I’ll pause there. Are there any other questions before we wrap it up here?

OPERATOR

Certainly. And once again, everyone, if you have any questions or comments, please press Star then 1 on your phone at this time. Thank you. That concludes our Q and A session. I’ll now hand the conference back to Ryan Schroeder.

Ryan Schroeder (Chief Executive Officer)

Thank you everyone for joining us today. The third quarter is the clearest evidence yet that the actions we took over the past year and a half positioned Eastern for the upturn in our markets and the businesses we added in June extended our runway beyond those markets. We are focused on turning that into consistent financial performance and long-term value for our shareholders. Thank you for your continued support of Eastern. Please reach out to Nick or myself if you have any additional questions.

We look forward to updating you next quarter.

OPERATOR

Thank you everyone. This concludes today’s event. You may disconnect at this time and have a wonderful day. Thank you for your participation.

Disclaimer: This transcript is provided for informational purposes only. While we strive for accuracy, there may be errors or omissions in this automated transcription. For official company statements and financial information, please refer to the company’s SEC filings and official press releases. Corporate participants’ and analysts’ statements reflect their views as of the date of this call and are subject to change without notice.