管理層發言
Good day, everyone. Welcome to The Eastern Company Second Quarter Fiscal Year 2026 Earnings Call. The operator provided instructions to participants. It is now my pleasure to turn the floor over to your host, Vice President and Chief Financial Officer, Nicholas Vlahos. 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'll 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 in 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 and Crown Precision. The transactions became effective on June 1, 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 absorb 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 a 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 customers are 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 closed 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 have embedded and long-cycle programs and have exposure to multiyear 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 4, 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.
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 4, 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 million 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 with a runoff of below-margin Big 3 Precision contracts Ryan described and tariff 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 we 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 and Crown Precision, we recorded a one-time noncash bargain purchase gain of $6.5 million. Under GAAP, we record the assets we acquire and the liabilities we assume at their fair values. When the fair value of the net assets acquired exceeds the consideration that we pay, the difference is recognized as a gain. That's what happened here. This gain is nonoperating and noncash. We exclude it from our adjusted measures, so it does not obscure the underlying performance of the business. Other income and expense for the second quarter was $0.1 million of expense compared to $0.1 million of income in the prior year period. Interest expense was $0.6 million in the second quarter, down modestly from the prior year. Income tax expense for the second quarter was $1.9 million compared to $0.5 million in the prior year period. The increase reflects higher pretax income, including the tax effects associated with the acquisition and the bargain purchase gain. Net income from continuing operations for the second quarter was $5.6 million or $0.94 per diluted share compared to $2 million or $0.33 per diluted share in the prior year period. The GAAP figure includes the $6.5 million one-time noncash bargain purchase I described above. Excluding that gain and other items we do not view as reflective of ongoing operations, adjusted net income from continuing operations was $0.9 million or $0.15 per diluted share compared to adjusted net income of $3.5 million or $0.57 per diluted share a year ago. The adjusted figure is a cleaner read on the quarter. It reflects the volume and margin pressure we have discussed, and we expect that pressure to ease as the recovery in our order book reaches the income statement. Adjusted EBITDA from continuing operations for the second quarter was $3.4 million compared to $6.7 million a year ago, a decrease of approximately 49%. The compression reflects lower volume and margin factors I described, and we expect it to recover as the second-half volume and mix improves. Turning to the balance sheet and cash flow. We generated $12 million of cash from operations in the first six months, a substantial improvement from $1.9 million a year ago. Total assets were $245 million. We ended the quarter with $15.1 million of cash, inventories of $66 million and accounts receivable of $36.8 million. On debt and liquidity, long-term debt was $41.7 million at quarter end, up from $33.9 million at year-end, reflecting borrowings to fund the $7.85 million acquisition of Sungear and Crown Precision. We had $59 million of availability under our $100 million revolving credit facility with Citizens Bank as of our filing date, and we are in compliance with all covenants. That capacity gives us the flexibility to fund organic growth and to continue pursuing disciplined strategic acquisitions. Our capital allocation priorities are unchanged. We continue to deploy capital with discipline. During the quarter, we paid a dividend of $0.11 per share. We repurchased 19,000 shares under our existing authorization with 256,000 shares remaining available, and we invested $1.5 million in capital expenditures across the first half of the year. That completes my financial review. I will now turn the call back to Ryan.
Thank you, Nick. Before we open the call for questions, I want to leave you with one takeaway. Eastern enters the second half of 2026 in a significantly stronger position than it began the year. Our order book provides improved visibility. Our margin trajectory is moving in the right direction and our new aerospace and defense platform expands our long-term growth opportunity. Our job now is to execute, convert the backlog into profitable shipments, make the investments that support organic growth and remain disciplined as we evaluate additional opportunities. With that, operator, please open the line for questions.
分析師問答
The operator provided instructions to participants. Your first question is coming from Jake Patterson with Talanta Investment Group.
I've got a couple. I don't know if you can see how many people are in queue or not. I know last time there was no one on here, so I was hoping to run through a few of these. But just curious: the truck builds are a pretty big driver of the business, and those are set to improve about 26% or so in second-half run rate versus first half. Even second-quarter builds were up about 24% versus first quarter, yet your revenue was only up a little sequentially. As builds accelerate, how should we think about how that flows through the P&L? I know you deal with customer inventory and their order rates. Can you frame expectations for the level of revenue increase we might expect in the second half given what's going on in the end markets?
From a truck build rate standpoint, we are feeling that in both of those two businesses, but most notably within Velvac. Eberhard is benefiting as well. We expect the build rate to continue to trend upward a bit. As we worked through the second quarter, we saw the improvement in the top line for those customers, most notably PACCAR and DP&A, as you noted. We felt that most notably in June, and we expect that in July, and we expect it to continue for the remainder of the year and well into 2027.
Got you. Okay. I also recall you mentioned last quarter that a lot of your customers are adding capacity. Should we think about that as any upside to where you guys have historically been within the Class 8 heavy truck market?
Yes. We're expecting a very strong second half. Last quarter, when we spoke about it, we mainly spoke about the impending increase, and over the quarter that transitioned to firm orders. That is a major driver of the significant increase in our order backlog. Our backlog on our legacy business increased something like 26% from the beginning of the quarter to the end of the quarter, primarily resulting from that heavy truck build increase as well as some of the other major end markets that had been quite soft in the first half of this year and really the second half of last year.
Okay. Also, you mentioned tariff costs paid — $5 million year-to-date versus $3 million in the first half last year. You said you recovered that with pricing, but has that pricing flowed through the P&L yet, or is that to be recovered in future quarters?
It's mostly flowed through the P&L. We were able to capture those pricing increases pretty promptly. When tariffs changed a couple of months ago, our prices with our customers adjusted. We manage prices as tariffs change in a live manner. There's some that will come in future quarters, but most has flowed through within about 30 days of the tariff changes.
The reason I ask is your gross margins are down from the mid-20s to about 20.8%, and you have this acquisition that looks like it will be a drag on gross margin based on that one month contribution. Volume is a big driver of margin expansion, but can you frame expectations around the magnitude of the margin increase from these trough levels, and what are expectations for the acquisition margin and the plan to get them up to profitability?
There is a bit of a mix impact to our gross margins, setting aside the acquisition. Some of our tighter-margin businesses are weighting the overall mix. That said, we feel strongly the volume benefit from higher builds will outweigh the negative mix impact. We believe the volume improvement will be favorable once it all comes through. As it pertains to the acquisition, there is some pricing work to be done and operational cost improvements to implement that we feel will bring those businesses along. In the short term it may weigh a bit on overall gross margin, but given the size of the businesses relative to Eastern, it's not overly material.
I agree with Ryan. The acquisition impact looks like roughly 120 basis points, give or take. We generally target acquisitions with 15%-plus EBITDA margins and demonstrated historical profitability. These aerospace businesses are smaller and have different dynamics; we see opportunity to improve throughput and pricing over time.
Our overall thesis is that there is a significant need in the Tier 2 aerospace market for reliable suppliers. Supply chain bottlenecks constrain output, and demand significantly outweighs the ability to supply, especially in the Tier 2/Tier 3 segments. We bring an operating scheme and long-term view that we believe can acquire and improve businesses like Crown and Sungear. We view this as an initial step in building a precision manufacturing platform, diversifying Eastern away from heavy concentration in trucks while delivering long-term shareholder value.
Were the acquired businesses profitable in recent fiscal years, or is this going to be a longer runway to profitability?
They will be profitable this year. They were profitable for the first half of this year after taking some pricing action last year, and we think there's more to be done. We intend for this acquisition to be accretive this year. There are longer-term improvements to make, but our expectation is accretion now and further improvement over time.
One more: last time you talked in March, the model launch schedule for 2027 was expected to be higher than historical levels. How has 2026 looked from a changeover perspective and the impact on your packaging business, and is 2027 still expected to be pretty solid?
2026 is significantly better than 2025, and 2027 is expected to be even higher. We are seeing several high-value automotive model launches underway. For Big 3 and our rack business, our backlog is pretty well full through almost the remainder of the year; there might be a little room in the fourth quarter, but we've filled up significantly based on those model launches. It's coming to fruition as we discussed in past quarters.
Okay. Sounds good. Thank you.
Your next question is coming from Mike Hughes.
Just a couple of follow-ups on the acquisitions. I know it's only one month, so maybe it's not representative, but taking the one month on a quarterly basis, about $5 million a quarter in revenue — is that a good run rate?
I would hope it's a bit more than that. Maybe $5 million to $6 million a quarter or a little above that is where we would hope for it to be. The first month out was a bit soft. We think the two combined have the potential to be close to $20 million a year.
The gross margins for that one-month period were effectively breakeven. Was there an inventory step-up on the acquisitions, meaning inventory was recorded at fair market value, and if so, that would carry forward until you burn through the acquired inventory. Is that correct?
Yes, that is correct.
That is correct.
So if you're doing a little more than $5 million a quarter in revenue and it operates at roughly breakeven gross margin initially, it will be a few quarters before we see a more reasonable level of gross margin out of that business. Is that fair?
That's correct. You got it exactly right.
What would be a targeted gross margin for that business over time?
We would target a gross margin over time in the 20% to 30% range. There are actions we need to take to improve throughput and processes to get us there, and we'll also take pricing actions as necessary.
What is their total backlog at this point?
It's just over $18 million.
Will you burn through most of that over the next few quarters so pricing improvements can start to kick in in 2027, or is there carryover into 2027 of backlog that will be at a lower margin?
We're hopeful about the conversion. Probably half of that will be suitable for 2026. For some products in the backlog that are priced inappropriately, we're going to address those now rather than wait for the next order. It's not massive, but there are a few projects we need to handle sooner. The vast majority of the backlog is priced at appropriate and healthy levels. The previous owners had realized higher prices in the latter part of last year and subsequently received orders at those prices. As we go deeper into the backlog, the margin targets Nick referenced will become more of a reality, driven both by pricing already realized and by operational improvements.
On material cost inflation, what did you see in the quarter year-over-year? And are most of your businesses on LIFO?
Material cost increases were minimal year-over-year — a couple of percent. Only one of our businesses is on LIFO, our Eberhard business. The newer businesses are not on LIFO.
Last question on ERP: you mentioned an ERP implementation in one of your business lines. Can you update us on how that's going and whether you have additional ERP rollouts planned?
We went live on the ERP changeover at Velvac on April 1. There are still some items to work through, but the business has been able to take, make and ship orders. The team has closed each month and the quarter on time. It's not without issues to resolve, but the team has done a nice job getting it to this point. We expect it to be normalized and not something we'll be talking about next quarter. We do not have other ERP upgrades or changes on the docket for any of the businesses, including the two we just acquired.
Do you have a tariff refund amount or a ballpark number?
No, it's not overly significant at this point. The businesses are working through it, mainly Eberhard and Velvac. We might have more to report next quarter.
There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Ryan Schroeder for closing remarks.
Thank you, and thank you, everyone, for joining us today. We are encouraged by the direction of the business and are focused on translating that momentum into stronger financial performance and long-term shareholder value. Thank you for your continued support of The Eastern. Please reach out to Nick or me if you have any additional questions. We look forward to updating you next quarter. Thank you, and goodbye.
Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.