Summary of EML Q2 2026 Earnings Call

1Key Financial Results and Metrics:

Net Sales: $61.8 million, down 11.9% year-over-year from $70.2 million.

Gross Margin: 20.6%, a decrease from 23.3% in the prior year, impacted by lower volumes and below-margin contracts.

Adjusted EBITDA: $3.4 million, down 49% from $6.7 million a year ago.

Net Income: $5.6 million ($0.94 per diluted share), boosted by a $6.5 million bargain purchase gain from acquisitions. Adjusted net income was $0.9 million ($0.15 per diluted share), down from $3.5 million ($0.57 per diluted share) year-over-year.

Backlog: Increased to $126 million, up 45% year-over-year, indicating strong order growth, particularly in aerospace and defense.

Cash Flow: Generated $12 million from operations in the first half, a significant improvement from $1.9 million the previous year.

2Strategic Updates and Business Highlights:

Acquisitions: Completed the acquisition of Crown Precision and Sungear, contributing to a new aerospace and defense segment. The acquisitions are expected to diversify the company's portfolio and enhance long-term growth.

Operational Improvements: Addressed margin challenges from below-threshold contracts at Big 3 Precision, leading to improved margins in July.

Market Recovery: Notable increases in backlog driven by recovery in heavy truck build rates, particularly benefiting Velvac and Eberhard.

3Forward Guidance and Outlook:

Second Half Expectations: Anticipate improved performance driven by a stronger order book and recovering demand across various markets. The majority of the current backlog is expected to convert to revenue in the second half of 2026.

Margin Recovery: While current gross margins are under pressure, management expects improvements as volume increases and new orders are booked at healthier margins.

4Bad News, Challenges, or Points of Concern:

Declining Sales: Year-over-year sales decline of 11.9% raises concerns about demand recovery in certain segments.

Margin Pressure: Gross margins are impacted by lower volumes and the integration of newly acquired businesses, which are currently operating at breakeven.

Tariff Costs: Continued tariff impacts on costs, although pricing adjustments have been made to recover some of these costs.

Acquisition Risks: The acquired businesses are not yet profitable and will require operational improvements to achieve targeted margins of 20-30%.

5Notable Q&A Insights:

Revenue Expectations: Management indicated that truck build rates are expected to improve, which should positively impact revenue in the second half of 2026.

Acquisition Performance: The acquired businesses are expected to generate more than $5 million in quarterly revenue, with a backlog of over $18 million. However, gross margins will take time to improve due to inventory step-up costs.

ERP Implementation: The ERP system implementation at Velvac is progressing well, with operations stabilizing and no further ERP upgrades planned for other divisions.

Material Costs: Minimal year-over-year material cost inflation was reported, with only one business operating on a LIFO basis. Overall, while EML is facing challenges with declining sales and margin pressures, the company is optimistic about the second half of 2026, buoyed by a strong backlog and strategic acquisitions aimed at diversifying its business.