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Item 2. Management’s Discussion and Analysis

2025-08-05 compared with 2025-05-06 · 84 added, 64 removed, 127 unchanged (54% of the section changed)

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to highlight significant changes in the financial position and results of operations of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the three months ended March 29, 2025.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 28, 2024 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2024, which was filed with the Securities and Exchange Commission (the “SEC”) on March 11, 2025 (the “2024 Form 10-K”).

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31.

References in this Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2025 (this “Form 10-Q”) to 2024, the 2024 fiscal year or fiscal 2024 mean the 52-week period ended on December 28, 2024, and references to 2025, the 2025 fiscal year or fiscal 2025 mean the 53-week period ending on January 3, 2026.

References in this Quarterly Report on Form 10-Q for the quarterly period ended June 28, 2025 (this “Form 10-Q”) to 2024, the 2024 fiscal year or fiscal 2024 mean the 52-week period ended on December 28, 2024, and references to 2025, the 2025 fiscal year or fiscal 2025 mean the 53-week period ending on January 3, 2026.

In a 52-week fiscal year, each quarter has 13 weeks.

References to the first quarter of 2024, the first fiscal quarter of 2024, the first three months of 2024 or the three months ended March 30, 2024 mean the 13-week period from December 31, 2023 to March 30, 2024.

References to the first quarter of 2025, the first fiscal quarter of 2025, the first three months of 2025 or the three months ended March 29, 2025 mean the 13-week period from December 29, 2024 to March 29, 2025.

References to the second quarter of 2024, the second fiscal quarter of 2024 or the three months ended June 29, 2024, mean the 13-week period from March 31, 2024 to June 29, 2024.

References to the second quarter of 2025, the second fiscal quarter of 2025 or the three months ended June 28, 2025 mean the 13-week period from March 30, 2025 to June 28, 2025.

References to the first six months of 2024 or the six months ended June 29, 2024 mean the period from December 31, 2023 to June 29, 2024.

References to the first six months of 2025 or the six months ended June 28, 2025 mean the period from December 29, 2024 to June 28, 2025.

Safe Harbor for Forward-Looking Statements

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Recent Developments

tariffs implemented in March 2025 did not materially impact our results for the first quarter 2025.

While the long-term effects remain uncertain, we continue to closely monitor the evolving tariff policy environment which presents a mix of impacts, with the potential for higher pricing, as well as higher product and operating costs.

On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) became law.

Among other provisions, the OBBBA extends permanently, with modifications, tax provisions enacted as part of the 2017 Tax Cuts and Jobs Act and restores and makes permanent many business provisions, such as full expensing for research and development and capital investments.

In addition, the OBBBA contains other new tax relief measures and various revenue raising measures.

We are currently assessing the potential impact of the OBBBA on our business and financial results.

For the six months ended June 28, 2025, we have recovered most of the U.S.

tariffs implemented in March 2025 through price increases.

However, the tariff environment has been dynamic over the last several months, with changes occurring on an ongoing basis, and it is likely that additional developments will occur over the next several months, particularly as the U.S.

negotiates with trade partners.

While the long-term effects remain uncertain, we continue to closely monitor the evolving tariff environment which presents a mix of impacts, with the potential for higher pricing, as well as higher product and operating costs.

See Part I, Item 1A, Risk Factors in the 2024 Form 10-K for a discussion regarding tariff-related risks.

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Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.

On April 30, 2025, the Company sold the equipment, workforce and customer list of the ISBM division of Big 3 Mold.

The following analysis excludes discontinued operations.

Net sales in the first quarter of 2025 decreased 2% to $63.3 million from $64.6 million in the corresponding period in 2024.

Sales decreased in the first quarter of 2025 due to decreased sales of truck mirror assemblies and truck accessories of $4.2 million and $2.6 million, respectively, offset by increased sales of returnable transport packaging products of $3.1 million.

Our backlog as of March 29, 2025 decreased 9% to $85.9 million from $94.0 million as of March 30, 2024, driven by decreased orders for returnable transport packaging products of $6.6 million various truck mirror assemblies of $2.7 million offset by increase a latch and handle assemblies of $1.3 million.

Net sales of existing products decreased 6% in the first quarter of 2025 compared to the corresponding period in 2024.

Price increases and new products increased net sales by 1% in the first quarter of 2025, compared to the corresponding periods in 2024.

New products sales included various truck mirror assemblies and handles.

Cost of products sold decreased less than $0.1 million in the first quarter of 2025 compared to the corresponding period in 2024.

Additionally, the Company paid tariff costs on China-sourced products of approximately $0.6 million in the first quarter of 2025, compared to $0.7 million in the first quarter of 2024.

Net sales in the second quarter of 2025 decreased 3% to $70.2 million from $72.6 million in the corresponding period in 2024.

The decrease in sales was due to lower sales of truck mirror assemblies of $3.5 million, offset by increased sales of latch and handle assemblies of $1.3 million.

Net sales in the first six months of 2025 decreased 3% to $136.1 million from $139.8 million in the corresponding period in 2024.

Sales decreased in the first six months of 2025 due to decreased sales of truck mirror assemblies of $7.0 million and latch and handle assemblies of $0.3 million, offset by increased sales of returnable transport packaging $3.6 million.

Our backlog as of June 28, 2025 decreased $20.1 million, or 19%, to $87.1 million from $107.3 million as of June 29, 2024, driven by decreased orders for returnable transport packaging products of $18.4 million and latch and handle assemblies of $1.3 million.

Net sales of existing products decreased 11% in the second quarter of 2025 and 8% in the first six months of 2025 compared to the corresponding periods in 2024.

New products increased net sales by 8% in the second quarter of 2025 and 6% in the first six months of 2025 compared to the corresponding periods in 2024.

New product sales included various truck mirror assemblies and handles.

Cost of products sold decreased $0.3 million in the second quarter of 2025 and less than $0.5 million in the first six months of 2025 compared to the corresponding period in 2024.

These decreases were due to lower sales volume.

Additionally, the Company paid tariff costs on China-sourced products of approximately $2.4 million in the second quarter of 2025 and $3.0 million in the first six months of 2025, compared to $0.6 million in the second quarter of 2024 and $1.2 million in the first six months of 2024.

Most tariffs on China-sourced products have been recovered through price increases.

Gross margin as a percentage of sales was 22.4% in the first quarter of 2025 compared to 23.9% in the corresponding period in 2024.

Gross margin for our returnable transport packaging business gained 1% offset by a comparable reduction in our latch and handle assembles business, while gross margin for our mirror assemblies was consistent with the prior comparable period.

Product development expenses decreased $0.3 million in the first quarter of 2025 compared to the corresponding periods in 2024.

As a percentage of net sales, product development costs were 2.0% in each period as we continue to invest in new products at our businesses.

Selling, general and administrative expenses decreased $0.8 million, or 8%, in the first quarter of 2025 when compared to the first quarter of 2024 due to lower payroll-related expenses of $0.5 million offset by higher sales commissions of $0.4 million and $0.7 million of other reductions.

Interest expense decreased $0.1 million in the first quarter of 2025 due to lower principal balances, offset by higher interest rates.

Other (expense) income decreased $0.2 million in the first quarter of 2025 compared to the corresponding period in 2024.

The decrease is due to $0.1 million of gains on securities transactions in 2024 that did not occur in 2025, and restructuring expenses incurred in 2025.

Net income for the first quarter of fiscal 2025 was $1.9 million, or $0.31 per diluted share compared to net income of $2.1 million, or $0.34 per diluted share, for the comparable period in 2024.

Gross margin as a percentage of sales was 23.3% in the second quarter of 2025 and 23.1% in the first six months of 2025 compared to 25.4% and 24.8% in the corresponding period in 2024.

This decrease was primarily due to increased raw material costs incurred as we transitioned from customer-provided material to in-house sourcing on a mirror project.

Product development expenses decreased $0.3 million in the second quarter of 2025 and decreased $0.5 million in the first six months of 2025 compared to the corresponding periods in 2024.

As a percentage of net sales, product development costs were 1.6% and 1.9% in the first six months of 2025 and 2024, respectively, as we continue to invest in new products at our businesses.

Selling, general and administrative expenses increased $1.0 million, or 9.4%, in the second quarter of 2025 compared to the corresponding period in 2024 due to $1.8 million of restructuring charges, offset by lower personnel costs of $0.2 million, amortization of $0.3 million, legal expenses of $0.1 million and other expenses of $0.3 million.

In connection with a reduction in workforce completed in the second quarter of 2025, the Company incurred aggregate charges of $1.8 million related to severance payments and other employee-related costs, and contract termination costs.

Selling, general and administrative expenses increased $0.3 million in the first six months due to $1.9 million of restructuring charges, offset by lower personnel costs of $1.0 million, amortization of $0.6 million and legal of $0.3 million.

Interest expense decreased $0.1 million in the second quarter of 2025 and $0.2 million in the first six months of 2025 compared to the corresponding period in 2024 due to lower principal balances, offset by higher interest rates.

Other income increased $0.1 million in the second quarter of 2025 and decreased $0.2 million in the first six months of 2025 compared to the corresponding periods in 2024.

The increase in the second quarter and the decrease in first six months of 2025 are the result of gains on marketable equity securities offset by lower lease income.

Net income for the second quarter of fiscal 2025 was $2.0 million, or $0.33 per diluted share, compared to net income of $4.1 million, or $0.65 per diluted share, for the comparable period in 2024.

In the first six months of 2025, net income was $4.2 million, or $0.69 per diluted share, compared to $6.4 million, or $1.02 per diluted share, for the comparable period in 2024.

A more detailed analysis of the Company’s results of operations and financial condition follows.

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Three Months Ended

March 29, 2025

March 30, 2024

Six Months Ended

June 28, 2025

June 29, 2024

June 28, 2025

June 29, 2024

Cost of products sold

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Operating Profit

The following table shows the change in sales and operating profit for the first quarter of 2025 compared to the first quarter of 2025 (dollars in thousands):

The following table shows the change in sales and operating profit for the second quarter and first six months of 2025 compared to the second quarter and first six months of 2024 (dollars in thousands):

June 28, 2025

Operating Profit

Liquidity and Sources of Capital

The Company used $1.9 million of cash in operations during the first three months of 2025 compared to generating $2.8 million during the first three months of 2024.

The usage in cash flow from operations in the first three months of 2025 compared to the cash generation from operations in the corresponding period in 2024 was primarily due to timing of annual vendor deposit and 2024 bonus payments offset by improved customer collection performance and lower sales.

Additions to property, plant, and equipment were $0.8 million and $1.7 million for the first three months of 2025 and 2024, respectively.

As of March 29, 2025, there was approximately $0.6 million of outstanding commitments for capital expenditures.

The following table shows key financial ratios as of the dates specified:

March 29, 2025

March 30, 2024

The Company generated $1.9 million of cash from operations during the first six months of fiscal 2025 compared to generating $11.2 million during the first six months of fiscal 2024.

Cash flow from operations in the first six months of 2025 was lower when compared to the corresponding period in 2024 primarily due to lower collections of receivables and lower liquidations of inventory, partially offset by increases in accounts payable.

Additions to property, plant, and equipment were $1.6 million and $2.8 million for the first six months of 2025 and 2024, respectively.

As of June 28, 2025, there was approximately $1.2 million of outstanding commitments for capital expenditures.

The following table shows key financial ratios at dates specified:

June 28, 2025

June 29, 2024

Fiscal Year 2024

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The following table shows important liquidity measures as of the balance sheet date for each specified period or for the period, as applicable (in millions):

March 29, 2025

March 30, 2024

Fiscal Year 2024

June 28, 2025

June 29, 2024

December 28, 2024

Held in the United States

Held by a foreign subsidiary

Six Months Ended

June 28, 2025

Six Months Ended

June 29, 2025

Fiscal Year Ended

December 28, 2025

Working capital

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Net cash used by financing activities

Inventories of $55.4 million as of March 29, 2025 increased by $0.2 million, or less than 0.1%, when compared to $55.2 million at the end of fiscal year 2024 and increased $0.3 million, or less than 0.1 % when compared to $55.1 million at the end of the first quarter of fiscal 2024.

Accounts receivable, less allowances, were $33.5 million as of March 29, 2025, as compared to $35.5 million at 2024 fiscal year end and $40.5 million at the end of the first quarter of fiscal 2024.

On June 16, 2023, the Company entered into a credit agreement with the lending institutions named therein (the "Lenders"), TD Bank NA, the swing line lender and as the administrative agent, TD Securities (USA) LLC, as sole arranger and sole bookrunner, and Bank of America, N.A.

and Wells Fargo Bank, National Association, as co-syndication (the “Credit Agreement”), and incurred indebtedness under the Credit Agreement in the aggregate principal amount of $60 million in the form of a term loan, the proceeds of which were used to repay the Company’s remaining outstanding term loan and to terminate its previous credit facility with Santander.

Inventories of $54.1 million as of June 28, 2025 declined by $1.1 million, or 2.0%, when compared to $55.2 million at the end of fiscal year 2024 and declined $2.8 million, or 4.9%, when compared to $56.9 million at the end of the second quarter of fiscal 2024.

Accounts receivable, less allowances, were $40.2 million as of June 28, 2025, as compared to $35.5 million at 2024 fiscal year end and $42.3 million at the end of the second quarter of fiscal 2024.

On June 16, 2023, the Company entered into a credit agreement with the lending institutions named therein (the "Lenders"), TD Bank N.A., the swing line lender and as the administrative agent, TD Securities (USA) LLC, as sole arranger and sole bookrunner, and Bank of America, N.A.

and Wells Fargo Bank, National Association, as co-syndication agents (the “Credit Agreement”), and incurred indebtedness under the Credit Agreement in the aggregate principal amount of $60 million in the form of a term loan.

The Credit Agreement also included a $30 million revolving commitment portion, which was increased to $50 million through an amendment to the Credit Agreement in April 2025.

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These covenants may limit how we conduct our business, and in the event of certain defaults, our repayment obligations may be accelerated.

We were in compliance with all of our covenants as March 29, 2025 and had $1.3 million borrowings under the revolving commitment portion of the credit facility as of such date.

We were in compliance with all of our covenants as June 28, 2025 and had no borrowings under the revolving commitment portion of the credit facility as of such date.

The Company has $50 million available on its revolving line of credit as of such date.

Cash, cash flow from operating activities and funds available under the revolving credit portion of the Credit Agreement are expected to be sufficient to cover future foreseeable working capital requirements in the short-term (i.e., the next 12 months from March 29, 2025) and separately in the long-term (i.e., beyond the next 12 months).

Cash, cash flow from operating activities and funds available under the revolving credit portion of the Credit Agreement are expected to be sufficient to cover future foreseeable working capital requirements in the short-term (i.e., the next 12 months from June 28, 2025) and separately in the long-term (i.e., beyond the next 12 months).

However, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available.

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In addition to funding capital requirements, we may use available cash to pay down our indebtedness, to make investments, which may include investments in publicly traded securities, or to make acquisitions that we believe will complement or expand our existing businesses.

As of the end of the first quarter of 2025, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

As of the end of the second quarter of 2025, the Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Estimates

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Adjusted Earnings Per Share from Continuing Operations is defined as earnings per share from continuing operations excluding, when incurred, certain per share gains or losses that we do not believe reflect our ongoing operations, including, for example, the impacts of impairment losses, gains/losses on the sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring costs.

We believe that Adjusted Earnings Per Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to assess operating performance on a consistent basis from period to period.

We believe that Adjusted Earnings Per Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis from period to period.

Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when incurred, the impacts of certain losses or gains that we do not believe reflect our ongoing operations, including, for example, impairment losses, gains/losses on sale of subsidiaries, property and facilities, transaction expenses primarily relating to acquisitions and divestitures, factory start-up costs, factory relocation expenses, executive severance, and restructuring expenses.

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Reconciliation of Non-GAAP Measures

Adjusted Net Income from Continuing Operations and

Adjusted Earnings per Share from Continuing Operations Calculation

For the Three Months ended March 29, 2025 and March 30, 2024

Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share from Continuing Operations Calculation

For the Three and Six Months ended June 28, 2025 and June 29, 2024

Three Months Ended

March 29, 2025

March 30, 2024

Six Months Ended

June 28, 2025

June 29, 2024

June 28, 2025

June 29, 2024

Net income from continuing operations as reported per generally accepted accounting principles (GAAP)

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Adjusted EBITDA Calculation

For the Three Months ended March 29, 2025 and March 30, 2024

For the Three and Six Months ended June 28, 2025 and June 29, 2024

Three Months Ended

March 29, 2025

March 30, 2024

Six Months Ended

June 28, 2025

June 29, 2024

June 28, 2025

June 29, 2024

Net income from continuing operations as reported per generally accepted accounting principles (GAAP)

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Adjusted EBITDA from continuing operations (non-GAAP)

Net income (loss) from discontinued operations as reported per generally accepted accounting principles (GAAP)

Interest expense

Provision (benefit) for income taxes

Depreciation and amortization

Adjusted EBITDA from discontinued operations (non-GAAP)

Net income as reported per generally accepted accounting principles (GAAP)

Interest expense

Provision for income taxes

Depreciation and amortization

Restructuring (a)

Total Adjusted EBITDA

(a) consists of personnel related and facility costs

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis