What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-11-04 compared with 2025-08-05 · 95 added, 94 removed, 117 unchanged (62% 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 and six months ended June 28, 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 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.

References in this Quarterly Report on Form 10-Q for the quarterly period ended September 27, 2025 (this “Form 10-Q”) to 2024, fiscal year 2024 or fiscal 2024 mean the 52-week period ended on December 28, 2024, and references to 2025, fiscal year 2025 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 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.

In a 53-week fiscal year, the first three quarters each have 13 weeks, and the fourth quarter has 14 weeks.

References to the third quarter of 2024, the third fiscal quarter of 2024 or the three months ended September 28, 2024 mean the 13-week period from June 30, 2024 to September 28, 2024.

References to the third quarter of 2025, the third fiscal quarter of 2025 or the three months ended September 27, 2025 mean the 13-week period from June 29, 2025 to September 27, 2025.

References to the first nine months of 2024 or the nine months ended September 28, 2024 mean the period from December 31, 2023 to September 28, 2024.

References to the first nine months of 2025 or the nine months ended September 27, 2025 mean the period from December 29, 2024 to September 27, 2025.

Safe Harbor for Forward-Looking Statements

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costs and liabilities associated with environmental compliance;

the impact of climate change, natural disasters, geopolitical events, and public health crises, including pandemics and epidemics, and any related Company or government policies or actions;

the impact of climate change, natural disasters, geopolitical events, and public health crises, including pandemics and epidemics, and any related Company or government policies or actions, including any potential adverse economic impacts resulting from the U.S.

federal government shutdown;

military conflict (including the Russia/Ukraine conflict, the conflict in the Middle East, the possible expansion of such conflicts and geopolitical consequences) or terrorist threats and the possible responses by the U.S.

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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.

For the nine months ended September 27, 2025, we incurred approximately $7.0 million in tariff and tariff-related expenses.

However, we have been able to mitigate most of the impact of the tariffs implemented 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.

continues to negotiate 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, such as 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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We expect the acquisition will enable the Company to become more competitive with respect to cost and quality of the products sold by Big 3.

In the third quarter of 2024, we determined that the Big 3 Mold business met the criteria to be held for sale and that the assets held for sale qualify for discontinued operations.

In the third quarter of 2024, we determined that the Big 3 Mold business met the criteria to be held for sale and that the assets held for sale qualified for discontinued operations.

As such, the financial results of the Big 3 Mold business are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented.

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The following analysis excludes discontinued operations.

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.

Net sales for the third quarter of 2025 decreased 22% to $55.3 million from $71.3 million in the corresponding period in 2024.

Net sales for the first nine months of 2025 decreased 7% to $191.4 million from $206.1 million in the corresponding period in 2024.

Sales decreased in the third quarter of 2025 primarily due to decreased shipments of returnable transport packaging products and truck mirror assemblies of $9.9 million and $6.4 million, respectively.

Sales decreased in the first nine months of 2025 primarily due to decreased shipments of truck mirror assemblies and returnable transport packaging products of $13.4 million and $1.0 million, respectively.

Our backlog as of September 27, 2025 decreased $23.6 million, or 24%, to $74.3 million from $97.2 million as of September 28, 2024, driven by decreased orders for returnable transport packaging products of $15.2 million and latch and handle assemblies of $4.7 million and truck mirror assemblies of $3.6 million.

Net sales of existing products decreased 28.3% for the third quarter of 2025 and decreased 13.0% for the first nine months of 2025 compared to the corresponding periods in 2024.

Price increases and new products increased net sales by 6.2% in the third quarter of 2025 and 6.2% in the first nine months of 2025 compared to the corresponding periods in 2024.

New products included various truck mirror and latch assemblies .

Cost of products sold decreased $10.1 million, or 19%, for the third quarter of 2025 and $6.5 million, or 4%, for the first nine months of 2025 compared to the corresponding period in 2024 primarily due to lower sales volume.

Additionally, the Company paid tariff costs on China-sourced products of approximately $4.0 million and $7.0 million in the third quarter and first nine months of 2025 respectively, compared to $0.6 million and $1.9 million in the third quarter and first nine months of 2024, respectively.

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

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.

Gross margin as a percentage of sales was 22.3% for the third quarter of 2025 and 22.9% for the first nine months of 2025 compared to 25.5% for the third quarter of 2024 and 25.2% for the first nine months of 2024.

This decrease was primarily due to an increase in raw material costs incurred as we transitioned from customer-provided material to in-house sourcing on a mirror project, as well as the impact of reduced volumes.

Product development expenses decreased $0.1 million for the third quarter of 2025 and decreased $0.6 million for the first nine months of 2025 compared to the corresponding periods in 2024.

As a percentage of net sales, product development costs were 1.6% and 1.8% for the first nine months of 2025 and 2024, respectively, as we continue to invest in new products at our businesses.

Selling, general and administrative expenses decreased $0.7 million, or 6.5%, for the third quarter of 2025 compared to the corresponding period in 2024 due to $1.1 million of lower compensation charges, offset by $0.3 million of restructuring charges.

In connection with a reduction in workforce completed in the second quarter of 2025, the Company incurred aggregate charges of $2.2 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.

Selling, general and administrative expenses increased $1.2 million in the first nine months of 2025 due to $2.2 million of restructuring charges and $0.6 million of commissions, offset by lower compensation costs of $1.5 million.

Interest expense decreased less than $0.1 million for both the third quarter of 2025 and the first nine months of 2025 compared to the corresponding periods in 2024 due to lower principal balances, offset by higher interest rates.

Other expenses, net increased $0.1 million for the third quarter of 2025 and $0.2 million in the first nine months of 2025 compared to the corresponding periods in 2024.

The increases in the third quarter of 2025 is the result of lower lease income and the first nine months of 2025 is the result of lower lease income offset by gains on marketable equity securities.

Net income for the third quarter of fiscal 2025 was $0.6 million, or $0.10 per diluted share, compared to net income of $4.7 million, or $0.75 per diluted share, for the comparable period in 2024.

For the first nine months of 2025, net income was $4.8 million, or $0.78 per diluted share, compared to $11.7 million, or $1.87 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

Six Months Ended

June 28, 2025

June 29, 2024

June 28, 2025

June 29, 2024

Nine Months Ended

September 27,

September 28,

September 27,

September 28,

Cost of products sold

2 unchanged sentences

Operating Profit

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

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

September 27,

Operating Profit

Liquidity and Sources of Capital

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

The Company generated $5.0 million of cash from operations during the first nine months of fiscal 2025 compared to generating $8.3 million during the first nine months of fiscal 2024.

Cash flow from operations in the first nine months of 2025 was lower due to lower income from operations and higher payments of accounts payable offset by collections of receivables.

Additions to property, plant, and equipment were $1.6 million and $7.6 million for the first nine months of 2025 and 2024, respectively.

As of September 27, 2025, there were approximately $1.2 million of outstanding commitments for capital expenditures.

The following table shows key financial ratios at the end of each specified period:

Third Quarter

Current Ratio

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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):

June 28, 2025

June 29, 2024

December 28, 2024

September 27,

September 28,

Held in the United States

Held by a foreign subsidiary

Six Months Ended

June 28, 2025

Six Months Ended

June 29, 2025

Nine months ended September 27,

Nine months ended September 28,

Fiscal Year Ended

December 28, 2025

Working capital

Net cash (used) provided by operating activities

Change in working capital impact on net cash (used) provided by operating activities

Net cash used by investing activities

Net cash used by financing activities

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.

See Note H Debt , for additional information regarding the terms of the Credit Agreement, including repayment terms, interest rates, and applicable loan covenants.

Under the terms of the Credit Agreement, the Company is subject to restrictive covenants that limit our ability to, among other things, incur additional indebtedness, pay dividends, or make other distributions, and consolidate, merge, sell or otherwise dispose of assets, as well as financial covenants that require us to maintain a fixed charge coverage ratio and a maximum senior net leverage ratio.

Net cash provided by operating activities

Change in working capital impact on net cash provided by operating activities

Net cash provided by (used in) investing activities

Net cash used in financing activities

Inventories of $56.8 million as of September 27, 2025 increased by $1.6 million, or 2.8%, when compared to $55.2 million at the end of fiscal year 2024 and decreased $1.3 million, or 2.2%, when compared to $58.1 million at the end of the third quarter of fiscal 2024.

Accounts receivable, less allowances, were $30.0 million at September 27, 2025, as compared to $35.5 million at December 29, 2024 and $46.0 million at September 28, 2024.

On October 28, 2025, the Company entered into a credit agreement with the lenders from time to time party thereto, Citizens Bank, N.A., as the administrative agent, as an LC issuer, and as the swing line lender (the “Citizens Credit Agreement”).

The Citizens Credit Agreement replaces the Company’s prior credit facility with TD Bank, N.A.

("TD Bank"), which was repaid using borrowings under the Citizens Credit Agreement and terminated on October 28, 2025.

See Note H, Debt, for additional information regarding the terms of the prior credit facility with TD Bank.

The Citizens Credit Agreement establishes a new $100 million five-year unsecured revolving credit facility and provides for the extension of credit to the Company in the form of revolving loans, swing line loans and letters of credit, at any time and from time to time during the term of the Citizens Credit Agreement.

See Note H, Debt, for additional information regarding the terms of the Citizens Credit Agreement, including repayment terms, interest rates, and applicable loan covenants.

Under the terms of the Citizens Credit Agreement, the Company is subject to restrictive covenants that limit our ability to, among other things, incur additional indebtedness, pay dividends, or make other distributions, and consolidate, merge, sell or otherwise dispose of assets, as well as financial covenants that require us to maintain a maximum senior net leverage ratio and a minimum interest coverage ratio.

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 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 June 28, 2025) and separately in the long-term (i.e., beyond the next 12 months).

The Company was in compliance with all its covenants under its prior credit facility with TD Bank on September 27, 2025 and through the date of such termination.

In addition, the Company was in compliance with all its covenants under the Citizens Credit Agreement at all times from entry into the Citizens Credit Agreement through the date of filing this Form 10-Q.

The Company has $64 million available on its line of credit under the Citizens Credit Agreement as of the date of filing this Form 10-Q.

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 September 27, 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 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.

As of the end of the third 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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Non-GAAP Financial Measures

The non-GAAP financial measures we provide in this Form 10-Q report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S.

The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with U.S.

To supplement the condensed consolidated financial statements prepared in accordance with U.S.

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These measures are not substitutes for their comparable U.S.

GAAP financial measures, such as net sales, net income, diluted earnings per share, or other measures prescribed by U.S.

GAAP financial measures, such as net income from continuing operations, diluted earnings per share from continuing operations, net (loss) income from discontinued operations, net income (loss) or other measures prescribed by U.S.

GAAP, and there are limitations to using non-GAAP financial measures.

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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 and Six Months ended June 28, 2025 and June 29, 2024

Adjusted Net Income from Continuing Operations and Adjusted Earnings per Share

from Continuing Operations Calculation

For the Three and Nine Months ended September 27, 2025 and September 28, 2024

Three Months Ended

Six Months Ended

June 28, 2025

June 29, 2024

June 28, 2025

June 29, 2024

Nine Months Ended

September 27,

September 28,

September 27,

September 28,

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

Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP):

Restructuring (a)

Non-GAAP tax impact of adjustments (1)

Earnings per share from continuing operations as reported under GAAP:

Restructuring

Non-GAAP tax impact of adjustments (b)

Total adjustments (Non-GAAP)

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Adjusted earnings per share from continuing operations (Non-GAAP):

Consists of personnel related and facility costs

We estimate the tax effect of the items identified to determine a non-GAAP annual effective tax rate applied to the pre-tax amount in order to calculate the non-GAAP provision for income taxes

(a) consists of personnel related and facility costs

Reconciliation of Non-GAAP Measures

Adjusted EBITDA Calculation

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

Adjusted EBITDA from Continuing Operations Calculation

For the Three and Nine Months ended September 27, 2025 and September 28, 2024

Three Months Ended

Six Months Ended

June 28, 2025

June 29, 2024

June 28, 2025

June 29, 2024

Nine Months Ended

September 27,

September 28,

September 27,

September 28,

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

2 unchanged sentences

Depreciation and amortization

Restructuring (a)

Severance and accrued compensation

Adjusted EBITDA from continuing operations (Non-GAAP)

Consists of personnel related and facility costs

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

1 unchanged sentence

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