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Item 2. Management’s Discussion and Analysis

2026-05-12 compared with 2025-11-04 · 88 added, 89 removed, 123 unchanged (59% 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 nine months ended September 27, 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 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.

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 January 3, 2026 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 January 3, 2026, as amended on March 19, 2026 (the “2025 Form 10-K”).

The Company’s fiscal year is a 52- or 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 April 4, 2026 (this “Form 10-Q”) to 2025, fiscal year 2025 or fiscal 2025 mean the 53-week period ended on January 3, 2026, and references to 2026, fiscal year 2026 or fiscal 2026 mean the 52-week period ending on January 2, 2027.

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.

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

References to the first quarter of 2025, the first fiscal quarter 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 first quarter of 2026, the first fiscal quarter of 2026 or the three months ended April 4, 2026, mean the 13-week period from January 4, 2026 to April 4, 2026.

Safe Harbor for Forward-Looking Statements

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delays in delivery of our products to our customers;

the impact of global economic conditions and interest rates, and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, and general industrial markets, including the impact, length and degree of economic downturns on the customers and markets we serve and demand for our products, reductions in production levels, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, the potential impact of bank failures on our ability to access financing or capital markets, and the impact of market conditions on pension plan funded status;

the impact of global economic conditions and interest rates, and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, and general industrial markets, including the impact, length and degree of economic downturns on the customers and markets we serve and demand for our products, reductions in production levels, the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, and the impact of market conditions on pension plan funded status;

restrictions on operating flexibility imposed by the agreement governing our credit facility;

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market acceptance of our products;

the inability to attain expected benefits from acquisitions or the inability to effectively integrate acquired businesses and achieve expected synergies;

the inability to attain expected benefits from acquisitions or dispositions or the inability to effectively integrate acquired businesses and achieve expected synergies;

costs and liabilities associated with environmental compliance;

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failure to protect our intellectual property;

cyberattacks;

cyberattacks, data breaches or interruptions or failures of our information technology systems;

materially adverse or unanticipated legal judgments, fines, penalties, or settlements.

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

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.

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.

For the three months ended April 4, 2026, we incurred approximately $3.1 million in tariff and tariff-related expenses, $2.9 million of which have been mitigated through price increases.

On February 20, 2026, the U.S.

Supreme Court ruled in Learning Resources, Inc.

Trump that the International Emergency Economic Powers Act (“IEEPA”) does not authorize the executive branch to impose certain tariffs.

Customs and Border Protection (“CBP”) is developing an administrative process for seeking refunds of tariffs paid pursuant to the IEEPA, and on April 20, 2026, launched the first phase of that administrative process.

The Company is in the process of submitting refund claims to the CBP.

The amount and timing of any potential refund remain uncertain, and, as of April 4, 2026, we have not recorded a benefit for potential refunds of IEEPA tariffs paid.

In response to the U.S.

Supreme Court’s decision, the presidential administration implemented a tariff surcharge pursuant to Section 122 of the Trade Act of 1974, establishing a minimum 10% duty on imports, subject to certain exemptions.

The tariff environment remains dynamic, and it is likely that additional developments will occur over the next several months, particularly as the U.S.

continues to negotiate with trade partners and the CBP further develops and executes on the administrative process for refunds.

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, including higher product and operating costs, and the potential for refunds.

See Part I, Item 1A, Risk Factors in the 2025 Form 10-K for a discussion regarding tariff-related risks.

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The following analysis excludes discontinued operations.

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.

Net sales for the first quarter of 2026 decreased 6% to $59.7 million from $63.3 million in the corresponding period in 2025.

Sales decreased in the first quarter of 2026 primarily due to decreased shipments resulting from lower order volume of returnable transport packaging products of $4.9 million offset by increased sales of truck mirror assemblies of $1.1 million.

Our backlog as of April 4, 2026 decreased $3.7 million, or 8%, to $82.2 million from $85.9 million as of March 29, 2025.

Net sales of existing products decreased 10.7% for the first quarter of 2026 compared to the corresponding period in 2025.

Price increases and new products increased net sales by 5.0% in the first quarter of 2026 compared to the corresponding period in 2025.

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 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 $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.

Cost of products sold decreased $1.4 million, or 3%, for the first quarter of 2026 due to lower sales volume.

Additionally, the Company paid tariff costs on China-sourced products of approximately $3.1 million in the first quarter of 2026, compared to $0.6 million in the first quarter of 2025.

A majority of tariffs on China-sourced products have been recovered through price increases.

Gross margin as a percentage of sales was 20.0% for the first quarter of 2026 compared to 22.4% for the first quarter of 2025.

This decrease was due to lower sales volume, pricing pressures on that volume and labor inefficiencies.

Product development expenses decreased $0.1 million for the first quarter of 2026 compared to the corresponding period in 2025.

As a percentage of net sales, product development costs were 1.7% and 1.8% for the first quarter of 2026 and 2025, respectively, as we continue to invest in new products at our businesses.

Selling and administrative expenses decreased $0.3 million, or 2.8%, for the first quarter of 2026 compared to the corresponding period in 2025 due to $0.2 million of lower compensation and related charges and $0.3 million of lower commission charges offset by 0.1 million of additional legal and professional expenses.

Interest expense decreased less than $0.1 million for the first quarter of 2026 compared to the corresponding period in 2025 due to lower principal balances.

Other expenses, net decreased $0.2 million for the first quarter of 2026 compared to the corresponding period in 2025.

The decrease in the first quarter of 2026 was the result of lower pension non-service expense.

Net income for the first quarter of fiscal 2026 was $0.6 million, or $0.11 per diluted share, compared to net income of $1.9 million, or $0.31 per diluted share, for the comparable period in 2025.

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

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Three Months Ended

Nine Months Ended

September 27,

September 28,

September 27,

September 28,

April 4, 2026

March 29, 2025

Cost of products sold

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Operating Profit

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,

The following table shows the change in net sales and operating profit for the first quarter of 2026 compared to the first quarter of 2025 (dollars in thousands):

April 4, 2026

Operating Profit

Liquidity and Sources of Capital

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 Company generated $3.5 million of cash from operations during the first three months of fiscal 2026 compared to using $1.9 million during the first three months of fiscal 2025.

Cash flow from operations in the first three months of 2026 increased due to consumption of inventories held at the end of the prior year and lower accounts payable disbursements offset by lower customer receivable collections.

Purchases of capital equipment were $0.9 million and $0.8 million for the first three months of 2026 and 2025, respectively.

As of April 3, 2026, there were approximately $0.1 million of outstanding commitments for capital expenditures.

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

Third Quarter

April 4, 2026

March 29, 2025

Fiscal Year 2025

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):

September 27,

September 28,

April 4, 2026

March 29, 2025

Fiscal Year 2025

Held in the United States

Held by a foreign subsidiary

Nine months ended September 27,

Nine months ended September 28,

Fiscal Year Ended

Working capital

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 provided by (used in) operating activities

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

Net cash 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.

Inventories of $53.1 million as of April 4, 2026 decreased by $3.2 million, or 5.7%, when compared to $56.3 million at January 3, 2026 and increased $2.3 million, or 4.2%, when compared to $55.4 million at March 29, 2025.

Accounts receivable, less allowances, were $32.6 million at April 4, 2026, as compared to $30.1 million at January 3, 2026 and $33.5 million at March 29, 2025.

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”).

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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.

The Citizens Credit Agreement establishes a new $100 million five-year senior secured 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.

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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.

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 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 $67 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).

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 April 4, 2026) 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 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.

As of the end of the first quarter of 2026, 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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Reconciliation of Non-GAAP Measures

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

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

For the Three Months ended April 4, 2026 and March 29, 2025

Three Months Ended

Nine Months Ended

September 27,

September 28,

September 27,

September 28,

April 4, 2026

March 29, 2025

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

Earnings per share from continuing operations as reported under GAAP:

Restructuring

Non-GAAP tax impact of adjustments (b)

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

Restructuring (a)

Non-GAAP tax impact of adjustments (1)

Total adjustments (Non-GAAP)

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

Consists of personnel related and facility costs

(1) 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 from Continuing Operations Calculation

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

Adjusted EBITDA Calculation

For the Three Months ended April 4, 2026 and March 29, 2025

($000's, except for per share data)

Three Months Ended

Nine Months Ended

September 27,

September 28,

September 27,

September 28,

April 4, 2026

March 29, 2025

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

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Depreciation and amortization

Severance and accrued compensation

Restructuring (a)

Adjusted EBITDA from continuing operations (non-GAAP)

Consists of personnel related and facility costs

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

Interest expense

Provision 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