EML US Equity☆

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s fiscal year ends on the Saturday nearest to December 31. Fiscal year 2025 was 53 weeks in length and fiscal year 2024 was 52 weeks in length. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to results for “2025” or “fiscal year 2025” mean the fiscal year ended January 3, 2026, and references to results for “2024” or “fiscal year 2024” mean the fiscal year ended December 28, 2024. References to the “fourth quarter of 2025” or the “fourth fiscal quarter of 2025” mean the fourteen-week period from September 28, 2025 to January 3, 2026, and references to the “fourth quarter of 2024” or the “fourth fiscal quarter of 2024” mean the thirteen-week period from September 29, 2024 to December 28, 2024.

The following analysis excludes discontinued operations.

Summary

Net sales for 2025 were $249.0 million compared to $272.8 million for 2024. Net income for 2025 was $6.0 million, or $0.98 per diluted share, compared to $13.2 million, or $2.13 per diluted share, for 2024. Sales for the fourth quarter of 2025 were $57.5 million compared to $66.7 million for the same period in 2024. Net income for the fourth quarter of 2025 was $1.2 million, or $0.19 per diluted share compared to $1.6 million, or $0.26 per diluted share, for the comparable 2024 period.

The Company’s backlog was $81.1 million on January 3, 2026, compared to $89.2 million on December 28, 2024, primarily due to decreased orders for returnable transport packaging products

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Areas of uncertainty that require judgments, estimates and assumptions include items such as the allowance for doubtful accounts; inventory accounting; the testing of goodwill and other intangible assets for impairment; pensions and other postretirement benefits; and gain or loss on held for sale. Management uses historical experience and all available information to make its estimates and assumptions, but actual results will inevitably differ from the estimates and assumptions that are used to prepare the Company’s financial statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and related footnotes provide a meaningful and fair presentation of the Company’s financial position and results of operations.

Management believes that the application of these estimates and assumptions on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company’s operating results and financial condition.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews the collectability of its receivables on an ongoing basis, considering a combination of factors that require judgment and estimates, including among others, our customers’ access to capital, customers’ willingness, or ability to pay, customer payment patterns, general economic conditions and geopolitical trends, and our ongoing relationship with our customers. The Company reviews potential problems, such as past due accounts, a bankruptcy filing or deterioration in the customer’s financial condition, to ensure that the Company has adequately accrued for potential loss. Accounts are considered past due based on when payment was originally due. If a customer’s situation changes, such as a bankruptcy or a change in its creditworthiness, or there is a change in the current economic climate, the Company may modify its estimate of the allowance for doubtful accounts. The Company will write off accounts receivable after reasonable collection efforts have been made and the accounts are deemed uncollectible. If our estimates and assumptions as to collectability were materially incorrect, or if any of our significant customers were to develop unexpected and immediate financial problems that would prevent payment of amounts due to us, and our allowance for doubtful accounts were inadequate, this could result in an unexpected loss in profitability.

As of January 3, 2026 and December 28, 2024, the Company’s allowance for doubtful accounts total was $0.6 million and $0.5 million, respectively. As of January 3, 2026, and December 28, 2024, the Company’s bad debt expense was $0.1 million and $0.1 million, respectively.

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Inventory

Inventories are valued at the lower of cost or net realizable value. Cost is determined by the last-in, first-out (“LIFO”) method at Eberhard while Big 3 Precision and Velvac and inventories outside the United States are valued using a first-in, first-out (“FIFO”) method. Accordingly, a LIFO valuation reserve is calculated using the dollar value link chain method.

We review the net realizable value of inventory in detail on an ongoing basis, considering deterioration, obsolescence, estimated future demand, current market conditions, and other factors. Based on these assessments, we provide for an inventory reserve in the period in which an impairment is identified. The reserve fluctuates with market conditions, design cycles, and other economic factors and could vary significantly, whether favorably or unfavorably, from actual results due to, among other things, unanticipated changes in economic conditions, customer demand, or the competitive landscape.

The inventory reserve for excess or obsolete inventory reduced the Company’s inventory valuation by $1.8 million and $1.9 million as of January 3, 2026 and December 28, 2024, respectively.

Goodwill and Other Intangible Assets

Intangible assets with finite useful lives are generally amortized on a straight-line basis over the periods benefited. Goodwill and other intangible assets with indefinite useful lives are not amortized. The Company performs annual qualitative assessments on goodwill and other intangible assets as of the end of each fiscal year by comparing the estimated fair value of each reporting unit with its carrying amount. Additionally, the Company performs an interim analysis if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events or circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions, including (i) macroeconomic conditions, (ii) market and industry conditions, (iii) cost factors, (iv) overall financial performance, (v) other relevant entity-specific events, and (vi) events affecting a reporting unit. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources.

In the third quarter of 2024, a goodwill impairment of approximately $12.1 million was recognized in discontinued operations when classifying Big 3 Mold as held for sale.

The Company performed its annual qualitative assessment as of the end of each of fiscal 2025 and 2024 on the carrying value of goodwill and determined that it is more likely than not that no impairment of goodwill existed as of such dates. See Note 3 – Accounting Policies –Goodwill, in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for more detail.

Pension and Other Postretirement Benefits

The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions about such factors as expected return on plan assets, discount rates at which liabilities could be settled, rate of increase in future compensation levels, mortality rates, and trends in health insurance costs. These assumptions are reviewed annually and updated as required. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect the expense recognized and obligations recorded in future periods.

The discount rate used is based on a single equivalent discount rate derived with the assistance of our actuaries by matching expected future benefit payments in each year to the corresponding spot rates from the FTSE Pension Liability Yield Curve, comprised of high quality (rated AA or better) corporate bonds. The Company calculates its service and interest costs in future years by applying the specific spot rates along the selected yield curve to the relevant projected cash flows.

The expected long-term rate of return on assets is also developed with input from the Company’s actuarial firms. We consider the Company’s historical experience with pension fund asset performance, the current and expected allocation of our plan assets and expected long-term rates of return. The long-term rate-of-return assumption used for determining net periodic pension expense was 7.5% for both 2025 and 2024, respectively. The Company reviews the long-term rate of return each year.

Future actual pension income and expenses will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company’s pension plans.

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The Company expects to make cash contributions of approximately $2,800,000 and $40,000 to our pension and other postretirement plans, respectively, in 2026.

In connection with our pension and other postretirement benefits, the Company reported income of $0.4 million and $3.0 million (net of tax) on its Consolidated Statement of Comprehensive Income for fiscal years 2025 and 2024, respectively. The main factor driving this income was the change in the discount rate during the applicable period.

Assumptions used to determine net periodic pension benefit cost for the fiscal years indicated were as follows:

Expected return on plan assets 7.5 % 7.5 %

Rate of compensation increase 0.0 % 0.0 %

Assumptions used to determine net periodic other postretirement benefit cost for the fiscal years indicated were as follows:

Expected return on plan assets 4.0 % 4.0 %

Rate of compensation increase 4.3 % 4.3 %

The changes in assumptions had the following effect on the net periodic pension and other postretirement costs recorded in Other Comprehensive Income as follows:

Year ended

January 3, December 28,

Additional recognition due to significant event -- --

Amortization of:

Unrecognized prior service cost (3,391 ) 4,241

The Plan has been investing a portion of the assets in long-term bonds to better match the impact of changes in interest rates on its assets and liabilities and thus reduce volatility in Other Comprehensive Income. Please refer to Note 10 – Retirement Benefit Plans in Item 8, Financial Statements and Supplementary Data of this Form 10-K for additional disclosures concerning the Company’s pension and other postretirement benefit plans.

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RESULTS OF OPERATIONS

Fourth Quarter 2025 Compared to Fourth Quarter 2024

The following table shows, for the fourth quarter of 2025 and 2024, selected line items from the consolidated statements of income from continuing operations as a percentage of net sales for the Company’s continuing operations. The Company’s continuing operations include (1) Big 3 Products; (2) Eberhard; and (3) Velvac.

Three Months Ended

Cost of Products Sold 77.2 % 77.0 %

Product Development Expense 1.6 % 1.7 %

Selling and Administrative Expense 17.4 % 16.8 %

Restructuring Costs 1.6 % 1.7 %

Operating Profit 3.8 % 4.5 %

Net sales in the fourth quarter of 2025 decreased 13.7% to $57.5 million from $66.7 million in the fourth quarter of 2024. Sales decreases were due to lower shipments of returnable transport packaging products and truck mirror assemblies. Net sales of existing products decreased 19.9% while price increases and new products increased net sales by 6.2% in the fourth quarter of 2025 when compared to sales in the fourth quarter of 2024. New products included various truck mirror assemblies, rotary latches, and handles.

Cost of products sold in the fourth quarter of 2025 decreased $6.9 million or 13.5% from the corresponding period in 2024. The decrease in cost of products sold is primarily attributable to the lower product shipments.

Gross margin as a percentage of net sales for the fourth quarter of 2025 was 22.8% compared to 23.0% in the prior year fourth quarter. The decrease is primarily due to higher material costs in the fourth quarter of 2025.

Product development expenses decreased $0.2 million, or 19.3%, in the fourth quarter of 2025 compared to the corresponding period in 2024 as we continue to invest in new products at Eberhard, Velvac and Big 3 Products. As a percentage of net sales, product development costs were 1.6% for the fourth quarter of 2025 compared to 1.7% for the corresponding period in 2024.

Selling and administrative expenses in the fourth quarter of 2025 decreased 10.5% compared to the fourth quarter of 2024. As a percentage of net sales, selling and administrative expenses were 17.4% for the fourth quarter of 2025 compared to 16.8% for the corresponding period in 2024. The decrease was primarily the result of decreased commissions, legal fees and personnel-related costs.

Net income from continuing operations for the fourth quarter of 2025 was $1.2 million, or $0.19 per diluted share, from $1.6 million, or $0.26 per diluted share, for the same period in 2024.

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Fiscal Year 2025 Compared to Fiscal Year 2024

The following table shows, for fiscal year 2025 and fiscal year 2024, selected line items from the consolidated statements of income as a percentage of net sales for the Company’s operations. The Company’s continuing operations include (1) Big 3 Products; (2) Eberhard; and (3) Velvac.

Fiscal Year Ended

Cost of Products Sold 77.1 % 75.3 %

Product Development Expense 1.6 % 1.8 %

Selling and Administrative Expense 17.0 % 15.5 %

Operating Profit 4.3 % 7.4 %

Summary

Net sales for 2025 decreased 8.7% to $249.0 million from $272.8 million in 2024. The sales decrease was primarily due to lower shipments for truck mirror assemblies and returnable transport packaging products. Net sales of existing products decreased 14.9% in 2025 compared to 2024 while price increases and new products increased net sales in 2025 by 6.2%. Sales of new products increased 5.9% in 2025 and included various new truck mirror assemblies, rotary latches, D-rings, and mirror cams.

Cost of products sold decreased $13.5 million or 6.6% to $192.0 million in 2025 from $205.5 million in 2024. The decrease in the cost of products sold is primarily attributable to lower sales volumes. Tariffs incurred during 2025 were $10.2 million from China-sourced products as compared to $2.5 million in 2024. Most tariffs were recovered through price increases.

Gross margin as a percentage of sales was 22.9% in 2025 compared to 24.7% in 2024. The decrease primarily reflects the impact of higher material costs on lower sales volumes.

Product development expenses as a percentage of sales were 1.6% and 1.8% in 2025 and 2024, respectively, as the Company continues to invest in new products at Eberhard, Velvac and Big 3 Products to better serve our customers.

Selling and administrative expenses were $42.2 million in 2025 compared to $42.2 million in 2024. As a percentage of net sales, selling and administrative expenses were 17.0% for the fiscal year of 2025 compared to 15.5% for the fiscal year 2024. During 2025, Selling and administrative expenses include a $2.5 million of restructuring charges composed of personnel and facilities related cost. The charges relate to actions completed within the fiscal year 2025.

Other expense increased $0.1 million to $0.5 million of expense in 2025 from $0.3 million of expense in 2024. The increase in other expense is due to costs associated with credit agreement refinancing partially offset by recovery of employment tax credits.

Net income from continuing operations for 2025 decreased 57% to $6.0 million, or $0.98 per diluted share, from $13.2 million, or $2.13 per diluted share, in 2024.

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Other Items

The following table shows the amount of change from the year ended December 28, 2024 to the year ended January 3, 2026 in other items (dollars in thousands):

Amount %

Interest Expense $ (37 ) -1.3 %

Other (Income) Expense $ 146 41.3 %

Income Tax Expense $ (2,336 ) -60.5 %

Interest expense decreased in 2025 from 2024 is primarily due to paydown of principal.

The effective tax rate for 2025 was 20.6% compared to the 2024 effective tax rate of 22.6%. Total income taxes paid were $1.9 million in 2025 and $5.2 million in 2024.

Liquidity and Sources of Capital

The primary source of the Company’s cash is earnings from operating activities adjusted for cash generated from or used for net working capital. The most significant recurring non-cash items included in net income are depreciation and amortization expense. Changes in working capital fluctuate with the changes in operating activities. As sales increase, there generally is an increased need for working capital. The Company closely monitors inventory levels and attempts to match production to expected market demand, keeping tight control over the collection of receivables, and optimizing payment terms on its trade and other payables. The maintenance of appropriate inventory levels considering demand has been and may continue to be challenged by supply chain disruptions, which have led in some cases to a deficiency inventory that has required us to pay expedited freight fees on some of our products to timely fulfill customer orders. Coupled with increased materials costs, this has decreased our margins. If these disruptions persist and we are unable to maintain sufficient inventory on hand, we may need to cancel or decline orders, and we may be unable to offset increased material and freight costs fully by increasing prices on our products, any of which could have a material adverse impact on our liquidity.

The Company is dependent on continued demand for its products and subsequent collection of accounts receivable from its customers. The Company serves a broad base of customers and industries with a variety of products. As a result, any fluctuations

in demand or payment from a particular industry or customer should not have a material impact on the Company’s sales and collection of receivables. Management expects that the Company’s foreseeable cash needs for operations, capital expenditures, debt service and dividend payments will continue to be met in the next 12 months from January 3, 2026 and beyond by the Company’s operating cash flows and available credit facility.

The following table shows key financial ratios at the end of each fiscal year:

Current ratio 3.7 2.6

Average days’ sales in accounts receivable 59 50

Inventory turnover 3.4 3.7

Ratio of working capital to sales 28.8 % 25.1 %

Total debt to shareholders’ equity 27 % 35 %

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The following table shows important liquidity measures as of the fiscal year-end balance sheet date for each of the preceding two years (in millions):

Cash and cash equivalents

- Held in the United States $ 5.2 $ 12.4

- Held by foreign subsidiaries 2.2 1.6

Net cash provided by operating activities 8.9 19.4

Net cash used in investing activities (0.5 ) (7.9 )

Net cash used in financing activities (16.3 ) (4.8 )

All cash held by foreign subsidiaries is readily convertible into other currencies, including the U.S. dollar.

Net cash provided by operating activities was $8.7 million in 2025 compared to $19.4 million net cash provided by operating activities in 2024. In 2025, the Company contributed $3.1 million to its defined benefit retirement plan.

In 2024, cash used to support increases in working capital requirements was $5.4 million, driven primarily by payments of accounts payable. In 2024, reductions in working capital requirements provided $4.9 million, primarily driven by reductions in inventory and prepaid expenses.

The Company used $0.5 million and $7.9 million for investing activities in 2025 and 2024, respectively. In 2025, the Company invested $4.0 million in capital expenditures, sold $2.2 million in marketable securities, and received $1.5 million from the sale of business assets. In 2024, the Company invested $9.7 million in capital expenditures, invested $1.0 million in marketable securities, received $2.3 million on the sale of one of its buildings, and received payments on notes receivable of $0.5 million. Capital expenditures in fiscal year 2026 are expected to be approximately $7.3 million.

In 2025, the Company made total debt payments of $44.8 million, of which $36.0 million were principal payments on the former credit facility and $2.7 million were for payment of dividends. The Company anticipates dividend payments in fiscal 2026 to be approximately $2.8 million. The Company has $66 million available on its revolving line of credit. See Note 6 - Debt in Item 8, Financial Statements and Supplementary Data, of this Form 10-K for further discussion on the Company’s debt facilities.

In 2024, the Company made total debt payments of $4.8 million, of which $1.8 million were principal payments on the revolving commitment portion of the credit facility and $2.7 million were for payment of dividends.

The Company leases certain equipment and buildings under cancelable and non-cancelable operating leases that expire at various dates for up to 8 years. Rent expenses amounted to approximately $4.5 million in 2025 and $4.9 million in 2024.

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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 6 - Debt for additional information regarding the terms of the prior credit facility with TD Bank. The Citizens Credit Agreement established 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 6, 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.

The Company was in compliance with all its covenants under the Citizens Credit Agreement as of January 3, 2026 and through the date of filing this Form 10-K. The Company has $66 million available on its line of credit under the Citizens Credit Agreement as of the date of filing this Form 10-K.

As of the end of the fourth 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.

Non-GAAP Financial Measures

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

To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income from continuing operations, diluted earnings per share from continuing operations, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when incurred, 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. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis across periods by removing the impact of certain items that management believes do not directly reflect our underlying operating performance.

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 access operating performance on a consistent basis from period to period.

Adjusted EBITDA from 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. Adjusted EBITDA from Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

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Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, U.S. GAAP financial measures.

We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.

Reconciliation of Non-GAAP Measures

For the Three and Twelve Months ended January 3, 2026 and December 28, 2024

Three Months Ended Twelve Months Ended

Adjustments:

Severance and accrued compensation 1,368 a 1,368 a

Personnel and facilities restructuring 350 b 2,522 b

Credit Agreement refinancing 527 c 527 c

Non-GAAP tax impact of adjustments (1) (181 ) (342 ) (628 ) (342 )

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

b) Expenses associated with severance and facilities related costs.

c) Writeoff of fees associated with former credit agreement.

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Reconciliation of Non-GAAP Measures

Adjusted EBITDA and Adjusted EBITDA from Operations Calculation

For the Three and Twelve Months ended January 3, 2026 and December 28, 2024

Three Months Ended Twelve Months Ended

Severance and accrued compensation - 1,368 a - 1,368 a

Personnel and facilities restructuring 350 c - 2,522 c -

Credit Agreement refinancing 527 d 527 d

Depreciation and amortization - - - 1,552

(Gain) Loss on classification as held for sale - - (2,017 )b 23,088

Adjusted EBITDA from discontinued operations $ - $ 97 $ (372 ) $ (758 )

Severance and accrued compensation 1,368 a 1,368 a

Personnel and facilities restructuring 350 c 2,522 c

Credit Agreement refinancing 527 d 527 d

(Gain) Loss on classification as held for sale - - (2,017 )b 23,088 b

b) Impact of classifying Big 3 Mold business as held for sale

c) Expenses associated with severance and facilities related costs

d) Writeoff of fees associated with former credit agreement.

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of the Company’s status as a smaller reporting company pursuant to Rule 12b-2 of the Exchange Act, the Company is not required to provide information under this Item 7A.

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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Eastern Company

Consolidated Balance Sheets

January 3, December 28,

ASSETS

Current Assets

Inventories:

Current assets held for sale - 5,071,828

Property, Plant and Equipment

Other Assets

Long term note receivable, less current portion 162,102

See accompanying notes.

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The Eastern Company

Consolidated Balance Sheets

January 3, December 28,

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Current portion of long-term debt - 3,603,935

Other current liabilities - 505,376

Current liabilities held for sale - 2,144,573

Long-term liabilities held for sale - -

Shareholders’ Equity

Voting Preferred Stock, no par value:

Authorized and unissued: 1,000,000 shares

Nonvoting Preferred Stock, no par value:

Authorized and unissued: 1,000,000 shares

Common Stock, no par value, Authorized: 50,000,000 shares

Accumulated other comprehensive loss:

Unrealized gain (loss) on foreign currency swap, net of tax 570,097 (505,376 )

See accompanying notes.

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The Eastern Company

Consolidated Statements of Income

Year Ended

January 3, December 28,

Discontinued Operations (see note 2)

Loss from operations of discontinued units $ (520,006 ) $ (2,821,898 )

Earnings per share from continuing operations:

Earnings (loss) per share from discontinued operations:

Total earnings (loss) per share:

Cash dividends per share: $ 0.44 $ 0.44

See accompanying notes.

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The Eastern Company

Consolidated Statements of Comprehensive Income

Year Ended

January 3, December 28,

Other comprehensive income:

Change in fair value of foreign currency swap 1,075,473 (505,376 )

See accompanying notes.

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The Eastern Company

Consolidated Statements of Shareholders’ Equity

Common Treasury Retained AccumulatedOtherComprehensive Shareholders'

Shares Stock Shares Stock Earnings Income (Loss) Equity

Change in fair value of foreign currency swap (505,376 ) (505,376 )

Stock Options Exercised -

Stock Options Exercised -

See accompanying notes.

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The Eastern Company

Consolidated Statements of Cash Flows

Year Ended

Operating Activities

Unrecognized pension and postretirement benefits (1,197,126 ) (1,613,436 )

Loss on refinancing of credit agreement 526,602 -

Changes in operating assets and liabilities:

Investing Activities

Business acquisition (421,039 ) -

Proceeds from sale of business 1,593,646 -

Proceeds from sale of building and equipment 51,727 2,278,540

Financing Activities

Proceeds from short term borrowings (revolver) - 3,000,000

Principal payments on short-term borrowings (revolver) - (1,750,000 )

Financing fees paid (299,521 ) -

Proceeds from new long-term debt refinancing 36,015,894 -

Discontinued Operations

Cash provided by operating activities - 1,165,057

Cash used in investing activities - (583,242 )

Cash provided by discontinued operations - 581,815

Supplemental disclosure of cash flow information:

Non-cash investing and financing activities

See accompanying notes

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The Eastern Company

Notes to Consolidated Financial Statements

1. DESCRIPTION OF BUSINESS

The Eastern Company, and its subsidiaries (the “Company,” “Eastern,” “we,” “us” or “our”) manage industrial businesses that design, manufacture and sell engineered solutions to industrial markets. Eastern’s businesses operate in industries with long-term macroeconomic growth opportunities. We look to acquire businesses that produce stable and growing earnings and cash flows. Eastern may pursue acquisitions in industries other than those in which its businesses currently operate if an acquisition presents an attractive opportunity.

Eastern manages the financial, operational, and strategic performance of its businesses to increase cash generation, operating earnings, and long-term shareholder value.

Eastern encompasses four operating entities within the United States, one wholly owned Canadian subsidiary located in Cambridge, Ontario, Canada, a wholly owned Taiwanese subsidiary located in Taipei, Taiwan, a wholly owned subsidiary in Hong Kong, two wholly owned Chinese subsidiaries (one located in Shanghai, China, and one located in Dongguan, China), and a wholly owned subsidiary in Reynosa, Mexico.

The Eastern Company has one reportable segment: Engineered Solutions. The Engineered Solutions segment provides engineered solutions to support our customer’s needs primarily in the commercial transportation and logistics markets. The Chief Operating Decision Maker (CODM), who is the Company’s Chief Executive Officer, uses both segment gross profit and segment profit or loss from operations before interest and income taxes to allocate resources (including employees, property, and financial or capital resources) for the Engineered Solutions segment predominantly in the annual budget and forecasting process.

Company Operations

The Engineered Solutions segment consists of Big 3 Precision, including Big 3 Precision Products, Inc. (“Big 3 Products”) and Big 3 Mold Services, Inc. (“Big 3 Mold”) and Hallink Moulds, Inc. (“Hallink Moulds”); Eberhard Manufacturing Company (“Eberhard Manufacturing”), Eastern Industrial Ltd, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries (together “Eberhard”); and Velvac Holdings Inc. (“Velvac”). These businesses design, manufacture, and market a diverse product line of custom and standard vehicular and industrial hardware, including turnkey returnable packaging solutions, access and security hardware, mirrors, and mirror-cameras.

Big 3 Products and Big 3 Mold’s turnkey returnable packaging solutions are used in the assembly processes of vehicles, aircraft, and durable goods and in the production processes of plastic packaging products, packaged consumer goods and pharmaceuticals. Big 3 Products works with original equipment manufacturers (“OEMs”) to design and produce custom returnable transport packaging to integrate with OEM assembly processes. Big 3 Mold designs and manufactures blow mold tools. Hallink Moulds is a producer of injection blow mold tooling and is a supplier of blow molds and change parts to the food, beverage, healthcare, and chemical industry. Hallink specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry, offering integrated turnkey solutions to its customers worldwide.

Eberhard specializes in the engineering and manufacturing of access and security hardware. Eberhard offers a standard product line of rotary latches, compression latches, draw latches, hinges, camlocks, key switches, padlocks, and handles among other products, as well as comprehensive development and program management services for custom electromechanical and mechanical systems designed for specific OEMs and customer applications. Eberhard’s products are found in an expansive range of applications and products globally.

Velvac is a designer and manufacturer of proprietary vision technology for OEMs and aftermarket applications, and a provider of aftermarket components to the heavy-duty truck market in North America. Velvac serves diverse, niche segments within the heavy- and medium-duty truck, motorhome, and bus markets.

Sales are made to customers primarily in North America.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

2. DISCONTINUED OPERATIONS

In the third quarter of 2024, the Company decided to sell Big 3 Mold and 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. As such, the financial results of the Big 3 Mold business are reflected in our consolidated statements of income as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the consolidated balance sheets for all periods presented. On April 30, 2025, the Company sold the equipment, workforce and customer list of the ISBM division of Big 3 Mold. ISBM, which is located in Centralia, Illinois, is an injection stretch blow mold toolmaker. From April 30, 2025, the assets and liabilities and results of operations have been included in continuing operations.

Summarized Financial Information of Discontinued Operations

The following table represents income (loss) from discontinued operations, net of tax:

Year Ended

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Notes to Consolidated Financial Statements (continued)

The following table represents the assets and liabilities from discontinued operations:

Total assets of discontinued operations $ - $ 5,071,828

Current assets of discontinued operations1 $ - $ 5,071,828

Total assets of discontinued operations $ - $ 5,071,828

Accrued compensation and other accrued expenses - 1,242,812

Current portion of operating lease liability - 121,299

Current portion of financing lease liability - 7,371

Other long-term liabilities - 16,249

Total liabilities of discontinued operations $ - $ 2,144,573

Current liabilities of discontinued operations1 $ - $ 2,144,573

Total liabilities of discontinued operations $ - $ 2,144,573

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Notes to Consolidated Financial Statements (continued)

3. ACCOUNTING POLICIES

Fiscal Year

The Company’s year ends on the Saturday nearest to December 31. Based on this policy, fiscal year 2025 was comprised of 53 weeks and fiscal year 2024 was comprised of 52 weeks. References in these Notes to the consolidated financial statements to “2025” or “fiscal year 2025” mean the fiscal year ended January 3. 2026, and references to “2024” or “fiscal year 2024” mean the fiscal year ended December 28, 2024. References to the “fourth quarter of 2025” or the “fourth fiscal quarter of 2025” mean the fourteen-week period from September 28, 2025 to January 3, 2026, and references to the “fourth quarter of 2024” or the “fourth fiscal quarter of 2024” mean the thirteen-week period from September 29, 2024 to December 28, 2024.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions are eliminated.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. On an ongoing basis the Company evaluates its estimates, including those related to product returns, bad debts, carrying value of inventories, intangible and other long-lived assets, income taxes, pensions, other postretirement benefits, and gain or loss on held for sale. Actual results could differ from those estimates.

Foreign Currency

For foreign operations asset and liability accounts are translated with an exchange rate at the respective balance sheet dates; income statement accounts are translated at the average exchange rate for the years. Resulting translation adjustments are made directly to a separate component of shareholders’ equity – “Accumulated other comprehensive (loss) – Foreign currency translation.” Foreign currency exchange transaction gains and losses are not material in any year.

Cash Equivalents

Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents. The Company has deposits that exceed amounts insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000, but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution. Approximately 31% of available cash is located outside of the United States in our foreign subsidiaries.

Accounts Receivable

Accounts receivable are stated at their net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews the collectability of its receivables on an ongoing basis considering a combination of factors. The Company reviews potential problems, such as past due accounts, a bankruptcy filing or deterioration in the customer’s financial condition, to ensure the Company has adequately accrued for potential loss. Accounts are considered past due based on when payment was originally due. If a customer’s situation changes, such as a bankruptcy or change in creditworthiness, or there is a change in the current economic climate, the Company may modify its estimate of the allowance for doubtful accounts. The Company will write off accounts receivable after reasonable collection efforts have been made and the accounts are deemed uncollectible. As of January 3, 2026 and December 28, 2024, the Company’s allowance for doubtful accounts total was $0.6 million and $0.5 million, respectively. As of January 3, 2026 and December 28, 2024, the Company’s bad debt expense was $0.1 million and $0.1 million, respectively.

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Notes to Consolidated Financial Statements (continued)

Inventories

Inventories are valued at the lower of cost or net realizable value. Cost is determined by the last-in, first-out (LIFO) method at Eberhard ($19.1 million on January 3, 2026 and $19.9 million December 28, 2024) and by the first-in, first-out (FIFO) method for inventories at Big 3 Precision, Velvac and outside the U.S. ($37.2 million on January 3, 2026 and $36.1 million on December 28, 2024).

Cost exceeded the LIFO carrying value by approximately $3.8 million on January 3, 2026 and $3.8 million on December 28, 2024. There was no material LIFO quantity liquidation in 2025 or 2024. In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete inventory.

Property, Plant and Equipment and Related Depreciation

Property, plant, and equipment (including equipment under finance lease of $4.0 million) are stated at cost. Depreciation expense ($3.8 million in 2025, $3.8 million in 2024) is computed using the straight-line method based on the following estimated useful lives of the assets: Buildings - 10 to 39.5 years; Machinery and equipment - 3 to 10 years.

Impairment of Long-Lived Assets

In accordance with Accounting Standards Codification (“ASC”) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its long-lived assets and certain intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In such an event, the carrying value of long-lived assets is reviewed by management to determine if the value may be impaired. If this review indicates that the carrying amount will not be recoverable, as determined based on the estimated expected future cash flows attributable to the asset over the remaining amortization period, management will reduce the carrying amount to recognize the impairment and recognize an impairment loss. The measurement of the impairment loss to be recognized is to be based on the difference between the fair value and the carrying amount of the asset. Fair value is defined as the amount by which the asset could be bought or sold in a current transaction between willing parties. Where quoted market prices in active markets are not available, management would estimate fair value based on the best information available in the circumstances such as the price of similar assets, a discounted cash flow analysis or other techniques.

Goodwill

The Company tests its reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events and circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. The Company tests reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources.

In the third quarter of 2024 a goodwill impairment of approximately $12.1 million was recognized in discontinued operations when classifying the disposal group as held for sale. See Note 2 – Discontinued Operations for further discussion of discontinued operations. Less than $0.1 million were recognized as impairment losses for the year ending January 3, 2026.

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Notes to Consolidated Financial Statements (continued)

The Company performed qualitative assessments of goodwill as of the end of fiscal 2025 and 2024 and determined that no impairment existed at the end of 2025 and 2024.

The Company will continue to perform annual qualitative assessments as of the end of each fiscal year. Additionally, the Company will perform an interim analysis whenever conditions warrant.

Intangible Assets

Patents are recorded at cost and are amortized using the straight-line method over the lives of the patents. Technology and licenses are recorded at cost and are amortized on a straight-line basis over periods ranging from 1 to 20 years. Non-compete agreements and customer relationships are amortized using the straight-line method over their useful lives. Trademarks are deemed to have indefinite lives. If facts and circumstances indicate that the carrying value of the intangible assets, including definite life intangible assets, may be impaired, an evaluation is performed to determine if a write-down is required.

In the third quarter of 2024 an impairment loss of approximately $4.7 million was recognized in discontinued operations when classifying the disposal group as held for sale. See Note 2 – Discontinued Operations for further discussion of discontinued operations. No impairment losses were recognized for the year ended January 3, 2026.

Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:

The Company’s financial instruments are primarily investments in marketable securities (Level 1) and pension assets, see Note 10 - Retirement Benefit Plans.

The carrying amounts of other financial instruments (cash and cash equivalents, marketable securities, accounts receivable, accounts payable and debt) as of January 3, 2026 and December 28, 2024, approximate fair value because of their short-term nature and market-based interest rates.

Leases

The Company presents right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company elected to account for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.

The Company has operating leases for buildings, warehouses, and office equipment as well as finance leases for equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if t

Company has the right to direct the use of and obtain substantially all the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term.

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Notes to Consolidated Financial Statements (continued)

Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Many leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. The Company’s option to extend certain leases ranges from 1–120 months. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability.

Currently, the Company has 17 operating leases with a lease liability of $16.0 million and 8 finance leases with a lease liability of $4.0 million as of January 3, 2026. The basis, terms, and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company. The weighted average remaining lease term is 5.8 years.

Revenue Recognition

The Company recognizes revenue in accordance with ASC 606, Revenue from Contracts with Customers, when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The Company considers several factors in determining that control transfers to the customer upon shipment of products. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risk and rewards of ownership at the time of shipment.

Big 3 Mold may employ the efforts expended method for the percentage of completion for revenue recognition for certain transactions. The efforts expended method calculates the proportion of effort expended to date in comparison to the total effort expected to be expended for the contract. The amount of revenue recognized by employing the percentage of completion method was $0.8 million for the year ended January 3, 2026 and $2.3 million for the year ended December 28, 2024.

Based on historical experience, product returns have been immaterial, and the Company does not accrue a reserve for product returns. For the years ended January 3, 2026 and December 28, 2024, the Company recorded sales returns of $0.5 million and $0.8 million, respectively, as a reduction to revenue.

Sales and similar taxes that are imposed on the Company’s sales and collected from the customer are excluded from revenues.

Costs for shipping and handling activities, including those activities that occur after transfer of control to the customer, are recorded as cost of sales and are expensed as incurred.

For the years ended January 3, 2026 and December 28, 2024, the Company recorded no revenues related to performance obligations satisfied in prior periods. The Company has elected to use the practical expedient to exclude disclosure of transaction prices allocated to remaining performance obligations, and when the Company expects to recognize such revenue, for all periods prior to the date of initial application of the standard.

The Company notes that it is impracticable to provide revenues from external customers for each product and service.

See Note 12 – Segment andGeographic Information regarding the Company’s revenue disaggregated by geography.

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Notes to Consolidated Financial Statements (continued)

Cost of Goods Sold

Cost of goods sold reflects the cost of purchasing, manufacturing, and preparing a product for sale. These costs generally represent the expenses to acquire or manufacture products for sale (including an allocation of depreciation and amortization) and are primarily comprised of direct materials, direct labor, and overhead, which includes indirect labor, facility and equipment costs, inbound freight, receiving, inspection, purchasing, warehousing, and any other costs related to the purchasing, manufacturing, or preparation of a product for sale.

Shipping and Handling Costs

Shipping and handling costs are included in the cost of goods sold.

Product Development Costs

Product development costs, charged to expense as incurred, were $4.1 million in 2025 and $4.9 million in 2024 and include costs to develop new or enhance existing products to better serve our customers.

Selling and Administrative Expenses

Selling and administrative expenses include all operating costs of the Company that are not directly related to the cost of purchasing, manufacturing, and preparing a product for sale. These expenses represent selling and administrative expenses for support functions and related overhead.

Advertising Costs

The Company expenses advertising costs as incurred. Advertising costs were $0.5 million in 2025 and $0.6 million in 2024.

Stock - Based Compensation

The Company accounts for its stock-based awards in accordance with ASC 718-10, Compensation-Stock Compensation, which requires a fair value measurement and recognition of compensation expense for all share-based payment awards made to its employees and Directors, including employee stock awards and restricted stock awards. The Company estimates the fair value of granted stock awards at the date of grant. This model requires the Company to make estimates and assumptions including, without limitation, estimates regarding the length of time an employee will retain vested stock awards before exercising them, the estimated volatility of the Company’s common stock price and the number of awards that will be forfeited prior to vesting. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination of the fair value of stock-based compensation and consequently, the related amount recognized in the Company’s consolidated statements of operations.

Under the terms of the Director’s Fee Program, the directors receive their director’s fees in shares of Company common stock.

Income Taxes

The Company and its U.S. subsidiaries file a consolidated U.S. federal income tax return.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

The Company accounts for uncertain tax positions pursuant to the provisions of ASC 740, Simplifying the Accounting for Income Taxes (“ASC 740”), which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. These provisions detail how companies should recognize, measure, present, and disclose uncertain tax positions that have or are expected to be taken. As such, the financial statements will reflect expected future tax consequences of uncertain tax positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. See Note 8 - Income Taxes.

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Notes to Consolidated Financial Statements (continued)

4. GOODWILL

The following is a roll-forward of goodwill for 2025 and 2024:

Impairment Charge (73,528 )

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Notes to Consolidated Financial Statements (continued)

5. INTANGIBLES

Trademarks are not amortized as their lives are deemed to be indefinite. Amortization expense recognized $2.6 million in 2025 and $4.0 million in 2024. Total amortization expense for each of the next five years is estimated to be as follows: 2026 - $2.6 million; 2027 - $1.8 million; 2028 - $0.2 million; 2029 - $0.1 million and 2029 - $0.1 million.

Weighted-Average

Amortization

Gross Amount

Patents and developed technology $ 7,375,481 4.2

Accumulated Amortization

Patents and developed technology $ 4,331,720

Non-compete agreements 43,103

Gross Amount

Patents and developed technology $ 7,312,228 4.0

Accumulated Amortization

Patents and developed technology $ 4,134,929

Non-compete agreements 18,061

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Notes to Consolidated Financial Statements (continued)

6. DEBT

On October 28, 2025, the Company entered into a Credit Agreement with Citizens Bank, N.A. that provides for the extension of credit to the Company in the form of revolving loans, swing line loans and letters of credit (the “Credit Agreement”).

The Credit Agreement provides the Company with a $100 million five-year senior secured revolving credit facility. Under the revolving credit facility, up to $5 million is available for letters of credit and up to $5 million is available for swing line loans. The Company can elect to increase the revolving commitment under the Credit Agreement by up to $75 million, provided that one or more lending institutions (whether or not existing lenders under the Credit Agreement) voluntarily agree to provide the additional commitment.

Revolving loans under the Credit Agreement bear interest at a variable rate based on the term secured overnight financing rate (“SOFR”) plus an applicable margin of 1.375% to 2.125% depending on the Company’s senor net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on substantially all of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement dated as of October 28, 2025.

Amounts outstanding under the Credit Agreement are generally due and payable on the expiration date of the Credit Agreement (October 28, 2030) or the earlier termination of the revolving commitments thereunder. The Company can elect to prepay some or all of the outstanding balance from time to time without penalty.

Debt consists of:

Amounts are net of unamortized discounts and debt issuance costs of $113,500 as of January 3, 2026 and $74,500 as of December 28, 2024.

The Company paid interest of $2,458,000 in 2025 and $3,224,798 in 2024.

The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 3.50 to 1.00, which is to be tested quarterly on a trailing twelve-month basis. In addition, the Company is required to maintain an interest coverage ratio not less than 3.00 to 1.00. The Company was in compliance with all covenants as of January 3, 2026 and December 28, 2024.

As of January 3, 2026, scheduled annual principal maturities of long-term debt, net of deferred financing fees, for each of the next five years follow:

Thereafter —

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Notes to Consolidated Financial Statements (continued)

7. STOCK OPTIONS AND AWARDS

Stock Awards

As of January 3, 2026, the Company has one incentive stock award plan, The Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”), for officers, other key employees, and non-employee directors. Restricted stock awards or restricted stock units may be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. The Company granted 88,416 and 92,016 restricted stock unit awards during 2025 and 2024, respectively.

The 2020 Plan also permits the issuance of stock options. Stock option awards granted under the 2020 Plan will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock awards are granted. The Company issued 50,688 and 53,568 stock options in 2025 and 2024, respectively. For the year of 2025, the Company used several assumptions which included an expected term of 3 years, volatility deviation of 42.54% and 40.34% and a risk-free rate of 3.73% and 4.34%. For the year of 2024, the Company used several assumptions which included an expected term of 3 years, volatility deviation of 38.30% and a risk-free rate of 4.51%.

Stock-based compensation expense, including forfeitures, in connection with stock awards and stock options previously granted to employees was $254,000 and $1,030,000 for fiscal years 2025 and 2024, respectively. The Company used fair market value to determine the associated expense with stock awards for the 2025 and 2024 fiscal years.

As of January 3, 2026, there were 780,962 shares of common stock reserved and available for future grant under 2020 Plan.

The following tables set forth the outstanding stock options for the period specified:

Stock Options Outstanding and Exercisable

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Notes to Consolidated Financial Statements (continued)

The following tables set forth the outstanding stock grants for the period specified:

Shares Shares

As of January 3, 2026, outstanding stock options and awards had an intrinsic value of $951,000.

8. INCOME TAXES

Deferred income taxes are provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those for income tax reporting purposes. Deferred income tax (assets) liabilities relate to:

Net deferred income tax (assets) liabilities $ (5,528,496 ) $ (6,611,518 )

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Notes to Consolidated Financial Statements (continued)

Income before income taxes consists of:

The provision for income taxes follows:

Current

Deferred:

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Notes to Consolidated Financial Statements (continued)

The Company adopted ASU 2023-09 "Income Taxes (Topic 740): Improvements To Income Tax Disclosures" on a prospective basis beginning with the year ended January 3, 2026. The following table presents required disclosure pursuant to ASU 2023-09 and reconciles the U.S. federal statutory tax amount and rate to our actual global effective amount and rate for the year ended January 3, 2026.

Amount Percent

State and local income taxes, net of federal income tax effect (1) 303,947 3.4 %

Foreign tax effects:

China

Mexico

Statutory tax rate difference between Mexico and the United States 500,157 5.6 %

Effect of changes in tax laws or rates enacted in the current period - 0.0 %

Effect of cross-border tax laws

Global intangible low-taxed income 292,864 3.3 %

Foreign partnership inclusion 247,104 2.7 %

Tax credits

Research and development tax credits (337,963 ) -3.8 %

Changes in valuation allowances - 0.0 %

Nontaxable or nondeductible items

Meals and entertainment 22,685 0.3 %

Changes in unrecognized tax benefits (64,382 ) -0.7 %

Provision for income taxes and effective tax rate $ 1,853,354 20.6 %

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Notes to Consolidated Financial Statements (continued)

The following table presents required disclosure pursuant to ASU 2023-09 and reconciles the U.S. federal statutory tax amount and rate to our actual global effective amount and rate for continuing operations for the year ended January 3, 2026:

Amount Percent

State and local income taxes, net of federal income tax effect (1) 287,243 3.8 %

Foreign tax effects

China

Mexico

Statutory tax rate difference between Mexico and the United States 500,157 6.7 %

Effect of changes in tax laws or rates enacted in the current period - 0.0 %

Effect of cross-border tax laws

Global intangible low-taxed income 292,864 3.9 %

Foreign partnership inclusion 247,104 3.3 %

Tax credits

Research and development tax credits (337,963 ) -4.5 %

Changes in valuation allowances - 0.0 %

Nontaxable or nondeductible items

Meals and entertainment 22,685 0.3 %

Changes in unrecognized tax benefits (64,382 ) -0.9 %

Provision for income taxes and effective tax rate $ 1,522,345 20.3 %

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Notes to Consolidated Financial Statements (continued)

The following table presents required disclosure pursuant to ASU 2023-09 and reconciles the U.S. federal statutory tax amount and rate to our actual global effective amount and rate for discontinued operations for the year ended January 3, 2026:

Amount Percent

U.S. federal statutory tax rate $ 314,305 21.0 %

State and local income taxes, net of federal income tax effect (1) 16,704 1.1 %

Foreign tax effects - 0.0 %

Effect of changes in tax laws or rates enacted in the current period - 0.0 %

Effect of cross-border tax laws - 0.0 %

Tax credits - 0.0 %

Changes in valuation allowances - 0.0 %

Nontaxable or nondeductible items - 0.0 %

Changes in unrecognized tax benefits - 0.0 %

Other adjustments - 0.0 %

Provision for income taxes and effective tax rate $ 331,009 22.1 %

The following table presents the required disclosures prior to the adoption of ASU 2023-09 and reconciles the U.S. federal statutory income tax rate to the actual global effective income tax rate for the year ended December 28, 2024:

Amount Percent

Income taxes using U.S. federal statutory rate $ (1,855,424 ) 21 %

State income taxes, net of federal benefit 188,037 (2 )

Impact of goodwill impairment charge 1,638,143 (18 )

Impact on Foreign Repatriation Tax Reform 252,786 (3 )

Impact of foreign subsidiaries on effective tax rate (95,924 ) 1

Impact of Research & Development tax credit (472,561 ) 5

Uncertain tax positions reserve (14,056 ) 0

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Notes to Consolidated Financial Statements (continued)

The following table presents the required disclosures prior to the adoption of ASU 2023-09 and reconciles the U.S. federal statutory income tax rate to the actual global effective income tax rate for continuing operations for the year ended December 28, 2024:

Amount Percent

Income taxes using U.S. federal statutory rate $ 3,585,607 21 %

State income taxes, net of federal benefit 556,658 3

Impact on Foreign Repatriation Tax Reform 252,786 2

Impact of foreign subsidiaries on effective tax rate (102,501 ) (1 )

Impact of Research & Development tax credit (472,561 ) (2 )

Uncertain tax positions reserve (14,056 ) 0

The following table presents the required disclosures prior to the adoption of ASU 2023-09 and reconciles the U.S. federal statutory income tax rate to the actual global effective income tax rate for discontinued operations for the year ended December 28, 2024:

Amount Percent

Income taxes using U.S. federal statutory rate $ (5,441,031 ) 21 %

State income taxes, net of federal benefit (368,621 ) 1

Impact of foreign subsidiaries on effective tax rate 6,577 0

Impact of goodwill impairment charge 1,638,143 (6 )

The Company adopted ASU 2023-09 on a prospective basis for the year ended January 3, 2026 and has included the following table as a result of adoption, which presents income taxes paid (net of refunds received) for the year ended January 3, 2026:

State

Foreign

Total cash paid for income taxes, net of refunds $ 1,924,358

The Company had income taxes paid of $5,166,195 for the year ended December 28, 2024, prior to the adoption of ASU 2023-09.

Under accounting standards (ASC 740), a deferred tax liability is not recorded for the excess of the financial reporting (book) basis over the tax basis of an investment in a foreign subsidiary if the indefinite reinvestment criteria are met. Effective for foreign earnings after December 30, 2017, if such earnings are distributed in the form of cash dividends, the Company would not be subject to additional U.S. income taxes but could be subject to foreign income and withholding taxes. A provision has not been made for additional U.S. federal and foreign taxes on January 3, 2026 of undistributed earnings of foreign subsidiaries because the Company intends to reinvest these funds indefinitely. It is not practicable to estimate the unrecognized deferred tax liability for withholding taxes on these undistributed earnings.

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Notes to Consolidated Financial Statements (continued)

On December 14, 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures which applies to all entities subject to income taxes. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. For public business entities (PBEs), the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. The Company adopted ASU 2023-09 on a prospective basis for the year ending January 3, 2026.

A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows:

Increase for positions taken during the current period (12,424 ) (2,303 )

Increase (decrease) for positions taken during the prior period - -

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2021 and non-U.S. income tax examinations by tax authorities prior to 2019.

Included in the balance as of January 3, 2026, are $315,916 of unrecognized tax benefits that would affect the annual effective tax rate. In 2025, the Company recognized accrued interest related to unrecognized tax benefits in income tax expense. The Company had approximately $65,008 and $52,039 of accrued interest as of January 3, 2026 and December 28, 2024, respectively. The amount of interest reflected in the statement of operations was an expense of $12,969 and a benefit of $17,791 for the years ending January 3, 2026 and December 28, 2024, respectively.

The total amount of unrecognized tax benefits could increase or decrease within the next twelve months for several reasons, including the closure of federal, state, and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under ASC 740.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

9. LEASES

The Company enters into leases for manufacturing facilities, warehouses, sales offices, plant equipment, vehicles, and certain other equipment with varying end dates from February 2026 to April 2033, including renewal options

The following table (in millions) represents the impact of leasing on the consolidated balance sheets:

Balance Sheet Classification January 3, 2026 December 28, 2024

Assets:

Operating lease assets, net Right of use assets $ 16.0 $ 14.2

Total leased assets, net 20.0 18.0

Liabilities:

Total lease liabilities $ 20.0 $ 18.0

Cash paid included in the measurement of operating lease liabilities was $4.0 million and $4.3 million for the fiscal years ended January 3, 2026 and December 28, 2024, respectively, all of which were included within the operating cash flow section of the consolidated statements of cash flows. Lease assets obtained in exchange for new operating lease liabilities were $4.5 million and $0.4 million for the fiscal years ended January 3, 2026 and December 28, 2024, respectively.

Cash paid included in the measurement of finance lease liabilities was $0.9 million and $0.4 million for the fiscal years ended January 3, 2026 and December 28, 2024, respectively, which were included within the financing cash flow section of the consolidated statements of cash flows for the fiscal years ended January 3, 2026 and December 28, 2024, respectively.

Total operating lease expense was $4.5 million and $4.9 million for the fiscal years ended January 3, 2026 and December 28, 2024, respectively.

Total financing lease expense was $0.3 million and $0.1 million for the fiscal years ended January 3, 2026 and December 28, 2024, respectively.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

9. LEASES(continued)

The future payments (in millions) due under non-cancelable operating and finance leases as of January 3, 2026 are as follows:

Operating Finance

Less effects of discounting (2.4 ) (0.8 )

Lease liabilities recognized $ 16.0 $ 4.0

As of January 3, 2026, the weighted average lease term for all operating and finance leases is 5.9 and 5.2 years, respectively. The weighted average discount rate associated with operating leases was 7.0% while the weighted average discount rate associated with finance leases was 7.2%.

10. RETIREMENT BENEFIT PLANS

The Company has non-contributory defined benefit pension plans covering some U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for its salaried plan, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law.

The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.

Components of the net periodic benefit cost of the Company’s pension benefit plans for the fiscal year indicated were as follows:

Service costs are reported in the cost of products sold and the other components of net periodic benefit costs are reported in other income in the consolidated statements of income.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

Assumptions used to determine net periodic benefit cost for the Company’s pension benefit plans for the fiscal year indicated were as follows:

Discount rate

- Supplemental pension plans 5.16 % 4.72 %

Expected return on plan assets 7.5 % 7.5 %

Rate of compensation increase 0 % 0 %

Components of the net periodic benefit cost of the Company’s other postretirement benefit plan were as follows:

Amortization of prior service cost (3,391 ) 4,241

Assumptions used to determine net periodic benefit cost for the Company’s other postretirement plan for the fiscal year indicated were as follows:

Expected return on plan assets 4.0 % 4.0 %

Rate of compensation increase 4.3 % 4.3 %

As of January 3, 2026 and December 28, 2024, the status of the Company’s pension benefit plans and other postretirement benefit plan was as follows:

Pension Benefit Other Postretirement Benefit

Plan amendment - - - (44,757 )

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

Pension Benefit Other Postretirement Benefit

Amounts recognized in accumulated other comprehensive income consist of:

Pension Benefit Other Postretirement Benefit

Change in the components of accumulated other comprehensive income consist of:

Pension Benefit Other Postretirement Benefit

Charged to net periodic benefit cost

Liability (gains)/losses

Assumptions used to determine the projected benefit obligations for the Company’s pension benefit plans and other postretirement benefit plan for the fiscal year indicated were as follows:

Discount rate

- Supplemental pension plans 4.52 % 5.16 %

- Other postretirement plan 5.62 % 5.65 %

On January 3, 2026 and December 28, 2024, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $75,493,395 and $75,916,060, respectively.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

Information for the under-funded pension plans with a projected benefit obligation and an accumulated benefit obligation in excess of plan assets:

Number of plans 5 5

Estimated future benefit payments to participants of the Company’s pension plans are $5.4 million in 2026, $5.4 million in 2027, $5.6 million in 2028, $5.6 million in 2029, $5.7 million in 2030 and a total of $28.4 million from 2031 through 2035.

Estimated future benefit payments to participants of the Company’s other postretirement plan are $40,000 in 2026, $40,000 in 2027, $41,000 in 2028, $43,000 in 2029, $44,000 in 2030 and a total of $240,000 from 2031 through 2035.

The Company expects to make cash contributions to its qualified pension plans of approximately $2,800,000 and to its other postretirement plan of approximately $40,000 in 2026.

We consider a number of factors in determining and selecting assumptions for the overall expected long-term rate of return on plan assets. We consider the historical long-term return experience of our assets, the current and expected allocation of our plan assets, and expected long-term rates of return. We derive these expected long-term rates of return with the assistance of our investment advisors and generally base these rates on a 10-year horizon for various asset classes and consider the expected positive impact of active investment management. We base our expected allocation of plan assets on a diversified portfolio consisting of domestic and international equity securities and fixed income securities.

We consider a variety of factors in determining and selecting our assumptions for the discount rate at the end of the year. In 2025, as in 2024, we developed each plan’s discount rate with the assistance of our actuaries by matching expected future benefit payments in each year to the corresponding spot rates from the FTSE Pension Liability Yield Curve, comprised of high quality (rated AA or better) corporate bonds.

The fair values of the Company’s pension plan assets on January 3, 2026 and December 28, 2024, utilizing the fair value hierarchy discussed in Note 3 – Accounting Policies – Fair Value of Financial Instruments, follow:

Level 1 Level 2 Level 3 Total

Cash and Equivalents:

Equities:

Fixed Income:

Target Duration LDI Fixed Income Funds (l)

STRIPS Fixed Income Funds (m)

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The Eastern Company

Notes to Consolidated Financial Statements (continued)