Good morning, welcome to The Eastern Company first quarter fiscal year 2026 earnings call. At this time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Marianne Barr, Treasurer of The Eastern Company. Marianne, the floor is yours.
Good morning, and thank you everyone for joining us this morning for a review of The Eastern Company's results for the first quarter of 2026. With me on the call are Ryan Schroeder, Chief Executive Officer, and Nicholas Vlahos, Chief Financial Officer. The company issued its earnings press release yesterday after market close. If anyone has not yet seen the release, please visit the investor's information section of the company's website, www.easterncompany.com, where you will find the release under financial news. Please note that some of the information you will hear during today's call will consist of forward-looking statements about the company's future financial performance and business prospects, including, without limitation, statements regarding revenue, gross margins, operating expenses, other income and expenses, taxes and business outlook.
These forward-looking statements are subject to risks and uncertainties that could cause actual results or trends to differ significantly from those projected in these forward-looking statements. We undertake no obligation to review or update any forward-looking statements to reflect events or circumstances that occur after the call. For more information regarding these risks and uncertainties, please refer to risk factors discussed in our SEC filings, including Form 10-K filed with the SEC on March 3rd, 2026 for the fiscal year 2025. In addition, during today's call, we will discuss non-GAAP financial measures that we believe are useful as supplemental measures of Eastern's performance. These non-GAAP measures should be considered in addition to, and not as a substitute for or in isolation from GAAP results.
A reconciliation of each of the non-GAAP measures discussed during today's call to the most directly comparable GAAP measure can be found in the earnings press release. With that introduction, I'll turn the call over to Ryan.
Thank you, Marianne, and good morning, everyone. Welcome to The Eastern Company's first quarter 2026 earnings conference call. Following my prepared remarks, Nick will walk through the financial results in detail, after which we'll open the line for questions. I want to start this morning with our headline view of our Q1 performance and the lens through which we are managing the business as we move into the second quarter and look ahead to the balance of 2026. This was a quarter with positives and negatives. On the positive side, net sales of $59.7 million improved sequentially from the fourth quarter by 4%. The sequential improvement reflects improved order execution in an improving demand environment. Notably, the sequential improvement was achieved despite continued softness in our returnable dunnage businesses, which weighed on the year-over-year comparison.
We also experienced a one-time destocking action by a customer of Eberhard. Strengthening order conversion drove sequential backlog growth to $82.2 million for the second consecutive quarter, continuing the recovery from the trough we reported in the third quarter of 2025. Order rates strengthened across virtually all of our segments. The underlying demand recovery we identified coming out of Q4 is intact and is showing early signs of broadening. We delivered a $5.4 million year-over-year improvement in cash flow from operations, reversing a use of cash in the first quarter of 2025. On the other side of the ledger, an operating issue within our returnable racks businesses, which resides within Big 3 Precision, pressured consolidated gross margin and net income for the quarter.
Consequently, we reported Q1 adjusted EBITDA of $3 million compared with $4.6 million in both the first and fourth quarters of 2025. Excluding the Big 3 impact, EBITDA across the rest of the portfolio was broadly in line with prior quarter and prior year periods. Our Q1 performance reflects three principal dynamics. I want to walk through each in turn, beginning with the operating issue at Big 3. In Q1, our Big 3 business recorded a below plan operating performance. I want to be clear about what happened, what we've done about it, and the timeframe over which the financial impact will work through our income statement. Within Big 3, to fill plant capacity against a prolonged period of soft demand, our racks team quoted orders in the fourth quarter, which were discovered to be below our margin thresholds.
Having identified and addressed the root cause of the below plan performance, we have tightened the quoting processes, adjusted the delegation of authority, and installed a cross-functional review process that improves accountability. We have determined that the financial impact is contained to the first half of 2026 while the affected contracts run off. We are honoring our commitments to customers who received these contracts, preserving the relationship that matters to the long-term value of this business. In fact, we continue to see backlog in this business grow. Despite this operational snafu, our operational turnaround is on track. Turning to the demand environment, we are seeing improvements across virtually all of our business segments. The market signals are encouraging. Backlog grew sequentially for the second consecutive quarter, reflecting strengthening order conversion across the portfolio.
We are seeing building order momentum at both Eberhard and Velvac. Notably at Velvac, that activity is supported by an early-stage recovery in heavy-duty truck build rates at our major OEMs, several of which have been adding capacity in their own plants. We also are seeing customers commit to orders for the second half of 2026, which gives us better visibility than we had at this point a year ago. Taken together, the demand environment heading into the remainder of 2026 is more constructive than it was in the second half of 2025. The trajectory of the order book and our customer engagement is moving in the direction that have been described for several quarters. That said, the macro backdrop continues to require active monitoring, and we are managing the business with appropriate caution as the recovery solidifies.
Our operational and commercial work in Q1 included positioning each business to win more business, fulfill it profitably, and capture operating leverage as demand recovers. Doing so ahead of new program launches scheduled across the second and third quarters. We believe these are the right investments at the right point in the cycle. At Eberhard, we are applying lean principles to compress lead times and reduce inventory with no material capital required. The result is a more responsive footprint for both existing products and new program launches. Most significant of those launches is a new door actuation program for a customer's next generation side-by-side ATV that is ramping up across the second and third quarters of this year. At Big 3, alongside corrective measures taken, we are making capacity investments designed to deliver operating leverage.
This includes automation and robotics that expand welding throughput without adding headcount and enabling lights out and weekend production. At Velvac, we went live on a new ERP system on the first day of the second quarter. The new platform is expected to support more efficient order management, inventory visibility, and financial close processes as Velvac continues to capture the recovery underway in the heavy-duty truck market. We are into week six of this major initiative, and while it is not a finished project just yet, we are taking, making, and shipping orders and have been able to successfully close the month of April. Now moving on to the balance sheet and capital allocation. Deleveraging the balance sheet remained a clear priority. In Q1, we continued to reduce debt, continued our regular quarterly dividend, repurchased shares under the authorized program, and generated meaningful cash from operations.
Strengthening the balance sheet gives us the capacity to absorb periods of operational pressure, like the one we are reporting today, without compromising the businesses or our strategic plan. It also preserves our optionality on M&A, allowing us to move on opportunities when they meet our criteria. I'll now turn the call over to Nick to review our financial results for the first quarter. Nick, over to you.
Thanks, Ryan. Beginning with net sales for the first quarter of 2026, net sales decreased approximately 6% to $59.7 million from $63.3 million in the first quarter of 2025, due primarily to decreased shipments resulting from lower order volume of returnable transport packaging products. The decrease was partially offset by increased sales of truck mirror assemblies. Our backlog as of April 4, 2026 was $82.2 million, down approximately 8% from $85.9 million a year ago, primarily reflecting softer order activity in returnable transport packaging. Notably, backlog increased modestly on a sequential basis from $81.1 million at fiscal year-end.
Gross margin as a percentage of net sales for the first quarter of 2026 was 20% or $11.9 million, compared to 22.4% or $14.2 million in the first quarter of 2025. This decrease reflects a decline in volumes on existing products, which spread manufacturing costs across a smaller revenue base and below plan operating performance at Big 3, as Ryan detailed. These factors were partially offset by new product contributions and price increases on existing products. As a percentage of net sales, product development costs were 1.7% in the first quarter of 2026, compared to 1.8% in the prior period. This reflects continued investment in new products across our business units while maintaining cost discipline relative to our revenue base.
Selling and administrative expenses for the first quarter of 2026 decreased $0.3 million or 2.8% to $9.6 million compared to $9.8 million in the first quarter of 2025. The decrease was driven by lower compensation and related charges and lower commission charges that were partially offset by higher legal and professional expenses. Operating profit for the first quarter of 2026 was $1.3 million, or 2.2% of net sales, compared to $3.2 million or 5.1% of net sales in the prior year period. Other income and expense for the first quarter of 2026 was $13,000 of income, compared to $200,000 of expense in the prior period.
Interest expense in the first quarter of 2026 was $528,000, a modest decline from interest expense of $617,000 in the same period in the prior year. Net income from continuing operations for the first quarter was $0.6 million, or $0.11 per diluted share, compared to $1.9 million or $0.31 per diluted share in the prior year period. Turning to adjusted EBITDA, first quarter 2026 adjusted EBITDA from continuing operations was $3 million, or 5% of net sales, compared to $4.6 million or 7.3% of net sales in the prior year period. The 230 basis point margin compression reflects two factors listed in order of magnitude. The most significant driver was Big 3's below-plan operating performance and lower volume in returnable transport packaging.
Turning to the balance sheet, I want to highlight several dynamics that underscore our financial stability and the continued progress we are making on our capital structure priorities. Total assets at the end of the first quarter were $217 million, essentially flat compared to $216.7 million at fiscal year-end. On working capital, we ended the quarter at $71.3 million, compared to $66.1 million in the prior year period, with a current ratio of 3.5 x. Inventory declined $3.3 million to $53.1 million, representing approximately a 5.9% reduction from year-end. Accounts receivables were $32.6 million, up modestly from $30.1 million at year-end. On debt and leverage, we continue to reduce our long-term debt, ending the quarter with a balance of $33 million at quarter-end.
Our total debt-to-equity ratio improved 26.6%, down substantially from 34.3% at the end of first quarter of 2025. We remain comfortably within all of our covenants under our Citizens Bank credit agreement, we have $67 million of availability on our $100 million revolving facility that provides us with significant financial flexibility as we look ahead. Cash generated from operations in the quarter was $3.5 million, a strong reversal from the $1.9 million usage in the prior year first quarter. Capital expenditures were $0.9 million. Consistent with our capital allocation policy, we repurchased approximately 21,000 shares during the quarter. To summarize, our strengthening balance sheet and borrowing capacity gives us the flexibility to fund organic growth and selectively pursue disciplined M&A pipeline. That completes my financial review. I'll now turn the call back to Ryan. Ryan?
Thanks, Nick. Before we open the line to questions, I want to leave you a couple of key takeaways. Our corporate strategy is unchanged, and we are staying the course. We continue to deleverage and strengthen the balance sheet. The commercial orientation of our businesses remains focused on an organic growth mindset. We are investing in the people, processes, and programs to support that orientation. Our pipeline of potential acquisition targets is filling, and we are well-positioned to move decisively when the right opportunity meets our criteria. With that, I'll open it up for questions.
Thank you very much. At this time, we'll be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. For anyone using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment while we poll for questions. Okay, just a reminder there, if you'd like to ask a question, you can do so by pressing star one on your phone keypad now. Okay, I'm not seeing anyone in the queue at this moment.
There are no further questions at this time. I would like to turn the floor back over to Ryan Schroeder for closing comments.
Thank you for attending our call today. I would like to thank you for your continued support in Eastern. Please reach out to me or Nick if you have any additional questions. We look forward to updating you in the next quarter.
Thank you very much. This does conclude today's conference. You may disconnect your phone lines at this time, and have a wonderful day. We thank you for your participation.