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Item 1. Financial Statements

2023-05-09 compared with 2022-11-07 · 126 added, 232 removed, 312 unchanged (53% of the section changed)

1 unchanged sentence

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

$ 210,191,448

$ 186,897,930

April 1, 2023

April 2, 2022

Cost of products sold

1 unchanged sentence

( 54,438,968 )

( 163,047,360 )

( 142,196,527 )

Product development expense

1 unchanged sentence

( 1,197,008 )

( 3,068,866 )

Selling general and administrative expenses

( 10,121,683 )

( 9,440,583 )

Selling and administrative expenses

( 11,937,637 )

2 unchanged sentences

Interest expense

( 1,583,894 )

( 1,388,512 )

Other (expense) income

Income from continuing operations before income taxes

Income tax expense

( 1,423,363 )

( 3,498,365 )

( 3,573,308 )

Net income from continuing operations

Discontinued Operations (see note B)

Income from operations of discontinued operations

Gain (loss) on classification of assets as held for sale

( 9,274,439 )

Income tax (expense) benefit

Gain (loss) from discontinued operations

( 4,926,248 )

Gain from operations of discontinued operations

Income tax expense

Gain from discontinued operations

Earnings per share from continuing operations:

Earnings (loss) per share from discontinued operations:

Earnings per share from discontinued operations:

Total earnings per share:

4 unchanged sentences

Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

Other comprehensive (loss) income:

April 1, 2023

April 2, 2022

Other comprehensive income:

Change in foreign currency translation

Change in fair value of interest rate swap, net of tax (benefit) cost of:

2023 - $(87,691) ;

2022 - $333,635

Change in fair value of interest rate swap, net of tax cost of:

2022 - $ 163,533 and $ 590,827 respectively;

2021 - $ 31,759 and $ 188,753 respectively

Change in pension and postretirement benefit costs, net of taxes of:

2022 - $ 92,235 and $ 276,705 respectively;

2021 - $ 107,962 and $ 308,117 respectively

Total other comprehensive (loss) income

2023 - $74,360 ;

2022 - $92,235

Total other comprehensive income

Comprehensive income

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

October 1, 2022

January 1, 2022

Current Assets

5 unchanged sentences

Prepaid expenses and other assets

Current assets held for sale

Total Current Assets

6 unchanged sentences

Long term notes receivable, less current portion

Deferred Income Taxes

Right of Use Assets

5 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

October 1, 2022

January 1, 2022

LIABILITIES AND SHAREHOLDERS’ EQUITY

3 unchanged sentences

Other accrued expenses

Current portion of lease liability

Current portion of operating lease liability

Current portion of finance lease liability

Current portion of long-term debt

Current liabilities held for sale

Total Current Liabilities

Deferred income taxes

Other long-term liabilities

Lease liability

Operating lease liability, less current portion

Finance lease liability, less current portion

Long-term debt, less current portion

18 unchanged sentences

Retained earnings

Accumulated other comprehensive (loss):

Accumulated other comprehensive income (loss):

Foreign currency translation

( 1,140,978 )

Unrealized gain (loss) on interest rate swap, net of tax

Unrealized gain on interest rate swap, net of tax

Unrecognized net pension and postretirement benefit costs, net of tax

11 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended

October 1, 2022

October 2, 2021

Three Months Ended

Operating Activities

gain (loss) from discontinued operations

( 4,926,248 )

gain from discontinued operations

Income from continuing operations

Adjustments to reconcile net income to net cash used in operating activities:

Adjustments to reconcile net income to net cash provided

by (used in) operating activities:

Depreciation and amortization

Unrecognized pension and postretirement benefits

( 3,056,642 )

Gain on sale of equipment and other assets

( 1,469,218 )

Loss on sale of equipment and other assets

Provision for doubtful accounts

Stock compensation expense

Stock compensation (benefit) expense

Changes in operating assets and liabilities:

3 unchanged sentences

( 4,902,631 )

( 13,686,268 )

Prepaid expenses and other

( 1,075,545 )

( 3,903,388 )

Accounts payable

( 1,031,704 )

Accrued compensation

Other accrued expenses

( 1,104,186 )

( 1,858,898 )

Net cash used in operating activities

Other accrued expenses

Net cash provided by (used in) operating activities

( 3,556,477 )

Investing Activities

Marketable securities

Issuance of Notes Receivable

Payments received from notes receivable

2 unchanged sentences

( 1,151,205 )

( 2,112,990 )

Net cash provided by investing activities

Financing Activities

Payments on short term borrowings (revolver)

( 1,000,000 )

Proceeds from short term borrowings (revolver)

4 unchanged sentences

Purchase common stock for treasury

( 1,637,072 )

Dividends paid

( 2,054,875 )

( 2,062,492 )

Net cash used in financing activities

Net cash (used in) provided by financing activities

( 5,087,288 )

Discontinued Operations

Cash (used in) provided by operating activities

Cash used in investing activities

Cash (used in) provided by discontinued operations

Cash used in operating activities

Cash used in discontinued operations

Effect of exchange rate changes on cash

6 unchanged sentences

Right of use asset

$ ( 820,561 )

Lease liability

( 1,608,530 )

¹ includes cash from assets held for sale of $0.4 million as of October 1, 2022 and $1.3 million as of October 2, 2021

¹ includes cash from assets held for sale of $0.1 million as of April 2, 2022

See accompanying notes

THE EASTERN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

October 1, 2022

April 1, 2023

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements.

Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2022, filed with the Securities and Exchange Commission on March 17, 2022 (the “2021 Form 10-K”), for additional information.

Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 14, 2023 (the “2022 Form 10-K”), for additional information.

The accompanying condensed consolidated financial statements are unaudited.

2 unchanged sentences

All intercompany accounts and transactions are eliminated.

The condensed consolidated balance sheet as of January 1, 2022 has been derived from the audited consolidated balance sheet at that date.

The condensed consolidated balance sheet as of December 31, 2022 has been derived from the audited consolidated balance sheet at that date.

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

References to 2021 or the 2021 fiscal year mean the 52-week period ended on January 1, 2022, and references to 2022 or the 2022 fiscal year mean the 52-week period ending on December 31, 2022.

References to 2022 or the 2022 fiscal year mean the 52-week period ended on December 31, 2022, and references to 2023 or the 2023 fiscal year mean the 52-week period ending on December 30, 2023.

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

References to the third quarter of 2021, the third fiscal quarter of 2021 or the three months ended October 2, 2021 mean the period from July 4, 2021 to October 2, 2021.

References to the third quarter of 2022, the third fiscal quarter of 2022 or the three months ended October 1, 2022 mean the 13-week period from July 3, 2022 to October 1, 2022.

Certain amounts in the financial statements have been reclassified to conform with the current presentation with no impact or change to previously reported net income or shareholder’s equity.

References to the first quarter of 2022, the first fiscal quarter of 2022 or the three months ended April 2, 2022, mean the period from January 2, 2022 to April 2, 2022.

References to the first quarter of 2023, the first fiscal quarter of 2023 or the three months ended April 1, 2023, mean the 13-week period from January 1, 2023 to April 1, 2023.

Certain amounts in the 2022 financial statements have been reclassified to conform with the 2023 presentation with no impact or change to previously reported net income or shareholders’ equity.

Note B – Discontinued Operations

2 unchanged sentences

The former Diversified Products segment met the criteria to be held for sale and furthermore, we determined that the assets held for sale qualify for discontinued operations.

As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented.

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

On November 3, 2021, the Company sold its Greenwald Industries, Inc.

division (“Greenwald”).

Greenwald, located in Chester, CT, is an OEM manufacturer offering a range of payment solutions from coin-vending products to smart card systems and payment applications.

On November 22, 2021, the Company sold its Frazer & Jones Company division (“Frazer & Jones”).

Frazer & Jones is a ductile and malleable iron foundry located in Syracuse, NY.

Eastern has exited the mining business to focus on our three core businesses.

As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statement of operations as discontinued operations for the prior period presented.

The results of the former Diversified Products segment are not reflected in the unaudited condensed consolidated statement of operations for the three months ended April 1, 2023 because dispositions of the businesses that comprised that segment were completed prior to the start of the period.

On October 19, 2022, the Company sold its Argo EMS business (“Argo”).

Argo supplies printed circuit boards and other electronic assemblies to original equipment manufacturers in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial control, medical, and military products.

Summarized Financial Information of Discontinued Operations

1 unchanged sentence

Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

Cost of products sold

( 1,603,762 )

( 8,749,365 )

( 4,943,751 )

( 29,793,971 )

Selling, general and administrative expenses

( 1,093,716 )

( 3,407,113 )

Gain (loss) on classification of assets as held for sale

( 9,274,439 )

Operating income (loss)

( 5,980,071 )

Selling and administrative expenses

Operating income

Interest expense

Gain (loss) from discontinued operations before income taxes

( 6,442,909 )

Income tax (expense) benefit

Income (loss) from discontinued operations, net of tax

$ ( 4,926,248 )

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

October 1, 2022

January 1, 2022

Accounts receivable

Prepaid expenses

Property, plant and equipment, net

Right of use assets

Total assets of discontinued operations¹

Accounts payable

Accrued compensation and other accrued expenses

Current portion of lease liability

Other long-term liabilities

Total liabilities of discontinued operations¹

¹ The total assets and liabilities of discontinued operations are presented as current in the October 1, 2022 and January 1, 2022 balance sheets as we sold the discontinued operations and collected proceeds within one year of the applicable balance sheet date.

Gain from discontinued operations before income taxes

Income tax expense

Income from discontinued operations, net of tax

Note C – Earnings Per Share

1 unchanged sentence

Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

Weighted average shares outstanding

4 unchanged sentences

Inventories from continuing operations consist of the following components:

October 1, 2022

January 1, 2022

Raw material and component parts

3 unchanged sentences

Note E - Goodwill

The aggregate carrying amount of goodwill from continuing operations is approximately $ 71.9 million as of October 1, 2022 and $ 72.2 million as of January 1, 2022.

No impairment was recognized in the third quarter of 2022.

The aggregate carrying amount of goodwill from continuing operations is approximately $ 70.8 million as of April 1, 2023.

No impairment was recognized in the first quarter of 2023.

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.

17 unchanged sentences

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 24 operating leases and two finance leases with a lease liability of $ 13.1 million as of October 1, 2022 and $ 11.3 million as of January 1, 2022.

The finance lease arrangements are immaterial.

Currently, the Company has twenty-one operating leases with a lease liability of $ 11.6 million and three finance leases with a lease liability of $ 1.0 million as of April 1, 2023.

The terms and conditions of the leases are determined by the individual agreements.

2 unchanged sentences

There are no leases that have not yet commenced that could create significant rights and obligations for the Company.

Total lease expense for each of the next five fiscal years is estimated to be as follows:

Approximate total minimum lease payments for each of the next five fiscal years is estimated to be as follows:

remainder of 2023 - $ 2.4 million;

5 unchanged sentences

The weighted average remaining lease term is 5.7 years.

The implicit interest rate used was 5.0 %.

The implicit interest rate used was 5.0 % to 6.4 %.

Note G - Debt

On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association and TD Bank, N.A.

On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, M&T Bank, and TD Bank, N.A.

as lenders (the “Credit Agreement”), that included a $100 million term portion and a $ 20 million revolving commitment portion.

Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with People’s United Bank, N.A.

(approximately $ 19 million) and to acquire certain subsidiaries of Big 3 Holdings, LLC.

Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with M&T Bank (approximately $ 19 million) and to acquire certain subsidiaries of Big 3 Holdings, LLC (collectively “Big 3 Precision”).

The term portion of the loan required quarterly principal payments of $ 1,250,000 for an 18-month period beginning December 31, 2019.

4 unchanged sentences

The revolving commitment portion has a maturity date of August 30, 2024.

As of October 1, 2022, the Company has borrowed $ 9,000,000 on the revolving commitment portion of the facility at an interest rate of 4.51 %.

As of April 1, 2023, the Company has not borrowed any funds on the revolving commitment portion of the facility.

The term loan bears interest at a variable rate based on the LIBOR rate plus an applicable margin of 1.25 % to 2.25 %, depending on the Company’s senior net leverage ratio.

3 unchanged sentences

In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.

The Company was in compliance with all of its covenants under the Credit Agreement on October 1, 2022, and through the date of filing this Form 10-Q.

On August 30, 2019, the Company entered an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $ 50,000,000 , which was equal to 50% of the outstanding balance of the term loan on that date.

The Company was in compliance with all its covenants under the Credit Agreement on April 1 , 2023, and through the date of filing this Form 10-Q.

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date.

The Company has a fixed interest rate of 1.44 % on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44 % and will receive interest when the LIBOR rate exceeds 1.44%.

On October 1, 2022, the interest rate for approximately half ($ 24.9 million) of the term portion was 4.28%, using a one-month LIBOR rate, and 3 .19 % on the remaining balance ($ 40.9 million) of the term loan based on a one-month LIBOR rate.

On April 1, 2023, the interest rate for approximately half ($20.1 million) of the term portion was 6.38%, using a one-month LIBOR rate, and 3.19 % on the remaining balance ($39.1 million) of the term loan based on a one-month LIBOR rate.

The interest rates under the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the phasing out of LIBOR.

Information regarding the phasing out of LIBOR is provided below.

On July 27, 2017, the Financial Conduct Authority (the “FCA”) (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021.

In December 2020, the ICE Benchmark Administration (the “IBA”) announced a market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023, which the FCA supports.

On March 5, 2021, the IBA released its feedback statement reporting the results of the market consultation.

Pursuant to its feedback statement, the IBA ceased publication of all settings of non-US dollar LIBOR and only the one-week and two-month U.S.

The ICE Benchmark Administration (the “IBA”) ceased publication of all settings of non-US dollar LIBOR and the one-week and two-month U.S.

dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S.

dollar LIBOR settings scheduled to be discontinued after June 30, 2023.

The Alternative Reference Rates Committee (ARRC), a financial industry group convened by the Federal Reserve Board, has recommended the use of a secured overnight financing rate (“SOFR”) to replace LIBOR.

In addition, on March 15, 2022, the Adjustable Interest Rate Act (the “LIBOR Act”) was signed into law, which provided a replacement framework for outstanding financial contracts tied to LIBOR once LIBOR ceases to be published.

The Adjustable Interest Rate Act (the “LIBOR Act”), which was signed into law on March 15, 2022, provided a replacement framework for outstanding financial contracts tied to LIBOR once LIBOR ceases to be published.

The LIBOR Act provides a statutory mechanism and safe harbor that applies on a nationwide basis to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board based on SOFR, for certain contracts that reference LIBOR and contain no or insufficient fallback provisions.

The LIBOR Act preempts and supersedes any state or local law, statute, rule, regulation, or standard relating to the selection or use of a benchmark replacement or related changes and allows parties that already have effective fallback provisions to opt out of the legislation.

On December 16, 2022, the Federal Reserve adopted a final rule implementing the LIBOR Act that, among other things, identifies the applicable SOFR-based benchmark replacements under the LIBOR Act for various contact types.

The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end.

SOFR is a backward-looking overnight rate, which has implications for how interest and other payments are based.

Although the Federal Reserve has proposed a regulation implementing the LIBOR Act, including the basis for calculation of the alternative benchmark rate thereunder, this regulation has not been finalized and changes in the method of calculating the alternative rate or benchmark are still in flux, and once an alternate rate is adopted, may adversely affect interest rates and result in higher borrowing costs.

This could materially and adversely affect the Company’s results of operations, cash flows and liquidity.

We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks at this time.

Note H - Stock Options and Awards

7 unchanged sentences

Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Board.

During the first nine months of fiscal 2022, the Company granted 43,300 stock awards that were subject to the meeting of performance measurements.

The Company granted 27,300 stock awards in the first nine months of fiscal 2021 that were subject to the meeting of performance measurements.

For the first nine months of fiscal 2022, the Company used assumptions which included an expected term of 4 .0 years, volatility deviation between 47.15 % to 47.70 % and a risk-free rate between 2.04 % to 2.66 % for the purposes of measuring compensation under the Black Scholes Method.

For the first nine months of fiscal 2021, the Company used several assumptions which included an expected term of 4 .0 years, volatility deviation between 47.25 % to 48.55 % and a risk-free rate between 0.18 % to 0.35 % for the purposes of measuring compensation under the Black Scholes Method.

The Company did not grant any stock awards during the first three months of fiscal 2023.

During the first three months of fiscal 2022, the Company granted 36,200 stock awards that were subject to the meeting of performance measurements.

For the first three months of fiscal 2022, the Company used fair market value to determine the associated expense with stock awards.

The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”).

The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock.

During the first nine months of fiscal 2022 and 2021 the Company did not issue any SARs.

Stock-based compensation expense in connection with SARs previously granted to employees was approximately $ 131,000 and $ 102,000 in the third quarter of 2022 and the third quarter of 2021, respectively and was approximately $ 381,000 and $ 316,000 in the first nine months of fiscal years 2022 and 2021, respectively.

As of October 1, 2022, there were 812,954 shares of Company common stock reserved and available for future grant under the 2020 Plan.

During the first three months of fiscal 2023 and 2022 the Company did not issue any SARs.

Stock-based compensation (income) expense in connection with SARs previously granted to employees was approximately $( 184,000 ) and $ 113,000 in the first quarter of 2023 and the first quarter of 2022, respectively.

As of April 1, 2023, there were 939,398 shares of Company common stock reserved and available for future grant under the 2020 Plan.

The following tables set forth the outstanding SARs for the period specified:

Nine Months Ended

October 1, 2022

January 1, 2022

Three Months Ended

April 1, 2023

December 31, 2022

Weighted Average Exercise Price

3 unchanged sentences

SARs Outstanding and Exercisable

Range of Exercise Prices

Outstanding as of October 1, 2022

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Exercisable as of October 1, 2022

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Exercise Prices

Outstanding as of

April 1, 2023

Weighted Average Remaining

Contractual Life

Weighted Average

Exercise Price

Exercisable as of

April 1, 2023

Weighted Average Remaining

Contractual Life

Weighted Average

Exercise Price

$ 19.44 - $ 26.30

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

Nine Months Ended

October 1, 2022

January 1, 2022

Three Months Ended

April 1, 2023

December 31, 2022

Outstanding at beginning of period

Outstanding at end of period

As of October 1, 2022, outstanding SARs and stock awards had an intrinsic value of $ 1,119,000 .

As of April 1, 2023, outstanding SARs and stock awards had an intrinsic value of $611,672.

Note I – Share Repurchase Program

On May 2, 2018, the Company announced that the Board of Directors of the Company had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock.

The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific price per share.

Under this program, shares of common stock may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

Below is a summary of the Company’s share repurchases during the third quarter of 2022.

The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share.

Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Below is a summary of the Company’s shares repurchased during the first quarter of 2023.

Total Number of Shares Purchased

2 unchanged sentences

Maximum Number of Shares that may yet be Purchased Under the Plans or Programs

Balance as of July 2, 2022

July 3, 2022 - October 1, 2022

Balance as of October 1, 2022

Balance as of December 31, 2022

January 1, 2023 - April 1, 2023

Balance as of April 1, 2023

Note J – Revenue Recognition

The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled.

The Company records revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” The Company has defined purchase orders as contracts in accordance with ASC Topic 606.

The Company records revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers”.

The Company has defined purchase orders as contracts in accordance with ASC Topic 606.

For its customer contracts, the Company identifies its performance obligations, which are delivering goods or services, determines the transaction price, allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer.

2 unchanged sentences

Revenues are recognized when products are shipped.

Customer volume rebates, product returns, discount and allowance are variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded.

Customer volume rebates, product returns, discount and allowance are variable considerations and are recorded as a reduction of revenue in the same period that the related sales are recorded.

The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material.

6 unchanged sentences

income tax examinations by foreign tax authorities for years prior to 2016.

The total amount of unrecognized tax benefits could increase or decrease within the next 12 months following October 1, 2022 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 FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the value of unrecognized tax benefits during the nine months ended October 1, 2022.

The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months following October 1, 2022.

The total amount of unrecognized tax benefits could increase or decrease within the next 12 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 FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the value of unrecognized tax benefits during the three months ended April 1, 2023.

The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.

Note L – Retirement Benefit Plans

1 unchanged sentence

Three of these pension plans are frozen and participants in these three plans have not accrued benefits since the date on which these plans were frozen.

A fourth pension plan, The Eastern Company Pension Plan for Hourly-Rated Employees of the Eberhard Division, does not permit new participants but existing participants in this fourth pension plan continue to accrue benefits.

A fourth pension plan does not permit new participants but existing participants in this fourth pension plan continue to accrue benefits.

Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, the level of compensation.

On August 29, 2022, in agreement with the International Association of Machinist and Aerospace Workers Union AFL-CIO District #54, Local #439 the Company agreed to freeze The Eastern Company Pension Plan for Hourly-Rated Employees of the Eberhard Division effective December 31, 2022.

As a result, no benefits will accrue under this plan after December 31, 2022.

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.

Significant disclosures relating to these benefit plans for the first three months and first nine months 2022 and 2021 are as follows:

Significant disclosures relating to these benefit plans for the first quarter of fiscal years 2023 and 2022 are as follows:

Pension Benefits

Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

Interest cost

2 unchanged sentences

( 1,460,661 )

( 4,381,980 )

( 4,346,020 )

Amortization of prior service cost

Amortization of the net loss

Net periodic benefit

$ ( 176,088 )

$ ( 215,203 )

$ ( 528,267 )

Net periodic cost (benefit)

$ ( 176,090 )

1 unchanged sentence

Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

Interest cost

Expected return on plan assets

Gain on significant event

Amortization of prior service cost

Amortization of the net loss

Net periodic benefit cost

Net periodic benefit

The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations.

In 2022, the Company expects to contribute $ 300,000 into its pension plans and $ 50,000 into its postretirement plan.

As of October 1, 2022, the Company has contributed $ 15,000 into its pension plans, has contributed $ 18,000 to its postretirement plan, and expects to make the remaining contributions as required during the remainder of the fiscal year.

In fiscal year 2023, the Company expects to contribute approximately $ 800,000 into its pension plans and approximately $ 50,000 into its postretirement plan.

As of April 1, 2023, the Company has not made any contributions to its pension plans, has contributed $ 12,000 to its postretirement plan, and expects to make the remaining contributions as required during the remainder of the fiscal year.

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S.

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Three Months Ended

Nine Months Ended

October 1, 2022

October 2, 2021

October 1, 2022

October 2, 2021

Regular matching contribution

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Total contributions for the period

The non-discretionary contribution of $ 323,082 made in the nine months ended October 1, 2022, was accrued and expensed in the prior fiscal year.

The non-discretionary contribution of $ 328,953 made in the three months ended April 1, 2023, was accrued for, and expensed in the prior fiscal year.

Effective January 1, 2023, the non-discretionary contributions are being contributed on a weekly basis.

Note M - Recent Accounting Pronouncements

In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Tax.

The changes implemented in ASU 2019-12 include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments.

In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting.

The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to employee stock ownership plans.

The Company adopted ASU 2019-12 as of January 3, 2021.

The adoption of this guidance did not have a material impact on the consolidated financial statements of the Company.

The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company.

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The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss.

As of October 1, 2022, there was one significant concentration of credit risk with a customer, who has receivables representing 15 % of our total accounts receivable.

One single customer represented more than 11 % of the Company’s net accounts receivable as of January 1, 2022.

As of April 1, 2023, there was one significant concentration of credit risk with a customer, who has receivables representing 15 % of our total accounts receivable.

One single customer represented 14 % of the Company’s net accounts receivable as of December 31, 2022.

The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.

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The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based on the LIBOR rate plus a margin spread of 1.25 % to 2.25 %.

The Company has an interest rate swap with a notional amount of $ 40.9 million on October 1, 2022, to convert a portion of the borrowing under the Credit Agreement from variable to fixed rates.

The Company has an interest rate swap with a notional amount of $ 39.0 million on April 1, 2023, to convert a portion of borrowings under the Credit Agreement from variable to fixed rates.

The valuation of this swap is determined using the one-month LIBOR rate index and mitigates the Company’s exposure to interest rate risk.

Additionally, interest rates on the Company’s debt are susceptible to changes to the method that LIBOR rates are determined and to the potential phasing out of LIBOR after 2021.

The potential phasing out of LIBOR is discussed in greater detail in Note G — Debt hereof and under the heading “The phaseout of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest rates” in Part I, Item 1A of the 2021 Form 10-K.

Additionally, interest rates on the Company’s debt are susceptible to the transition from LIBOR to alternative benchmark rates, such as SOFR.

This transition is discussed in greater detail under Note G - Debt hereof and under Note 6 - Debt in Part II, Item 8 of the 2022 Form 10-K.

Currency Exchange Rate Risk

The Company’s currency exposure is concentrated in the British pound, Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB and the Hong Kong dollar.

Because of the Company’s limited exposure to any single foreign market, any currency gains or losses have not been material and are not expected to be material in the future.

The Company’s currency exposure is concentrated in the Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB, Hong Kong dollar and United Kingdom pound sterling.

Because of the Company’s limited exposure to any single foreign market, any exchange gains or losses have not been material and are not expected to be material in the future.

As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments.

Note O – Subsequent Events

Subsequent to the end of the third quarter of 2022, on October 14, 2022, the Company closed on the sale of the assets of Argo to CCK Automation, LLC.

The proceeds will be used to pay down debt and fund the operations of the Company.

The strategic decision to divest of the Argo business reflects our strategy of focusing on our core capabilities and offerings.

On April 25, 2023, the Board of Directors of The Eastern Company (the “Company”) approved a plan to close the Company’s Associated Tool Makers Ltd.

facility located in Farndon, United Kingdom, which specializes in the design and manufacture of molds for the plastic injection molding industry.

The plan is intended to address long-standing profitability issues at the Farndon facility.

The plan would include approximately 10 job reductions at the Farndon facility.

The Company expects to substantially complete this plan by the end of the third quarter of 2023 and estimates total pre-tax charges associated with this action to be between $ 3.5 million and $ 4.5 million, of which $ 0.4 million to $ 0.8 million is expected to be cash charges primarily for associate-related and other exit costs, with the remainder representing non-cash charges primarily for accelerated depreciation and other asset-related charges.

The Company expects to record the majority of these pre-tax charges and cash outflows in the second quarter of 2023.

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

What changed 10-Q

Item 1. Financial Statements