EASTERN CO 10-Q

ITEM 1 – FINANCIAL STATEMENTS THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) Three Months Ended April 1, 2023 April 2, 2022 Net sales $ 72,495,367 $ 69,014,648 Cost of products sold ( 56,997,668 ) ( 54,438,968 ) Gross margin 15,497,699 14,575,680 Product development expense ( 1,401,199 ) ( 1,197,008 ) Selling and administrative expenses ( 11,937,637 ) ( 9,865,614 ) Operating profit 2,158,863 3,513,058 Interest expense ( 726,006 ) ( 434,335 ) Other (expense) income ( 630,699 ) 488,520 Income from continuing operations before income taxes 802,158 3,567,243 Income tax expense ( 194,845 ) ( 881,125 ) Net income from continuing operations 607,313 2,686,118 Discontinued Operations (see note B) Gain from operations of discontinued operations - 471,187 Income tax expense - ( 126,867 ) Gain from discontinued operations - 344,320 Net income $ 607,313 $ 3,030,438 Earnings per share from continuing operations: Basic $ 0.10 $ 0.43 Diluted $ 0.10 $ 0.43 Earnings per share from discontinued operations: Basic $ - $ 0.06 Diluted $ - $ 0.05 Total earnings per share: Basic $ 0.10 $ 0.49 Diluted $ 0.10 $ 0.48 Cash dividends per share: $ 0.11 $ 0.11 See accompanying notes. 3 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended April 1, 2023 April 2, 2022 Net income $ 607,313 $ 3,030,438 Other comprehensive income: Change in foreign currency translation 336,585 202,281 Change in fair value of interest rate swap, net of tax (benefit) cost of: 2023 - $(87,691) ; 2022 - $333,635 ( 277,687 ) 1,056,511 Change in pension and postretirement benefit costs, net of taxes of: 2023 - $74,360 ; 2022 - $92,235 252,668 313,408 Total other comprehensive income 311,566 1,572,200 Comprehensive income $ 918,879 $ 4,602,638 See accompanying notes. 4 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS April 1, 2023 December 31, 2022 (unaudited) ASSETS Current Assets Cash and cash equivalents $ 13,071,017 $ 10,187,522 Accounts receivable, less allowances: 2023 - $ 676,000 ; 2022 - $ 677,000 44,481,853 42,886,250 Inventories 57,652,961 64,636,591 Current portion of notes receivable 214,780 1,006,421 Prepaid expenses and other assets 6,639,228 6,598,774 Total Current Assets 122,059,839 125,315,558 Property, Plant and Equipment 57,318,367 56,112,889 Accumulated depreciation ( 30,877,891 ) ( 30,000,797 ) Property, Plant and Equipment, Net 26,440,476 26,112,092 Goodwill 70,788,971 70,777,459 Trademarks 5,514,888 5,514,886 Patents and other intangibles net of accumulated amortization 17,987,968 18,819,897 Long term notes receivable, less current portion 905,851 2,276,631 Deferred Income Taxes 488,989 488,989 Right of Use Assets 11,564,607 12,217,521 Total Other Assets 107,251,274 110,095,383 TOTAL ASSETS $ 255,751,589 $ 261,523,033 See accompanying notes. 5 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS April 1, 2023 December 31, 2022 (unaudited) LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 26,643,423 $ 27,638,317 Accrued compensation 2,233,923 3,327,832 Other accrued expenses 3,900,764 3,944,964 Current portion of operating lease liability 3,030,116 3,059,547 Current portion of finance lease liability 150,773 - Current portion of long-term debt 9,375,000 9,010,793 Total Current Liabilities 45,333,999 46,981,453 Other long-term liabilities 754,762 754,762 Operating lease liability, less current portion 8,556,037 9,195,205 Finance lease liability, less current portion 846,547 - Long-term debt, less current portion 49,661,128 55,136,231 Accrued postretirement benefits 664,293 666,222 Accrued pension cost 23,134,787 22,174,465 Total Liabilities 128,951,553 134,908,338 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 33,536,918 33,586,165 Issued: 9,066,057 shares in 2023 and 9,056,421 shares in 2022 Outstanding: 6,231,612 shares in 2023 and 6,221,976 shares in 2022 Treasury Stock: 2,834,445 shares in 2023 and 2,834,445 shares in 2022 ( 22,544,684 ) ( 22,544,684 ) Retained earnings 138,908,874 138,985,852 Accumulated other comprehensive income (loss): Foreign currency translation ( 804,393 ) ( 1,140,978 ) Unrealized gain on interest rate swap, net of tax 1,172,067 1,449,754 Unrecognized net pension and postretirement benefit costs, net of tax ( 23,468,746 ) ( 23,721,414 ) Accumulated other comprehensive loss ( 23,101,072 ) ( 23,412,638 ) Total Shareholders’ Equity 126,800,036 126,614,695 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 255,751,589 $ 261,523,033 See accompanying notes. 6 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended April 1, 2023 April 2, 2022 Operating Activities Net income $ 607,313 $ 3,030,438 Less: gain from discontinued operations - 344,320 Income from continuing operations 607,313 2,686,118 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,814,749 1,830,427 Unrecognized pension and postretirement benefits 880,421 247,133 Loss on sale of equipment and other assets - 268,770 Provision for doubtful accounts 3,269 19,740 Stock compensation (benefit) expense ( 49,246 ) 221,468 Changes in operating assets and liabilities: Accounts receivable ( 1,585,976 ) ( 3,951,314 ) Inventories 7,212,179 ( 4,902,631 ) Prepaid expenses and other ( 37,330 ) ( 1,075,545 ) Other assets ( 155,055 ) ( 89,366 ) Accounts payable ( 1,031,704 ) 3,526,499 Accrued compensation ( 1,104,186 ) ( 1,858,898 ) Other accrued expenses 305,824 ( 478,878 ) Net cash provided by (used in) operating activities 6,860,258 ( 3,556,477 ) Investing Activities Payments received from notes receivable 2,233,192 175,220 Proceeds from sale of equipment - 1,371,073 Purchases of property, plant, and equipment ( 1,151,205 ) ( 572,047 ) Net cash provided by investing activities 1,081,987 974,246 Financing Activities Proceeds from short term borrowings (revolver) ( 268,249 ) 5,000,000 Principal payments on long-term debt ( 4,858,000 ) ( 1,852,107 ) Financing leases, net 723,254 ( 92,111 ) Purchase common stock for treasury - ( 766,889 ) Dividends paid ( 684,293 ) ( 687,180 ) Net cash (used in) provided by financing activities ( 5,087,288 ) 1,601,713 Discontinued Operations Cash used in operating activities - (396,936 ) Cash used in discontinued operations - ( 396,936 ) Effect of exchange rate changes on cash 28,538 ( 22,903 ) Net change in cash and cash equivalents 2,883,495 ( 1,400,357 ) Cash and cash equivalents at beginning of period 10,187,522 6,602,429 Cash and cash equivalents at end of period ¹ $ 13,071,017 $ 5,202,072 Supplemental disclosure of cash flow information: Interest $ 716,763 $ 463,080 Income taxes ( 59,681 ) 110,917 Non-cash investing and financing activities Right of use asset ( 652,914 ) 292,097 Lease liability ( 328,721 ) ( 226,903 ) ¹ includes cash from assets held for sale of $0.1 million as of April 2, 2022 See accompanying notes 7 Table of Contents THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 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. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. All intercompany accounts and transactions are eliminated. 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 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 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 In the second quarter of 2021, the Company determined that the companies included in our former Diversified Products segment no longer fit with our long-term strategy and the Company initiated the process of selling the companies within the Diversified Products segment. We believe that selling the companies within this segment will allow management to focus on our core capabilities and offerings. 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 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. 8 Table of Contents Summarized Financial Information of Discontinued Operations The following table represents income from discontinued operations, net of tax: Three Months Ended April 1, 2023 April 2, 2022 (unaudited) (unaudited) Net sales $ - $ 2,367,226 Cost of products sold - ( 1,603,762 ) Gross margin - 763,464 Selling and administrative expenses - ( 257,060 ) Operating income - 506,404 Interest expense - ( 35,217 ) Gain from discontinued operations before income taxes - 471,187 Income tax expense - ( 126,867 ) Income from discontinued operations, net of tax $ - $ 344,320 Note C – Earnings Per Share The denominators used to calculate earnings per share are as follows: Three Months Ended April 1, 2023 April 2, 2022 Basic: Weighted average shares outstanding 6,223,027 6,247,649 Diluted: Weighted average shares outstanding 6,223,027 6,247,649 Dilutive stock appreciation rights 10,962 12,055 Denominator for diluted earnings per share 6,233,989 6,259,704 Note D – Inventories Inventories from continuing operations consist of the following components: April 1, 2023 December 31, 2022 Raw material and component parts $ 23,123,674 $ 25,924,696 Work in process 8,315,774 9,323,082 Finished goods 26,213,513 29,388,813 Total inventories $ 57,652,961 $ 64,636,591 Note E - Goodwill 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. 9 Table of Contents 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. Note F – 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 accounts 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. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the 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. 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. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. 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 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. 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 lease transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company. 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; 2024 - $ 2.8 million; 2025 - $ 1.9 million; 2026 - $ 1.5 million; 2027 - $ 1.2 million; and $ 2.8 million thereafter. The weighted average remaining lease term is 5.7 years. 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, 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 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. The repayment amount then increased to $ 1,875,000 per quarter beginning September 30, 2021 and continuing through June 30, 2023. The repayment amount then increases to $ 2,500,000 per quarter beginning September 30, 2023 and continuing through June 30, 2024. The term loan is a 5 -year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25 % based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. 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. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.25% to 1.25 % or the LIBOR rate plus an applicable margin of 1.25% to 2.25 %, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019, with Santander Bank, N.A., as administrative agent. The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. 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 its covenants under the Credit Agreement on April 1 , 2023, and through the date of filing this Form 10-Q. 10 Table of Contents 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 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. 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 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. Note H - Stock Options and Awards The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers, other key employees, and non-employee directors expired in February 2020. On February 19, 2020, the Board of Directors of the Company (the “Board”) adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”). On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The 2020 Plan replaced the 2010 Plan. The Company has no other existing plan pursuant to which equity awards may be granted. Incentive stock options granted under the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Board. Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Board. 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 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. 11 Table of Contents The following tables set forth the outstanding SARs for the period specified: Three Months Ended Year Ended April 1, 2023 December 31, 2022 Units Weighted Average Exercise Price Units Weighted Average Exercise Price Outstanding at beginning of period 146,166 $ 23.22 180,833 $ 22.88 Issued - - - - Expired ( 42,000 ) 24.90 - - Exercised ( 33,333 ) 21.10 ( 16,667 ) 21.20 Forfeited ( 32,500 ) 21.97 ( 18,000 ) 21.74 Outstanding at end of period 38,333 23.58 146,166 23.22 SARs Outstanding and Exercisable Range of 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 38,333 0.9 $ 23.58 38,333 0.9 $ 23.58 The following tables set forth the outstanding stock awards for the period specified: Three Months Ended Year Ended April 1, 2023 December 31, 2022 Shares Shares Outstanding at beginning of period 64,500 27,300 Issued - 43,300 Forfeited ( 33,100 ) ( 6,100 ) Outstanding at end of period 31,400 64,500 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 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. 12 Table of Contents Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number of Shares that may yet be Purchased Under the Plans or Programs Balance as of December 31, 2022 139,716 $ 24.61 139,716 60,284 January 1, 2023 - April 1, 2023 - - - - Balance as of April 1, 2023 139,716 $ 24.61 139,716 60,284 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. 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. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped. 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. The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts. Note K - Income Taxes The Company files income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2018 and is no longer subject to non-U.S. 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 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 The Company has four non-contributory defined benefit pension plans covering most U.S. employees. 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 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. 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. 13 Table of Contents 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 April 1, 2023 April 2, 2022 Service cost $ 216,153 $ 269,744 Interest cost 990,054 608,189 Expected return on plan assets ( 1,049,016 ) ( 1,460,661 ) Amortization of prior service cost — 16,563 Amortization of the net loss 342,865 390,075 Net periodic cost (benefit) $ 500,056 $ ( 176,090 ) Other Postretirement Benefits Three Months Ended April 1, 2023 April 2, 2022 Service cost 6,486 13,323 Interest cost 14,533 10,988 Expected return on plan assets ( 4,849 ) ( 4,400 ) Gain on significant event — — Amortization of prior service cost 1,060 1,060 Amortization of the net loss ( 16,895 ) ( 2,054 ) Net periodic benefit $ 335 $ 18,917 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 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. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion. The Company made contributions to the plan as follows: Three Months Ended April 1, 2023 April 2, 2022 Regular matching contribution $ 252,761 $ 210,939 Transitional credit contribution 34,320 51,564 Non-discretionary contribution 431,950 343,377 Total contributions for the period $ 719,031 $ 605,880 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. 14 Table of Contents Note M - Recent Accounting Pronouncements 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. Note N - Concentration of Risk Credit Risk Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. 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. The Company has deposits that exceed amounts up to $ 250,000 that are insured by the Federal Deposit Insurance Corporation (FDIC), but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution. Interest Rate Risk 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 $ 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 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 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 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. 15 Table of Contents