What changed in this filing

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Item 1. Financial Statements

2023-08-08 compared with 2023-05-09 · 125 added, 117 removed, 321 unchanged (43% of the section changed)

3 unchanged sentences

Three Months Ended

April 1, 2023

April 2, 2022

Six Months Ended

$ 140,833,158

$ 138,554,702

Cost of products sold

1 unchanged sentence

( 53,552,232 )

( 110,187,615 )

( 107,991,200 )

Product development expense

1 unchanged sentence

( 2,832,309 )

Selling and administrative expenses

( 2,156,372 )

Selling general and administrative expenses

( 11,289,037 )

( 10,141,815 )

( 23,226,674 )

( 20,007,429 )

Operating profit

Interest expense

Other (expense) income

( 1,507,110 )

Other income (expense)

Income from continuing operations before income taxes

Income tax expense

( 1,193,877 )

( 2,075,002 )

Net income from continuing operations

11 unchanged sentences

Three Months Ended

April 1, 2023

April 2, 2022

Other comprehensive income:

Six Months Ended

Other comprehensive (loss) income:

Change in foreign currency translation

( 1,173,177 )

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

2023 - $(274,957) and $(362,648) respectively;

2022 - $93,659 and $427,294 respectively

( 1,172,067 )

1 unchanged sentence

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

2023 - $74,359 and $148,719 respectively;

2022 - $92,235 and $184,470 respectively

Total other comprehensive (loss) income

( 1,350,439 )

( 1,038,873 )

Total other comprehensive income

Comprehensive income

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2022

Current Assets

21 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

December 31, 2022

LIABILITIES AND SHAREHOLDERS’ EQUITY

23 unchanged sentences

50,000,000 shares

9,066,057 shares in 2023 and 9,056,421 shares in 2022

6,231,612 shares in 2023 and 6,221,976 shares in 2022

9,072,761 shares at 2023 and 9,056,421 shares at 2022

6,238,316 shares at 2023 and 6,221,976 shares at 2022

Treasury Stock:

2,834,445 shares in 2023 and 2,834,445 shares in 2022

2,834,445 shares at 2023 and 2,834,445 shares at 2022

( 22,544,685 )

1 unchanged sentence

Retained earnings

Accumulated other comprehensive income (loss):

Accumulated other comprehensive loss:

Foreign currency translation

( 1,235,435 )

( 1,140,978 )

Unrealized gain on interest rate swap, net of tax

12 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended

Six Months Ended

Operating Activities

1 unchanged sentence

Income from continuing operations

Adjustments to reconcile net income to net cash provided

by (used in) operating activities:

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation and amortization

2 unchanged sentences

Provision for doubtful accounts

Stock compensation (benefit) expense

Stock compensation expense

Changes in operating assets and liabilities:

2 unchanged sentences

( 5,237,113 )

( 4,902,631 )

Prepaid expenses and other

1 unchanged sentence

Accounts payable

( 1,031,704 )

Accrued compensation

( 1,711,069 )

( 1,858,898 )

Other accrued expenses

( 1,274,858 )

( 1,812,968 )

Net cash provided by (used in) operating activities

1 unchanged sentence

Investing Activities

Business Acquisition

Payments received from notes receivable

2 unchanged sentences

( 1,978,784 )

Net cash provided by investing activities

( 1,140,728 )

Net cash (used in) provided by investing activities

Financing Activities

Proceeds from short term borrowings (revolver)

Principal payments on long-term debt

1 unchanged sentence

( 3,767,866 )

Principal payments on short-term borrowing (revolver)

Proceeds from short term borrowings (revolver)

Proceeds from new long-term debt financing

Financing leases, net

Purchase common stock for treasury

( 1,423,378 )

Dividends paid

( 1,369,941 )

( 1,372,101 )

Net cash (used in) provided by financing activities

5 unchanged sentences

Net change in cash and cash equivalents

( 1,400,357 )

Cash and cash equivalents at beginning of period

4 unchanged sentences

Lease liability

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

( 5,355,510 )

( 1,595,081 )

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

See accompanying notes

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

April 1, 2023

Note A – Basis of Presentation

9 unchanged sentences

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.

References to the second quarter of 2022, the second fiscal quarter of 2022 or the three months ended July 2, 2022, mean the period from April 3, 2022 to July 2, 2022.

References to the second quarter of 2023, the second fiscal quarter of 2023 or the three months ended July 1, 2023, mean the 13-week period from April 2, 2023 to July 1, 2023.

References to the first six months of 2022 or the six months ended July 2, 2022 mean the period from January 2, 2022 to July 2, 2022.

References to the first six months of 2023 or the six months ended July 1, 2023 mean the period from January 1, 2023 to July 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.

Argo supplied 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.

We believe that the sale of the Diversified Products segment has allowed 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.

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

Summarized Financial Information of Discontinued Operations

1 unchanged sentence

Three Months Ended

Six Months Ended

Cost of products sold

( 1,683,295 )

Selling and administrative expenses

Operating income

( 3,287,057 )

Selling, general and administrative expenses

Operating income (loss)

Interest expense

Gain from discontinued operations before income taxes

Income tax expense

Income from discontinued operations, net of tax

Gain (Loss) from discontinued operations before income taxes

Income tax (expense) benefit

Income (loss) from discontinued operations, net of tax

Note C – Earnings Per Share

1 unchanged sentence

Three Months Ended

Six Months Ended

Weighted average shares outstanding

4 unchanged sentences

Inventories from continuing operations consist of the following components:

December 31, 2022

Raw material and component parts

3 unchanged sentences

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.

The aggregate carrying amount of goodwill from continuing operations is approximately $ 70.8 million as of July 1, 2023 and includes the write-off of approximately $ 0.5 million of goodwill associated with the closure of Associated Toolmakers Ltd.

In the second quarter of 2023.

Additionally, the Company recorded approximately $ 0.5 million of goodwill associated with the acquisition of Sureflex, Inc.

in the second quarter of 2023.

See Note O – Business Acquisitions for further details.

No impairment was recognized in the second 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 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.

Currently, the Company has twenty-one operating leases with a lease liability of $ 16.6 million and four finance leases with a lease liability of $ 1.0 million as of July 1, 2023.

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

12 unchanged sentences

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.

On June 16, 2023, the Company entered into a credit agreement with TD Bank, N.A., Wells Fargo Bank, Bank of America, and M&T Bank as lenders (the “Credit Agreement”), that included a $ 60 million term portion and a $ 30 million revolving commitment portion.

The proceeds of the term loan were used to repay the Company’s remaining outstanding term loan and to terminate its existing credit facility with Santander Bank, N.A.

(approximately $59 million).

The term loan portion of the credit facility requires quarterly principal payments of (i) $ 750,000 beginning on September 30, 2023 through June 30, 2025, (ii) $ 1,125,000 beginning on September 30, 2025 through June 30, 2027, and (iii) $ 1,500,000 beginning on September 30, 2027 through March 31, 2028, with the balance of the term loan payable on the maturity date of June 16, 2028.

Amounts outstanding under the revolving portion of the credit facility are generally due and payable on the expiration date of the Credit Agreement (June 16, 2028).

The Company can elect to prepay some or all the outstanding balance from time to time without penalty.

A commitment fee is payable on the unused portion of the revolving credit facility based on the Company’s consolidated ratio of net debt to adjusted EBITDA from time to time.

Currently, the commitment fee is 0.30 %.

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

The term loan bears interest at a variable rate based on the SOFR rate plus an applicable margin of 1.875 % to 2.625 %, 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 0.875 % to 1.625 % or the SOFR rate plus an applicable margin of 1.875% to 2.625%, 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 as of June 16, 2023, with TD 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 3.5 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.

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.

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

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 February 19, 2020, the Board of Directors of the Company (the “Board”) adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”), which replaced The Eastern Company 2010 Executive Stock Incentive Plan after its expiration in February 2020.

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.

2 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.

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.

During the first six months of fiscal 2023 and 2022, the Company granted 64,500 and 43,300 stock awards, respectively, that were subject to the meeting of performance measurements or time based.

For the first six months of fiscal years 2023 and 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.

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

Stock-based compensation (income) expense, including forfeitures, in connection with SARs and stock awards previously granted to employees was approximately $ 21,000 and $ 136,000 in the second quarter of 2023 and the second quarter of 2022, respectively, and was approximately $( 163,000 ) and $ 250,000 in the first six months of fiscal years 2023 and 2022, respectively.

As of July 1, 2023, there were 898,105 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:

Three Months Ended

April 1, 2023

Six Months Ended

December 31, 2022

4 unchanged sentences

SARs Outstanding and Exercisable

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

Range of Exercise Prices

Outstanding as of July 1, 2023

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Exercisable as of July 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:

Three Months Ended

April 1, 2023

Six Months Ended

December 31, 2022

1 unchanged sentence

Outstanding at end of period

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

As of July 1, 2023, outstanding SARs and stock awards had an intrinsic value of $ 1,543,077 .

Note I – Share Repurchase Program

2 unchanged sentences

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.

Below is a summary of the Company’s shares repurchased during the second 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 December 31, 2022

January 1, 2023 - April 1, 2023

Balance as of April 1, 2023

April 2, 2023 – July 1, 2023

Balance as of July 1, 2023

Note J – Revenue Recognition

15 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 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.

6 unchanged sentences

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 quarter of fiscal years 2023 and 2022 are as follows:

Significant disclosures relating to these benefit plans for the first three months and first six months 2023 and 2022 are as follows:

Pension Benefits

Three Months Ended

Six Months Ended

Interest cost

2 unchanged sentences

( 1,460,661 )

( 2,098,030 )

( 2,921,322 )

Amortization of prior service cost

Amortization of the net loss

Net periodic cost (benefit)

Net periodic benefit cost (benefit)

$ ( 176,089 )

$ ( 352,179 )

What changed 10-Q

Item 1. Financial Statements