EASTERN CO 10-K

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Eastern Company Consolidated Balance Sheets December 30, December 31, 2023 2022 ASSETS Current Assets Cash and cash equivalents $ 8,299,453 $ 10,187,522 Marketable Securities 986,477 - Accounts receivable, less allowances: 2023-$ 564,816 ; 2022-$ 676,678 37,057,488 42,886,250 Inventories: Raw materials and component parts 24,500,087 25,924,696 Work in process 9,957,068 9,323,082 Finished goods 24,815,052 29,388,813 59,272,207 64,636,591 Current portion of note receivable 573,269 1,006,421 Prepaid expenses and other assets 6,047,814 6,598,774 Total Current Assets 112,236,708 125,315,558 Property, Plant and Equipment Land 824,344 824,344 Buildings 14,243,082 14,360,165 Machinery and equipment 45,202,670 40,928,380 Accumulated depreciation ( 31,980,335 ) ( 30,000,797 ) Property, Plant and Equipment, net 28,289,761 26,112,092 Other Assets Goodwill 70,776,893 70,777,459 Trademarks 5,514,960 5,514,886 Patents, technology and other intangibles net of accumulated amortization 15,325,927 18,819,897 Long term note receivable, less current portion 374,932 2,276,631 Deferred income taxes 2,283,571 488,989 Right of Use Assets 17,236,449 12,217,521 Total Other Assets 111,512,732 110,095,383 TOTAL ASSETS $ 252,039,201 $ 261,523,033 See accompanying notes. 32 Table of Contents December 30, December 31, 2023 2022 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 25,319,473 $ 27,638,317 Accrued compensation 5,379,381 3,327,832 Other accrued expenses 4,556,623 3,944,964 Current portion of operating lease liability 4,424,369 3,059,547 Current portion of financing lease liability 182,010 - Current portion of long-term debt 2,871,870 9,010,793 Total Current Liabilities 42,733,726 46,981,453 Other long-term liabilities 640,724 754,762 Operating lease liability, less current portion 12,812,079 9,195,205 Financing lease liability, less current portion 728,100 - Long-term debt, less current portion 41,063,865 55,136,231 Accrued postretirement benefits 554,758 666,222 Accrued pension cost 21,025,365 22,174,465 Total Liabilities 119,558,617 134,908,338 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 Issued: 9,091,815 shares in 2023 and 9,056,421 shares in 2022 Outstanding: 6,217,370 shares in 2023 and 6,221,976 shares in 2022 33,950,859 33,586,165 Treasury Stock: 2,874,445 shares in 2023 and 2,834,445 shares in 2022 ( 23,280,467 ) ( 22,544,684 ) Retained earnings 144,805,168 138,985,852 Accumulated other comprehensive loss: Foreign currency translation ( 866,599 ) ( 1,140,978 ) Unrealized gain on interest rate swap, net of tax - 1,449,754 Unrecognized net pension and postretirement benefit costs, net of tax ( 22,128,377 ) ( 23,721,414 ) Accumulated other comprehensive loss ( 22,994,976 ) ( 23,412,638 ) Total Shareholders’ Equity 132,480,584 126,614,695 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 252,039,201 $ 261,523,033 See accompanying notes. 33 Table of Contents The Eastern Company Consolidated Statements of Income Year Ended December 30, December 31, 2023 2022 Net sales $ 273,454,857 $ 279,265,146 Cost of products sold ( 208,501,713 ) ( 220,648,900 ) Gross margin 64,953,144 58,616,246 Product development expense ( 5,592,355 ) ( 4,241,211 ) Selling and administrative expenses ( 44,177,459 ) ( 39,508,849 ) Restructuring costs - ( 699,868 ) Operating profit 15,183,330 14,166,318 Interest expense ( 3,506,598 ) ( 2,275,612 ) Other (expense) income ( 684,790 ) 2,512,211 Income from continuing operations before income taxes 10,991,942 14,402,917 Income taxes ( 2,406,940 ) ( 3,352,456 ) Net income from continuing operations $ 8,585,002 $ 11,050,461 Discontinued Operations (see note 2) Gain from operations of discontinued units $ - $ 1,360,773 Gain (loss) on sale of businesses - 305,539 Income tax (expense) benefit - ( 414,855 ) Net gain (loss) on discontinued operations $ - $ 1,251,457 Net Income $ 8,585,002 $ 12,301,918 Earnings per share from continuing operations: Basic $ 1.38 $ 1.78 Diluted $ 1.37 $ 1.77 Gain (loss) per share from discontinued operations: Basic $ - $ 0.20 Diluted $ - $ 0.20 Total earnings per share: Basic $ 1.38 $ 1.98 Diluted $ 1.37 $ 1.97 Cash dividends per share: $ 0.44 $ 0.44 See accompanying notes. 34 Table of Contents The Eastern Company Consolidated Statements of Comprehensive Income Year Ended December 30, December 31, 2023 2022 Net income $ 8,585,002 $ 12,301,918 Other comprehensive income: Change in foreign currency translation 274,379 ( 1,959,424 ) Change in fair value of interest rate swap, net of tax cost of: $(426,659) in 2023 and $531,425 in 2022 ( 1,449,754 ) 1,805,742 Change in pension and other postretirement benefit costs, net of taxes of: $307,548 in 2023 and $941,964 in 2022 1,593,037 3,273,800 Total other comprehensive income 417,662 3,120,118 Comprehensive income $ 9,002,664 $ 15,422,036 See accompanying notes. 35 Table of Contents The Eastern Company Consolidated Statements of Shareholders’ Equity Accumulated Other Common Common Stock Treasury Treasury Stock Retained Comprehensive Shareholders' Shares Amount Shares Amount Earnings Income (Loss) Equity Balances at January 1, 2022 9,029,852 $ 32,620,008 ( 2,764,325 ) $ ( 20,907,613 ) $ 129,422,625 $ ( 26,532,756 ) $ 114,602,264 Net income 12,301,918 12,301,918 Cash dividends declared, $0.44 per share ( 2,738,691 ) ( 2,738,691 ) Currency translation adjustment ( 1,959,424 ) ( 1,959,424 ) Change in fair value of interest rate swap 1,805,742 1,805,742 Change in pension and other postretirement benefit costs, net of tax 3,273,800 3,273,800 Stock Options Exercised 1,370 ( 58,515 ) ( 58,515 ) Treasury Stock Purchase ( 70,120 ) ( 1,637,071 ) ( 1,637,071 ) Issuance of SARS 504,694 504,694 Issuance of Common Stock for directors' fees 25,199 519,978 519,978 Balances at December 31, 2022 9,056,421 $ 33,586,165 ( 2,834,445 ) $ ( 22,544,684 ) $ 138,985,852 $ ( 23,412,638 ) $ 126,614,695 Net income 8,585,002 8,585,002 Cash dividends declared, $0.44 per share (2,765,686 ) (2,765,686 ) Currency translation adjustment 274,379 274,379 Change in fair value of interest rate swap ( 1,449,754 ) ( 1,449,754 ) Change in pension and other postretirement benefit costs, net of tax 1,593,037 1,593,037 Stock Options Exercised - Treasury Stock Purchase ( 40,000 ) ( 735,783 ) ( 735,783 ) Issuance of stock awards, net 7,175 ( 163,453 ) ( 163,453 ) Issuance of Common Stock for directors' fees 28,219 528,147 528,147 Balances at December 30, 2023 9,091,815 $ 33,950,859 ( 2,874,445 ) $ ( 23,280,467 ) $ 144,805,168 $ ( 22,994,976 ) $ 132,480,584 See accompanying notes. 36 Table of Contents The Eastern Company Consolidated Statements of Cash Flows Year Ended December 30, 2023 December 31, 2022 Operating Activities Net income $ 8,585,002 $ 12,301,918 Less: Gain from discontinued operations - 1,251,457 Income from continuing operations $ 8,585,002 $ 11,050,461 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,466,483 7,235,143 Reduction in carrying amount of ROU assets ( 3,522,981 ) ( 2,918,468 ) Change in operating lease liability 3,560,612 3,046,936 Unrecognized pension and postretirement benefits 47,550 ( 3,575,749 ) Loss (gain) on sale of equipment and other assets 1,327,649 ( 274,238 ) Provision for doubtful accounts 62,893 207,040 Stock compensation expense 364,694 966,157 Deferred taxes ( 1,124,895 ) ( 3,047,762 ) Changes in operating assets and liabilities: Accounts receivable 5,774,371 ( 1,075,218 ) Inventories 6,024,489 ( 5,298,977 ) Prepaid expenses and other 427,470 ( 293,348 ) Other assets 356,636 193,784 Accounts payable ( 2,186,244 ) ( 1,741,258 ) Accrued compensation 616,996 ( 923,146 ) Other accrued expenses ( 1,298,663 ) 3,905,457 Net cash provided by operating activities 26,482,062 7,456,814 Investing Activities Marketable securities ( 986,477 ) - Business acquisition ( 444,840 ) - Issuance of notes receivable - ( 400,000 ) Payments received from notes receivable 2,435,394 870,771 Proceeds from sale of businesses - 5,814,019 Proceeds from sale of building and equipment - 2,171,073 Purchases of property, plant and equipment ( 6,434,375 ) ( 3,365,594 ) Net cash (used in) provided by investing activities ( 5,430,298 ) 5,090,269 Financing Activities Proceeds from issuance of long-term debt and notes payable - 260,793 Proceeds from short term borrowings (revolver) - 10,000,000 Principal payments on short-term borrowings (revolver) ( 300,029 ) - Proceeds from new long-term debt refinancing 60,000,000 - Principal payments on long-term debt ( 79,737,707 ) ( 17,505,501 ) Financing leases, net 636,927 ( 283,854 ) Purchase common stock for treasury ( 735,783 ) ( 1,637,072 ) Dividends paid ( 2,765,686 ) ( 2,738,691 ) Net cash used in financing activities ( 22,902,278 ) ( 11,904,325 ) Discontinued Operations Cash provided by operating activities - 3,135,874 Cash provided by discontinued operations - 3,135,874 Effect of exchange rate changes on cash ( 37,555 ) ( 193,540 ) Net change in cash and cash equivalents ( 1,888,069 ) 3,585,092 Cash and cash equivalents at beginning of year 10,187,522 6,602,430 Cash and cash equivalents at end of year $ 8,299,453 $ 10,187,522 Supplemental disclosure of cash flow information: Interest $ 3,388,347 $ 2,502,883 Income taxes 6,608,084 3,679,678 Non-cash investing and financing activities Right of use asset 5,018,928 1,078,986 Lease liability ( 4,981,697 ) ( 950,518 ) See accompanying notes 37 Table of Contents The Eastern Company Notes to Consolidated Financial Statements 1. DESCRIPTION OF BUSINESS The Eastern Company, and its subsidiaries (the “Company,” “Eastern,” “we,” “us” or “our”) manage industrial businesses that design, manufacture and sell engineered solutions to industrial markets. Eastern’s businesses operate in industries with long-term macroeconomic growth opportunities. We look to acquire businesses that produce stable and growing earnings and cash flows. Eastern may pursue acquisitions in industries other than those in which its businesses currently operate if an acquisition presents an attractive opportunity. Eastern manages the financial, operational, and strategic performance of its businesses to increase cash generation, operating earnings, and long-term shareholder value. Eastern encompasses four operating entities within the United States, one wholly owned Canadian subsidiary located in Cambridge, Ontario, Canada, a wholly owned Taiwanese subsidiary located in Taipei, Taiwan, a wholly owned subsidiary in Hong Kong, two wholly owned Chinese subsidiaries (one located in Shanghai, China, and one located in Dongguan, China), and a wholly owned subsidiary in Reynosa, Mexico. The Eastern Company has one reportable segment: Engineered Solutions. The Engineered Solutions segment provides engineered solutions to support our customer’s needs primarily in the commercial transportation and logistics markets. The Chief Operating Decision Maker (CODM) uses both segment gross profit and segment profit or loss from operations before interest and income taxes to allocate resources (including employees, property, and financial or capital resources) for the Engineered Solutions segment predominantly in the annual budget and forecasting process. Company Operations The Engineered Solutions segment consists of Big 3 Precision, including Big 3 Precision Products, Inc. (“Big 3 Products”) and Big 3 Mold Services, Inc. (“Big 3 Mold”) and Hallink Moulds, Inc. (“Hallink Moulds”); Eberhard Manufacturing Company (“Eberhard Manufacturing”), Eberhard Hardware Manufacturing Ltd. (“Eberhard Hardware”), Eastern Industrial Ltd, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries (together “Eberhard”); and Velvac Holdings Inc. (“Velvac”). These businesses design, manufacture, and market a diverse product line of custom and standard vehicular and industrial hardware, including turnkey returnable packaging solutions, access and security hardware, mirrors, and mirror-cameras. Big 3 Products and Big 3 Mold’s turnkey returnable packaging solutions are used in the assembly processes of vehicles, aircraft, and durable goods and in the production processes of plastic packaging products, packaged consumer goods and pharmaceuticals. Big 3 Products works with original equipment manufacturers (“OEMs”) to design and produce custom returnable transport packaging to integrate with OEM assembly processes. Big 3 Mold designs and manufactures blow mold tools. Hallink Moulds is a producer of injection blow mold tooling and is a supplier of blow molds and change parts to the food, beverage, healthcare, and chemical industry. Hallink specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry, offering integrated turnkey solutions to its customers worldwide. In 2020, we combined all businesses associated with Eberhard Manufacturing and Illinois Lock Company to create Eberhard, which specializes in the engineering and manufacturing of access and security hardware. Eberhard offers a standard product line of rotary latches, compression latches, draw latches, hinges, camlocks, key switches, padlocks, and handles among other products, as well as comprehensive development and program management services for custom electromechanical and mechanical systems designed for specific OEMs and customer applications. Eberhard’s products are found in an expansive range of applications and products globally. Velvac is a designer and manufacturer of proprietary vision technology for OEMs and aftermarket applications, and a provider of aftermarket components to the heavy-duty truck market in North America. Velvac serves diverse, niche segments within the heavy- and medium-duty truck, motorhome, and bus markets. Sales are made to customers primarily in North America. 38 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 2. DISCONTINUED OPERATIONS In the second quarter of 2021, we determined that the companies previously included in our former Diversified Products segment no longer fit with our long-term strategy and initiated the process of selling the companies within the former Diversified Products segment to 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 qualified for discontinued operations. As such, the financial results of Argo EMS are reflected in our condensed consolidated statements of operations as discontinued operations for 2022. On October 19, 2022, the Company sold its Argo EMS business (“Argo”). 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. 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. 39 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) Summarized Financial Information of Discontinued Operations The following table represents income from discontinued operations, net of tax: Year Ended December 30, 2023 December 31, 2022 Net sales $ - $ 7,574,181 Cost of products sold - ( 5,137,380 ) Gross margin - 2,436,801 Selling and administrative expenses - ( 891,519 ) Restructuring benefit (costs) - 305,539 Operating income (loss) - 1,850,821 Interest expense - ( 184,509 ) Income (loss) from discontinued operations before income taxes - 1,666,312 Income tax (expense) benefit - ( 414,855 ) Gain (loss) from discontinued operations, net of tax $ - $ 1,251,457 3. ACCOUNTING POLICIES Fiscal Year The Company’s year ends on the Saturday nearest to December 31. Based on this policy, fiscal years 2023 and 2022 were each comprised of 52 weeks. References in these Notes to the consolidated financial statements to “2023” or “fiscal year 2023” mean the fiscal year ended December 30, 2023, and references to “2022” or “fiscal year 2022” mean the fiscal year ended December 31, 2022. References to the “fourth quarter of 2023” or the “fourth fiscal quarter of 2023” mean the thirteen-week period from October 1, 2023 to December 30, 2023, and references to the “fourth quarter of 2022” or the “fourth fiscal quarter of 2022” mean the thirteen-week period from October 2, 2022 to December 31, 2022. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions are eliminated. Reclassification Product development expense is not a cost of product sold. Rather, these expenses are related to product development. The reclassification of these expenses does not affect the net income reported. Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations. 40 Table of Contents Eastern Company Notes to Consolidated Financial Statements (continued) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. On an ongoing basis the Company evaluates its estimates, including those related to product returns, bad debts, carrying value of inventories, intangible and other long-lived assets, income taxes, pensions, and other postretirement benefits. Actual results could differ from those estimates. Foreign Currency For foreign operations asset and liability accounts are translated with an exchange rate at the respective balance sheet dates; income statement accounts are translated at the average exchange rate for the years. Resulting translation adjustments are made directly to a separate component of shareholders’ equity – “Accumulated other comprehensive (loss) – Foreign currency translation.” Foreign currency exchange transaction gains and losses are not material in any year. Cash Equivalents Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents. The Company has deposits that exceed amounts insured by the Federal Deposit Insurance Corporation (FDIC) up to $ 250,000 , but the Company does not consider this a significant concentration of credit risk based on the strength of the financial institution. Approximately 16 % of available cash is located outside of the United States in our foreign subsidiaries. Accounts Receivable Accounts receivable are stated at their net realizable value. The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company reviews the collectability of its receivables on an ongoing basis considering a combination of factors. The Company reviews potential problems, such as past due accounts, a bankruptcy filing or deterioration in the customer’s financial condition, to ensure the Company is adequately accrued for potential loss. Accounts are considered past due based on when payment was originally due. If a customer’s situation changes, such as a bankruptcy or change in creditworthiness, or there is a change in the current economic climate, the Company may modify its estimate of the allowance for doubtful accounts. The Company will write off accounts receivable after reasonable collection efforts have been made and the accounts are deemed uncollectible. As of December 30, 2023 and December 31, 2022, the Company’s allowance for doubtful accounts total was $ 0.6 million and $ 0.7 million, respectively. As of December 30, 2023, and December 31, 2022, the Company’s bad debt expense was $ 0.1 million and $ 0.2 million, respectively. Inventories Inventories are valued at the lower of cost or net realizable value. Cost is determined by the last-in, first-out (LIFO) method at Eberhard ($ 18.2 million on December 30, 2023) and by the first-in, first-out (FIFO) method for inventories at Big 3 Precision, Velvac and outside the U.S. ($ 41.0 million on December 30, 2023). Cost exceeded the LIFO carrying value by approximately $ 3.7 million on December 30, 2023 and $ 4.2 million on December 31, 2022. There was no material LIFO quantity liquidation in 2023 or 2022. In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete inventory. Property, Plant and Equipment and Related Depreciation Property, plant, and equipment (including equipment under finance lease of $ 0.9 million) are stated at cost. Depreciation expense ($ 3.5 million in 2023, $ 3.3 million in 2022) is computed using the straight-line method based on the following estimated useful lives of the assets: Buildings - 10 to 39.5 years; Machinery and equipment - 3 to 10 years. 41 Table of Contents Eastern Company Notes to Consolidated Financial Statements (continued) Impairment of Long-Lived Assets In accordance with Accounting Standards Codification (“ASC”) 360-10, Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its long-lived assets and certain intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In such an event, the carrying value of long-lived assets is reviewed by management to determine if the value may be impaired. If this review indicates that the carrying amount will not be recoverable, as determined based on the estimated expected future cash flows attributable to the asset over the remaining amortization period, management will reduce the carrying amount to recognize the impairment and recognize an impairment loss. The measurement of the impairment loss to be recognized is to be based on the difference between the fair value and the carrying amount of the asset. Fair value is defined as the amount by which the asset could be bought or sold in a current transaction between willing parties. Where quoted market prices in active markets are not available, management would estimate fair value based on the best information available in the circumstances such as the price of similar assets, a discounted cash flow analysis or other techniques. No impairment losses were recognized for the years ended December 30, 2023 and December 31, 2022. Goodwill The Company tests its reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events and circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. The Company tests reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources. The Company performed qualitative assessments of goodwill as of the end of fiscal 2023 and 2022 and determined that no impairment existed at the end of 2023 and 2022. The Company will continue to perform annual qualitative assessments as of the end of each fiscal year. Additionally, the Company will perform an interim analysis whenever conditions warrant. 42 Table of Contents Eastern Company Notes to Consolidated Financial Statements (continued) Intangible Assets Patents are recorded at cost and are amortized using the straight-line method over the lives of the patents. Technology and licenses are recorded at cost and are amortized on a straight-line basis over periods ranging from 1 to 20 years. Non-compete agreements and customer relationships are amortized using the straight-line method over their useful lives. Trademarks are deemed to have indefinite lives. If facts and circumstances indicate that the carrying value of the intangible assets, including definite life intangible assets, may be impaired, an evaluation is performed to determine if a write-down is required. No impairment losses were recognized for the years ended December 30, 2023 and December 31, 2022. Fair Value of Financial Instruments Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value: Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable. The Company’s financial instruments are primarily investments in marketable securities (Level 1) and pension assets, see Note 10, Retirement Benefit Plans . The carrying amounts of other financial instruments (cash and cash equivalents, marketable securities, accounts receivable, accounts payable and debt) as of December 30, 2023 and December 31, 2022, approximate fair value because of their short-term nature and market-based interest rates. Leases The Company presents right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company elected to account for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate. The Company has operating leases for buildings, warehouses, and office equipment as well as finance leases for equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if 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. Many leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. The Company’s option to extend certain leases ranges from 1–120 months. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability. 43 Table of Contents Eastern Company Notes to Consolidated Financial Statements (continued) Currently, the Company has 22 operating leases with a lease liability of $ 17.2 million and two finance leases with a lease liability of $ 0.9 million as of December 30, 2023. The basis, terms, and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. We rent or sublease one real estate property to two unrelated third parties. There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company. The weighted average remaining lease term is 7.0 years. Revenue Recognition The Company recognizes revenue in accordance with ASC 606 when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company considers several factors in determining that control transfers to the customer upon shipment of products. These factors include that legal title transfers to the customer, the Company has a present right to payment, and the customer has assumed the risk and rewards of ownership at the time of shipment. Big 3 Mold may employ the efforts expended method for the percentage of completion for revenue recognition for certain transactions. The efforts expended method calculates the proportion of effort expended to date in comparison to the total effort expected to be expended for the contract. The amount of revenue recognized by employing the percentage of completion method was $ 1.1 million for the year ended December 30, 2023 and $ 1.4 million for the year ended December 31, 2022. Based on historical experience, product returns have been immaterial, and the Company does not accrue a reserve for product returns. For the years ended December 30, 2023 and December 31, 2022, the Company recorded sales returns of $ 0.9 million and $ 0.6 million, respectively, as a reduction to revenue. Sales and similar taxes that are imposed on the Company’s sales and collected from the customer are excluded from revenues. Costs for shipping and handling activities, including those activities that occur after transfer of control to the customer, are recorded as cost of sales and are expensed as incurred. For the years ended December 30, 2023 and December 31, 2022, the Company recorded no revenues related to performance obligations satisfied in prior periods. The Company has elected to use the practical expedient to exclude disclosure of transaction prices allocated to remaining performance obligations, and when the Company expects to recognize such revenue, for all periods prior to the date of initial application of the standard. The Company notes that it is impracticable to provide revenues from external customers for each product and service. See Note 12 – Geographic Information regarding the Company’s revenue disaggregated by geography. Cost of Goods Sold Cost of goods sold reflects the cost of purchasing, manufacturing, and preparing a product for sale. These costs generally represent the expenses to acquire or manufacture products for sale (including an allocation of depreciation and amortization) and are primarily comprised of direct materials, direct labor, and overhead, which includes indirect labor, facility and equipment costs, inbound freight, receiving, inspection, purchasing, warehousing, and any other costs related to the purchasing, manufacturing, or preparation of a product for sale. Shipping and Handling Costs Shipping and handling costs are included in the cost of goods sold. 44 Table of Contents Eastern Company Notes to Consolidated Financial Statements (continued) Product Development Costs Product development costs, charged to expense as incurred, were $ 5.6 million in 2023 and $ 4.2 million in 2022 and include costs to develop new or enhance existing products to better serve our customers. Selling and Administrative Expenses Selling and administrative expenses include all operating costs of the Company that are not directly related to the cost of purchasing, manufacturing, and preparing a product for sale. These expenses represent selling and administrative expenses for support functions and related overhead. Advertising Costs The Company expenses advertising costs as incurred. Advertising costs were $ 0.4 million in 2023 and $ 0.3 million in 2022. Stock - Based Compensation The Company accounts for its stock-based awards in accordance with ASC 718-10, Compensation, which requires a fair value measurement and recognition of compensation expense for all share-based payment awards made to its employees and Directors, including employee stock awards and restricted stock awards. The Company estimates the fair value of granted stock awards at the date of grant. This model requires the Company to make estimates and assumptions including, without limitation, estimates regarding the length of time an employee will retain vested stock awards before exercising them, the estimated volatility of the Company’s common stock price and the number of awards that will be forfeited prior to vesting. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Changes in these estimates and assumptions can materially affect the determination of the fair value of stock-based compensation and consequently, the related amount recognized in the Company’s consolidated statements of operations. Under the terms of the Director’s Fee Program, the directors receive their director’s fees in common shares of the Company. Income Taxes The Company and its U.S. subsidiaries file a consolidated U.S. federal income tax return. Deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company accounts for uncertain tax positions pursuant to the provisions of ASC 740 which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements. These provisions detail how companies should recognize, measure, present, and disclose uncertain tax positions that have or are expected to be taken. As such, the financial statements will reflect expected future tax consequences of uncertain tax positions presuming the taxing authorities’ full knowledge of the position and all relevant facts. See Note 8 - Income Taxes . 45 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 4. GOODWILL The following is a roll-forward of goodwill for 2023 and 2022: 2023 Beginning Balance $ 70,777,459 Acquisition 444,840 Disposition ( 498,443 ) Foreign Exchange 53,037 Ending Balance $ 70,776,893 2022 Beginning Balance $ 72,211,873 Disposition ( 1,225,226 ) Foreign Exchange ( 209,188 ) Ending Balance $ 70,777,459 46 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 5. INTANGIBLES Trademarks are not amortized as their lives are deemed to be indefinite. Amortization expense recognized in 2023 and 2022 was $ 4.0 million. Total amortization expense for each of the next five years is estimated to be as follows: 2024 - $ 3.9 million; 2025 - $ 3.9 million; 2026 - $ 3.4 million; 2027 - $ 2.4 million and 2028 - $ 1.0 million. Weighted-Average Amortization 2023 Period (Years) Gross Amount Patents and developed technology $ 7,677,970 4.1 Customer relationships 26,034,541 3.7 Non-compete agreements 1,068,345 1.5 Total Gross Intangibles $ 34,780,856 3.7 Accumulated Amortization Patents and developed technology $ 4,045,572 Customer relationships 14,683,710 Non-compete agreements 725,647 Accumulated Amortization $ 19,454,929 Net 2023 per Balance Sheet $ 15,325,927 2022 Gross Amount Patents and developed technology $ 7,412,101 4.8 Customer relationships 25,883,709 4.8 Non-compete agreements 1,044,714 2.4 Total Gross Intangibles $ 34,340,524 4.7 Accumulated Amortization Patents and developed technology $ 3,395,729 Customer relationships 11,620,461 Non-compete agreements 504,437 Accumulated Amortization $ 15,520,627 Net 2022 per Balance Sheet $ 18,819,897 47 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 6. DEBT 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 September 30, 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 term secured overnight financing rate (“SOFR”), plus an adjustment of ten basis points, 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 0.87 5% to 1.62 5% or term SOFR, plus an adjustment of ten basis points, 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 . Debt consists of: 2023 2022 Term loans $ 43,935,735 $ 64,147,028 Revolving credit loan — — 43,935,735 64,147,028 Less current portion 2,871,870 9,010,793 $ 41,063,865 $ 55,136,231 Amounts are net of unamortized discounts and debt issuance costs of $ 564,265 as of December 30, 2023 and $ 113,769 as of December 31, 2022. The Company paid interest of $ 3,388,347 in 2023 and $ 2,502,883 in 2022. The Company’s loan covenants under the Credit Agreement require the Company to maintain a consolidated fixed charge coverage ratio of at least 1.25 to 1, which is to be tested quarterly on a twelve-month trailing basis. In addition, the Company is required to show a senior net leverage ratio not to exceed 3.5 to 1 . Additionally, the Company has restrictions on, among other things, new capital leases, purchases or redemptions of its capital stock, mergers and divestitures, and new borrowings. The Company was in compliance with all covenants as of December 30, 2023 and December 31, 2022. 48 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 6. DEBT (continued) As of December 30, 2023, scheduled annual principal maturities of long-term debt, net of deferred financing fees, for each of the next five years follow: 2024 2,871,870 2025 3,621,870 2026 4,371,870 2027 5,121,870 2028 27,948,255 Thereafter — $ 43,935,735 7. STOCK OPTIONS AND AWARDS Stock Awards As of December 30, 2023, the Company has one incentive stock award plan, The Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”), for officers, other key employees, and non-employee Directors. Incentive stock awards 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 awards are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. Under the 2020 Plan, non-qualified stock awards granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors. The Company granted 82,800 and 43,300 awards during 2023 and 2022, respectively. The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an award 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. The Company did not issue SARs in 2023 or 2022. Stock-based compensation (income)/expense, including forfeitures, in connection with stock awards and SARs previously granted to employees was $( 74,277 ) and $ 504,694 for fiscal years 2023 and 2022, respectively. The Company used fair market value to determine the associated expense with stock awards for the 2023 and 2022 fiscal years. As of December 31, 2023, there were 880,973 shares of common stock reserved and available for future grant under 2020 Plan. The following tables set forth the outstanding SARs for the period specified: Year Ended December 30, 2023 Year Ended 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 Expired ( 50,833 ) 24.24 - - Exercised ( 33,333 ) 21.10 ( 16,667 ) 21.20 Forfeited ( 49,000 ) 22.80 ( 18,000 ) 21.74 Outstanding at end of period 13,000 24.19 146,166 23.22 49 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 7. STOCK OPTIONS AND AWARDS (continued) SARs Outstanding and Exercisable Range of Exercise Prices Outstanding as of December 30, 2023 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Exercisable as of December 30, 2023 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price $ 19.44 -$ 26.30 13,000 0.5 $ 24.19 13,000 0.5 $ 24.19 The following tables set forth the outstanding stock grants for the period specified: Year Ended December 30, 2023 Year Ended December 31, 2022 Shares Shares Outstanding at beginning of period 64,500 27,300 Issued 82,800 43,300 Exercised ( 10,600 ) - Forfeited ( 47,300 ) ( 6,100 ) Outstanding at end of period 89,400 64,500 As of December 30, 2023, outstanding SARs and awards had an intrinsic value of $ 2,289,440 . 50 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES Deferred income taxes are provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those for income tax reporting purposes. Deferred income tax (assets) liabilities relate to: 2023 2022 Property, plant, and equipment $ 3,897,991 $ 3,568,209 Right of Use Asset 4,192,368 2,786,486 Intangible assets 1,674,225 3,374,192 Other 369,358 876,731 Foreign Withholding Tax - 60,462 Total deferred income tax liabilities 10,133,942 10,666,080 Other postretirement benefits ( 139,050 ) ( 151,486 ) Inventories ( 1,587,374 ) ( 1,562,175 ) Allowance for doubtful accounts ( 133,988 ) ( 160,446 ) Accrued compensation ( 434,631 ) ( 498,530 ) Lease Obligation ( 4,192,368 ) ( 2,786,486 ) Pensions ( 4,819,568 ) ( 5,042,030 ) Foreign Tax Credit ( 1,110,534 ) ( 953,916 ) Total deferred income tax assets ( 12,417,513 ) ( 11,155,069 ) Net deferred income tax (assets) liabilities $ ( 2,283,571 ) $ ( 488,989 ) Income before income taxes consists of: 2023 2022 Continuing Operations Discontinued Operations Total Income Statement Continuing Operations Discontinued Operations Total Income Statement Domestic $ 8,351,677 - $ 8,351,677 $ 12,787,773 $ 1,666,312 $ 14,454,085 Foreign 2,640,266 - 2,640,266 1,615,144 - 1,615,144 $ 10,991,943 - $ 10,991,943 $ 14,402,917 $ 1,666,312 $ 16,069,229 The provision for income taxes follows: 2023 2022 Continuing Operations Discontinued Operations Total Income Statement Continuing Operations Discontinued Operations Total Income Statement Current Federal $ 2,558,279 - $ 2,558,279 $ 4,528,423 $ 332,665 $ 4,861,088 Foreign 967,152 - 967,152 572,555 - 572,555 State 503,738 - 503,738 1,361,461 82,190 1,443,651 Deferred: Federal ( 1,371,310 ) - ( 1,371,310 ) ( 2,567,573 ) - ( 2,567,573 ) Foreign ( 60,462 ) - ( 60,462 ) - - - State ( 190,457 ) - ( 190,457 ) ( 542,410 ) - ( 542,410 ) $ 2,406,940 - $ 2,406,940 $ 3,352,456 $ 414,855 $ 3,767,311 51 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES (continued) A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows: 2023 2022 Amount Percent Amount Percent Income taxes using U.S. federal statutory rate $ 2,308,308 21 % $ 3,374,538 21 % State income taxes, net of federal benefit 244,874 2 714,416 4 Impact on Foreign Repatriation Tax Reform 306,330 3 - 0 Impact of foreign subsidiaries on effective tax rate ( 297,728 ) ( 3 ) ( 41,404 ) 0 Impact of Research & Development tax credit ( 136,343 ) ( 1 ) ( 131,005 ) ( 1 ) Uncertain tax positions reserve 461 0 54,705 0 Other net ( 18,962 ) 0 ( 203,939 ) ( 1 ) $ 2,406,940 22 % $ 3,767,311 23 % A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows for continuing operations: 2023 2022 Amount Percent Amount Percent Income taxes using U.S. federal statutory rate $ 2,308,308 21 % $ 3,024,612 21 % State income taxes, net of federal benefit 244,874 2 649,486 4 Impact on Foreign Repatriation Tax Reform 306,330 3 - 0 Impact of foreign subsidiaries on effective tax rate ( 297,728 ) ( 3 ) ( 41,404 ) 0 Impact of Research & Development tax credit ( 136,343 ) ( 1 ) ( 131,005 ) ( 1 ) Uncertain tax positions reserve 461 0 54,705 0 Other net ( 18,962 ) 0 ( 203,938 ) ( 1 ) $ 2,406,940 22 % $ 3,352,456 23 % A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows for discontinued operations: 2023 2022 Amount Percent Amount Percent Income taxes using U.S. federal statutory rate - 0 % $ 349,925 21 % State income taxes, net of federal benefit - 0 64,930 4 $ - 0 % $ 414,855 25 % Total income taxes paid were $ 6,608,084 in 2023 and $ 3,679,678 in 2022. Under accounting standards (ASC 740), a deferred tax liability is not recorded for the excess of the financial reporting (book) basis over the tax basis of an investment in a foreign subsidiary if the indefinite reinvestment criteria are met. Effective for foreign earnings after December 30, 2017, if such earnings are distributed in the form of cash dividends, the Company would not be subject to additional U.S. income taxes but could be subject to foreign income and withholding taxes. A provision has not been made for additional U.S. federal and foreign taxes on December 30, 2023 on approximately $ 11,507,000 of undistributed earnings of foreign subsidiaries because the Company intends to reinvest these funds indefinitely. It is not practicable to estimate the unrecognized deferred tax liability for withholding taxes on these undistributed earnings. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The list of changes is comprehensive. The changes 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. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted ASU 2019-12 in the first interim period of 2021. 52 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 8. INCOME TAXES (continued) On December 14, 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures which applies to all entities subject to income taxes. The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as information on income taxes paid. The standard is intended to benefit investors by providing more detailed income tax disclosures that would be useful in making capital allocation decisions. For public business entities (PBEs), the new requirements will be effective for annual periods beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. The Company is currently in the process of evaluating the effect of this guidance on its financial statements. A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows: 2023 2022 Balance at beginning of year $ 685,518 $ 672,098 Increase for positions taken during the current period 34,293 58,586 Increase (decrease) for positions taken during the prior period ( 59,779 ) - Decrease resulting from the expiration of the statute of limitations ( 88,168 ) ( 45,166 ) Balance at end of year $ 571,864 $ 685,518 The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2019 and non-U.S. income tax examinations by tax authorities prior to 2017. Included in the balance as of December 30, 2023, are $ 451,772 of unrecognized tax benefits that would affect the annual effective tax rate. In 2023, the Company recognized accrued interest related to unrecognized tax benefits in income tax expense. The Company had approximately $ 69,830 of accrued interest as of December 30, 2023. The total amount of unrecognized tax benefits could increase or decrease within the next twelve months for several reasons, including the closure of federal, state, and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under ASC 740. The Company believes that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months. 53 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 9. LEASES The Company enters into leases for manufacturing facilities, warehouses, sales offices, plant equipment, vehicles, and certain other equipment with varying end dates from April 2024 to April 2033, including renewal options. The following table (in millions) represents the impact of leasing on the consolidated balance sheets: Balance Sheet Classification December 30, 2023 December 31, 2022 Assets: Operating lease assets, net Right of use assets $ 17.2 $ 12.2 Finance lease right of use assets, net Property, plant and equipment, net 0.9 - Total leased assets, net 18.1 12.2 Liabilities: Current operating lease liabilities Current portion of operating lease liability 4.4 3.1 Current finance lease liabilities Current portion of financing lease liability 0.2 - Noncurrent operating lease liabilities Operating lease liability, less current portion 12.8 9.2 Noncurrent finance lease liabilities Financing lease liability, less current portion 0.7 - Total lease liabilities $ 18.1 $ 12.3 Cash paid included in the measurement of operating lease liabilities was $ 4.3 million and $ 3.6 million for the fiscal years ended December 30, 2023 and December 31, 2022, respectively, all of which were included within the operating cash flow section of the consolidated statements of cash flows. Lease assets obtained in exchange for new operating lease liabilities were $ 8.5 million and $ 4.0 million for the fiscal years ended December 30, 2023 and December 31, 2022, respectively. Cash paid included in the measurement of finance lease liabilities was $ 0.1 million for the fiscal year ended December 30, 2023 which was included within the financing cash flow section of the consolidated statements of cash flows for the fiscal years ended December 30, 2023. Total operating lease expense was $ 4.0 million and $ 3.3 million for the fiscal years ended December 30, 2023 and December 31, 2022, respectively. Total financing lease expense was $ 0.1 million for the fiscal year ended December 30, 2023. 54 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) The future payments (in millions) due under non-cancelable operating and finance leases as of December 30, 2023 are as follows: Operating Finance 2024 $ 4.4 $ 0.2 2025 3.1 0.2 2026 2.5 0.2 2027 and thereafter 10.2 0.6 20.2 1.1 Less effects of discounting ( 3.0 ) ( 0.2 ) Lease liabilities recognized $ 17.2 $ 0.9 As of December 30, 2023, the weighted average lease term for all operating and finance leases is 7.0 and 6.1 years, respectively. The weighted average discount rate associated with operating leases was 6.2 % while the weighted average discount rate associated with finance leases was 6.4 %. 10. RETIREMENT BENEFIT PLANS The Company has non-contributory defined benefit pension plans covering some U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for its salaried plan, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law. The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements. Components of the net periodic benefit cost of the Company’s pension benefit plans for the fiscal year indicated were as follows: 2023 2022 Service cost $ 864,611 $ 1,078,973 Interest cost 3,960,212 2,432,756 Expected return on plan assets ( 4,196,060 ) ( 5,842,641 ) Amortization of prior service cost - 66,252 Amortization of the net loss 1,371,460 1,560,299 Net periodic benefit cost $ 2,000,223 $ ( 704,361 ) Service costs are reported in the cost of products sold and the other components of net periodic benefit costs are reported in other income in the consolidated statements of income. 55 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 10. RETIREMENT BENEFIT PLANS (continued) Assumptions used to determine net periodic benefit cost for the Company’s pension benefit plans for the fiscal year indicated were as follows: 2023 2022 Discount rate - Pension plans 5.21 % - 5.23 % 2.75 % - 2.81 % - Supplemental pension plans 4.92 % 2.08 % Expected return on plan assets 7.5 % 7.5 % Rate of compensation increase 0 % 0 % Components of the net periodic benefit cost of the Company’s other postretirement benefit plan were as follows: 2023 2022 Service cost $ 25,945 $ 53,291 Interest cost 58,131 43,950 Expected return on plan assets ( 19,396 ) ( 17,600 ) Amortization of prior service cost 4,241 4,241 Amortization of the net loss ( 67,581 ) ( 8,214 ) Net periodic benefit cost $ 1,340 $ 75,668 Assumptions used to determine net periodic benefit cost for the Company’s other postretirement plan for the fiscal year indicated were as follows: 2023 2022 Discount rate 5.28 % 2.93 % Expected return on plan assets 4.0 % 4.0 % Rate of compensation increase 4.3 % 4.3 % As of December 30, 2023, and December 31, 2022, the status of the Company’s pension benefit plans and other postretirement benefit plan was as follows: Pension Benefit Other Postretirement Benefit 2023 2022 2023 2022 Benefit obligation at beginning of year $ 80,701,715 $ 107,420,338 $ 1,151,126 $ 1,724,582 Change in discount rate 1,794,084 ( 26,408,548 ) 35,126 ( 562,340 ) Service cost 864,611 1,078,973 25,945 53,291 Interest cost 3,960,212 2,432,756 58,131 43,950 Actuarial (gain)/loss ( 587,910 ) 934,211 ( 162,766 ) ( 73,395 ) Benefits paid ( 4,870,701 ) ( 4,756,015 ) ( 37,286 ) ( 34,962 ) Benefit obligation at end of year $ 81,862,011 $ 80,701,715 $ 1,070,276 $ 1,151,126 2023 2022 2023 2022 Fair value of plan assets at beginning of year $ 58,527,250 $ 80,814,956 $ 484,904 $ 439,993 Actual return on plan assets 5,902,956 ( 17,701,556 ) ( 16,501 ) 44,911 Employer contributions 1,277,138 169,865 51,180 49,158 Benefits paid ( 4,870,701 ) ( 4,756,015 ) ( 51,180 ) ( 49,158 ) Fair value of plan assets at end of year $ 60,836,643 $ 58,527,250 $ 468,403 $ 484,904 56 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 10. RETIREMENT BENEFIT PLANS (continued) Pension Benefit Other Postretirement Benefit Funded Status 2023 2022 2023 2022 Net amount recognized in the balance sheet $ ( 21,025,365 ) $ ( 22,174,465 ) $ ( 554,758 ) $ ( 666,222 ) Amounts recognized in accumulated other comprehensive income consist of: Pension Benefit Other Postretirement Benefit 2023 2022 2023 2022 Net (loss)/gain $ ( 35,084,405 ) $ ( 36,956,587 ) $ 929,097 $ 900,694 Prior service (cost) credit - - - - $ ( 35,084,405 ) $ ( 36,956,587 ) $ 929,097 $ 900,694 Change in the components of accumulated other comprehensive income consist of: Pension Benefit Other Postretirement Benefit 2023 2022 2023 2022 Balance at beginning of period $ ( 36,956,587 ) $ ( 40,513,278 ) $ 900,694 $ 241,621 Charged to net periodic benefit cost Prior service cost - 66,252 4,241 4,241 Net loss (gain) 1,371,460 1,560,299 ( 67,581 ) ( 8,214 ) Liability (gains)/losses Discount rate ( 1,794,084 ) 26,408,548 ( 35,126 ) 562,340 Asset (gains)/losses deferred 2,431,940 ( 22,866,209 ) ( 35,897 ) 27,311 Other ( 137,134 ) ( 1,612,199 ) 162,766 73,395 Balance at end of period $ ( 35,084,405 ) $ ( 36,956,587 ) $ 929,097 $ 900,694 Assumptions used to determine the projected benefit obligations for the Company’s pension benefit plans and other postretirement benefit plan for the fiscal year indicated were as follows: 2023 2022 Discount rate - Pension plans 4.99 % - 5.00 % 5.21 % - 5.23 % - Supplemental pension plans 4.72 % 4.92 % - Other postretirement plan 5.04 % 5.28 % On December 30, 2023 and December 31, 2022, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $ 81,862,011 and $ 80,701,715 , respectively. 57 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 10. RETIREMENT BENEFIT PLANS (continued) Information for the under-funded pension plans with a projected benefit obligation and an accumulated benefit obligation in excess of plan assets: 2023 2022 Number of plans 5 5 Projected benefit obligation $ 81,862,011 $ 80,701,715 Accumulated benefit obligation 81,862,011 80,701,715 Fair value of plan assets 60,836,643 58,527,250 Net amount recognized in accrued benefit liability $ ( 21,025,368 ) $ ( 22,174,465 ) Estimated future benefit payments to participants of the Company’s pension plans are $ 5.1 million in 2024, $ 5.3 million in 2025, $ 5.5 million in 2026, $ 5.6 million in 2027, $ 5.7 million in 2028 and a total of $ 29.1 million from 2029 through 2033. Estimated future benefit payments to participants of the Company’s other postretirement plan are $ 46,000 in 2024, $ 47,000 in 2025, $ 49,000 in 2026, $ 49,000 in 2027, $ 51,000 in 2028 and a total of $ 281,000 from 2029 through 2033. The Company expects to make cash contributions to its qualified pension plans of approximately $ 2,100,000 and to its other postretirement plan of approximately $ 50,000 in 2024. We consider a number of factors in determining and selecting assumptions for the overall expected long-term rate of return on plan assets. We consider the historical long-term return experience of our assets, the current and expected allocation of our plan assets, and expected long-term rates of return. We derive these expected long-term rates of return with the assistance of our investment advisors and generally base these rates on a 10-year horizon for various asset classes and consider the expected positive impact of active investment management. We base our expected allocation of plan assets on a diversified portfolio consisting of domestic and international equity securities and fixed income securities. We consider a variety of factors in determining and selecting our assumptions for the discount rate at the end of the year. In 2023, as in 2022, we developed each plan’s discount rate with the assistance of our actuaries by matching expected future benefit payments in each year to the corresponding spot rates from the FTSE Pension Liability Yield Curve, comprised of high quality (rated AA or better) corporate bonds. 58 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 10. RETIREMENT BENEFIT PLANS (continued) The fair values of the Company’s pension plan assets on December 30, 2023 and December 31, 2022, utilizing the fair value hierarchy discussed in Note 3 – Accounting Policies – Fair Value of Financial Instruments , follow: December 30, 2023 Level 1 Level 2 Level 3 Total Cash and Equivalents: Common/collective trust funds $ — $ 411,688 $ — $ 411,688 Equities: The Eastern Company Common Stock 4,774,396 — 4,774,396 RITC Russell Investments Russell 1000® Index Fund (a) 6,595,564 6,595,564 RITC Small Cap Fund (b) 567,998 567,998 RITC International Fund (c) 3,669,895 3,669,895 RITC Emerging Markets Fund (d) 1,298,014 1,298,014 RITC World Equity Fund (e) 7,960,264 7,960,264 RITC Global Real Estate Securities Fund (f) 1,373,408 1,373,408 RITC Global Listed Infrastructure Fund (g) 1,327,625 1,327,625 RITC Commodities Fund (h) 1,161,864 1,161,864 RIIFL High Yield Bond Fund (i) 2,643,118 2,643,118 Fixed Income: Common/collective trust funds Target Duration LDI Fixed Income Funds (j) • Russell 25 Year LDI Fixed Income Fund — 9,858,521 — 9,858,521 • Russell 14 Year LDI Fixed Income Fund — 17,481,926 — 17,481,926 STRIPS Fixed Income Funds (k) • Russell 15 to 20 Year STRIPS Fixed Income Fund — 876,584 — 876,584 • Russell 10 to 15 Year STRIPS Fixed Income Fund — 835,778 — 835,778 Total $ 4,774,396 $ 56,062,246 $ — $ 60,836,643 59 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 10. RETIREMENT BENEFIT PLANS (continued) December 31, 2022 Level 1 Level 2 Level 3 Total Cash and Equivalents: Common/collective trust funds $ — $ 391,357 $ — $ 391,357 Equities: The Eastern Company Common Stock 4,184,107 — 4,184,107 Common/collective trust funds Russell Multi Asset Core Plus Fund (l) — 26,244,623 — 26,244,623 Fixed Income: Common/collective trust funds Target Duration LDI Fixed Income Funds (j) • Russell 25 Year LDI Fixed Income Fund — 4,376,600 — 4,376,600 • Russell 14 Year LDI Fixed Income Fund — 18,012,813 — 18,012,813 STRIPS Fixed Income Funds (k) • Russell 15 to 20 Year STRIPS Fixed Income Fund — 2,151,410 — 2,151,410 • Russell 10 to 15 Year STRIPS Fixed Income Fund — 3,166,340 — 3,166,340 Total $ 4,184,107 $ 54,343,143 $ — $ 58,527,250 Equity common funds primarily hold publicly traded common stock of both U.S and international companies selected for purposes of total return and to maintain equity exposure consistent with policy allocations. The Level 1 investment is made up of shares of The Eastern Company Common Stock and is valued at market price. Level 2 investments include commingled funds valued at unit values provided by the investment managers, which are based on the fair value of the underlying publicly traded securities. 60 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 10. RETIREMENT BENEFIT PLANS (continued) (a) The RITC Russell Investments Russell 1000® Index Fund - Series I seeks to replicate the performance of the Russell 1000® Index as closely as possible before the deduction of Fund expenses. The Fund invests, through an underlying fund, primarily in stocks that closely match the composition of the Russell 1000® Index. The stocks in the index are highly diversified across industries and sectors. The Fund practices a passive investment approach and seeks to replicate the performance of the Russell 1000® Index. (b) The RITC Small Cap Fund seeks to provide long-term capital appreciation. It aims to outperform the Russell 2000® Index while managing volatility and maintaining diversification similar to the Index over a full market cycle. The Fund invests primarily in common stocks of U.S. small capitalization companies. Advisors in the Fund use a wide range of criteria and disciplines, focusing on factors such as: undervalued or under-researched companies, special situations, emerging growth, asset plays and turnarounds. (c) The RITC International Fund seeks to provide long-term growth of capital. It aims to outperform the MSCI World ex USA Index Net (the “Index”) while managing volatility and maintaining diversification similar to the index over a full market cycle. The Fund invests primarily in equity securities issued by Non-U.S. companies and in depositary receipts and other derivatives representing economic ownership of securities of non-U.S. companies. Seeks to invest in most of the developed nations of the world to maintain a high degree of diversification among countries and currencies. Employs multiple managers with distinct investment styles (growth, market-oriented and value), which are intended to be complementary. (d) The RITC Emerging Markets Fund seeks to provide the potential for long-term growth of capital. It aims to outperform the MSCI Emerging Markets Index Net over a full market cycle. The Fund Invests in equity securities of companies located in, or are economically tied to, emerging market countries. Securities are denominated principally in foreign currencies and are typically held outside the U.S. The Fund employs a multi-style (growth, market-oriented and value) and multi-manager approach whereby portions of the fund are allocated to different money managers who employ distinct styles. (e) The RITC World Equity Fund seeks to provide long-term capital appreciation. It aims to outperform the MSCI World Net Dividend Index over a full market cycle. The Fund employs specialist global equity advisors using global stock and sector selection strategies. Advisors invest across the world, without being limited by national borders or to specific regions, and typically take more aggressive positions on stocks and sectors and the extended equity markets. Their cross-border approach offers a different, complementary source of excess returns to Russell Investments' U.S. and International funds. (f) The RITC Global Real Estate Securities Fund seeks to provide current income and long-term capital growth. It strives to outperform the FTSE EPRA NAREIT Developed Index Net TRI with above-average consistency over a full market cycle. The Fund invests principally in equity securities of real estate companies, primarily in real estate investment trusts (REITs), other property trusts and real estate-related companies listed on global stock exchanges, predominantly in North America, Europe, Asia, and Australia. It employs a multi-manager approach whereby portions of the fund are allocated to different money managers whose approaches are intended to complement one another. (g) The RITC Global Listed Infrastructure Fund seeks to provide the potential for excess return streams, stable income potential, and a possible hedge against inflation. It seeks to outperform the S&P Infrastructure Index over a full market cycle. The Fund invests in a diversified portfolio of listed companies that provide services essential for a functioning modern economy, including roads, utilities, hospitals, schools, and airports. Employs multiple managers with complementary strategies with each manager expected to take an active management approach with a ’pure play’ bias - meaning they select companies with assets that tend to be monopolistic, highly regulated, long-lived, with steady cash flows. (h) The RITC Commodities Fund is designed to provide the potential for long-term growth of capital and income. It seeks to outperform the Bloomberg Commodity Index Total Return with above-average consistency over a full market cycle. The Fund invests in commodity index-linked securities, other commodity-linked securities, derivative instruments, cash, and fixed income securities that together are intended to provide exposure to the performance of the collateralized commodity futures market. Combines strategies with different payoffs over different phases of an economic and stock market cycle. Multiple advisors, funds and strategies are employed to reduce style or strategy concentration risk. (i) The RIIFL High Yield Bond Fund seeks to provide current income and capital appreciation. It aims to outperform the ICE BofA Developed Markets High Yield Constrained Index (USD-hedged) over an interest rate cycle. The Fund invests primarily in non-investment grade, high yielding fixed income securities issued by companies from around the globe. These securities are commonly referred to as "junk bonds." A majority of the Fund's holdings are U.S. dollar denominated. (j) The Target Duration LDI Fixed Income Funds seek to outperform their respective Barclays-Russell LDI Indexes over a full market cycle. These Funds invest primarily in investment grade corporate bonds that closely match those found in discount curves used to value U.S. pension liabilities. They seek to provide additional incremental return through modest interest rate timing, security selection and tactical use of non-credit sectors. Generally, for use in combination with other bond funds to gain additional credit exposure, with the goal of reducing the mismatch between a plan’s assets and liabilities. (k) The STRIPS (Separate Trading of Registered Interest and Principal of Securities) Funds seek to provide duration and Treasury exposure by investing in an optimized subset of the STRIPS universe with a similar duration profile as the Barclays U.S. Treasury STRIPS 10-15 year, 15-20 year or 25+ year Index. These passively managed funds are generally used with other bond funds to add additional duration to the asset portfolio. This will help reduce the mismatch between a plan’s assets and liabilities. (l) The investment objective of the RITC (formerly Russell) Multi-Asset Core Plus Fund seeks to provide long-term growth of capital over a market cycle by offering a diversified portfolio of funds and separate accounts investing in global stock, return seeking fixed income, commodities, global real estate, and opportunistic investments. They hold a dynamic mix of underlying Russell Investments funds and/or separate accounts. Russell Investments is a strong proponent of disciplined strategic asset allocation and rebalancing strategies and believes that unstable movements in the market have the potential to create opportunities. By identifying short-term mispricing and making small tactical adjustments to the Multi-Asset Core Plus Fund, they believe there is potential to enhance returns while continuing to manage risks. The investment portfolio contains a diversified blend of common stocks, bonds, cash equivalents, and other investments, which may reflect varying rates of return. The investments are further diversified within each asset classification. The portfolio diversification provides protection against a single security or class of securities having a disproportionate impact on aggregate performance. The Company has elected to change its investment strategy to better match the assets with the underlying plan liabilities. Currently, the long-term target allocations for plan assets are 50% in equities and 50% in fixed income although the actual plan asset allocations may be within a range around these targets. The actual asset allocations are reviewed and rebalanced on a periodic basis to maintain the target allocations. It is expected that, as the funded status of the plans improves, more assets will be invested in long-duration fixed income instruments. 61 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 10. RETIREMENT BENEFIT PLANS (continued) The plans’ assets include 217,018 shares of the common stock of the Company having a market value of $ 4,774,396 and $ 4,184,107 on December 30, 2023 and December 31, 2022, respectively. No shares were purchased in 2023 or 2022 nor were any shares sold in either period. Dividends received during 2023 and 2022 on the common stock of the Company were $ 95,488 and $ 95,488 , respectively. U.S. salaried and non-union hourly employees and most employees of the Company’s Canadian subsidiaries are covered by defined contribution plans. The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code covering substantially all U.S. non-union employees. This plan allows participants to make voluntary contributions of up to 100% of their annual compensation on a pretax basis, subject to IRS limitations. The plan provides for contributions by the Company at its discretion. The Eastern Company Savings and Investment Plan as amended effective April 1, 2023 (“401(k) Plan Amendment”) provides for a match of 50% of the first 6% of employee contributions. The 401(k) Plan Amendment also provides for an additional non-discretionary contribution (the “transitional credit”) for certain non-union U.S. employees. The amount of this non-discretionary contribution ranges from 0% to 4% of wages, based on the age of the individual on June 1, 2016. The 401(k) Plan Amendment provides a non-discretionary safe harbor contribution of 3%. All non-union U.S. employees are eligible to join the plan . The Company made contributions to the plan as follows: 2023 2022 Regular matching contributions $ 990,993 $ 561,357 Transitional credit contributions 105,880 123,387 Non-discretionary contributions 682,154 376,861 Total contributions made for the period $ 1,779,027 $ 1,061,605 The non-discretionary contribution of $ 328,953 made in the twelve months ended December 30, 2023 was accrued for and expensed in the prior fiscal year. As of December 31, 2022, the Company had accrued $ 379,090 for the non-discretionary safe harbor contribution. This amount was expensed in 2022 and was contributed to the plan in January 2023. Effective January 1, 2023, the non-discretionary contributions are being contributed on a weekly basis. 11. EARNINGS PER SHARE The denominators used in the earnings per share computations follow: 2023 2022 Basic: Weighted average shares outstanding 6,232,341 6,223,839 Diluted: Weighted average shares outstanding 6,232,341 6,223,839 Dilutive stock awards 38,424 14,102 Denominator for diluted earnings per share 6,270,765 6,237,941 There were no anti-dilutive stock equivalents in 2023 or 2022. 62 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 12. GEOGRAPHIC INFORMATION 2023 2022 Geographic Information: Net Sales: United States $ 265,377,645 $ 270,342,724 Foreign 8,077,212 8,922,422 $ 273,454,857 $ 279,265,146 Foreign sales are primarily to customers in North America. Identifiable Assets: United States $ 240,930,387 $ 248,587,059 Foreign 11,108,814 12,935,974 $ 252,039,201 $ 261,523,033 13. RECENT ACCOUNTING PRONOUNCEMENTS In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which amends the reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. This standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We do not expect this new standard to have a significant impact to our disclosures. In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 240), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit disaggregated between domestic and foreign and (3) income tax expense or benefit from continuing operations disaggregated by Federal, state, and foreign. The update also requires entities to disclose their income tax payments to various jurisdictions. This standard is effective for fiscal years beginning after December 15, 2024, and interim periods within fiscal years beginning after December 15, 2025. We do not expect this new standard to have a significant impact to our disclosures. 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. 63 Table of Contents The Eastern Company Notes to Consolidated Financial Statements (continued) 14. CONTINGENCIES The Company is party to various legal proceedings from time to time related to its normal business operations. Currently, the Company is not involved in any legal proceedings. In 2016, the Company created a plan to remediate a landfill of spent foundry sand maintained at the Company’s previously owned metal casting facility in New York. This plan was agreed to by the New York State Department of Environmental Conservation (the “NYSDEC”) on March 27, 2018. Based on estimates provided by the Company’s environmental engineers, the anticipated cost to remediate and monitor the landfill was $ 430,000 . The Company accrued for and expensed the entire $ 430,000 in the first quarter of 2018 and fiscal 2017. In the fall of 2018, detailed construction drawings were prepared by an outside consultant in conjunction with informal progress reviews by the NYSDEC. Long-term groundwater monitoring commenced in April 2019. Verbal approval for the closure plan was received from the NYSDEC in May 2019, and written approval was received in October 2020. Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap was completed in October 2021. A closure report and long-term maintenance plan were submitted to the NYSDEC in November 2021. In July 2023, the Company received NYSDEC approval for the closure report and long-term maintenance plan. The 30-year annual groundwater monitoring and site maintenance program is underway and will continue through 2048. 15. 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 December 30, 2023, and December 31, 2022, there was one significant concentration of credit risk. One customer represented 12 % of total accounts receivable for 2023 and one customer represented 14 % of total accounts receivable in 2022. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable. In 2023, this customer had revenues totaling $ 29.2 million (10% of Engineered Solutions segment total revenue). In 2022, no customer had sales exceeding 10% of total Engineered Solutions total revenue. 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 term SOFR, plus an adjustment of ten basis points, plus an applicable margin of 1.87 5% to 2.62 5%, depending on the Company’s senior net leverage ratio. See Note 6 – Debt for more information regarding the Company’s debt facility. Currency Exchange Rate Risk The Company’s currency exposure is concentrated in the Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB, and Hong Kong dollar. 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. 64 Table of Contents Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of The Eastern Company Shelton, Connecticut Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of The Eastern Company (the Company) as of December 30, 2023 and December 31, 2022, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the two-year period ended December 30, 2023, including the related notes and financial statement schedule appearing under Item 15(a)(2) on Form 10-K (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended December 30, 2023, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2024 expressed an unqualified opinion. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Impairment Assessment of Goodwill Description of the Critical Audit Matter and the Relevant Accounts and Disclosures As described in Notes 3 and 4 to the financial statements, the Company’s consolidated goodwill balance is $70.8 million as of December 30, 2023. Management tests 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. As disclosed by management, reporting units are tested for impairment by utilizing qualitative factors that include a) macroeconomic conditions, b) market and industry conditions, c) cost factors, d) overall financial performance, e) other relevant entity-specific events, and f) events affecting a reporting unit. Principal Considerations for the Designation of the Critical Audit Matter The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments is a critical audit matter are (i) the significant judgments and assumptions used by management when developing the qualitative factors that are part of the impairment assessment; and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant judgments and assumptions related to the qualitative factors. How the Critical Audit Matter was Addressed in the Audit Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments. These procedures also included, among others (i) testing management’s process for developing the qualitative factors; (ii) evaluating the appropriateness of the qualitative factors; and (iii) testing the completeness and accuracy of underlying data used in the qualitative factors by corroborating and recalculating the relevant metrics. Evaluating management’s significant judgments and assumptions related to qualitative factors involved evaluating whether those significant judgments and assumptions used by management were reasonable considering (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. /s/ Fiondella, Milone & LaSaracina LLP Fiondella, Milone & LaSaracina LLP We have served as the Company’s auditor since 2009. Glastonbury, Connecticut March 12, 2024 65 Table of Contents ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.