eml_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2023

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from ________________ to _______________

Commission File Number 001-35383

THE EASTERN COMPANY

(Exact name of registrant as specified in its charter)

Connecticut

06-0330020

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

3 Enterprise Drive, Suite 408, Shelton, Connecticut		06484
(Address of principal executive offices)		(Zip Code)

(203)-729-2255

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	EML	NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of September 30, 2023, 6,238,413 shares of the registrant’s common stock, no par value per share, were issued and outstanding.

The Eastern Company

Form 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023

TABLE OF CONTENTS

		Page



PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

Item 3.	Defaults Upon Senior Securities	26

Item 4.	Mine Safety Disclosures	26

Item 5.	Other Information	26

Item 6	Exhibits	27

Signatures		28

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PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30, 2023			October 1, 2022			September 30, 2023			October 1, 2022
Net sales	$	65,635,680		$	71,636,746		$	206,468,838		$	210,191,448
Cost of products sold		(49,260,313	)		(55,056,160	)		(159,447,930	)		(163,047,360	)
Gross margin		16,375,367			16,580,586			47,020,908			47,144,088

Product development expense		(1,425,159	)		(1,011,961	)		(4,257,468	)		(3,168,333	)
Selling general and administrative expenses		(9,700,342	)		(10,121,683	)		(32,927,015	)		(30,129,112	)
Operating profit		5,249,866			5,446,942			9,836,425			13,846,643

Interest expense		(1,067,779	)		(645,773	)		(2,574,890	)		(1,583,894	)
Other (expense) income		(135,839	)		1,118,453			(514,357	)		2,118,783
Income from continuing operations before income taxes		4,046,248			5,919,622			6,747,178			14,381,532

Income tax expense		(984,289	)		(1,423,363	)		(1,678,698	)		(3,498,365	)
Net income from continuing operations		3,061,959			4,496,259			5,068,480			10,883,167

Discontinued Operations (see Note B)
Gain from operations of discontinued operations		-			495,820			-			1,426,569
Income tax expense		-			(133,500	)		-			(384,104	)
Gain from discontinued operations		-			362,320			-			1,042,465

Net income	$	3,061,959		$	4,858,579		$	5,068,480		$	11,925,632

Earnings per share from continuing operations:
Basic	$	0.49		$	0.72		$	0.81		$	1.75

Diluted	$	0.49		$	0.72		$	0.81		$	1.74

Earnings per share from discontinued operations:
Basic	$	-		$	0.06		$	-		$	0.17

Diluted	$	-		$	0.06		$	-		$	0.17

Total earnings per share:
Basic	$	0.49		$	0.78		$	0.81		$	1.92

Diluted	$	0.49		$	0.78		$	0.81		$	1.91

Cash dividends per share:	$	0.11		$	0.11		$	0.33		$	0.33

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30, 2023			October 1, 2022			September 30, 2023			October 1, 2022
Net income	$	3,061,959		$	4,858,579		$	5,068,480		$	11,925,632
Other comprehensive (loss) income:

Change in foreign currency translation		(87,572	)		(1,387,274	)		(182,029	)		(2,358,170	)

Change in fair value of interest rate swap, net of tax cost of:
2023 - $0 and $(274,957) respectively; 2022 - $163,533 and $590,827 respectively		-			517,855			(1,449,754	)		1,870,954

Change in pension and postretirement benefit costs, net of taxes of:
2023 - $74,360 and $223,079 respectively; 2022 - $92,235 and $276,705 respectively		252,668			313,408			758,006			940,225
Total other comprehensive income (loss)		165,096			(556,011	)		(873,777	)		453,009
Comprehensive income	$	3,227,055		$	4,302,568		$	4,194,703		$	12,378,641

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2023			December 31, 2022
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	9,540,786		$	10,187,522
Accounts receivable, less allowances: 2023 - $718,568; 2022 - $677,000		42,838,864			42,886,250
Inventories		60,648,599			64,636,591
Current portion of notes receivable		570,696			1,006,421
Prepaid expenses and other assets		5,876,920			6,598,774
Total Current Assets		119,475,865			125,315,558

Property, Plant and Equipment		60,077,603			56,112,889
Accumulated depreciation		(32,088,351	)		(30,000,797	)
Property, Plant and Equipment, Net		27,989,252			26,112,092

Goodwill		70,764,166			70,777,459
Trademarks		5,514,890			5,514,886
Patents and other intangibles net of accumulated amortization		16,080,034			18,819,897
Long term notes receivable, less current portion		446,627			2,276,631
Deferred Income Taxes		657,607			488,989
Right of Use Assets		15,796,743			12,217,521
Total Other Assets		109,260,067			110,095,383

TOTAL ASSETS	$	256,725,184		$	261,523,033

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2023			December 31, 2022
	(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	30,257,077		$	27,638,317
Accrued compensation		4,205,484			3,327,832
Other accrued expenses		4,830,717			3,944,964
Current portion of operating lease liability		3,540,157			3,059,547
Current portion of finance lease liability		150,362			-
Current portion of long-term debt		3,000,000			9,010,793
Total Current Liabilities		45,983,797			46,981,453

Other long-term liabilities		754,763			754,762
Operating lease liability, less current portion		12,256,587			9,195,205
Finance lease liability, less current portion		792,484			-
Long-term debt, less current portion		45,661,186			55,136,231
Accrued postretirement benefits		672,064			666,222
Accrued pension cost		21,958,215			22,174,465
Total Liabilities		128,079,096			134,908,338

Shareholders’ Equity
Voting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Common Stock, no par value, Authorized: 50,000,000 shares		33,737,465			33,586,165
Issued: 9,086,096 shares in 2023 and 9,056,421 shares in 2022
Outstanding: 6,238,413 shares in 2023 and 6,221,976 shares in 2022
Treasury Stock: 2,847,683 shares in 2023 and 2,834,445 shares in 2022		(22,790,230	)		(22,544,684	)
Retained earnings		141,985,268			138,985,852
Accumulated other comprehensive loss:
Foreign currency translation		(1,323,007	)		(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		(22,963,408	)		(23,721,414	)
Accumulated other comprehensive loss		(24,286,415	)		(23,412,638	)
Total Shareholders’ Equity		128,646,088			126,614,695
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	256,725,184		$	261,523,033

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended
	September 30, 2023			October 1, 2022
Operating Activities
Net income	$	5,068,480		$	11,925,632
Less: gain from discontinued operations		-			1,042,465
Income from continuing operations	$	5,068,480		$	10,883,167
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization		5,471,633			5,389,394
Unrecognized pension and postretirement benefits		635,677			(477,560	)
Loss (Gain) on sale of equipment and other assets		331,474			(345,718	)
Provision for doubtful accounts		(88,353	)		35,000
Stock compensation expense		151,300			699,454
Changes in operating assets and liabilities:
Accounts receivable		116,025			(8,008,687	)
Inventories		4,628,294			(5,217,395	)
Prepaid expenses and other		888,342			(1,082,483	)
Other assets		190,216			340,925
Accounts payable		1,499,401			(537,072	)
Accrued compensation		476,714			(957,022	)
Other accrued expenses		(119,557	)		(1,046,094	)
Net cash provided by (used in) operating activities		19,249,646			(324,091	)

Investing Activities
Business Acquisition		(547,638	)		—
Issuance of Notes Receivable		—			(400,000	)
Payments received from notes receivable		2,265,730			748,148
Proceeds from sale of equipment		—			2,171,073
Purchases of property, plant, and equipment		(4,718,673	)		(1,734,553	)
Net cash (used in) provided by investing activities		(3,000,581	)		784,668

Financing Activities
Principal payments on long-term debt		(74,919,004	)		(5,688,866	)
Principal payments on short-term borrowings (revolver)		(300,029	)		(1,000,000	)
Proceeds from short term borrowings (revolver)		—			10,000,000
Proceeds from new long-term debt financing		60,000,000			—
Financing leases, net		674,558			(161,906	)
Purchase common stock for treasury		(245,546	)		(1,637,072	)
Dividends paid		(2,069,043	)		(2,054,875	)
Net cash used in financing activities		(16,859,064	)		(542,719	)

Discontinued Operations
Cash used in operating activities		-			(610,887	)
Cash used in discontinued operations		-			(610,887	)

Effect of exchange rate changes on cash		(36,737	)		(257,093	)
Net change in cash and cash equivalents		(646,737	)		(950,122	)

Cash and cash equivalents at beginning of period		10,187,522			6,602,429
Cash and cash equivalents at end of period ¹	$	9,540,786		$	5,652,307

Supplemental disclosure of cash flow information:
Interest	$	2,482,362		$	1,753,699
Income taxes		1,321,170			3,197,375

Non-cash investing and financing activities
Right of use asset	$	3,579,222		$	1,743,518
Lease liability		(4,484,838	)		(1,608,530	)



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

See accompanying notes

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THE EASTERN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

September 30, 2023

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 14, 2023 (the “2022 Form 10-K”), for additional information.

The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. All intercompany accounts and transactions are eliminated.

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

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2022, the 2022 fiscal year or fiscal 2022 mean the 52-week period ended on December 31, 2022, and references to 2023, the 2023 fiscal year or fiscal 2023 mean the 52-week period ending on December 30, 2023. In a 52-week fiscal year, each quarter has 13 weeks. References to the third quarter of 2022, the third fiscal quarter of 2022, the third quarter of fiscal 2022 or the three months ended October 1, 2022, mean the period from July 3, 2022 to October 1, 2022. References to the third quarter of 2023, the third fiscal quarter of 2023, the third fiscal quarter of 2023 or the three months ended September 30, 2023, mean the 13-week period from July 2, 2023 to September 30, 2023. References to the first nine months of 2022, the first nine months of fiscal 2022 or the nine months ended October 1, 2022 mean the period from January 2, 2022 to October 1, 2022. References to the first nine months of 2023, the first nine months of fiscal 2023 or the nine months ended September 30, 2023 mean the period from January 1, 2023 to September 30, 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, which process was completed with the sale of the Company’s Argo EMS business (“Argo”) on October 19, 2022. 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 qualified for discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statements of income as discontinued operations for the prior periods presented. The results of the former Diversified Products segment are not reflected in the unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2023 because dispositions of the businesses that comprised that segment were completed prior to the start of the period.

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Summarized Financial Information of Discontinued Operations

The following table represents income from discontinued operations, net of tax:

	Three Months Ended					Nine Months Ended
	September 30, 2023		October 1, 2022			September 30, 2023		October 1, 2022
	(unaudited)		(unaudited)			(unaudited)		(unaudited)
Net sales	$	-	$	2,516,064		$	-	$	7,356,491
Cost of products sold		-		(1,656,694	)		-		(4,943,751	)
Gross margin		-		859,370			-		2,412,740

Selling, general and administrative expenses		-		(311,190	)		-		(857,747	)
Operating income		-		548,180			-		1,554,993

Interest expense		-		(52,360	)		-		(128,424	)
Gain from discontinued operations before income taxes		-		495,820			-		1,426,569

Income tax expense		-		(133,500	)		-		(384,104	)
Income from discontinued operations, net of tax	$	-	$	362,320		$	-	$	1,042,465

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Note C – Earnings Per Share

The denominators used to calculate earnings per share are as follows:

Three Months Ended

Nine Months Ended

September 30, 2023

October 1, 2022

September 30, 2023

October 1, 2022

Basic:

Weighted average shares outstanding

6,241,796

6,209,014

6,233,493

6,226,493

Diluted:

Weighted average shares outstanding

6,241,796

6,209,014

6,233,493

6,226,493

Dilutive stock appreciation rights

32,462

14,102

32,462

14,102

Denominator for diluted earnings per share

6,274,258

6,223,116

6,265,955

6,240,595

Note D – Inventories

Inventories from continuing operations consist of the following components:

	September 30, 2023		December 31, 2022

Raw material and component parts	$	24,325,177	$	25,924,696
Work in process		8,747,860		9,323,082
Finished goods		27,575,562		29,388,813
Total inventories	$	60,648,599	$	64,636,591

Note E - Goodwill

The aggregate carrying amount of goodwill from continuing operations is approximately $70.8 million as of September 30, 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 Acquisition for further details. No impairment was recognized in the third quarter of 2023.

The Company evaluates its reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events and circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. The Company tests reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources.

Note F – Leases

The Company presents right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company accounts for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.

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The Company has operating leases for buildings, warehouses, and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability.

Currently, the Company has twenty-one operating leases with a lease liability of $15.8 million and four finance leases with a lease liability of $0.9 million as of September 30, 2023. The terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. There are no related party lease transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.

Approximate total minimum lease payments for each of the next five fiscal years is estimated to be as follows: remainder of 2023 - $1.0 million; 2024 - $3.6 million; 2025 - $2.4 million; 2026 - $1.8 million; 2027 - $1.5 million; and $6.5 million thereafter. The weighted average remaining lease term is 7.3 years. The implicit interest rate used was 5.0% to 8.25%.

Note G - 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 0.875% to 1.625% 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. The Company was in compliance with all its covenants under the Credit Agreement on September 30, 2023, and through the date of filing this Form 10-Q.

Note H - Stock Options and Awards

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 Company has no other existing plan pursuant to which equity awards may be granted.

Incentive stock options granted under the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Board. Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Board. During the first nine months of fiscal 2023 and 2022, the Company granted stock awards with respect to 79,500 and 43,300 shares of Company common stock respectively, that were subject to the meeting of performance measurements or time based. For the first nine months of fiscal years 2023 and 2022, the Company used fair market value to determine the associated expense with stock awards.

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The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During the first nine months of fiscal 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 $5,000 and $131,000 in the third quarter of 2023 and the third quarter of 2022, respectively, and was approximately $(158,000) and $381,000 in the first nine months of fiscal years 2023 and 2022, respectively.

As of September 30, 2023, there were 889,992 shares of Company common stock reserved and available for future grant under the 2020 Plan.

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

	Nine Months Ended					Year Ended
	September 30, 2023					December 31, 2022
	Units			Weighted Average Exercise Price		Units			Weighted Average Exercise Price
Outstanding at beginning of period		146,166		$	23.22		180,833		$	22.88
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

SARs Outstanding and Exercisable
Range of Exercise Prices	Outstanding as of September 30, 2023		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Exercisable as of September 30, 2023		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price

$19.44 - $26.30		13,000		0.7	$	24.19		13,000		0.7	$	24.19

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

	Nine Months Ended			Year Ended
	September 30, 2023			December 31, 2022
	Shares			Shares
Outstanding at beginning of period		64,500			27,300
Issued		79,500			43,300
Exercised		(10,600	)		-
Forfeited		(47,300	)		(6,100	)
Outstanding at end of period		86,100			64,500

As of September 30, 2023, outstanding SARs and stock awards had an intrinsic value of $1,562,715.

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Note I – Share Repurchase Program

On August 21, 2023, the Company announced that the Board of Directors of the Company had approved a new share repurchase program authorizing the Company to repurchase up to 200,000 shares of the Company’s common stock through August 20, 2028. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.

Below is a summary of the Company’s shares repurchased during the third quarter of 2023 under the prior share repurchase program.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that may yet be Purchased Under the Plans or Programs
Balance as of July 1, 2023		139,716	$	24.61		139,716		60,284

July 2, 2023 – September 30, 2023		-		-		-		(60,284	)

Balance as of September 30, 2023		139,716	$	24.61		139,716		-

Below is a summary of the Company’s shares repurchased during the third quarter of 2023 under the new share repurchase program.

Period

Total Number of Shares Purchased

Average Price Paid Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

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

Balance as of July 1, 2023

July 2, 2023 – September 30, 2023

13,238

18.55

13,238

186,762

Balance as of September 30, 2023

13,238

18.55

13,238

186,762

Note J – Revenue Recognition

The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled. The Company records revenues in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers.” The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which are delivering goods or services, determines the transaction price, allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.

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Customer volume rebates, product returns, discount and allowance are variable considerations and are recorded as a reduction of revenue in the same period that the related sales are recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material.

The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.

Note K - Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state, and local income tax examinations by tax authorities for years before 2018 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2016.

The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for several reasons, including the closure of federal, state, and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the value of unrecognized tax benefits during the nine months ended September 30, 2023. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.

Note L - Retirement Benefit Plans

The Company has four non-contributory defined benefit pension plans covering most U.S. employees. Three of these pension plans are frozen and participants in these three plans have not accrued benefits since the date on which these plans were frozen. A fourth pension plan does not permit new participants but existing participants in this fourth pension plan continue to accrue benefits. Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law.

The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.

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

	Pension Benefits
	Three Months Ended						Nine Months Ended
	September 30, 2023			October 1, 2022			September 30, 2023			October 1, 2022
Service cost	$	216,153		$	269,744		$	648,459		$	809,231
Interest cost		990,053			608,188			2,970,160			1,824,568
Expected return on plan assets		(1,049,016	)		(1,460,658	)		(3,147,046	)		(4,381,980	)
Amortization of prior service cost		-			16,563			-			49,689
Amortization of the net loss		342,866			390,075			1,028,596			1,170,225
Net periodic benefit cost (benefit)	$	500,056		$	(176,088	)	$	1,500,169		$	(528,267	)

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	Other Postretirement Benefits
	Three Months Ended						Nine Months Ended
	September 30, 2023			October 1, 2022			September 30, 2023			October 1, 2022
Service cost	$	6,486		$	13,323		$	19,458		$	39,969
Interest cost		14,533			10,988			43,599			32,964
Expected return on plan assets		(4,849	)		(4,400	)		(14,547	)		(13,200	)
Amortization of prior service cost		1,060			1,060			3,180			3,180
Amortization of the net loss		(16,895	)		(2,054	)		(50,685	)		(6,162	)
Net periodic benefit cost	$	335		$	18,917		$	1,005		$	56,751

The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In fiscal year 2023, the Company expects to contribute approximately $1,300,000 into its pension plans and approximately $50,000 into its postretirement plan. As of September 30, 2023, the Company has contributed $800,000 to its pension plans, has contributed $32,000 to its postretirement plan, and expects to make the remaining contributions as required during the remainder of the fiscal year.

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion.

The Company made contributions to the plan as follows:

SEC Form 10-Q filed by Eastern Company