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 July 2, 2022

☐

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		(I.R.S. Employer
incorporation or organization)		Identification No.)

112 Bridge Street, Naugatuck, Connecticut		06770
(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 July 2, 2022, 6,217,164 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 JULY 2, 2022

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.

Table of Contents

PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

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

	Three Months Ended						Six Months Ended
	July 2, 2022			July 3, 2021			July 2, 2022			July 3, 2021
Net sales	$	69,540,054		$	61,247,592		$	138,554,702		$	123,021,025
Cost of products sold		(53,552,232	)		(47,270,990	)		(107,991,200	)		(93,535,153	)
Gross margin		15,987,822			13,976,602			30,563,502			29,485,872

Product development expense		(959,364	)		(1,088,380	)		(2,156,372	)		(2,105,942	)
Selling general and administrative expenses		(10,141,815	)		(9,375,537	)		(20,007,429	)		(18,319,931	)
Operating profit		4,886,643			3,512,685			8,399,701			9,059,999

Interest expense		(503,787	)		(434,147	)		(938,121	)		(961,291	)
Other income		511,810			525,124			1,000,330			2,951,873
Income from continuing operations before income taxes		4,894,666			3,603,662			8,461,910			11,050,581

Income tax expense		(1,193,877	)		(848,302	)		(2,075,002	)		(2,601,424	)
Net income from continuing operations		3,700,789			2,755,360			6,386,908			8,449,157

Discontinued Operations (see note B)
Gain from operations of discontinued operations		459,563			1,128,286			930,749			1,339,467
Loss on classification as held for sale					(10,583,078	)					(10,583,078	)
Income tax (expense) benefit		(123,737	)		2,225,658			(250,604	)		2,175,946
Gain (loss) from discontinued operations		335,826			(7,229,134	)		680,145			(7,067,665	)

Net income (loss)	$	4,036,615		$	(4,473,774	)	$	7,067,053		$	1,381,491

Earnings per share from continuing operations:
Basic	$	0.59		$	0.44		$	1.02		$	1.35

Diluted	$	0.59		$	0.44		$	1.02		$	1.35

Earnings (loss) per share from discontinued operations:
Basic	$	0.06		$	(1.15	)	$	0.11		$	(1.13	)

Diluted	$	0.06		$	(1.15	)	$	0.11		$	(1.13	)

Total earnings (loss) per share:
Basic	$	0.65		$	(0.71	)	$	1.13		$	0.22

Diluted	$	0.65		$	(0.71	)	$	1.13		$	0.22

Cash dividends per share:	$	0.11		$	0.11		$	0.22		$	0.22

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended						Six Months Ended
	July 2, 2022			July 3, 2021			July 2, 2022			July 3, 2021
Net income (loss)	$	4,036,615		$	(4,473,774	)	$	7,067,053		$	1,381,491
Other comprehensive income (loss):

Change in foreign currency translation		(1,173,177	)		363,848			(970,896	)		284,795

Change in fair value of interest rate swap, net of tax cost (benefit) of:
2022 - $93,659 and $427,294 respectively; 2021 - $26,535 and $157,036 respectively		296,588			84,030			1,353,099			497,275

Change in pension and postretirement benefit costs, net of taxes of:
2022 - $92,235 and $184,470 respectively; 2021 - $107,961 and $200,155 respectively		313,409			346,329			626,817			642,073
Total other comprehensive income (loss)		(563,180	)		794,207			1,009,020			1,424,143
Comprehensive income (loss)	$	3,473,435		$	(3,679,567	)	$	8,076,073		$	2,805,634

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	July 2, 2022			January 1, 2022
	(unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	7,106,344		$	6,168,304
Accounts receivable, less allowances: 2022 - $545,073; 2021 - $515,000		46,252,585			43,151,500
Inventories		67,689,722			62,862,342
Current portion of notes receivable		874,186			1,027,125
Prepaid expenses and other assets		8,191,519			6,943,691
Current assets held for sale		5,043,663			3,521,899
Total Current Assets		135,158,019			123,674,861

Property, Plant and Equipment		55,306,643			56,935,080
Accumulated depreciation		(29,248,062	)		(28,631,329	)
Property, Plant and Equipment, Net		26,058,581			28,303,751

Goodwill		72,114,853			72,211,873
Trademarks		5,489,068			5,409,720
Patents and other intangibles net of accumulated amortization		20,837,033			22,863,497
Long term notes receivable, less current portion		2,450,805			2,726,698
Right of Use Assets		12,833,246			11,138,535
Total Other Assets		113,725,005			114,350,323

TOTAL ASSETS	$	274,941,605		$	266,328,935

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	July 2, 2022			January 1, 2022
	(unaudited)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable	$	29,624,251		$	29,633,974
Accrued compensation		2,689,074			4,375,867
Other accrued expenses		1,602,455			4,808,000
Current portion of lease liability		3,019,573			2,664,895
Current portion of long-term debt		7,500,000			7,500,000
Current liabilities held for sale		1,097,757			580,990
Total Current Liabilities		45,533,110			49,563,726

Deferred income taxes		1,151,759			1,151,759
Other long-term liabilities		668,354			668,354
Lease liability		9,879,742			8,639,339
Long-term debt, less current portion		70,102,231			63,813,522
Accrued postretirement benefits		1,315,350			1,284,589
Accrued pension cost		25,993,583			26,605,382
Total Liabilities		154,644,129			151,726,671

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		33,034,627			32,620,008
Issued: 9,041,489 shares in 2022 and 9,029,852 shares in 2021
Outstanding: 6,217,164 shares in 2022 and 6,265,527 shares in 2021
Treasury Stock: 2,824,325 shares in 2022 and 2,764,325 shares in 2021		(22,330,991	)		(20,907,613	)
Retained earnings		135,117,576			129,422,625
Accumulated other comprehensive income (loss):
Foreign currency translation		(152,450	)		818,446
Unrealized gain (loss) on interest rate swap, net of tax		997,111			(355,988	)
Unrecognized net pension and postretirement benefit costs, net of tax		(26,368,397	)		(26,995,214	)
Accumulated other comprehensive loss		(25,523,736	)		(26,532,756	)
Total Shareholders’ Equity		120,297,476			114,602,264
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	274,941,605		$	266,328,935

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Six Months Ended
	July 2, 2022			July 3, 2021
Operating Activities
Net income	$	7,067,053		$	1,381,491
Less: gain (loss) from discontinued operations		680,145			(7,067,665	)
Income from continuing operations	$	6,386,908		$	8,449,156
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		3,632,317			3,531,159
Unrecognized pension and postretirement benefits		81,210			(1,722,275	)
Loss (gain) on sale of equipment and other assets		276,250			(1,555,983	)
Provision for doubtful accounts		39,437			73,097
Stock compensation expense		414,619			680,014
Changes in operating assets and liabilities:
Accounts receivable		(3,302,349	)		(3,343,695	)
Inventories		(5,237,113	)		(5,763,475	)
Prepaid expenses and other		(1,228,182	)		(3,057,099	)
Other assets		58,576			(143,156	)
Accounts payable		(100,497	)		6,047,550
Accrued compensation		(1,711,069	)		(144,509	)
Other accrued expenses		(1,812,968	)		1,215,384
Net cash (used in) provided by operating activities		(2,502,861	)		4,266,168

Investing Activities
Payments received from notes receivable		428,832			629,912
Proceeds from sale of equipment		1,371,073			2,044,167
Purchases of property, plant and equipment		(1,140,728	)		(1,810,434	)
Net cash provided by investing activities		659,177			863,645

Financing Activities
Proceeds from short term borrowings (revolver)		10,000,000			—
Principal payments on long-term debt		(3,767,866	)		(2,336,564	)
Financing leases, net		(126,547	)		169,765
Purchase common stock for treasury		(1,423,378	)		—
Dividends paid		(1,372,101	)		(1,375,509	)
Net cash provided by (used in) financing activities		3,310,108			(3,542,308	)

Discontinued Operations
Cash (used in) provided by operating activities		(717,668	)		1,261,868
Cash used in investing activities		-			(571,945	)
Cash (used in) provided by discontinued operations		(717,668	)		689,923

Effect of exchange rate changes on cash		(160,653	)		147,050
Net change in cash and cash equivalents		588,103			2,424,478

Cash and cash equivalents at beginning of period		6,602,429			16,101,635
Cash and cash equivalents at end of period ¹	$	7,190,532		$	18,526,113

Supplemental disclosure of cash flow information:
Interest	$	1,012,157		$	1,264,023
Income taxes		1,647,375			284,075

Non-cash investing and financing activities
Right of use asset		1,694,711			(484,797	)
Lease liability		(1,595,081	)		315,032

¹ includes cash from assets held for sale of $0.1 million as of July 2, 2022 and $1.6 million as of July 3, 2021

See accompanying notes

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THE EASTERN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

July 2, 2022

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 1, 2022, filed with the Securities and Exchange Commission on March 17, 2022 (the “2021 Form 10-K”), for additional information.

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

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2021 or the 2021 fiscal year mean the 52-week period ended on January 1, 2022, and references to 2022 or the 2022 fiscal year mean the 52-week period ending on December 31, 2022. In a 52-week fiscal year, each quarter has 13 weeks. References to the second quarter of 2021, the second fiscal quarter of 2021 or the three months ended July 3, 2021 mean the period from April 4, 2021 to July 3, 2021. References to the second quarter of 2022, the second fiscal quarter of 2022 or the three months ended July 2, 2022, mean the 13-week period from April 3, 2022 to July 2, 2022.

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

Note B – Discontinued Operations

In the second quarter of 2021, the Company determined that the companies included in our former Diversified Products segment no longer fit with our long-term strategy and the Company initiated the process of selling the companies within the Diversified Products segment. We believe that selling the companies within this segment will allow management to focus on our core capabilities and offerings.

The former Diversified Products segment met the criteria to be held for sale and furthermore, we determined that the assets held for sale qualify for discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.

On November 3, 2021, the Company sold its Greenwald Industries, Inc. division (“Greenwald”). Greenwald, located in Chester, CT, is an OEM manufacturer offering a range of payment solutions from coin-vending products to smart card systems and payment applications.

On November 22, 2021, the Company sold its Frazer & Jones Company division (“Frazer & Jones”). Frazer & Jones is a ductile and malleable iron foundry located in Syracuse, NY. Eastern has exited the mining business to focus on our three core businesses.

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Summarized Financial Information of Discontinued Operations

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

	Three Months Ended						Six Months Ended
	July 2, 2022			July 3, 2021			July 2, 2022			July 3, 2021
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net sales	$	2,473,201		$	13,693,457		$	4,840,427		$	25,017,899
Cost of products sold		(1,683,295	)		(11,139,886	)		(3,287,057	)		(21,044,606	)
Gross margin		789,906			2,553,571			1,553,370			3,973,293

Selling, general and administrative expenses		(289,497	)		(1,280,570	)		(546,557	)		(2,313,397	)
Restructuring costs					(10,583,078	)					(10,583,078	)
Operating income (loss)		500,409			(9,310,077	)		1,006,813			(8,923,182	)

Interest expense		(40,846	)		(144,715	)		(76,064	)		(320,429	)
Gain (Loss) from discontinued operations before income taxes		459,563			(9,454,792	)		930,749			(9,243,611	)

Income tax (expense) benefit		(123,737	)		2,225,658			(250,604	)		2,175,946
Income (loss) from discontinued operations, net of tax	$	335,826		$	(7,229,134	)	$	680,145		$	(7,067,665	)

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

	July 2, 2022		January 1, 2022
	(unaudited)
Cash	$	84,186	$	434,126
Accounts receivable		1,097,596		1,153,274
Inventory		3,031,820		1,258,032
Prepaid expenses		24,022		59,850
Property, plant and equipment, net		550,601		591,920
Right of use assets		255,438		24,697
Total assets of discontinued operations¹	$	5,043,663	$	3,521,899

Accounts payable	$	409,295	$	167,794
Accrued compensation and other accrued expenses		433,023		388,499
Current portion of lease liability		92,887		24,697
Other long-term liabilities		162,552		-
Total liabilities of discontinued operations¹	$	1,097,757	$	580,990

¹ The total assets and liabilities of discontinued operations are presented as current in the July 2, 2022 and January 1, 2022 balance sheets as we expect to sell the discontinued operations and collect proceeds within one year of the applicable balance sheet date.

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Note C – Earnings Per Share

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

Three Months Ended

Six Months Ended

July 2, 2022

July 3, 2021

July 2, 2022

July 3, 2021

Basic:

Weighted average shares outstanding

6,222,818

6,259,654

6,235,231

6,253,996

Diluted:

Weighted average shares outstanding

6,222,818

6,259,654

6,235,231

6,253,996

Dilutive stock appreciation rights

14,102

17,751

14,102

17,751

Denominator for diluted earnings per share

6,236,920

6,277,405

6,249,333

6,271,747

Note D – Inventories

Inventories from continuing operations consist of the following components:

	July 2, 2022		January 1, 2022

Raw material and component parts	$	27,042,024	$	25,113,487
Work in process		10,375,986		9,636,009
Finished goods		30,271,712		28,112,846
Total inventories	$	67,689,722	$	62,862,342

Note E - Goodwill

The aggregate carrying amount of goodwill from continuing operations is approximately $72.1 million as of July 2, 2022. No impairment was recognized in the second quarter of 2022.

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

Note F – Leases

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

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

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Currently, the Company has 25 operating leases and three finance leases with a lease liability of $13.2 million as of July 2, 2022. The finance lease arrangements are immaterial. 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.

Total lease expense for each of the next five fiscal years is estimated to be as follows: remainder of 2022 - $1.6 million; 2023 - $3.0 million; 2024 - $2.6 million; 2025 - $1.6 million; 2026 - $1.3 million; and $3.1 million thereafter. The weighted average remaining lease term is 5.8 years. The implicit interest rate used was 5.0%.

Note G - Debt

On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association and TD Bank, N.A. as lenders (the “Credit Agreement”), that included a $100 million term portion and a $20 million revolving commitment portion. Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with People’s United Bank, N.A. (approximately $19 million) and to acquire certain subsidiaries of Big 3 Holdings, LLC (collectively “Big 3 Precision”). The term portion of the loan required quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increased to $1,875,000 per quarter beginning September 30, 2021 and continuing through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023 and continuing through June 30, 2024. The term loan is a 5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. As of July 2, 2022, the Company has borrowed $10,000,000 on the revolving commitment portion of the facility at an interest rate of 2.59%. The term loan bears interest at a variable rate based on the LIBOR rate plus an applicable margin of 1.25% to 2.25%, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.25% to 1.25% or the LIBOR rate plus an applicable margin of 1.25% to 2.25%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019, with Santander Bank, N.A., as administrative agent.

The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. The Company was in compliance with all of its covenants under the Credit Agreement on July 2, 2022, and through the date of filing this Form 10-Q.

On August 30, 2019, the Company entered an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On July 2, 2022, the interest rate for approximately half ($25.9 million) of the term portion was 2.81%, using a one-month LIBOR rate, and 3.19% on the remaining balance ($41.9 million) of the term loan based on a one-month LIBOR rate.

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

On July 27, 2017, the Financial Conduct Authority (the “FCA”) (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. In December 2020, the ICE Benchmark Administration (the “IBA”) announced a market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023, which the FCA supports. On March 5, 2021, the IBA released its feedback statement reporting the results of the market consultation. Pursuant to its feedback statement, the IBA ceased publication of all settings of non-US dollar LIBOR and only the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings scheduled to be discontinued after June 30, 2023. The Alternative Reference Rates Committee (ARRC), a financial industry group convened by the Federal Reserve Board, has recommended the use of a secured overnight financing rate (“SOFR”) to replace LIBOR. In addition, on March 15, 2022, the Adjustable Interest Rate Act (the “LIBOR Act”) was signed into law, which provided a replacement framework for outstanding financial contracts tied to LIBOR once LIBOR ceases to be published. The LIBOR Act provides a statutory mechanism and safe harbor that applies on a nationwide basis to replace LIBOR with a benchmark rate, selected by the Federal Reserve Board based on SOFR, for certain contracts that reference LIBOR and contain no or insufficient fallback provisions. The LIBOR Act preempts and supersedes any state or local law, statute, rule, regulation or standard relating to the selection or use of a benchmark replacement or related changes and allows parties that already have effective fallback provisions to opt out of the legislation. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate which has implications for how interest and other payments are based. Changes in the method of calculating the replacement of LIBOR with an alternative rate or benchmark are still in flux, and once an alternate rate is adopted, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect the Company’s results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks at this time.

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Note H - Stock Options and Awards

The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers, other key employees, and non-employee directors expired in February 2020. On February 19, 2020, the Board of Directors of the Company (the “Board”) adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”). On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The 2020 Plan replaced the 2010 Plan. The Company has no other existing plan pursuant to which equity awards may be granted.

Incentive stock options granted under the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Board. Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Board. During the first six months of fiscal 2022, the Company granted 43,300 stock awards that were subject to the meeting of performance measurements. The Company granted 27,300 stock awards in the first six months of fiscal 2021 that were subject to the meeting of performance measurements. For the first six months of fiscal 2022, the Company used assumptions which included an expected term of 4.0 years, volatility deviation between 47.15% to 47.70% and a risk-free rate between 2.04% to 2.66% for the purposes of measuring compensation under the Black Scholes Method. For the first six months of fiscal 2021, the Company used several assumptions which included an expected term of 4.0 years, volatility deviation between 47.25% to 48.55% and a risk-free rate between 0.18% to 0.35% for the purposes of measuring compensation under the Black Scholes Method.

The 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 six months of fiscal 2022 and 2021 the Company did not issue any SARs.

Stock-based compensation expense in connection with SARs previously granted to employees was approximately $136,000 and $100,000 in the second quarter of 2022 and the second quarter of 2021, respectively and was approximately $250,000 and $214,000 in the first six months of fiscal years 2022 and 2021, respectively.

As of July 2, 2022, there were 766,433 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:

	Six Months Ended					Year Ended
	July 2, 2022					January 1, 2022
	Units			Weighted Average Exercise Price		Units			Weighted Average Exercise Price
Outstanding at beginning of period		180,833		$	22.88		244,001		$	21.87
Issued		-			-		-			-
Exercised		(16,667	)		21.20		(55,668	)		19.31
Forfeited		(13,000	)		21.14		(7,500	)		21.20
Outstanding at end of period		151,166			25.04		180,833			22.88

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SARs Outstanding and Exercisable
Range of Exercise Prices	Outstanding as of July 2, 2022		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Exercisable as of July 2, 2022		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price

$20.20 - $26.30		151,166		1.6	$	25.04		120,166		1.1	$	23.52

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

	Six Months Ended			Year Ended
	July 2, 2022			January 1, 2022
	Units			Units
Outstanding at beginning of period		27,300			25,000
Issued		43,300			27,300
Exercised		-			-
Forfeited		(5,300	)		(25,000	)
Outstanding at end of period		65,300			27,300

As of July 2, 2022, outstanding SARs and stock awards had an intrinsic value of $1,337,000.

Note I – Share Repurchase Program

On May 2, 2018, the Company announced that the Board of Directors of the Company had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific price per share. Under this program, shares of common stock may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Below is a summary of the Company’s share repurchases during the second quarter of 2022.

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 April 2, 2022

99,834

25.73

99,834

100,166

April 3, 2022 - July 2, 2022

29,762

22.06

29,762

(29,762

)

Balance as of July 2, 2022

129,596

24.89

129,596

70,404

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Note J – Revenue Recognition

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

Customer volume rebates, product returns, discount and allowance are variable consideration 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 2017 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2015.

The total amount of unrecognized tax benefits could increase or decrease within the next 12 months following July 2, 2022 for several reasons, including the closure of federal, state, and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the value of unrecognized tax benefits during the six months ended July 2, 2022. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months following July 2, 2022.

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 six months 2022 and 2021 are as follows:

	Pension Benefits
	Three Months Ended						Six Months Ended
	July 2, 2022			July 3, 2021			July 2, 2022			July 3, 2021
Service cost	$	269,743		$	271,835		$	539,487		$	543,668
Interest cost		608,191			504,254			1,216,380			1,008,509
Expected return on plan assets		(1,460,661	)		(1,448,675	)		(2,921,322	)		(2,897,349	)
Amortization of prior service cost		16,563			24,845			33,126

SEC Form 10-Q filed by Eastern Company