EML US Equity☆

ITEM 7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s fiscal year ends on the Saturday nearest to December 31. Fiscal year 2021 was 52 weeks in length and fiscal year 2020 was 53 weeks in length. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to results for “2021” or “fiscal year 2021” mean the fiscal year ended January 1, 2022, and references to results for “2020” or “fiscal year 2020” mean the fiscal year ended January 2, 2021. References to the “fourth quarter of 2021” or the “fourth fiscal quarter of 2021” mean the thirteen-week period from October 3, 2021 to January 1, 2022, and references to the “fourth quarter of 2020” or the “fourth fiscal quarter of 2020” mean the thirteen-week period from October 4, 2020 to January 2, 2020.

The following analysis excludes discontinued operations.

Summary

Sales for 2021 were $246.5 million compared to $197.6 million for 2020. Net income for 2021 was $16.2 million, or $2.58 per diluted share, compared to $11.0 million, or $1.76 per diluted share, for 2020. Sales for the fourth quarter of 2021 were $59.6 million compared to $50.6 million for the same period in 2020. Net income for the fourth quarter of 2021 was $3.9 million, or $0.62 per diluted share compared to $3.2 million, or $0.50 per diluted share, for the comparable 2020 period.

During 2021, the Company experienced rising material costs, supply chain disruption, labor shortages and abnormally high freight costs all having a negative impact on our gross margin. Despite all these challenges, demand for our products are at an all-time high. The Company’s backlog was $82.8 million on January 1, 2022, compared to $64.7 million on January 2, 2021, primarily due to an increase of $10.1 million in backlog for locks and hardware at Eberhard due to new product launches and an increase of $8.5 million in backlog related to the launch of new mirror programs for Class 8 trucks being awarded to our Velvac subsidiary.

During 2021 the Company experienced price increases for many of the raw materials used in producing its products, including: scrap iron, stainless steel, hot and cold rolled steel, zinc, copper, aluminum, and nickel. These increases could negatively impact the Company’s gross margin if raw material prices increase too rapidly for the Company to recover those cost increases through either price increases to our customers or cost reductions in other areas of the business.

Critical Accounting Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Areas of uncertainty that require judgments, estimates and assumptions include items such as the accounting for derivatives; environmental matters; the testing of goodwill and other intangible assets for impairment; proceeds on assets to be sold; pensions and other postretirement benefits; leases; and tax matters. Management uses historical experience and all available information to make its estimates and assumptions, but actual results will inevitably differ from the estimates and assumptions that are used to prepare the Company’s financial statements at any given time. Despite these inherent limitations, management believes that Management’s Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and related footnotes provide a meaningful and fair presentation of the Company’s financial position and results of operations.

Management believes that the application of these estimates and assumptions on a consistent basis enables the Company to provide the users of the financial statements with useful and reliable information about the Company’s operating results and financial condition.

Allowance for Doubtful Accounts

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 that the Company has 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 a change in its 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.

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Inventory

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 while Big 3 Precision and Velvac are valued on a first-in, first-out (“FIFO”) method. Accordingly, a LIFO valuation reserve is calculated using the dollar value link chain method.

We review the net realizable value of inventory in detail on an ongoing basis, considering deterioration, obsolescence, and other factors. Based on these assessments, we provide for an inventory reserve in the period in which an impairment is identified. The reserve fluctuates with market conditions, design cycles, and other economic factors.

Goodwill and Other Intangible Assets

Intangible assets with finite useful lives are generally amortized on a straight-line basis over the periods benefited. Goodwill and other intangible assets with indefinite useful lives are not amortized. The Company performed its annual qualitative assessment as of the end of fiscal 2021 on the carrying value of goodwill and determined that it is more likely than not that no impairment of goodwill existed at the end of 2021. See Note 4 – Accounting Policies –Goodwill, in Item 8, Financial Statements and Supplementary Data for more detail. The Company will perform annual qualitative assessments in subsequent years as of the end of each fiscal year. Additionally, the Company will perform an interim analysis whenever conditions warrant.

Pension and Other Postretirement Benefits

The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions about such factors as expected return on plan assets, discount rates at which liabilities could be settled, rate of increase in future compensation levels, mortality rates, and trends in health insurance costs. These assumptions are reviewed annually and updated as required. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, affect the expense recognized and obligations recorded in future periods.

The discount rate used is based on a single equivalent discount rate derived 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. The Company calculates its service and interest costs in future years by applying the specific spot rates along the selected yield curve to the relevant projected cash flows.

The expected long-term rate of return on assets is also developed with input from the Company’s actuarial firms. We consider the Company’s historical experience with pension fund asset performance, the current and expected allocation of our plan assets and expected long-term rates of return. The long-term rate-of-return assumption used for determining net periodic pension expense was 7.5% for 2021 and 2020. The Company reviews the long-term rate of return each year.

Future actual pension income and expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company’s pension plans.

The Company expects to make cash contributions of approximately $300,000 and $50,000 to our pension plans and other postretirement plan, respectively, in 2022.

In connection with our pension and other postretirement benefits, the Company reported income of $2.1 million and an expense of $5.7 million (net of tax) on its Consolidated Statement of Comprehensive Income for fiscal years 2021 and 2020, respectively. The main factor driving this expense was the change in the discount rate during the applicable period.

Assumptions used to determine net periodic pension benefit cost for the fiscal years indicated were as follows:

Expected return on plan assets 7.5 % 7.5 %

Rate of compensation increase 0.0 % 0.0 %

Assumptions used to determine net periodic other postretirement benefit cost are the same as those assumptions used for the pension benefit cost, except that the rate of compensation is not applicable for other postretirement benefit cost.

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The changes in assumptions had the following effect on the net periodic pension and other postretirement costs recorded in Other Comprehensive Income as follows:

Year ended

January 1, January 2,

Additional recognition due to significant event (71,547 ) --

Amortization of:

The Plan has been investing a portion of the assets in long-term bonds to better match the impact of changes in interest rates on its assets and liabilities and thus reduce some of the volatility in Other Comprehensive Income. Please refer to Note 11 – Retirement Benefit Plans in Item 8, Financial Statements and Supplementary Data of this Form 10-K for additional disclosures concerning the Company’s pension and other postretirement benefit plans.

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RESULTS OF OPERATIONS

Fourth Quarter 2021 Compared to Fourth Quarter 2020

The following table shows, for the fourth quarter of 2021 and 2020, selected line items from the consolidated statements of income as a percentage of net sales for the Company’s operations. The Company’s continuing operations include (1) Big 3 Precision, including Big 3 Products and Big 3 Mold, Hallink Moulds, and Associated Toolmakers; (2) Eberhard Manufacturing, Eberhard Hardware, Eastern Industrial Ltd., Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries Ltd.; and (3) Velvac Holdings.

Three Months Ended

Cost of Products Sold 79.8 % 77.3 %

Product Development Expense 1.7 % 0.7 %

Selling and Administrative Expense 12.5 % 13.7 %

Goodwill Impairment Loss -- 1.9 %

Restructuring Costs -- 1.3 %

Operating Profit 6.0 % 5.1 %

Net sales in the fourth quarter of 2021 increased 18% to $59.6 million from $50.6 million in the fourth quarter of 2020. Sales increases were due to higher demand for trucks accessories, distribution products and automotive returnable packaging and improved pricing. Sales volume of existing products increased 6%, prices and new products contributed 12% in sales growth in the fourth quarter of 2021 when compared to sales in the fourth quarter of 2020. New products included various truck, mirrors, latches, and accessories.

Sales of new products contributed 8% to sales growth in the fourth quarter compared to 4% sales growth from new products in the fourth quarter of 2020. New products in the fourth quarter included various new truck mirrors and truck latches.

Cost of products sold in the fourth quarter of 2021 increased $8.5 million or 22% from the corresponding period in 2020. The increase in cost of products sold is primarily attributable to increased sales volume, increases in the cost of materials, and increases in freight costs due to expedite fees associated with supply chain constraints. During the fourth quarter of 2021, material costs have begun to decrease from the third quarter of 2021 levels with costs for hot rolled steel decreasing 16% and costs for cold roll steel decreasing by 7%. Material costs increased over the third quarter of 2021 for aluminum, copper, nickel, and zinc which increased by 2%, 4%, 5% and 15%, respectively.

Gross margin as a percentage of net sales for the fourth quarter of 2021 was 20% compared to 23% in the prior year fourth quarter. The decrease reflects the combination of higher material and freight costs.

Product development expenses in the fourth quarter of 2021 of $1.0 million were up 192% when compared to the fourth quarter of 2020. As a percentage of net sales, product development costs were 1.7% and 0.7% for the fourth quarter of 2021 and 2020 respectively as part of our investment in new products at Eberhard and Velvac.

Selling and administrative expenses in the fourth quarter of 2021 increased 8% compared to the fourth quarter of 2020. The increase was primarily the result of increased payroll and payroll related expenses, increased travel, and other expenses as business returned to more normal operations in 2021.

Goodwill impairment expense of $1.0 million was incurred in the fourth quarter of 2020 as the Company announced the closure of Eberhard Hardware in Ontario, Canada.

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Restructuring expenses of $0.7 million were incurred in the fourth quarter of 2020 due to severance expenses related to the closure of Eberhard Hardware in Ontario Canada.

Net income for the fourth quarter of 2021 increased 24% to $3.9 million, or $0.62 per diluted share, from $3.2 million, or $0.50 per diluted share, in 2020. In the fourth quarter of 2020, net income was negatively impacted by non-cash goodwill impairment charges of $0.7 million, net of tax, and non-recurring restructuring, factory relocation, and transaction costs of $0.9 million net of tax.

Fiscal Year 2021 Compared to Fiscal Year 2020

The following table shows, for fiscal year 2021 and fiscal year 2020, selected line items from the consolidated statements of income as a percentage of net sales for the Company’s operations. The Company’s continuing operations include (1) Big 3 Precision, including Big 3 Products, Big 3 Mold, Hallink Moulds and Associated Toolmakers Ltd.; (2) Eberhard Manufacturing Company, Eberhard Hardware, Eastern Industrial Ltd., Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd. and World Security Industries Ltd.; and (3) Velvac Holdings.

Fiscal Year Ended

Cost of Products Sold 77.0 % 75.7 %

Product Development Expense 1.6 % 1.4 %

Selling and Administrative Expense 14.3 % 15.3 %

Goodwill Impairment Loss -- 0.5 %

Restructuring Costs -- 0.3 %

Operating Profit 7.1 % 6.8 %

Summary

Net sales for 2021 increased 25% to $246.5 million from $197.6 million in 2020. The sales increase was due to higher demand for trucks accessories, distribution products and automotive returnable packaging. Sales volume of existing products increased by 15% in 2021 compared to 2020 while price increases and new products increased sales in 2021 by 10%. Sales of new products contributed 8% to sales growth in 2021 compared to 4% sales growth from new products in 2020. New products in 2021 included various new truck mirrors, truck compression latches, cable locks, and locking assemblies.

Cost of products sold increased by $40.2 million or 27% to $189.8 million in 2021 from $149.5 million in 2020. The increase in cost of products sold is primarily attributable to increased sales volume, increases in the price of materials, and increases in freight costs due to expedite fees associated with supply chain constraints. Material costs have increased substantially over prior year for hot rolled steel by 75%; cold rolled steel by 94%; aluminum by 66%; copper by 36%, nickel by 27% and zinc by 31%. Many of our supply contracts contain price adjustment clauses when material cost increase by a certain percentage. Tariffs incurred during 2021 were $2.9 million from China-sourced products as compared to $2.6 million in 2020. Most of the tariffs were recovered through price increases.

Gross margin as a percentage of sales was 23% in 2021 compared to 24% in 2020. The decrease reflects the combination of higher material and freight costs.

Product development expenses as a percentage of sales increased to 1.6% 2021 from 1.4% in 2020. The increase reflects the Company’s on-going efforts to continue developing new products to better serve our customers.

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Selling and administrative expenses increased $5.0 million or 17% to $35.2 million in 2021 from $30.2 million in 2020. The increase relates to increased payroll and payroll related costs, increased travel, and other expenses as our businesses returned to more normal operations in 2021.

Net income for 2021 increased by 47% to $16.2 million, or $2.58 per diluted share, from $11.0 million, or $1.76 per diluted share, in 2020. In 2021, net income was positively impacted by a $1.4 million gain, net of tax, related to the sale of the Eberhard Hardware property in the first quarter, partially offset by one-time factory relocation and start-up costs of $0.5 million, net of tax. Net income for 2020 was adversely impacted by non-cash goodwill impairment charges of $0.7 million, net of tax and non-recurring restructuring, factory relocation, and transaction costs of $1.3 million, net of tax.

Other Items

The following table shows the amount of change from the year ended January 2, 2021 as compared to the year ended January 1, 2022 in other items (dollars in thousands):

Amount %

Interest expense $ (311 ) -15 %

Interest expense decreased in 2021 from 2020 due to principal payments made on long-term debt.

Other income in 2021 increased $1.6 million over 2020. Other income in 2021 included a favorable $1.5 million pension cost adjustment and a $1.8 million gain on the sale of the Eberhard Hardware property. In 2020, other income included a favorable $1.2 million pension cost adjustment and a $0.4 million gain on a sale/leaseback transaction.

The effective tax rate for 2021 was 8% compared to the 2020 effective tax rate of 10%. The effective tax rate for 2021 was reduced due to the impact of foreign subsidiaries on the effective tax rate and the R&D credit. Total income taxes paid were $2.3 million in 2021 and $3.8 million in 2020.

Liquidity and Sources of Capital

The primary source of the Company’s cash is earnings from operating activities adjusted for cash generated from or used for net working capital. The most significant recurring non-cash items included in net income are depreciation and amortization expense. Changes in working capital fluctuate with the changes in operating activities. As sales increase, there generally is an increased need for working capital. The Company closely monitors inventory levels and attempts to match production to expected market demand, keeping tight control over the collection of receivables, and optimizing payment terms on its trade and other payables.

The Company is dependent on continued demand for its products and subsequent collection of accounts receivable from its customers. The Company serves a broad base of customers and industries with a variety of products. As a result, any fluctuations in demand or payment from a particular industry or customer should not have a material impact on the Company’s sales and collection of receivables. Management expects that the Company’s foreseeable cash needs for operations, capital expenditures, debt service and dividend payments will continue to be met by the Company’s operating cash flows and available credit facility.

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The following table shows key financial ratios at the end of each fiscal year:

Current ratio 2.5 2.8

Average days’ sales in accounts receivable 64 56

Inventory turnover 3.0 3.5

Ratio of working capital to sales 27.2 % 36.0 %

Total debt to shareholders’ equity 62.2 % 85.1 %

The following table shows important liquidity measures as of the fiscal year-end balance sheet date for each of the preceding two years (in millions):

Cash and cash equivalents

- Held in the United States $ 4.3 $ 10.0

- Held by foreign subsidiaries 2.3 6.1

Net cash (used in) provided by operating activities (7.8 ) 14.6

Net cash provided by (used in) in investing activities 13.6 (8.4 )

Net cash used in by financing activities (20.3 ) (13.2 )

All cash held by foreign subsidiaries is readily convertible into other currencies, including the U.S. dollar.

Net cash used in by operating activities was $7.8 million in 2021 compared to $14.6 million net cash provided by operating activities in 2020. In 2021 the Company contributed $2.3 million to its defined benefit retirement plan.

In 2021, cash used to support additional working capital requirements was $22.9 million, which was primarily due to management’s focus on ensuring availability of inventory to meet customer demands during the current supply chain constraints. In 2020, cash used to support additional working capital requirements was $5.6 million.

The Company provided $13.6 million and used $8.4 million for investing activities in 2021 and 2020, respectively. In 2021 the company sold businesses associated with its discontinued operations for $17.3 million and one of its buildings for $1.7 million, the Company also issued a note receivable of $2.5 million as part of the sale of the discontinued operations. In 2020 the Company invested $7.2 million to acquire Hallink Moulds and received $3.2 million for divestures of subsidiaries and equipment. The Company issued notes receivable of $2.2 million as part of the sale of its subsidiaries. These transactions are more fully discussed in Note 2 to the 2021 Consolidated Financial Statements located in Item 8 of this Form 10-K. The Company invested in capital expenditures of $3.7 million and $2.3 million in 2021 and 2020, respectively. Capital expenditures in fiscal year 2022 are expected to be approximately $5.3 million.

In 2021, the Company made total debt payments of $17.3 million, of which $11.0 million was an accelerated principal payment, and used $2.8 million for payment of dividends. The Company did not draw down on its $20.0 million revolving credit facility in 2021. On January 11, 2022, the Company drew down $5.0 million on its revolving credit facility to support ongoing working capital requirements brought on by current supply chain constraints. The Company has $15.0 million available on its revolving line of credit. See Note 7 - Debt for further discussion on the Company’s debt facilities.

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In 2020, the Company made total debt payments of $10.0 million, of which $5.0 million was an accelerated principal payment, and used $2.8 million for payment of dividends. The Company did not draw down on its $20.0 million revolving credit facility in 2020.

The Company leases certain equipment and buildings under cancelable and non-cancelable operating leases that expire at various dates up to five years. Rent expense amounted to approximately $2.3 million in 2021 and $1.9 million in 2020.

On August 30, 2019, the Company entered into the Credit Agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association and TD Bank, N.A. as lenders, that included a $100.0 million term portion and a $20.0 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 $19.0 million) and to acquire Big 3 Precision. The term portion of the loan requires quarterly principal payments of $1.25 million for an 18-month period beginning December 31, 2019. The repayment amount then increases to $1.875 million per quarter beginning September 30, 2021 and continues through June 30, 2023. The repayment amount then increases to $2.5 million per quarter beginning September 30, 2023 and continues through June 30, 2024. The term loan is a five-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. During 2021 and 2020, the Company did not borrow any funds on the revolving commitment portion of the facility. The interest rates on the term and revolving credit portion of the Credit Agreement vary. The interest rates may vary based on the LIBOR rate plus a margin spread of 1.25% to 2.25%. 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 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 will be required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50.0 million, 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 January 2, 2021, the interest rate for half ($27.8 million) of the term portion was 1.6%, using a one-month LIBOR rate, and 3.19% on the remaining balance ($43.8 million) of the term loan based on a one-month LIBOR rate.

The interest rates on the Credit Agreement, and interest rate swap contract are susceptible to changes to the method that LIBOR rates are determined and to the potential phasing out of LIBOR after 2021. Information regarding the potential 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 intends to cease 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 being 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 SOFR to replace LIBOR. 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 a fallback rate (effectively SOFR plus a spread adjustment) will become effective in June 2023 unless adopted earlier. The effect of this change is still unknown and could adversely affect the Company’s results of operations, cash flow, and liquidity.

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Non-GAAP Financial Measures

The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).

To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable U.S. GAAP financial measures, such as net sales, net income, diluted earnings per common share, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

Adjusted Net Income from Continuing Operations is defined as net income from continuing operations excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of property, factory start-up costs, factory relocation expenses and restructuring costs. Adjusted Net Income from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

Adjusted Earnings Per Share from Continuing Operations is defined as diluted earnings per share from continuing operations excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, factory start-up costs, factory relocation expenses and restructuring costs. We believe that Adjusted Earnings Per Share from Continuing Operations provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis.

Adjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization and excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, factory start-up costs, factory relocation expenses and restructuring expenses. Adjusted EBITDA from Continuing Operations is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

Management uses such measures to evaluate performance period over period, to analyze the underlying trends in our business including our business operations, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. These financial measures should not be considered in isolation from, or as a replacement for, U.S. GAAP financial measures.

We believe that presenting non-GAAP financial measures in addition to U.S. GAAP financial measures provides investors greater transparency to the information used by our management for its financial and operational decision-making. We further believe that providing this information better enables our investors to understand our operating performance and to evaluate the methodology used by management to evaluate and measure such performance.

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Reconciliation of Non-GAAP Measures

Adjusted Net Income and EPS from Continuing Operations Calculation

For the Three and Twelve Months ended January 1, 2022 and January 2, 2021

Three Months Ended Twelve Months Ended

Adjustments:

Goodwill impairment loss, net of tax 715 A 715 A

Gain on sale of Eberhard Hardware property, net of tax (1,353 ) B

Factory relocation, net of tax 300 C 105 F 475 C

Factory start-up costs, net of tax 161 G 348 G

Restructuring costs, net of tax 489 D 489 D

Transaction expenses 96 E 300 E

Adjusted earnings per share from continuing operations (Non-GAAP):

A) Goodwill impairment

B) Gain on sale of Eberhard Hardware Ltd property

C) Cost incurred on relocation of Velvac factory in Reynosa, MX

D) Costs incurred on announced reorganization of Eberhard Hardware

E) Cost incurred in the acquisition of Hallink RSB, Inc.

F) Costs incurred on relocation of ILC facility in Wheeling, IL

G) Costs incurred on start-up of Eberhard factory in Reynosa, MX

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Reconciliation of Non-GAAP Measures

Adjusted EBITDA from Continuing Operations Calculation

For the Three and Twelve Months ended January 1, 2022 and January 2, 2021

Three Months Ended Twelve Months Ended

Goodwill impairment loss 973 A 973 A

Gain on sale of Eberhard Hardware property (1,841 )B

Factory start-up costs 215 G 465 G

Restructuring costs 666 D 666 D

Transaction expenses 96 E 300 E

A) Goodwill impairment

B) Gain on sale of Eberhard Hardware property

C) Cost incurred on relocation of Velvac factory in Reynosa, MX

D) Costs incurred on announced reorganization of Eberhard Hardware

E) Cost incurred in the acquisition of Hallink RSB, Inc.

F) Costs incurred on relocation of ILC facility in Wheeling, IL

G) Costs incurred on start-up of Eberhard factory in Reynosa, MX

ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of the Company’s status as a smaller reporting company pursuant to Rule 12b-2 of the Exchange Act, the Company is not required to provide information under this Item 7A.

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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Eastern Company

Consolidated Balance Sheets

January 1, January 2,

ASSETS

Current Assets

Inventories:

Property, Plant and Equipment

Other Assets

Long-term assets held for sale - 15,783,701

See accompanying notes.

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January 1, January 2,

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities

Long-term liabilities held for sale - 76,995

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

Accumulated other comprehensive loss:

Unrealized (loss) gain on interest rate swap, net of tax (355,988 ) (1,391,592 )

See accompanying notes.

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Consolidated Statements of Income

Year Ended

January 1, January 2,

Goodwill impairment loss - (972,823 )

Restructuring costs - (665,861 )

Discontinued Operations (see note 3)

Gain (loss) from operations of discontinued units $ 2,870,588 $ (7,191,198 )

Loss on sale of businesses (11,807,512 ) -

Earnings per Share from continuing operations:

Loss per Share from discontinued operations:

Total Earnings per Share:

Cash dividends per share: $ 0.44 $ 0.44

See accompanying notes.

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Consolidated Statements of Comprehensive Income

Year Ended

January 1, January 2,

Other comprehensive income:

Change in fair value of interest rate swap,

Change in pension and other postretirement benefit costs,

See accompanying notes.

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CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Accumulated

Other

Common Common Treasury Treasury Retained Comprehensive Shareholders'

Shares Stock Shares Stock Earnings Income (Loss) Equity

Cash dividends declared,

Change in fair value of interest

Change in pension and other

postretirement benefit costs,

Issuance of Common Stock

Cash dividends declared,

Change in fair value of interest

Change in pension and other

postretirement benefit costs,

Issuance of Common Stock

See accompanying notes.

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Consolidated Statements of Cash Flows

Year Ended

Operating Activities

Adjustments to reconcile net income to net cash provided

by (used in) operating activities:

Loss on disposition of subsidiaries - (192,466 )

Unrecognized pension and postretirement benefits (4,032,917 ) (1,010,684 )

Gain on sale of equipment and other assets (2,470,339 ) (333,590 )

Changes in operating assets and liabilities:

Investing Activities

Business acquisition, net of cash acquired - (7,172,868 )

Proceeds from sale of businesses 17,030,726 -

Financing Activities

Discontinued Operations

Supplemental disclosure of cash flow information:

Non-cash investing and financing activities

1 includes cash from assets held for sale of $0.4 million as of January 1, 2022 and $0.8 million as of January 2, 2021

See accompanying notes

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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”) manages 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), a wholly owned subsidiary in Reynosa, Mexico and a wholly owned subsidiary in Wrexham, United Kingdom.

Company Operations

The Company’s operations consist of Big 3 Precision, including Big 3 Precision Products, Inc. (“Big 3 Products”) and Big 3 Mold Services, Inc. (“Big 3 Mold”), Hallink Moulds, Inc. (“Hallink Moulds”), and Associated Toolmakers Ltd. (“Associated Toolmakers”); 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.

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Notes to Consolidated Financial Statements (continued)

2. BUSINESS ACQUISITIONS

Hallink Moulds, Inc.

Effective August 10, 2020 the Company acquired certain assets, including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights and rights existing under all sales and purchase agreements, and assumed certain liabilities, of Hallink, RSB Inc. These assets are held in our subsidiary, Hallink Moulds. Hallink Moulds produces injection blow mold tooling and is a supplier of blow molds and change parts to the food, beverage, healthcare and chemical industry. Hallink Moulds 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.

The cost of the acquisition of Hallink Moulds was approximately $7,173,000.

The above acquisition was accounted for under ASU 2014-18, Business Combinations (Topic 805). The acquired business is included in the consolidated operating results of the Company from the effective date of the acquisition. The excess of the cost of Hallink Moulds over the fair market value of the net assets acquired of $2,302,000 has been recorded as goodwill. An independent third party was utilized to establish the fair market value of net assets acquired.

In connection with the above acquisition, the Company recorded the following intangible assets:

Asset Class/Description Amount Weighted-Average Useful Lives in Years

There is no anticipated residual value relating to these intangible assets.

3. DISCONTINUED OPERATIONS

We determined that the companies previously included in our former Diversified Products segment no longer fit with our long-term strategy and have initiated the process of selling the companies within the former Diversified Products segment. Selling these companies 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 qualified for discontinued operations. As such, the financial results of the former Diversified Products segment are reflected in our 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 condensed consolidated balance sheets for both periods presented.

On November 3, 2021, the Company sold its Greenwald Industries, Inc. division (“Greenwald”) for a sales price of $8.0 million, subject to a final working capital adjustment. 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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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

Loss from discontinued operations before income taxes (8,936,924 ) (7,191,198 )

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Notes to Consolidated Financial Statements (continued)

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

Patents and other intangibles net of accumulated amortization - 6,935

Non-current assets of discontinued operations - 15,783,701

Accrued compensation and other accrued expenses 388,499 937,911

Note payable, current - 22,164

Other long-term liabilities - 76,995

Total liabilities of discontinued operations $ 580,990 $ 3,329,540

Non-current liabilities of discontinued operations - 76,995

Total liabilities of discontinued operations $ 580,990 $ 3,329,540

4. ACCOUNTING POLICIES

Fiscal Year

The Company’s year ends on the Saturday nearest to December 31. Based on this policy, fiscal year 2021 was comprised of 52 weeks and fiscal 2020 included 53 weeks. References in these Notes to the consolidated financial statements to “2021” or “fiscal year 2021” mean the fiscal year ended January 1, 2022, and references to “2020” or “fiscal year 2020” mean the fiscal year ended January 2, 2021. References to the “fourth quarter of 2021” or the “fourth fiscal quarter of 2021” mean the thirteen-week period from October 3, 2021 to January 1, 2022, and references to the “fourth quarter of 2020” or the “fourth fiscal quarter of 2020” mean the thirteen-week period from October 4, 2020 to January 2, 2021.

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Notes to Consolidated Financial Statements (continued)

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.

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 38% 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 January 1, 2022 and January 2, 2021, the Company’s allowance for doubtful accounts total was $515,000 and $487,000, respectively. As of January 1, 2022, and January 2, 2021, the Company’s bad debt expense was $48,000 and $253,000 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 in the U.S. ($23.4 million for U.S. inventories at January 1, 2022, excluding Big 3 Precision and Velvac) and by the first-in, first-out (FIFO) method for inventories outside the U.S. ($4.5 million for inventories outside the U.S. at January 1, 2022) and for Big 3 Precision and Velvac. Cost exceeds the LIFO carrying value by approximately $3.6 million at January 1, 2022 and $2.9 million at January 2, 2021. There was no material LIFO quantity liquidation in 2021 or 2020. In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete inventory.

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Notes to Consolidated Financial Statements (continued)

Property, Plant and Equipment and Related Depreciation

Property, plant, and equipment (including equipment under capital lease) are stated at cost. Depreciation expense ($3,255,894 in 2021, $3,208,206 in 2020) 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.

Impairment of Long-Lived Assets

In accordance with 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 the that 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 of 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 January 1, 2022 and January 2, 2021.

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 2021 and determined that no impairment existed at the end of 2021.

In the fourth quarter of 2020 the Company announced that the Eberhard Hardware, subsidiary in Ontario, Canada would be closed, and all tangible assets would be moved to Eberhard Manufacturing division in Cleveland, Ohio. As a result, approximately $1.0 million of goodwill associated with Eberhard Hardware was impaired and an impairment charge was recognized in the fourth quarter of 2020.

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.

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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 5 to 17 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. Amortization expense recognized in 2021 and 2020 was $3,985,179 and $3,607,577, respectively. 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 periods ended January 1, 2022 and January 2, 2021.

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:

The Company’s financial instruments are primarily investments in pension assets, see Note 10, Retirement Benefit Plans, and consists of an interest rate swap.

The Company’s interest rate swap is not an exchange-traded instrument. However, it is valued based on observable inputs for similar liabilities and accordingly is classified as Level 2. The amount of the interest rate swap is included in other accrued liabilities.

The carrying amounts of other financial instruments (cash and cash equivalents, accounts receivable, accounts payable and debt) as of January 1, 2022 and January 2, 2021, 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, warehouse, 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 of 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. The Company’s option to extend certain leases ranges from 1–107 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.

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Eastern Company

Notes to Consolidated Financial Statements (continued)

Currently, the Company has 28 operating leases and three finance leases with a lease liability of $11.3 million as of January 1, 2022. The finance lease arrangements are immaterial. 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 a part of one real estate property to a third party. 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.

Total lease expense for each of the next five fiscal years is estimated to be as follows: 2022 - $2,664,761; 2023 - $2,186,238; 2024 - $1,700,834; 2025 - $1,081,468; 2026 - $805,722 and $2,865,077 thereafter. The weighted average remaining lease term is 6.4 years. The weighted average discount rate used was 5.0%.

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 employing the percentage of completion method was $795,000 for the year ended January 1, 2022 and $505,000 for the year ended January 2, 2021.

Based on historical experience, the Company does not accrue a reserve for product returns. For the years ended January 1, 2022 and January 2, 2021, the Company recorded sales returns of $395,000 and $374,000, respectively, as a reduction of 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 subsequent to transfer of control to the customer, are recorded as cost of sales and are expensed as incurred.

For the years ended January 1, 2022 and January 2, 2021, 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.

See Note 13 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 cost of goods sold.

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Notes to Consolidated Financial Statements (continued)

Product Development Costs

Product development costs, charged to expense as incurred, were $4,101,399 in 2021 and $2,749,333 in 2020.

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 $200,482 in 2021 and $278,392 in 2020.

Stock Based Compensation

The Company accounts for its stock-based awards in accordance with Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”), 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 using the Black-Scholes valuation model 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 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 FASB Accounting Standards Codification (“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 9, Income Taxes.

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Notes to Consolidated Financial Statements (continued)

5. GOODWILL

The following is a roll-forward of goodwill for 2021 and 2020:

Foreign Exchange (7,531 )

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Notes to Consolidated Financial Statements (continued)

6. INTANGIBLES

Trademarks are not amortized as their lives are deemed to be indefinite. Total amortization expense for each of the next five years is estimated to be as follows: 2022 - $4.7 million; 2023 - $4.7 million; 2024 - $3.9 million; 2025 - $3.9 million and 2026 - $3.9 million.

Weighted-Average

Amortization

Gross Amount

Patents and developed

Accumulated Amortization

Patents and developed

Gross Amount

Patents and developed

Accumulated Amortization

Patents and developed

Accumulated Amortization $ 7,111,804

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Notes to Consolidated Financial Statements (continued)

7. DEBT

On August 30, 2019, the Company entered into the Credit Agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association. and TD Bank, N.A. as lenders, 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 Big 3 Precision. The term portion of the loan requires quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increases to $1,875,000 per quarter beginning September 30, 2021 and continues through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023 and continues 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. During 2020 and 2021, the Company did not borrow any funds on the revolving commitment portion of the facility. The interest rates on the term and revolving credit portion of the Credit Agreement vary. The interest rates may vary based on the LIBOR rate plus a margin spread of 1.25% to 2.25%. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its U.S. 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 will be required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1.

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On January 1, 2022, the interest rate for half ($27.8 million) of the term portion was 1.6%, using a one-month LIBOR rate, and 2.94% one the remaining balance ($43.8 million) of the term loan based on a one-month LIBOR rate.

The interest rates on the Credit Agreement, and interest rate swap contract are susceptible to changes to the method that LIBOR rates are determined and to the potential phasing out of LIBOR after 2021. Information regarding the potential 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. The ICE Benchmark Administration (the “IBA”) recently announced market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023, which the FCA supports. The Alternative Reference Rates Committee (the “ARRC”), a financial industry group convened by the Federal Reserve Board, has recommended the use of the Secured Overnight Financing Rate (“SOFR”) to replace LIBOR. 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.

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Notes to Consolidated Financial Statements (continued)

7. DEBT (continued)

Debt consists of:

Revolving credit loan — —

Amounts are net of unamortized discounts and debt issuance costs of $186,478 as of January 1, 2022 and $273,312 as of January 2, 2021.

The Company paid interest of $2,271,818 in 2021, $2,754,980 in 2020.

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 will be required to show a senior net leverage ratio of 4.25 to 1. The Company was in compliance with all covenants as of January 1, 2022. In addition, the Company has restrictions on, among other things, new capital leases, purchases or redemptions of its capital stock, mergers and divestitures, and new borrowing. The Company was in compliance with all covenants in 2021 and 2020.

As of January 1, 2022, scheduled annual principal maturities of long-term debt for each of the next five years follow:

Thereafter —

8. STOCK OPTIONS AND AWARDS

Stock Awards

As of January 1, 2022, 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. The Eastern Company 2010 Executive Stock Incentive Plan expired in February 2020. 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 27,300 awards during 2021. During 2020 the Company did not grant stock awards or restricted stock.

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 during 2021 and issued 44,000 SARs during 2020.

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Notes to Consolidated Financial Statements (continued)

8. STOCK OPTIONS AND AWARDS(continued)

Stock-based compensation expense in connection with stock awards and SARs granted to employees during fiscal year 2021 was $418,000 and for 2020 was $376,000. For the period of 2021, the Company used several assumptions which included an expected term of 4 years, volatility deviation of 47.25% to 48.55% and a risk-free rate of 0.18% to 0.35%. For the period of 2020, the Company used several assumptions which included an expected term of 4 years, volatility deviation of 38.62% and a risk-free rate of 0.26%.

As of January 1, 2022, there were 804,703 shares of common stock reserved and available for future grant under the above noted 2020 Plan.

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

Year Ended January 1, 2022 Year Ended January 2, 2021

Units Weighted - Average Exercise Price Units Weighted - Average Exercise Price

SARs Outstanding and Exercisable

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

Year Ended January 1, 2022 Year Ended January 2, 2021

Shares Shares

As of January 1, 2022, outstanding SARs and awards had an intrinsic value of $1,087,570.

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Notes to Consolidated Financial Statements (continued)

9. 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:

Capital Loss Carry forward (182,582 ) -

Income before income taxes consists of:

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Notes to Consolidated Financial Statements (continued)

9. INCOME TAXES (continued)

The provision for income taxes follows:

Current

Deferred:

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows:

Amount Percent Amount Percent

State income taxes, net of federal benefit (165,221 ) (2 ) 96,742 1

Impact of foreign subsidiaries on effective tax rate (282,614 ) (3 ) 165,210 3

Impact of Research & Development tax credit (188,944 ) (3 ) (188,944 ) (3 )

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows for continuing operations:

Amount Percent Amount Percent

Impact of foreign subsidiaries on effective tax rate (282,614 ) (2 ) 165,210 1

Impact of Research & Development tax credit (188,944 ) (1 ) (188,944 ) (1 )

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Notes to Consolidated Financial Statements (continued)

9. INCOME TAXES (continued)

A reconciliation of income taxes computed using the U.S. federal statutory rate to that reflected in operations follows for discontinued operations:

Amount Percent Amount Percent

State income taxes, net of federal benefit (226,998 ) (3 ) (51,632 ) (1 )

Total income taxes paid were $2,318,018 in 2021 and $3,755,475 in 2020.

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 at January 1, 2022 on approximately $11,176,328 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. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. An entity that elects to early adopt the amendments in an interim period should reflect any adjustments as of the beginning of the annual period that includes that interim period. Additionally, an entity that elects early adoption must adopt all the amendments in the same period. The Company adopted ASU 2019-12 in the first interim period of 2021.

On March 27, 2020, the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (the “CARES Act”) became law. The CARES Act includes a variety of economic and tax relief measures intended to stimulate the economy, including loans for small businesses, payroll tax credits/deferrals, and corporate income tax relief. We are analyzing the following components of the CARES Act to determine their effect on our income tax provision:

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

9. INCOME TAXES (continued)

The Company will also continue to assess the effect of state level tax relief provisions as enacted, such as state net operating loss rule changes and conformity to the federal interest, depreciation and charitable contribution deduction changes.

A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows:

Increase (decrease) for positions taken during the prior period - -

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 2017 and non-U.S. income tax examinations by tax authorities prior to 2015.

Included in the balance at January 1, 2022, are $243,052 of unrecognized tax benefits that would affect the annual effective tax rate. In 2021, the Company recognized accrued interest related to unrecognized tax benefits in income tax expense. The Company had approximately $65,836 of accrued interest at January 1, 2022.

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.

10. LEASES

The Company leases certain equipment and buildings under operating lease arrangements. Most leases are for a fixed term and for a fixed amount. The Company is not a party to any leases that have capital improvement funding or payment increases based on any index or rate.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

10. LEASES (continued)

Future minimum payments under non-cancelable operating leases with initial or remaining terms more than one year during each of the next five fiscal years follow:

Rent expense for all operating leases was $2,816,258 in 2021 and $2,431,285 in 2020. The weighted average lease term for all operating leases is 6.4 years. The weighted average discount rate for all operating leases is 5%.

11. 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:

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.

Assumptions used to determine net periodic benefit cost for the Company’s pension benefit plans for the fiscal year indicated were as follows:

Discount rate

- Supplemental pension plans 1.49 % 2.61 %

Expected return on plan assets 7.5 % 7.5 %

Rate of compensation increase 0 % 0 %

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

11. RETIREMENT BENEFIT PLANS (continued)

Components of the net periodic benefit cost of the Company’s other postretirement benefit plan were as follows:

Amortization of prior service cost - (8,253 )

Assumptions used to determine net periodic benefit cost for the Company’s other postretirement plan for the fiscal year indicated were as follows:

Expected return on plan assets 4.0 % 4.0 %

As of January 1, 2022, and January 2, 2021, the status of the Company’s pension benefit plans and other postretirement benefit plan was as follows:

Pension Benefit Other Postretirement Benefit

Plan Amendment - - 36,388 -

Significant Event - - (218,103 ) -

Significant Event - - (218,103 ) -

Pension Benefit Other Postretirement Benefit

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

11. RETIREMENT BENEFIT PLANS (continued)

Amounts recognized in accumulated other comprehensive income consist of:

Pension Benefit Other Postretirement Benefit

Change in the components of accumulated other comprehensive income consist of:

Pension Benefit Other Postretirement Benefit

Change due to availability of final actual assets and census data - - - -

Charged to net periodic benefit cost

Liability (gains)/losses

Plan Amendments - - (36,388 ) -

Significant Event - - (35,159 ) -

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:

Discount rate

- Supplemental pension plans 2.08 % 1.49 %

- Other postretirement plan 2.93 % 2.66 %

At January 1, 2022 and January 2, 2021, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $107,420,338 and $111,549,725, respectively. During 2021, the pension benefit obligation decreased between 3.5% to 4.8% due to the decrease in the discount rates from 2.40%-2.48% to 2.75%-2.81%.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

11. 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:

Number of plans 5 5

Estimated future benefit payments to participants of the Company’s pension plans are $4.8 million in 2022, $5.0 million in 2023, $5.2 million in 2024, $5.4 million in 2025, $5.5 million in 2026 and a total of $29.2 million from 2027 through 2031.

Estimated future benefit payments to participants of the Company’s other postretirement plan are $50,000 in 2022, $50,000 in 2023, $50,000 in 2024, $52,000 in 2025, $54,000 in 2026 and a total of $303,000 from 2027 through 2031.

The Company expects to make cash contributions to its qualified pension plans of approximately $300,000 and to its other postretirement plan of approximately $50,000 in 2022.

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 2021, as in 2020, 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.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

11. RETIREMENT BENEFIT PLANS (continued)

The fair values of the company’s pension plans assets at January 1, 2022 and January 2, 2021, utilizing the fair value hierarchy discussed in Note 4 – Accounting Policies – Fair Value of Financial Instruments, follow:

Level 1 Level 2 Level 3 Total

Cash and Equivalents:

Equities:

Common/collective trust funds

Fixed Income:

Common/collective trust funds

Target Duration LDI Fixed Income Funds (b)

STRIPS Fixed Income Funds (c)

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

11. RETIREMENT BENEFIT PLANS (continued)

Level 1 Level 2 Level 3 Total

Cash and Equivalents:

Equities:

Common/collective trust funds

Fixed Income:

Common/collective trust funds

Target Duration LDI Fixed Income Funds (b)

STRIPS Fixed Income Funds (c)

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.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

11. RETIREMENT BENEFIT PLANS (continued)

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.

The plans’ assets include 217,018 shares of the common stock of the Company having a market value of $5,460,173 and $5,230,134 on January 1, 2022 and January 2, 2021, respectively. No shares were purchased in 2021 or 2020 nor were any shares sold in either period. Dividends received during 2021 and 2020 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.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

11. RETIREMENT BENEFIT PLANS (continued)

The Company amended the Eastern Company Savings and Investment Plan (“401(k) Plan Amendment”) effective June 1, 2016. The 401(k) Plan Amendment increased this match to 50% of the first 6% of contributions for the remainder of Fiscal 2016. The 401(k) Plan Amendment also provided for an additional non-discretionary contribution (the “transitional credit”) for certain non-union U.S. employees who were eligible to participate in the Salaried Plan. 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 increased the non-discretionary safe harbor contribution to 3% and changed the eligibility to all non-union U.S. employees.

The Company made contributions to the plan as follows:

As of January 1, 2022, the Company had accrued $323,082 for the non-discretionary safe harbor contribution this amount was expensed in 2021 and was contributed to the plan in January 2022. As of January 2, 2021, the Company had accrued $332,092 for the non-discretionary safe harbor contribution. This amount was contributed to the Plan in January 2021 and was expensed in 2020.

12. EARNINGS PER SHARE

The denominators used in the earnings per share computations follow:

Basic:

Diluted:

There were no anti-dilutive stock equivalents in 2021 or 2020.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

13. GEOGRAPHIC INFORMATION

Geographic Information:

Net Sales:

Foreign sales are primarily to customers in North America.

Identifiable Assets:

14. RECENT ACCOUNTING PRONOUNCEMENTS

Adopted

In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Tax. The changes implemented in ASU 2019-12 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. The Company adopted ASU 2019-12 as of January 3, 2021. The adoption of this guidance did not have a material impact on the consolidated financial statements of the Company.

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.

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The Eastern Company

Notes to Consolidated Financial Statements (continued)

15. 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. 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. The 30-year annual groundwater monitoring and site maintenance program are underway and will continue through 2048.

16. CONCENTRATION OF RISK