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Item 8. Financial Statements and Supplementary Data

2021-03-16 compared with 2020-03-05 · 614 added, 639 removed, 558 unchanged (69% of the section changed)

ITEM 8 FINANCIAL STATEMENTS

ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Eastern Company

3 unchanged sentences

Marketable securities

Accounts receivable, less allowances of $556,000 in 2019 and $680,000 in 2018

Accounts receivable, less allowances:

2020 - $ 545,000 ;2019 - $ 556,000

Raw materials and component parts

1 unchanged sentence

Finished goods

Prepaid expenses and other current assets

Refundable income taxes

Current portion of note receivable

Prepaid expenses and other assets

Total Current Assets

2 unchanged sentences

Accumulated depreciation

( 48,246,120 )

( 46,313,630 )

Patents, technology and other intangibles net of accumulated amortization

Long term notes receivable, less current portion

Right of Use Assets

Deferred income taxes

$ 275,528,354

$ 280,662,976

See accompanying notes.

Consolidated Balance Sheets

4 unchanged sentences

Other accrued expenses

Contingent liability

Current portion of lease liability

Current portion of long-term debt

4 unchanged sentences

Long-term debt, less current portion

Accrued other postretirement benefits

Accrued postretirement benefits

Accrued pension cost

Commitments and contingencies (See Note 6)

Total Liabilities

Shareholders’ Equity

5 unchanged sentences

1,000,000 shares

Common Stock, no par value:

Common Stock, no par value, Authorized:

50,000,000 shares

3 unchanged sentences

2,749,729 shares in 2020 and 2,734,729 shares in 2019

( 20,537,962 )

( 20,169,098 )

Retained earnings

Accumulated other comprehensive income (loss):

Accumulated other comprehensive loss:

Foreign currency translation

Unrealized gain/(loss) on interest rate swap, net of tax

Unrecognized net pension and other postretirement benefit costs, net of taxes

( 2,037,952 )

Unrealized (loss) gain on interest rate swap, net of tax

( 1,391,592 )

Unrecognized net pension and postretirement benefit costs, net of tax

( 29,059,023 )

( 23,363,637 )

Accumulated other comprehensive loss

( 29,496,751 )

( 25,234,571 )

Total Shareholders’ Equity

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$ 275,528,354

$ 280,662,976

See accompanying notes.

Consolidated Statements of Income

$ 240,403,114

$ 251,742,619

Cost of products sold

Product development expenses

( 186,744,637 )

( 189,890,070 )

Product development expense

( 3,131,035 )

( 6,024,567 )

Selling and administrative expenses

( 35,439,858 )

( 35,719,188 )

Goodwill impairment loss

( 4,975,372 )

Loss on disposition of subsidiary

( 2,158,863 )

Restructuring costs

( 2,650,940 )

Operating profit

Interest expense

( 2,744,800 )

( 1,857,961 )

Income before income taxes

2 unchanged sentences

Consolidated Statements of Comprehensive Income

Other comprehensive income/(loss) -

Other comprehensive income:

Change in foreign currency translation

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

Change in fair value of interest rate swap,

net of tax benefit (cost) of:

$ 490,234 in 2020 and $ 26 in 2019

Change in pension and other postretirement benefit costs, net of income taxes (expense)/benefit of:

( 1,558,610 )

Change in pension and other postretirement benefit costs,

net of taxes of:

$ 1,776,264 in 2020 and $ 664,279 in 2019

Total other comprehensive income/(loss)

Comprehensive income/(loss)

( 5,695,386 )

( 2,675,007 )

Total other comprehensive (loss)

( 4,262,180 )

( 2,606,056 )

Comprehensive income

See accompanying notes.

Consolidated Statements of Shareholders’ Equity

Common Shares

Comprehensive

2 unchanged sentences

Balances at December 29, 2018

( 2,734,729 )

$ ( 20,169,098 )

$ 109,671,362

$ ( 22,628,515 )

Cash dividends declared, $.44 per share

( 2,748,393 )

Currency translation adjustment

1 unchanged sentence

Change in pension and other postretirement benefit costs, net of tax

Treasury stock purchases

( 2,675,007 )

Issuance of SARS

1 unchanged sentence

Balances at December 28, 2019

( 2,734,729 )

$ ( 20,169,098 )

$ 120,189,111

$ ( 25,234,571 )

$ 105,437,257

Cash dividends declared, $.44 per share

( 2,754,502 )

Currency translation adjustment

Change in fair value of interest rate swap

( 1,558,610 )

Change in pension and other postretirement benefit costs, net of tax

( 5,695,386 )

Treasury stock purchases

Issuance of SARS

Issuance of Common Stock for directors’ fees

Balances at December 28, 2019

Balances at January 2, 2021

( 2,749,729 )

$ ( 20,537,962 )

$ 122,840,131

$ ( 29,496,751 )

$ 104,306,459

See accompanying notes.

1 unchanged sentence

Operating Activities

Adjustments to reconcile net income to net cash provided by operating activities:

Adjustments to reconcile net income to net cash provided by

operating activities:

Depreciation and amortization

Unrecognized pension & other postretirement benefits

Loss on disposition of subsidiaries

Unrecognized pension and postretirement benefits

( 1,010,684 )

Goodwill impairment loss

(Gain) loss on sale of equipment and other assets

2 unchanged sentences

Deferred taxes

( 2,118,551 )

( 2,093,654 )

Stock compensation expense

1 unchanged sentence

Accounts receivable

Prepaid expenses

Prepaid expenses and other

Accounts payable

( 2,337,146 )

Accrued compensation

( 1,462,262 )

Other accrued expenses

( 1,457,896 )

( 3,315,475 )

Net cash provided by operating activities

Investing Activities

Purchases of property, plant and equipment

Capitalized software

Proceeds from sale of equipment and other assets

Marketable securities

Business acquisitions, net of cash acquired

Business acquisition, net of cash acquired

( 7,172,868 )

( 81,155,753 )

Proceeds from business dispositions

Issuance of Note Receivable

( 2,172,068 )

Payments Received from Note Receivable

Proceeds from sale of equipment

Purchases of property, plant and equipment

( 3,098,983 )

( 5,440,488 )

Net cash used in investing activities

( 9,111,319 )

( 85,772,579 )

Financing Activities

Proceeds from issuance of long-term debt

Proceeds from long-term borrowings

Principal payments on long-term debt

Proceeds from short-term borrowing (Revolver)

Payments on Revolving Credit Note

( 10,049,577 )

( 30,285,146 )

Lease Payments

Purchase common stock for treasury

Dividends paid

Net cash used in financing activities

( 2,754,650 )

( 2,743,993 )

Net cash provided by (used in) financing activities

( 13,183,591 )

Effect of exchange rate changes on cash

Net change in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

( 1,894,870 )

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosure of cash flow information:

Cash paid during the year for:

Non-cash investing and financing activities

Right of use asset

Lease liability

( 12,342,475 )

See accompanying notes.

2 unchanged sentences

DESCRIPTION OF BUSINESS

The Eastern Company (the “Company”) includes nine separate operating businesses located within the United States, two wholly-owned Canadian subsidiaries (one

located in Tillsonburg, Ontario, Canada, and one in Kelowna, British Columbia, 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), two wholly-owned subsidiaries in Mexico (one located in Lerma, Mexico and one located in Reynosa, Mexico) and a wholly owned subsidiary in Wrexham, United Kingdom.

The operations of the Company consist of three business segments:

industrial hardware, security products, and metal products.

Industrial Hardware

The Industrial Hardware segment consists of Big 3 Precision, including Big 3 Products and Big 3 Mold;

Eberhard Manufacturing Company, Eberhard Hardware

Manufacturing Ltd., and Eastern Industrial Ltd;

Velvac Holdings;

Canadian Commercial Vehicles Corporation;

and Sesamee Mexicana, S.A.

These businesses design, manufacture and market a diverse product line of custom and standard vehicular and industrial hardware, including turnkey returnable

packaging solutions;

passenger restraint and vehicular locks, latches, hinges;

The Eastern Company (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 focuses on proactive financial, operational, and strategic management of its businesses in order to increase cash generation, operating earnings and long-term shareholder value.

Eastern encompasses seven operating entities within the United States, two wholly-owned Canadian subsidiaries (one located in Tillsonburg, Ontario, Canada, and one 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.

The Company reports in two business segments:

Engineered Solutions and Diversified Products.

Engineered Solutions

The Engineered Solutions segment consists of Big 3 Precision, including Big 3 Products and Big 3 Mold (each as defined below), Hallink Moulds, Inc.

(“Hallink Moulds”) and Associated Toolmakers Ltd.

(as defined below);

Eberhard Manufacturing Company, Eberhard Hardware Manufacturing Ltd., and Eastern Industrial Ltd;

Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and World Security Industries Ltd.

(together “Eberhard”);

and Velvac Holdings (“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, mirror-cameras.

and light-weight sleeper boxes and truck bodies.

The segment also designs and manufactures a wide selection of fasteners and other closure devices

used to secure access doors on various types of industrial equipment such as metal cabinets, machinery housings and electronic instruments.

Big 3 Products and Big 3 Mold’s turnkey returnable packaging solutions are used in the assembly process for

vehicles, aircraft, and durable goods and in the production process of plastic packaging products, packaged consumer goods and pharmaceuticals.

Big 3 Products works with leading manufacturers to design and produce custom returnable packaging to

integrate with their assembly processes.

Other products are found on tractor-trailer trucks, specialty commercial vehicles, recreational vehicles, fire and rescue vehicles, school buses, military vehicles and other vehicles.

In addition, through Big 3

Precision Products and Big 3 Precision Mold Services, Big 3 Precision serves diverse markets including truck, automotive, plastic packaging products, consumer packaged goods and pharmaceuticals.

The segment sells directly to “OEM’s” and to

distributors through in-house sales personnel and outside sales representatives.

Sales, customer engineering and customer service are primarily provided through in-house sales personnel and engineering staff.

Security Products

The Security Products segment consists of Illinois Lock Company/CCL Security Products, World Lock Company Ltd., Dongguan Reeworld Security Products Ltd., and

World Security Industries Ltd.;

Greenwald Industries (“Greenwald”);

Big 3 Products and Big 3 Mold offer turnkey returnable packaging solutions that are used in the assembly process of vehicles, aircraft and durable goods and in the production process of plastic packaging products, packaged consumer goods and pharmaceuticals.

Big 3 Products works with manufacturers to design and produce custom returnable packaging to integrate with their assembly processes.

Big 3 Mold designs and manufactures blow mold tools.

Hallink Moulds manufactures 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.

In 2020, we combined all businesses associated with the Eberhard Manufacturing Company and The Illinois Lock Company to create Eberhard, a global leader 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 original equipment manufacturers (“OEMs”) and customer applications.

Eberhard’s products are found in various ranges of applications and products globally.

Velvac is a designer and manufacturer of proprietary vision technology for OEMs and aftermarket applications, and a leading 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.

Diversified Products

The Diversified Products segment consists of Frazer & Jones, Greenwald Industries (“Greenwald”);

and Argo EMS (formerly Argo Transdata).

Illinois Lock Company/CCL Security Products, known in the market as ILC, is a global leader in the design and manufacture of engineered

security and access solutions in the form of mechanical, electronic and wireless products.

ILC focuses on the industrial, vehicle accessory, outdoor recreational equipment, medical, and point of sale and vending segments.

These products and solutions

are specified and sold to OEM’s, contract equipment manufacturers, and industrial distributors globally.

Frazer & Jones designs and manufactures high quality ductile and malleable iron castings.

Products include valves, torque screws, bean clamps and concrete anchors.

These products are sold to a wide range of industrial markets, including oil, water and gas;

truck/automotive rail, and military/aerospace.

The Company believes Frazer & Jones is a producer of expansion shells for use in supporting the roofs of underground mines in North America.

Greenwald designs, manufactures and markets payment systems and coin security products used primarily in the commercial laundry market.

Greenwald’s products include timers, drop meters, coin chutes, money boxes, meter cases, mobile payment apps, smart cards, value transfer stations, smart card readers, card management software, and access control units.

Argo EMS supplies printed

circuit boards and other electronic assemblies to original equipment manufacturers in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial controls, medical and military products.

Argo EMS supplies printed circuit boards and other electronic assemblies to OEMs in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial controls, medical and military products.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

Metal Products

The Metal Products segment consists of Frazer & Jones, The Frazer & Jones Company, designs and manufactures high quality ductile and malleable iron

Products include valves, rings, torque screws, bean clamps, and concrete anchors.

These products are sold to a wide range of industrial markets, including oil, water, gas;

truck/automotive rail, and military/aerospace.

In addition, the

Company believes that its Metal Products segment, is the largest and most efficient producer of expansion shells for use in supporting the roofs of underground mines in North America.

Sales are made to customers primarily in North America.

B usiness Acquisitions

Load N Lock Systems, Inc.

Effective June 1, 2018 the Company acquired certain assets of Load N Lock Systems, Inc.

(“Load N Lock”), including accounts receivable, inventories,

furniture, fixtures and equipment, intellectual property rights, and assumed certain liabilities and rights existing under all sales and purchase agreements.

Load N Lock provides innovative truck cap and tonneau cover locks that keep truck contents

safe and secure.

Load N Lock developed and patented the first integrated power lock for the automotive industry and has developed numerous truck cap and tonneau cover lock related products.

Load N Lock provides its innovative products and solutions

to the automotive industry’s leading manufacturers of truck and automotive accessories in the United States and Asia.

The above acquisition was accounted for under ASC 805 – Business Combinations.

Load N Lock has been included in the Security Products segment of the Company

from the date of the acquisition.

The cost of the acquisition of Load N Lock was approximately $4,995,000.

The excess of the cost of Load N Lock over the fair market value of the net definitive tangible and intangible assets acquired was $2,694,700,

which has been recorded as goodwill.

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 is included in the Engineered Solutions segment of the Company from the date of the acquisition.

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

Weighted-average Life in Years

Weighted-Average Period in Years

Patents, technology, and licenses

2 unchanged sentences

Non-compete agreements

Big 3 Precision Products

On August 30, 2019, the Company and its newly-formed wholly-owned subsidiary, Eastern Engineered Systems, Inc., a Delaware corporation (“EES”) entered into a

Stock Purchase Agreement (the “Stock Purchase Agreement”) with Big 3 Holdings, LLC, a Delaware limited liability company (“Seller”), Big 3 Precision Mold Services, Inc., a Delaware corporation and wholly-owned subsidiary of Seller (“Big 3 Mold”), Big 3

Precision Products, Inc., a Delaware corporation and wholly owned subsidiary of Seller (“Big 3 Products”), Industrial Design Innovations, LLC, a Delaware limited liability company and wholly-owned subsidiary of Big 3 Products (“Design Innovations”),

Sur-Form, LLC, a Delaware limited liability company and wholly-owned subsidiary of Big 3 Products (“Sur-Form”), Associated Toolmakers Limited, a limited company formed under the laws of England and Wales and wholly-owned subsidiary of Big 3 Mold

(“Associated” and together with Big 3 Mold, Big 3 Products, Design Innovations and Sur-Form, collectively “Big 3 Precision”), TVV Capital Partners III, L.P., a Delaware limited partnership, TVV Capital Partners III-A, L.P., a Delaware limited

partnership, Alan Scheidt, Todd Riley, Clinton Hyde, and Big 3 Holdings, LLC, a Delaware limited liability company, as the initial Seller Representative (the “Seller Representative”).

On August 30, 2019, pursuant to the Stock Purchase Agreement, the

Company, through EES, acquired all of the outstanding equity interests of Big 3.

Eastern Company

Notes to Consolidated Financial Statements (continued)

B usiness Acquisitions (continued)

Precision Products and Big 3 Mold Services, and indirectly through them, all of the outstanding equity interests in Design The Innovations, Sur-Form and

Associated, for an adjusted purchase cash price of $81.2 million.

The Big 3 acquisition was financed with a combination of $2.1 million of cash on hand, a credit agreement (the “Credit Agreement”) with Santander Bank, N.A., for itself and, People’s

United Bank, National Association and TD Bank, N.A.

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

Big 3 Precision

On August 30, 2019, the Company and its newly-formed wholly-owned subsidiary, Eastern Engineered Systems, Inc., a Delaware corporation (“EES”) entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Big 3 Holdings, LLC, a Delaware limited liability company (“Seller”), Big 3 Precision Mold Services, Inc., a Delaware corporation and wholly-owned subsidiary of Seller (“Big 3 Mold”), Big 3 Precision Products, Inc., a Delaware corporation and wholly owned subsidiary of Seller (“Big 3 Products”), Industrial Design Innovations, LLC, a Delaware limited liability company and wholly-owned subsidiary of Big 3 Products (“Design Innovations”), Sur-Form, LLC, a Delaware limited liability company and wholly-owned subsidiary of Big 3 Products (“Sur-Form”), Associated Toolmakers Limited, a limited company formed under the laws of England and Wales and wholly-owned subsidiary of Big 3 Mold (“Associated” and together with Big 3 Mold, Big 3 Products, Design Innovations and Sur-Form, collectively “Big 3 Precision”), TVV Capital Partners III, L.P., a Delaware limited partnership, TVV Capital Partners III-A, L.P., a Delaware limited partnership, Alan Scheidt, Todd Riley, Clinton Hyde, and Big 3 Holdings, LLC, a Delaware limited liability company, as the initial Seller Representative.

On August 30, 2019, pursuant to the Stock Purchase Agreement, the Company, through EES, acquired all of the outstanding equity interests of Big 3 Products and Big 3 Mold, and indirectly through them, all of the outstanding equity interests in Design Innovations, Sur-Form and Associated, for an adjusted purchase cash price of $ 81.2 million (the “Big 3 Precision Acquisition”).

The Big 3 Precision Acquisition was financed with a combination of $ 2.1 million of cash on hand, a credit agreement (the “Credit Agreement”) with Santander Bank, N.A., for itself and, People’s United Bank, National Association and TD Bank, N.A.

as lenders, providing for a $ 100.0 million term loan and a $ 20.0 million revolving credit line.

In connection with the Credit Agreement, the Company also used its cash to repay the remaining

balance (approximately $19.1 million) of its then outstanding term loan with People’s United Bank National Association.

Through its two divisions, Big 3 Products and Big 3 Mold, Big 3 Precision serves diverse markets including truck, automotive,

plastic packaging products, packaged consumer goods and pharmaceuticals.

In particular, Big 3 Precision Products works with leading manufacturers to design and produce custom returnable packaging to integrate with their assembly processes.

is a global leader in the design and manufacture of blow mold tools.

The following table summarizes the consideration paid for Big 3 Precision and the amounts of the assets acquired and liabilities assumed recognized at the

acquisition date, as well as the fair value at the acquisition date.

In connection with the Credit Agreement, the Company also used its cash to repay the remaining balance (approximately $ 19.1 million) of its then outstanding term loan with People’s United Bank, National Association.

Through its two divisions, Big 3 Products and Big 3 Mold, Big 3 Precision serves diverse markets including truck, automotive, plastic packaging products, packaged consumer goods and pharmaceuticals.

In particular, Big 3 Products works with leading manufacturers to design and produce custom returnable packaging to integrate with their assembly processes.

Big 3 Mold designs and manufactures blow mold tools.

Notes to Consolidated Financial Statements (continued)

BUSINESS ACQUISITIONS (continued)

The following table summarizes the consideration paid for Big 3 Precision and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date, as well as the fair value at the acquisition date.

An independent third party was utilized to establish the fair market value of net assets acquired.

At August 30, 2019:

8 unchanged sentences

Current liabilities

( 4,910,384 )

Deferred revenue

( 1,585,709 )

Income tax payable

( 2,039,117 )

Deferred tax liabilities

( 7,114,732 )

Total identifiable net assets

Accounts Receivable

Acquired receivables are amounts due from customers, and are stated at net realizable value.

The estimated fair value of inventories acquired, which is at net realizable value based upon third party valuation specialist.

Acquired receivables are amounts due from customers, with fair value based on net realizable value.

The estimated fair value of inventories acquired, which are at net realizable value based upon third party valuation specialist.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

B usiness Acquisitions (continued)

BUSINESS ACQUISITIONS (continued)

Property, Plant and Equipment

The property plant and equipment are estimated at net realizable value at the time of the acquisition based upon third party valuation specialist.

The property plant and equipment are estimated at fair value at the time of the acquisition based upon third party valuation specialist.

Intangible Assets

The estimated fair value of identifiable intangible assets is determined primarily using the Income Approach method which is a valuation technique that

provides an estimate of the fair value of an asset based on the market participant’s expectations of the cash flows that an asset would generate over its remaining useful life.

Some of the more significant assumption inherent in the development of the

identifiable intangible assets valuation, from the perspective of a market participant, include the estimate net cash flows for each year for each project or product, the appropriate discount rate to select in order to measure the risk inherent in each

future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors.

The estimated fair value of identifiable intangible assets is determined primarily using the Income Approach method which is a valuation technique that provides an estimate of the fair value of an asset based on the market participant’s expectations of the cash flows that an asset would generate over its remaining useful life.

Some of the more significant assumption inherent in the development of the identifiable intangible assets valuation, from the perspective of a market participant, include the estimate net cash flows for each year for each project or product, the appropriate discount rate to select in order to measure the risk inherent in each future cash flow stream, the assessment of each asset’s life cycle, competitive trends impacting the asset and each cash flow stream as well as other factors.

Goodwill Allocation

Goodwill of $44,096,980 arising from the acquisition consists of the difference between the consideration paid and the fair value of the assets and

liabilities acquired.

None of the goodwill recognized is expected to be deductible for income tax purposes.

Goodwill of $ 2,302,000 arising from the acquisition of Hallink Moulds consists of the difference between the consideration paid and the fair value of the assets and liabilities acquired.

Current Liabilities

4 unchanged sentences

Deferred Tax Liability

The deferred tax liability is stated at estimated tax liability due to the difference in the book basis of assets compared to the tax basis of those assets

at the time of acquisition.

The deferred tax liability is stated at estimated tax liability due to the difference in the book basis of assets compared to the tax basis of those assets at the time of acquisition.

Acquisition Related Expenses

Included in general and administrative expenses in the consolidated statements of operations for the three and twelve month periods ended December 28, 2019

were $765,000 and $1,184,000, respectively, for acquisition expenses.

A ccounting P olicies

Included in general and administrative expenses in the consolidated statements of operations were acquisition expenses for the twelve-month period ended January 2, 2021 of $ 299,531 .

ACCOUNTING POLICIES

The Company’s year ends on the Saturday nearest to December 31.

Fiscal years, 2019 and 2018, were 52 weeks each.

Based on this policy, fiscal year 2020 was comprised of 53 weeks and fiscal 2019 included 52 weeks.

References in these Notes to the consolidated financial statements to “2020” or “fiscal year 2020” mean the fiscal year ended January 2, 2021, and references to “2019” or “fiscal year 2019” mean the fiscal year ended December 28, 2019.

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, and references to the “fourth quarter of 2019” or the “fourth fiscal quarter of 2019” mean the thirteen-week period from September 29, 2019 to December 28, 2019.

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.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

A ccounting P olicies (continued)

All intercompany accounts and transactions are eliminated.

Reclassification

Commencing with the first quarter of 2018, pension service costs have been broken out and reclassified from the gains and losses associated with the pension

The reclassification of these expenses does not affect the net income reported.

Product development expense is not necessarily 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.

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.

An adjustment has been made to the Consolidated Balance Sheet for fiscal year ended December 28, 2019 to reclassify customer funded projects from fixed assets to prepaid expenses and other current assets.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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

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.

Actual results could differ from those estimates.

1 unchanged sentence

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 income (loss) – Foreign currency translation”.

currency exchange transaction gains and losses are not material in any year.

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 50% of available cash is

located outside of the United States in our foreign subsidiaries.

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 taking into account 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.

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.

customer’s situation changes, such as a bankruptcy or 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.

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.

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.

($31,011,130 for

inventories at December 28, 2019, excluding Big 3 and Velvac) and by the first-in, first-out (FIFO) method for inventories outside the U.S.

($7,295,793 for inventories outside the U.S.

at December 28, 2019).

Cost exceeds the LIFO carrying value by

approximately $6,712,162 at December 28, 2019 and $6,957,972 at December 29, 2018.

($ 27.9 million for U.S.

inventories at January 2, 2021, excluding Big 3 Precision and Velvac) and by the first-in, first-out (FIFO) method for inventories outside the U.S.

($ 5.8 million for inventories outside the U.S.

at January 2, 2021) and for Big 3 Precision and Velvac.

Cost exceeds the LIFO carrying value by approximately $ 6.8 million at January 2, 2021 and $ 6.7 million at December 28, 2019.

There was no material LIFO quantity liquidation in 2020 or 2019.

In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete

The Eastern Company

Notes to Consolidated Financial Statements (continued)

A ccounting P olicies (continued)

In addition, as of the balance sheet dates, the Company has recorded reserves for excess/obsolete inventory.

Property, Plant and Equipment and Related Depreciation

Property, plant and equipment (including equipment under capital lease) are stated at cost.

Depreciation ($4,722,758 in 2019, $4,329,136 in 2018) is

computed generally using the straight-line method based on the following estimated useful lives of the assets:

Depreciation expense ($ 4,843,134 in 2020, $ 4,722,758 in 2019) is computed generally using the straight-line method based on the following estimated useful lives of the assets:

Buildings - 10 to 39.5 years;

1 unchanged sentence

Impairment of Long-Lived Assets

In accordance with ASC 360-10, Accounting for the Impairment or Disposal of Long Lived Assets, the Company reviews

it 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.

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

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 period ended December 28, 2019 and for the period December 29, 2018.

The Company performed qualitative assessments of goodwill as of the end of fiscal 2019 and fiscal 2018 and determined it is more likely than not that no

impairment of goodwill existed at the end of 2019 or 2018.

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 period ended January 2, 2021 and for the period December 28, 2019.

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.

In the second quarter of 2020, management determined that the estimated fair value of Greenwald Industries was likely below its carrying amount.

The factors that led to this determination included additional competition, industry movement away from legacy products and intense competition in new mobile payment apps.

This fundamental shift in lower cost mobile payment systems away from the higher cost electronic smart card payment systems resulted in our belief that the carrying value of Greenwald exceeded its fair value.

As a result, an independent valuation was conducted which estimated that the carrying value exceeded the fair value by approximately $ 4.0 million.

Management recognized this impairment charge in the second quarter.

In December, 2020 the Company announced that the Eberhard Hardware Manufacturing Ltd.

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 Manufacturing Ltd.

was impaired and written off the books in December 2020.

Management recognized this impairment charge in the fourth quarter of 2020.

The Company performed qualitative assessments of goodwill as of the end of fiscal 2019 and determined it was more likely than not that no impairment existed at the end of 2019.

The Company will perform annual qualitative assessments in subsequent years as of the end of each fiscal year.

Additionally, the Company will perform interim analysis whenever conditions

Goodwill would be considered impaired whenever the historical carrying amount exceeds the fair value.

Pursuant to the qualitative assessment performed,

goodwill was not impaired in 2019 or 2018.

Should we reach a different conclusion in the future, additional work would be performed to determine the amount of the non-cash impairment charge to be recognized.

The maximum future impairment of goodwill

that could occur is the amount recognized on our balance sheet.

Additionally, the Company will perform interim analysis whenever conditions warrant.

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 generally amortized on a straight-line basis over periods ranging from 5 to 17 years.

Generally, non-compete agreements and customer relationships are being amortized using the straight-line method over a period of 5 years.

expense in 2019 and 2018 was $1,726,539 and $1,452,084, respectively.

In the event that 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.

Technology and licenses are recorded at cost and are generally amortized on a straight-line basis over periods ranging from 5 to 17 years.

Generally, non-compete agreements and customer relationships are amortized using the straight-line method over a period of 5 years.

Amortization expense in 2020 and 2019 was $ 3,634,378 and $ 1,726,539 , respectively.

In the event that 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 period ended January 2, 2021 and for the period December 28, 2019.

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.

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 Eastern Company

Notes to Consolidated Financial Statements (continued)

A ccounting P olicies (continued)

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted

assets or liabilities.

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Quoted prices in markets that are not active;

or other inputs that are observable, either directly or indirectly, for

substantially the full term of the asset or liability.

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and

unobservable.

The Company’s financial instruments are primarily investments in pension assets, see footnote 11, and consists of an interest rate swap.

or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

The Company’s financial instruments are primarily investments in 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.

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 December 28, 2019 and

December 29, 2018, approximate fair value based on the expected future cash flows of the related instruments.

Right of Use Assets

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2016-02, Leases (“Topic 842”).

ASU 2016-02 requires lessees to present

right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months.

See Note 13 – Recent Accounting Pronouncements.

In calculating the effect of ASU 2016-02, the Company elected the transition method thereby not restating comparable periods.

The Company elected to account

for non-lease components as part of the lease component to which they relate.

Lease accounting involves significant judgments, including making estimates related to the lease term, lease payments, and discount rate.

In accordance with the guidance,

the Company recognized ROU assets and lease liabilities for all leases with a term greater than 12 months.

The Company has operating leases for buildings, warehouses and office equipment.

Currently, the Company has 45 operating leases with a ROU asset and lease

liability totaling $12,342,000 as of December 28, 2019.

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

The carrying amounts of other financial instruments (cash and cash equivalents, accounts receivable, accounts payable and debt) as of January 2, 2021 and December 28, 2019, approximate fair value based on the expected future cash flows of the related instruments.

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 1–119 months.

All options to extend have

been included in the calculation of the ROU asset and lease liability.

The leases do not contain residual value guarantees, restrictions, or covenants that could incur additional financial obligations to the Company.

There are no subleases,

sale-leaseback, or related party transactions.

All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability.

Currently, the Company has 35 operating leases and three finance leases with a lease liability of $ 12.8 million as of January 2, 2021.

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:

2021 - $ 2,923,761 ;

2022 - $ 2,262,399 ;

2023 - $ 1,872,491 ;

2024 - $ 1,481,832 ;

2025 - $ 844,884 and $ 3,421,563 thereafter.

The weighted average remaining lease term is 6.8 years.

The interest rate used was 3.5 % - 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 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 generates wholesale revenues primarily from the sale of products to original equipment manufacturers and distributers in the United States.

Company recognizes revenue upon shipment or transfer of title to the customer as that is when the customer obtains control of the promised goods.

The Company typically extends credit terms to its customers based on their creditworthiness and generally

does not receive advance payments.

The Company recognizes revenue upon shipment or transfer of title to the customer as that is when the customer obtains control of the promised goods.

The Company typically extends credit terms to its customers based on their creditworthiness and generally does not receive advance payments.

As such, the Company records accounts receivable at the time of shipment, when the Company’s right to the consideration becomes unconditional.

Accounts receivable from the Company’s customers are typically due

within 30 days of invoicing.

An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment

The Eastern Company

Notes to Consolidated Financial Statements (continued)

A ccounting P olicies (continued)

trends and the Company’s assessment of the customer’s credit worthiness.

As of December 28, 2019 and December 29, 2018, the Company’s

allowance for doubtful accounts total was $556,000 and $680,000, respectively.

As of December 28, 2019 and December 29, 2018, the Company’s bad debt expense was $64,000 and $220,000, respectively.

Accounts receivable from the Company’s customers are typically due within 30 days of invoicing.

An allowance for doubtful accounts is provided based on a periodic analysis of individual account balances, including an evaluation of days outstanding, payment history, recent payment trends and the Company’s assessment of the customer’s credit worthiness.

As of January 2, 2021 and December 28, 2019, the Company’s allowance for doubtful accounts total was $ 545,000 and $ 556,000 , respectively.

As of January 2, 2021, and December 28, 2019, the Company’s bad debt expense was $ 253,000 and $ 64,000 respectively.

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 division may employ the efforts expended method for the percentage of completion for revenue recognition for certain

transactions.

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 $576,000 for the year ended December 28, 2019.

No revenue was recognized employing the percentage of completion method for the year ended December 29, 2018.

The amount of revenue recognized employing the percentage of completion method was $ 505,000 for the year ended January 2, 2021 and $ 576,000 for the year ended December 28, 2019.

Based on historical experience, the Company does not accrue a reserve for product returns.

For the years ended December 28, 2019 and

December 29, 2018, the Company recorded sales returns of $613,000 and $725,000, respectively, as a reduction of revenue.

Greenwald Industries generates subscription services revenue from access provided to customers to the division’s specific online

For the years ended December 28, 2019 and December 29, 2018, Greenwald Industries subscription services revenue was $567,000 and $448,000, respectively.

For the years ended January 2, 2021 and December 28, 2019, the Company recorded sales returns of $ 459,000 and $ 613,000 , respectively, as a reduction of revenue.

Greenwald Industries generates subscription services revenue from access provided to customers to the division’s specific online databases.

For the years ended January 2, 2021 and December 28, 2019, Greenwald Industries subscription services revenue was $ 441,000 and $ 567,000 , respectively.

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 December 28, 2019 and December 29, 2018, the Company recorded no revenues related to performance obligations

satisfied in prior periods.

As part of the Company’s adoption of the new revenue standard, 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.

There was no subscription services revenue from remaining performance obligations as of December 28, 2019.

See footnote 12 regarding the Company’s revenue disaggregated by reporting segment, intersegment sales by reporting segment and

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 2, 2021 and December 28, 2019, 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 12 regarding the Company’s revenue disaggregated by reporting segment, intersegment sales by reporting segment and 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.

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

1 unchanged sentence

Product Development Costs

Product development costs, charged to expense as incurred, were $6,024,567 in 2019, $6,950,969 in 2018.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

A ccounting P olicies (continued)

Product development costs, charged to expense as incurred, were $ 3,131,035 in 2020 and $ 6,024,567 in 2019.

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.

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 generally represent administrative expenses for support functions and related overhead.

1 unchanged sentence

The Company expenses advertising costs as incurred.

Advertising costs were $462,911 in 2019, $501,615 in 2018.

Software Development Costs

Software development costs, are primarily costs to develop software sold, leased, or otherwise marketed, that are incurred subsequent to the establishment of

technological feasibility are capitalized if significant.

Capitalized software development costs are amortized using the straight-line amortization method over the estimated useful life of the applicable software.

no capitalized software development costs in the 2019.

For the year ended December 29, 2018 capitalized software development costs were $1,813,973.

Advertising costs were $ 303,060 in 2020 and $ 462,911 in 2019.

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 options and restricted stock awards.

The Company estimates the fair value of

granted stock options using the Black-Scholes valuation model.

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 options before exercising them, the estimated volatility of the Company’s common stock price and the number of options that will be

forfeited prior to vesting.

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 options and restricted stock awards.

The Company estimates the fair value of granted stock options using the Black-Scholes valuation model.

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 options before exercising them, the estimated volatility of the Company’s common stock price and the number of options 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.

For the year ended December 28, 2019, there were 96,000 SARs granted under the 2010 Plan.

Under the terms of the Director’s Fee Program, the directors can elect to receive their Director’s fees in cash or in common shares of the Company.

election is made at the beginning of each fiscal year and remains in effect for the entire year.

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.

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 bases 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.

Deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases 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.

On December, 22, 2017, SAB 118 was issued due to the complexities involved in accounting for the enacted Tax Act.

SAB 118 requires the company to include in

its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined.

SAB 118 requires the company to include in its financial statements a reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined.

Accordingly, the U.S.

provision for income tax for 2017 was based on the reasonable estimate guidance provided by

provision for income tax for 2017 was based on the reasonable estimate guidance provided by SAB 118.

The company has assessed the impact from the Tax Act and recorded the impact in the fourth quarter of 2018.

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

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 8, Income Taxes .

The Eastern Company

Notes to Consolidated Financial Statements (continued)

A ccounting P olicies (continued)

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 7 Income Taxes.

The following is a roll-forward of goodwill for 2020 and 2019:

Beginning Balance

Investment in Big 3

Investment in Hallink Moulds

Impairment Charge

( 4,002,548 )

( 4,975,372 )

Foreign Exchange

1 unchanged sentence

Beginning Balance

Investment in Load N Lock

Investment in Big 3 Precision

Foreign Exchange

3 unchanged sentences

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

2020 - $4,082,000;

2021 - $4,062,000;

2022 - $4,055,000;

2023 - $4,055,000 and 2024 - $3,372,000.

Total amortization expense for each of the next five years is estimated to be as follows:

2021 - $ 3.8 million;

2022 - $ 3.8 million;

2023 - $ 3.8 million;

2024 - $ 3.0 million and 2025 - $ 3.0 million.

Weighted-Average

Amortization Period (Years)

Period (Years)

2020 Gross Amount

27 unchanged sentences

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.

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 $ 1,875,000 per quarter beginning September 30, 2021 and continues through June 30, 2023.

The term loan is a

5-year loan with the remaining balance due on August 30, 2024.

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 2019, the Company did not borrow any funds on the revolving commitment portion of the facility.

During 2019 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 August 30, 2019 with Santander

Bank, N.A., as administrative agent.

The interest rates may vary based on the LIBOR rate plus a margin spread of 1.25 % to 2.25 %.

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 notational 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 December 28, 2019, the interest rate for half ($50 million) of the term portion was 3.44%, using a one month LIBOR rate, and 3.19% one the remaining balance ($50 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.

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 notational 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 2, 2021, the interest rate for half ($ 41.9 million) of the term portion was 1.9 %, using a one-month LIBOR rate, and 3.19 % one the remaining balance ($ 46.9 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 U.K.

Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021.

the United States, efforts to identify a set of alternative U.S.

Dollar reference interest rates have been initiated by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York.

At this time, it is

not possible to predict whether any such changes will occur, whether LIBOR will be phased out or any such alternative reference rates or other reforms to LIBOR will be enacted in the United Kingdom, the United States or elsewhere or the effect that any

such changes, phase-out, alternative reference rates or other reforms, if they occur, would have on the amount of interest paid on the Company’s LIBOR-based borrowings.

Uncertainty as to the nature of such potential changes, phase-out, alternative

reference rates or other reforms may materially adversely affect interest rates paid by the Company on its borrowings.

Reform of, or the replacement or phasing out of, LIBOR and proposed regulation of LIBOR and other “benchmarks” may materially

adversely affect the amount of interest paid on the Company’s LIBOR-based borrowings and could have a material adverse effect on the Company’s business, financial condition and results of operations.

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.

Changes in the method of calculating the replacement of LIBOR with an alternative rate or benchmark are still in flux, and once an alternative rate is adopted, may adversely affect interest rates and result in higher borrowing costs.

This could materially and adversely affect the Company’s results of operations, cash flows and liquidity.

We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks at this time.

We are working with our senior lender and may need to renegotiate our credit facilities as LIBOR phases out in June 2023.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

D ebt (continued)

DEBT (continued)

Debt consists of:

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Less current portion

1 Amounts are net of unamortized discounts and debt issuance costs of

$360,146 as of December 28, 2019 and $0 as of December 29, 2018.

1 Amounts are net of unamortized discounts and debt issuance costs of $ 273,312 as of January 2, 2021 and $ 360,146 as of December 28, 2019.

The Company paid interest of $ 2,754,980 in 2020, $ 1,857,961 in 2019.

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.

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 December 28, 2019.

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 as of January 2, 2021.

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 2020 and 2019.

As of December 29, 2019, scheduled annual principal maturities of long-term debt for each of the next five years follow:

S tock O ptions and A wards

As of January 2, 2021, scheduled annual principal maturities of long-term debt for each of the next five years follow:

STOCK OPTIONS AND AWARDS

Stock Options

As of December 28, 2019, the Company had one stock option plan, The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers,

other key employees, and non-employee Directors.

Incentive stock options granted under the 2010 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are

As of January 2, 2021, the Company has one stock option 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 options granted under the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted.

Restricted stock awards may also be granted to participants under the 2020 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors.

Under the 2010 Plan, non-qualified stock options granted to

participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors.

During 2019 and 2018, no stock options or restricted stock were granted that were subject to the meeting of performance measurements.

For the period of 2019, the Company used several assumptions which included an expected term of 3.5 to 4 years, volatility deviation of 28.88% and 32.33% and a risk free rate of 1.42% to 2.48%.

For the period of 2018, the Company used several

assumptions which included an expected term of 3.5 years, volatility deviation of 29.5% and a risk free rate of 2.33%.

Under the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors.

During 2020 and 2019, the Company did not grant stock options or restricted stock.

The 2020 Plan also permits the issuance of Stock Appreciation Rights (“SARs”).

The SARs are in the form of an option with a cashless exercise price equal to

the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock.

During 2019, the Company issued 96,000 SARs and during 2018

51,000 SARs were issued.

The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock.

The Company issued 44,000 SARs during 2020 and 96,000 SARs during 2019.

The Eastern Company

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STOCK OPTIONS AND AWARDS (continued)

Stock-based compensation expense in connection with SARs granted to employees during fiscal year 2019 was $397,250 and for 2018 was $276,778.

As of December 28, 2019, there were 178,500 shares of common stock reserved and available for future grant under the above noted 2010 Plan.

Stock-based compensation expense in connection with Stock Awards and SARs granted to employees during fiscal year 2020 was $376,000 and for 2019 was $397,000.

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 %.

For the period of 2019, the Company used several assumptions which included an expected term of 3.5 to 4 years, volatility deviation of 28.88 % and 32.33 % and a risk-free rate of 1.42 % to 2.48 %.

As of January 2, 2021, there were 818,864 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:

December 28, 2019

January 2, 2021

December 28, 2019

6 unchanged sentences

Outstanding as of

December 28, 2019

January 2, 2021

Weighted- Average Remaining Contractual Life

1 unchanged sentence

Exercisable as of

December 28, 2019

January 2, 2021

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

19.10 - 26.30

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

December 28, 2019

January 2, 2021

December 28, 2019

9 unchanged sentences

Outstanding as of

December 28, 2019

January 2, 2021

Weighted- Average Remaining Contractual Life

1 unchanged sentence

Exercisable as of

December 28, 2019

January 2, 2021

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

As of December 28, 2019, outstanding SARs and options had an intrinsic value of $2,898,945.

I ncome T axes

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.

As of January 2, 2021, outstanding SARs and options had an intrinsic value of $ 1,253,140 .

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:

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What changed 10-K

Item 8. Financial Statements and Supplementary Data