What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2022-03-17 compared with 2021-03-16 · 328 added, 356 removed, 816 unchanged (46% of the section changed)

4 unchanged sentences

Cash and cash equivalents

Marketable securities

Accounts receivable, less allowances:

5 unchanged sentences

Prepaid expenses and other assets

Current assets held for sale

Total Current Assets

4 unchanged sentences

( 27,965,412 )

Property, Plant and Equipment, net

Patents, technology and other intangibles net of accumulated amortization

Long term notes receivable, less current portion

Long term note receivable, less current portion

Right of Use Assets

Long-term assets held for sale

Total Other Assets

$ 266,328,935

1 unchanged sentence

See accompanying notes.

Consolidated Balance Sheets

LIABILITIES AND SHAREHOLDERS’ EQUITY

5 unchanged sentences

Current portion of long-term debt

Current liabilities held for sale

Total Current Liabilities

5 unchanged sentences

Accrued pension cost

Long-term liabilities held for sale

Total Liabilities

17 unchanged sentences

Foreign currency translation

( 2,037,952 )

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

24 unchanged sentences

Goodwill impairment loss

( 4,975,372 )

Loss on disposition of subsidiary

( 2,158,863 )

Restructuring costs

( 2,650,940 )

Operating profit

2 unchanged sentences

( 2,058,600 )

Income before income taxes

Earnings per Share:

Income from continuing operations before income taxes

( 2,888,217 )

( 2,181,891 )

Net income from continuing operations

Discontinued Operations ( see note 3 )

Gain (loss) from operations of discontinued units

$ ( 7,191,198 )

Loss on sale of businesses

( 11,807,512 )

Income tax benefit

Net loss on discontinued operations

$ ( 6,833,172 )

$ ( 5,629,397 )

Earnings per Share from continuing operations:

Loss per Share from discontinued operations:

Total Earnings per Share:

Cash dividends per share:

See accompanying notes.

3 unchanged sentences

Change in fair value of interest rate swap,

net of tax benefit (cost) of:

net of tax (cost) benefit of:

$ 327,118 in 2021 and $ 490,234 in 2020

4 unchanged sentences

( 5,695,386 )

( 2,675,007 )

Total other comprehensive (loss)

( 4,262,180 )

Total other comprehensive income (loss)

( 4,262,180 )

1 unchanged sentence

See accompanying notes.

Consolidated Statements of Shareholders’ Equity

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

Comprehensive

Income (Loss)

Shareholders'

Income (Loss)

Balances at December 28, 2019

3 unchanged sentences

$ ( 25,234,571 )

Cash dividends declared, $.44 per share

$ 105,437,257

( 2,748,393 )

Currency translation adjustment

Change in fair value of interest rate swap

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

Cash dividends declared,

$0.44 per share

( 2,754,502 )

Issuance of SARS

Issuance of Common Stock for directors’ fees

Balances at December 28, 2019

Currency translation adjustment

Change in fair value of interest

( 1,558,610 )

Change in pension and other

postretirement benefit costs,

( 5,695,386 )

Treasury Stock Purchase

Issuance of SARS

Issuance of Common Stock

for directors' fees

Balances at January 2, 2021

( 2,749,729 )

Cash dividends declared, $.44 per share

$ ( 20,537,963 )

$ 122,840,131

Currency translation adjustment

Change in fair value of interest rate swap

$ ( 29,496,751 )

$ 104,306,458

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

Cash dividends declared,

$0.44 per share

( 2,766,677 )

Treasury stock purchases

Currency translation adjustment

Change in fair value of interest

Change in pension and other

postretirement benefit costs,

Stock Options Exercised

Treasury Stock Purchase

Issuance of SARS

Issuance of Common Stock for directors’ fees

Issuance of Common Stock

for directors' fees

Balances at January 1, 2022

7 unchanged sentences

Operating Activities

Adjustments to reconcile net income to net cash provided by

operating activities:

Loss from discontinued operations

( 6,833,172 )

( 5,629,397 )

Income from continuing operations

Adjustments to reconcile net income to net cash provided

by (used in) operating activities:

Depreciation and amortization

2 unchanged sentences

( 4,032,917 )

Goodwill impairment loss

(Gain) loss on sale of equipment and other assets

Non-cash restructuring charges

( 1,010,684 )

Goodwill impairment

Gain on sale of equipment and other assets

( 2,470,339 )

Provision for doubtful accounts

Stock compensation expense

Deferred taxes

1 unchanged sentence

( 2,118,551 )

Stock compensation expense

Changes in operating assets and liabilities:

Accounts receivable

( 11,282,090 )

( 19,608,565 )

Prepaid expenses and other

Accounts payable

( 3,527,171 )

Accrued compensation

( 4,581,818 )

Accounts payable

Accrued compensation

Other accrued expenses

( 1,457,896 )

Net cash (used in) provided by operating activities

( 7,757,423 )

Net cash provided by operating activities

Investing Activities

2 unchanged sentences

( 7,172,868 )

Business disposition

Issuance of notes receivable

( 2,500,000 )

Proceeds from business dispositions

Issuance of Note Receivable

( 2,172,068 )

Payments Received from Note Receivable

Proceeds from sale of equipment

Payments received from notes receivable

Proceeds from sale of businesses

Proceeds from sale of building and equipment

Purchases of property, plant and equipment

1 unchanged sentence

( 2,335,308 )

Net cash used in investing activities

( 9,111,319 )

Net cash provided by (used in) investing activities

( 8,347,644 )

Financing Activities

Proceeds from long-term borrowings

Principal payments on long-term debt

1 unchanged sentence

( 10,049,577 )

Lease Payments

Financing leases, net

Purchase common stock for treasury

2 unchanged sentences

( 2,754,650 )

Net cash provided by (used in) financing activities

Net cash used in financing activities

( 20,272,950 )

( 13,183,591 )

Discontinued Operations

Cash provided by operating activities

Cash used in investing activities

( 1,022,256 )

( 1,407,932 )

Cash provided by discontinued operations

Effect of exchange rate changes on cash

1 unchanged sentence

( 9,499,205 )

( 1,894,870 )

Cash and cash equivalents at beginning of period

1 unchanged sentence

Supplemental disclosure of cash flow information:

Cash paid during the year for:

Non-cash investing and financing activities

Right of use asset

Lease liability

( 1,456,128 )

Lease liability

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

2 unchanged sentences

DESCRIPTION OF BUSINESS

The Eastern Company (the “Company,” “Eastern,” “we,” “us” or “our”) manages industrial businesses that design, manufacture and sell engineered solutions to industrial markets.

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.

1 unchanged sentence

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.

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.

(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.

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.

(“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.

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 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.

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.

Diversified Products

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

and Argo EMS (formerly Argo Transdata).

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 OEMs in various industries, including measurement systems, semiconductor equipment manufacturing, and industrial controls, medical and military products.

Sales are made to customers primarily in North America.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

Sales are made to customers primarily in North America.

BUSINESS ACQUISITIONS

4 unchanged sentences

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 .

5 unchanged sentences

Asset Class/Description

Weighted-Average Period in Years

Patents, technology, and licenses

Weighted-Average Useful Lives in Years

Customer relationships

2 unchanged sentences

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 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.

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.

The Eastern Company

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:

Consideration

Cash proceeds from debt

Recognized amounts of identifiable assets acquired and liabilities assumed

Accounts receivable

Prepaid and other assets

Property plant and equipment

Other noncurrent assets

Other intangible assets

Current liabilities

Summarized Financial Information of Discontinued Operations

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

Cost of products sold

( 24,873,717 )

Deferred revenue

( 40,701,607 )

Income tax payable

Selling and administrative expenses

( 15,962,532 )

Deferred tax liabilities

( 8,591,915 )

Total identifiable net assets

Accounts Receivable

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

Restructuring costs

( 11,807,512 )

Operating loss

( 8,354,350 )

( 6,504,998 )

Interest expense

Loss from discontinued operations before income taxes

( 8,936,924 )

( 7,191,198 )

Income tax benefit

Loss from discontinued operations

$ ( 6,833,172 )

$ ( 5,629,397 )

Eastern Company

Notes to Consolidated Financial Statements (continued)

BUSINESS ACQUISITIONS (continued)

Property, Plant and Equipment

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.

Goodwill Allocation

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

Acquired current liabilities are amounts owed to vendors or accrued expenses.

Deferred Revenue

Deferred revenue is the amount of customers deposits at the time of the acquisition.

Income taxes are the estimated amount of state and federal taxes to settle certain tax positions prior to the acquisition.

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.

Acquisition Related Expenses

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 .

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

Accounts receivable

Prepaid expenses

Property, plant and equipment, net

Patents and other intangibles net of accumulated amortization

Right of use assets

Total assets of discontinued operations

Current assets of discontinued operations¹

Non-current assets of discontinued operations

Total assets of discontinued operations

Accounts payable

Accrued compensation and other accrued expenses

Note payable, current

Current portion of lease liability

Other long-term liabilities

Total liabilities of discontinued operations

Current liabilities of discontinued operations¹

Non-current liabilities of discontinued operations

Total liabilities of discontinued operations

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

ACCOUNTING POLICIES

1 unchanged sentence

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 “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.

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.

Eastern Company

Notes to Consolidated Financial Statements (continued)

Principles of Consolidation

2 unchanged sentences

Reclassification

Product development expense is not necessarily a cost of product sold.

Product development expense is not a cost of product sold.

Rather, these expenses are related to product development.

2 unchanged sentences

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

20 unchanged sentences

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 are valued at the lower of cost or net realizable value.

4 unchanged sentences

at January 1, 2022) 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.

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.

Eastern Company

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 ($ 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:

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;

7 unchanged sentences

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.

No impairment losses were recognized for the years ended January 1, 2022 and January 2, 2021.

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.

4 unchanged sentences

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 warrant.

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.

Eastern Company

Notes to Consolidated Financial Statements (continued)

Intangible Assets

Patents are recorded at cost and are amortized using the straight-line method over the lives of the patents.

Technology and licenses are recorded at cost and are 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.

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

10 unchanged sentences

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 2, 2021 and December 28, 2019, approximate fair value based on the expected future cash flows of the related instruments.

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.

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.

11 unchanged sentences

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.

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.

12 unchanged sentences

The weighted average remaining lease term is 6.4 years.

The interest rate used was 3.5 % - 5.0 %.

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 generates wholesale revenues primarily from the sale of products to original equipment manufacturers and distributers in the United States.

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 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.

2 unchanged sentences

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 $ 505,000 for the year ended January 2, 2021 and $ 576,000 for the year ended December 28, 2019.

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 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.

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 2, 2021 and December 28, 2019, the Company recorded no revenues related to performance obligations satisfied in prior periods.

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 12 regarding the Company’s revenue disaggregated by reporting segment, intersegment sales by reporting segment and geography.

See Note 13 regarding the Company’s revenue disaggregated by geography.

Cost of Goods Sold

3 unchanged sentences

Shipping and handling costs are included in cost of goods sold.

Eastern Company

Notes to Consolidated Financial Statements (continued)

Product Development Costs

2 unchanged sentences

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.

These expenses represent selling and administrative expenses for support functions and related overhead.

Advertising Costs

2 unchanged sentences

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 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.

3 unchanged sentences

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.

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.

Accordingly, the U.S.

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.

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.

6 unchanged sentences

Beginning Balance

Investment in Hallink Moulds

Impairment Charge

( 4,002,548 )

( 4,975,372 )

Foreign Exchange

1 unchanged sentence

Beginning Balance

Investment in Big 3 Precision

Investment in Hallink

Impairment Charge

Foreign Exchange

10 unchanged sentences

Period (Years)

2020 Gross Amount

Patents and developed technology

Patents and developed

Customer relationships

Non-compete agreements

Intellectual property

Total Gross Intangibles

Accumulated Amortization

Patents and developed technology

Patents and developed

Customer relationships

Non-compete agreements

Intellectual property

Accumulated Amortization

Net 2021 per Balance Sheet

2019 Gross Amount

Patents and developed technology

Patents and developed

Customer relationships

Non-compete agreements

Intellectual property

Total Gross Intangibles

Accumulated Amortization

Patents and developed technology

Patents and developed

Customer relationships

Non-compete agreements

Intellectual property

Accumulated Amortization

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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 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 notational amount of $ 50,000,000 , which was equal to 50% of the outstanding balance of the term loan on that date.

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 %.

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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

4 unchanged sentences

Less current portion

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.

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.

6 unchanged sentences

STOCK OPTIONS AND AWARDS

Stock Options

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.

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 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.

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 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.

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 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 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.

The Eastern Company

2 unchanged sentences

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 %.

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

1 unchanged sentence

January 1, 2022

December 28, 2019

January 2, 2021

Weighted - Average Exercise Price

15 unchanged sentences

January 1, 2022

December 28, 2019

Weighted - Average Exercise Price

January 2, 2021

Outstanding at beginning of period

Outstanding at end of period

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

The Eastern Company

Notes to Consolidated Financial Statements (continued)

STOCK OPTIONS AND AWARDS (continued)

Stock Grants Outstanding and Exercisable

Range of Exercise Prices

Outstanding as of

January 2, 2021

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

Exercisable as of

January 2, 2021

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

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.

16 unchanged sentences

Foreign Tax Credit

( 1,164,515 )

Capital Loss Carry forward

Total deferred income tax assets

3 unchanged sentences

Income before income taxes consists of:

Continued Operations

Discontinued Operations

Total Income Statement

Continued Operations

Discontinued Operations

Total Income Statement

$ ( 8,936,924 )

$ ( 7,191,198 )

$ ( 8,936,924 )

$ ( 7,191,198 )

The Eastern Company

2 unchanged sentences

The provision for income taxes follows:

Continued Operations

Discontinued Operations

Total Income Statement

Continued Operations

Discontinued Operations

Total Income Statement

$ ( 1,816,413 )

$ ( 1,496,443 )

$ ( 503,106 )

( 2,292,101 )

$ ( 2,103,752 )

$ ( 1,561,801 )

A reconciliation of income taxes computed using the U.S.

7 unchanged sentences

Uncertain tax positions reserve

A reconciliation of income taxes computed using the U.S.

federal statutory rate to that reflected in operations follows for continuing operations:

Income taxes using U.S.

federal statutory rate

State income taxes, net of federal benefit

Impact on Foreign Repatriation Tax Reform

Impact of foreign subsidiaries on effective tax rate

Impact of Research & Development tax credit

Uncertain tax positions reserve

The Eastern Company

Notes to Consolidated Financial Statements (continued)

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:

Income taxes using U.S.

federal statutory rate

$ ( 1,876,754 )

$ ( 1,510,152 )

State income taxes, net of federal benefit

$ ( 2,103,752 )

$ ( 1,561,784 )

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

Pursuant to SAB 118, the company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts and as such has adjusted for the finalization of the tax impacts in the fourth quarter of 2018.

The change primarily related to deferred taxes.

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.

13 unchanged sentences

Additionally, an entity that elects early adoption must adopt all the amendments in the same period.

The Company will adopt ASU 2019-12 in the first interim period of 2021.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

INCOME TAXES (continued)

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.

3 unchanged sentences

Net operating losses arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years, which may result in refunds of prior period corporate income tax.

The Company had taxable income in 2018 and 2019, thus we would only benefit from this item of CARES Act relief to the extent we incur a tax net operating loss in 2020 that can be carried back.

As of October 3, 2020, a tax net operating loss is not expected for taxable year 2020.

In addition, this item of CARES Act relief increased the positive evidence supporting utilization of our gross deferred tax assets due to available income in carryback years;

this did not change our overall assessment as we do not have a valuation allowance recorded against our deferred tax assets.

The Company had taxable income in 2018, 2019 and 2020, thus we did not benefit from this item of CARES Act relief.

Furthermore, for taxable years beginning before 2021, net operating loss carryforwards and carrybacks to that year may offset 100% of taxable income in the year.

Previously, net operating losses generated through 2017 could offset 100% of taxable income, while losses generated after 2017 could only offset 80% of taxable income.

The Company had taxable income in 2018 and 2019 and would carry back a loss generated in 2020 if applicable, leaving minimal opportunity to benefit from this item of CARES Act relief.

As noted previously, the Company had taxable income in 2018, 2019 and 2020, thus we did not benefit from this item of CARES Act relief.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

INCOME TAXES (continued)

For taxable years beginning in 2019 and 2020, the interest deduction limitation is increased from 30% to 50% of “adjusted taxable income” (taxable income without interest, tax depreciation and tax amortization) plus interest income.

Furthermore, the Company may choose to use the 2019 adjusted taxable income (instead of 2020) in determining the 2020 interest expense limitation.

The Company was not subject to an interest limitation in 2019 and therefore expects to use the 2019 adjusted taxable income if needed to avoid or reduce an interest expense limitation in 2020.

The Company was not subject to an interest limitation in 2019 nor 2020.

A technical correction to the Tax Cuts and Jobs Act permits bonus depreciation and a 15-year straight-line recovery period on qualified improvement property placed in service after December 31, 2017.

Prior to this technical correction, such property placed in service after 2017 was subject to the 39-year straight-line recovery period and was ineligible for bonus depreciation.

The Company will take advantage of this accelerated recovery period and bonus depreciation.

To the extent the Company has eligible improvements in 2021, the Company can claim bonus depreciation which would reduce taxes payable and increase the deferred tax liability for fixed assets.

16 unchanged sentences

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 a number of 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 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.

1 unchanged sentence

Most leases are for a fixed term and for a fixed amount.

The Company is not a party to any leases that have step rent provisions, escalation clauses, capital improvement funding or payment increases based on any index or rate.

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

The Company is not a party to any leases that have capital improvement funding or payment increases based on any index or rate.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

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.

7 unchanged sentences

Components of the net periodic benefit cost of the Company’s pension benefit plans for the fiscal year indicated were as follows:

Notes to Consolidated Financial Statements (continued)

RETIREMENT BENEFIT PLANS (continued)

Interest cost

6 unchanged sentences

$ ( 860,816 )

$ ( 139,222 )

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.

5 unchanged sentences

- Supplemental pension plans

1.49 % 2.61 %

Expected return on plan assets

Rate of compensation increase

The Eastern Company

Notes to Consolidated Financial Statements (continued)

RETIREMENT BENEFIT PLANS (continued)

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

7 unchanged sentences

Expected return on plan assets

The Eastern Company

Notes to Consolidated Financial Statements (continued)

RETIREMENT BENEFIT PLANS (continued)

As of January 2, 2021, and December 28, 2019, the status of the Company’s pension benefit plans and other postretirement benefit plan was as follows:

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

2 unchanged sentences

$ 111,549,725

$ 102,991,053

Change in discount rate

( 5,316,621 )

Interest cost

Plan Amendment

Actuarial (gain)/loss

( 1,786,595 )

( 1,508,935 )

Significant Event

21 unchanged sentences

$ ( 1,185,139 )

The Eastern Company

Notes to Consolidated Financial Statements (continued)

RETIREMENT BENEFIT PLANS (continued)

Amounts recognized in accumulated other comprehensive income consist of:

7 unchanged sentences

$ ( 43,893,239 )

The Eastern Company

Notes to Consolidated Financial Statements (continued)

RETIREMENT BENEFIT PLANS (continued)

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

11 unchanged sentences

( 10,606,709 )

( 12,313,831 )

Asset (gains)/losses deferred

Plan Amendments

Significant Event

( 2,994,746 )

( 4,308,541 )

Balance at end of period

8 unchanged sentences

- Other postretirement plan

At January 2, 2021 and December 28 2019, the accumulated benefit obligation for all qualified and nonqualified defined benefit pension plans was $111,549,725 and $102,991,053, respectively.

During 2020, the pension benefit obligation increased between 10.3% to 11.3% due to the decrease in the discount rates from 3.18 %- 3.23 % to 2.40 %- 2.48 %.

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 %.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

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:

9 unchanged sentences

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.

The Eastern Company

Notes to Consolidated Financial Statements (continued)

Retirement Benefit Plans (continued)

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.

9 unchanged sentences

RETIREMENT BENEFIT PLANS (continued)

The fair values of the company’s pension plans assets at January 2, 2021 and December 28, 2019, utilizing the fair value hierarchy discussed in Note 3, follow:

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:

January 1, 2022

15 unchanged sentences

RETIREMENT BENEFIT PLANS (continued)

December 28, 2019

January 2, 2021

Cash and Equivalents:

9 unchanged sentences

STRIPS Fixed Income Funds (c)

· Russell 15 Year STRIPS Fixed Income Fund

· Russell 10 Year STRIPS Fixed Income Fund

· Russell 15 to 20 Year STRIPS Fixed Income Fund

· Russell 10 to 15 Year STRIPS Fixed Income Fund

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.

24 unchanged sentences

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 $ 5,230,134 and $ 6,625,560 at January 2, 2021 and December 28, 2019, respectively.

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.

19 unchanged sentences

Total contributions made for the period

At January 2, 2021, the Company had accrued $ 519,177 for the non-discretionary safe harbor contribution this amount was expensed in 2020 and was contributed to the plan in January 2021.

At December 28, 2019, the Company had accrued $ 550,286 for the non-discretionary safe harbor contribution.

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.

3 unchanged sentences

Weighted average shares outstanding

Dilutive stock options

Dilutive stock awards

Denominator for diluted earnings per share

2 unchanged sentences

Notes to Consolidated Financial Statements (continued)

REPORTABLE SEGMENTS

Sales to unaffiliated customers:

Engineered Solutions

$ 197,614,590

$ 186,795,507

Diversified Products

$ 240,403,114

$ 251,742,619

Inter-segment Sales:

Engineered Solutions

Diversified Products

Income Before Income Taxes:

Engineered Solutions

Diversified Products

( 7,589,421 )

Operating Profit

Interest Expense

( 2,744,800 )

( 1,857,961 )

GEOGRAPHIC INFORMATION

Geographic Information:

United States

10 unchanged sentences

$ 275,528,354

Engineered Solutions

Diversified Products

General corporate

$ 275,528,354

$ 280,662,976

The Eastern Company

Notes to Consolidated Financial Statements (continued)

REPORTABLE SEGMENTS (continued)

Depreciation and Amortization:

Engineered Solutions

Diversified Products

Capital Expenditures:

Engineered Solutions

Diversified Products

Currency translation adjustment

General corporate

RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU No.

2016-02, Leases (“Topic 842”).

ASU 2016-02 requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months.

The guidance is to be applied at the beginning of the earliest comparative period in the financial statements and is effective for years beginning after December 15, 2018.

Early adoption was permitted.

In July 2018, the FASB issued ASU No.

2018-10, Codification Improvements to Topic 842 - Leases.

ASU 2018-10 clarifies and increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing transactions.

The guidance is to be applied upon adoption of Topic 842 and is effective for years beginning after December 15, 2018.

Also in July 2018, the FASB issued ASU No.

2018-11, Leases.

ASU 2018-11 provides clarification and an additional (and optional) transition method to adopt the new leases standard.

The guidance is to be applied upon adoption of Topic 842 and is effective for years beginning after December 15, 2018.

In March 2019, the FASB issued ASU No.

2019-01, Leases (Topic 842):

Codification Improvements.

2019-01 aligns the new leases guidance with existing guidance for the fair value of the underlying asset by lessors that are not manufacturers or dealers and clarifies an exemption for lessors and lessees from a certain interim disclosure requirement associated with adopting the FASB’s new lease accounting standard.

The guidance is to be applied upon adoption of Topic 842 and is effective for years beginning after December 15, 2018.

See Note 3, Accounting Policies – Leases.

In December 2019, the FASB issued ASU No.

2019-12, Income Taxes (Topic 740).

The amendments in this update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.

The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.

Early adoption of the amendments is permitted.

For public business entities, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

The adoption of this amendment will not have a material impact on the consolidated financial statements of the Company.

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.

4 unchanged sentences

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 metal casting facility in New York.

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.

4 unchanged sentences

Verbal approval for the closure plan was received from the NYSDEC in May 2019.

Written approval was received in October of 2020.

Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap, is anticipated in May 2021.

In the third fiscal quarter of 2021, following the completion of construction work, a closure report and maintenance plan is expected to be prepared for the NYSDEC.

This closure report and maintenance plan documents the work done and requests acknowledgment of satisfactory completion of the Order on Consent between Frazer and Jones, and the NYSDEC.

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.

CONCENTRATION OF RISK

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The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss.

As of January 2, 2021 and December 28, 2019, there was one significant concentration of credit risk.

One customer exceeded 10 % of total accounts receivable for 2020 and 2019.

As of January 1, 2022, and January 2, 2021, there was one significant concentration of credit risk.

One customer represented 11 % of total accounts receivable for 2021 and 2020.

The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.

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As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments.

The Eastern Company

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

The Eastern Company

Naugatuck, Connecticut

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of The Eastern Company (the Company) as of January 2, 2021 and December 28, 2019, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended January 2, 2021, including the related notes and financial statement schedule appearing under Item 15(a) (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 2, 2021 and December 28, 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended January 2, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheets of The Eastern Company (the Company) as of January 1, 2022 and January 2, 2021, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the two-year period ended January 1, 2022, including the related notes and financial statement schedule appearing under Item 15(a)(2) (collectively referred to as the financial statements).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of January 1, 2022 and January 2, 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended January 1, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of January 1, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 17, 2022, expressed an unqualified opinion.

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The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Valuation and Impairment Assessment of Goodwill

Impairment Assessment of Goodwill

Description of the Critical Audit Matter and the Relevant Accounts and Disclosures

As described in Notes 3 and 4 to the consolidated financial statements, the Company’s consolidated goodwill balance was $76.9 million as of January 2, 2021.

As described in Notes 4 and 5 to the consolidated financial statements, the Company’s consolidated goodwill balance is $72.2 million as of January 1, 2022.

Management tests reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

Reporting units are tested 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, an impairment loss is recorded based on the difference between the fair value and carrying amount, not to exceed the associated carrying amount of goodwill.

Management recognized impairment losses of $5.0 million for the year ended January 2, 2021.

Management generally utilizes a combination of a) the discounted cash flow method under the income approach, and b) the comparable companies method under the market approach to estimate the fair value of reporting units.

As disclosed by management, management’s valuation methods included significant judgments and assumptions related to net sales, cost of products sold, selling and administrative expenses (SG&A), depreciation, working capital, capital expenditures, income tax rates, discount rates, long-term growth rates, and other market factors.

As disclosed by management, reporting units are tested for impairment by utilizing qualitative factors that include a) macroeconomic conditions, b) market and industry conditions, c) cost factors, d) overall financial performance, e) other relevant entity-specific events, and f) events affecting a reporting unit.

Principal Considerations for the Designation of the Critical Audit Matter

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments is a critical audit matter are (i) the significant judgments and assumptions used by management when developing the fair value measurements of the reporting units;

and (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating management’s significant assumptions related to net sales, cost of products sold, SG&A, discount rates, long-term growth rates, and other market factors.

and (ii) a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating management’s significant judgments and assumptions related to the qualitative factors.

How the Critical Audit Matter was Addressed in the Audit

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These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the valuation of the Company’s reporting units.

These procedures also included, among others (i) testing management’s process for developing the fair value estimates;

(ii) evaluating the appropriateness of the discounted cash flow and comparable companies methods;

(iii) testing the completeness and accuracy of underlying data used in the fair value estimates and (iv) evaluating the significant assumptions related to net sales, cost of products sold, SG&A, discount rates, long-term growth rates, and other market factors.

Evaluating management’s assumptions related to net sales, cost of products sold, SG&A, discount rates, long-term growth rates, and other market factors involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit;

These procedures also included, among others (i) testing management’s process for developing the qualitative factors;

(ii) evaluating the appropriateness of the qualitative factors;

and (iii) testing the completeness and accuracy of underlying data used in the qualitative factors by corroborating and recalculating the relevant metrics.

Evaluating management’s significant judgments and assumptions related to qualitative factors involved evaluating whether those significant judgments and assumptions used by management were reasonable considering (i) the current and past performance of the reporting units;

(ii) the consistency with external market and industry data;

and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.

/s/Fiondella, Milone & LaSaracina LLP

Fiondella, Milone & LaSaracina LLP

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data