eml_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	for the quarterly period ended October 2, 2021

OR

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	for the transition period from ________________ to _______________

Commission File Number 001-35383

THE EASTERN COMPANY

(Exact name of registrant as specified in its charter)

Connecticut		06-0330020
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

112 Bridge Street, Naugatuck, Connecticut		06770
(Address of principal executive offices)		(Zip Code)

(203)-729-2255

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

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

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

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

As of October 2, 2021, 6,275,180 shares of the registrant’s common stock, no par value per share, were issued and outstanding.

The Eastern Company

Form 10-Q

FOR THE QUARTERLY PERIOD ENDED OCTOBER 2, 2021

TABLE OF CONTENTS

		Page



PART I	FINANCIAL INFORMATION

Item 1.	Financial Statements	3.

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19.

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27.

Item 4.	Controls and Procedures	27.

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	28.

Item 1A.	Risk Factors	28.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28.

Item 3.	Defaults Upon Senior Securities	28.

Item 4.	Mine Safety Disclosures	28.

Item 5.	Other Information	28.

Item 6	Exhibits	29.

	Signatures	30.

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PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended						Nine Months Ended
	October 2, 2021			October 3, 2020			October 2, 2021			October 3, 2020
Net sales	$	63,876,906		$	55,705,597		$	186,897,930		$	147,059,497
Cost of products sold		(48,661,374	)		(42,315,555	)		(142,196,527	)		(110,427,295	)
Gross margin		15,215,532			13,390,042			44,701,403			36,632,202

Product development expense		(962,924	)		(556,469	)		(3,068,866	)		(2,395,932	)
Selling and administrative expenses		(9,440,583	)		(8,536,752	)		(27,760,514	)		(23,289,068	)
Operating profit		4,812,025			4,296,821			13,872,023			10,947,202

Interest expense		(427,222	)		(485,300	)		(1,388,512	)		(1,560,962	)
Other income		407,192			365,701			3,359,065			969,023
Income from continuing operations before income taxes		4,791,995			4,177,222			15,842,576			10,355,263

Income taxes		(971,884	)		(1,021,607	)		(3,573,308	)		(2,476,640	)
Net income from continuing operations		3,820,111			3,155,615			12,269,268			7,878,623

Discontinued Operations (see note B )
Gain (loss) from operations of discontinued units		1,492,063			(222,773	)		2,831,530			(5,054,259	)
Gain (loss) on classification as held for sale		1,308,639			-			(9,274,439	)		-
Income tax (expense) benefit		(659,285	)		51,833			1,516,661			1,167,345
Gain (loss) on discontinued operations		2,141,417			(170,940	)		(4,926,248	)		(3,886,914	)

Net income	$	5,961,528		$	2,984,675		$	7,343,020		$	3,991,709

Earnings per share from continuing operations:
Basic	$	0.61		$	0.51		$	1.96		$	1.26

Diluted	$	0.61		$	0.51		$	1.96		$	1.26

Earnings (loss) per share from discontinued operations:
Basic	$	0.34		$	(0.03	)	$	(0.79	)	$	(0.62	)

Diluted	$	0.34		$	(0.03	)	$	(0.79	)	$	(0.62	)

Total earnings per share:
Basic	$	0.95		$	0.48		$	1.17		$	0.64

Diluted	$	0.95		$	0.48		$	1.17		$	0.64

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

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

	Three Months Ended					Nine Months Ended
	October 2, 2021			October 3, 2020		October 2, 2021			October 3, 2020
Net income	$	5,961,528		$	2,984,675	$	7,343,020		$	3,991,709
Other comprehensive (loss) income:

Change in foreign currency translation		(523,632	)		277,618		(238,837	)		(248,786	)

Change in fair value of interest rate swap, net of tax cost (benefit) of:
2021 - $31,759 and $188,753 respectively; 2020 - $(35,587) and $547,087 respectively		104,949			113,180		602,224			(1,740,442	)

Change in pension and postretirement benefit costs, net of taxes of:
2021 - $107,962 and $308,117 respectively; 2020 - $81,144 and $243,429 respectively		346,328			260,295		988,401			780,886
Total other comprehensive (loss) income		(72,355	)		651,093		1,351,788			(1,208,342	)
Comprehensive income	$	5,889,173		$	3,635,768	$	8,694,808		$	2,783,367

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

	October 2, 2021			January 2, 2021
	(unaudited)
Current Assets
Cash and cash equivalents	$	8,703,386		$	15,320,776
Accounts receivable, less allowances: 2021 - $583,891; 2020 - $486,707		41,295,019			31,804,207
Inventories		56,698,552			43,121,737
Current portion of notes receivable		588,926			398,414
Prepaid expenses and other assets		7,314,511			3,152,720
Current assets held for sale		35,044,564			17,937,918
Total Current Assets		149,644,958			111,735,772

Property, Plant and Equipment		50,934,225			52,173,305
Accumulated depreciation		(26,031,846	)		(25,976,187	)
Property, Plant and Equipment, Net		24,902,379			26,197,118

Goodwill		70,992,398			70,994,178
Trademarks		5,393,868			5,404,284
Patents and other intangibles net of accumulated amortization		23,803,304			27,089,071
Long term notes receivable, less current portion		791,802			1,677,277
Right of Use Assets		11,774,102			12,594,663
Long-term assets held for sale		-			19,894,688
Total Other Assets		112,755,474			137,654,161

TOTAL ASSETS	$	287,302,811		$	275,587,051

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY
	October 2, 2021			January 2, 2021
	(unaudited)
Current Liabilities
Accounts payable	$	31,480,819		$	21,311,619
Accrued compensation		4,182,611			3,474,686
Other accrued expenses		1,648,486			3,362,032
Current portion of lease liability		2,785,950			2,798,712
Current portion of long-term debt		7,500,000			6,437,689
Current liabilities held for sale		7,086,138			3,281,225
Total Current Liabilities		54,684,004			40,665,963

Deferred income taxes		2,957,771			2,957,771
Other long-term liabilities		1,068,580			1,144,126
Lease liability		9,159,274			9,834,853
Long-term debt, less current portion		76,772,649			82,255,803
Accrued postretirement benefits		1,138,148			1,185,139
Accrued pension cost		29,132,453			33,188,623
Long-term liabilities held for sale		-			48,315
Total Liabilities		174,912,879			171,280,593

Shareholders’ Equity
Voting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Common Stock, no par value, Authorized: 50,000,000 shares		32,591,987			31,501,041
Issued: 9,024,909 shares in 2021 and 8,996,625shares in 2020
Outstanding: 6,275,180 shares in 2021 and 6,246,896 shares in 2020
Treasury Stock: 2,749,729 shares in 2021 and 2,749,729 shares in 2020		(20,537,961	)		(20,537,962	)
Retained earnings		128,480,870			122,840,131
Accumulated other comprehensive income (loss):
Foreign currency translation		715,026			953,863
Unrealized loss on interest rate swap, net of tax		(789,368	)		(1,391,592	)
Unrecognized net pension and postretirement benefit costs, net of tax		(28,070,622	)		(29,059,023	)
Accumulated other comprehensive loss		(28,144,964	)		(29,496,752	)
Total Shareholders’ Equity		112,389,932			104,306,458
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	287,302,811		$	275,587,051

See accompanying notes.

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THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended
	October 2, 2021			October 3, 2020
Operating Activities
Net income	$	7,343,020		$	3,991,709
Less: Loss from discontinued operations		(4,926,248	)		(3,886,914	)
Income from continuing operations	$	12,269,268		$	7,878,623
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization		5,188,863			4,966,934
Unrecognized pension and postretirement benefits		(3,056,642	)		(1,066,777	)
Gain on sale of equipment and other assets		(1,469,218	)		(418,872	)
Provision for doubtful accounts		73,097			156,286
Stock compensation expense		1,090,946			652,232
Changes in operating assets and liabilities:
Accounts receivable		(9,553,337	)		3,013,523
Inventories		(13,686,268	)		3,092,768
Prepaid expenses and other		(3,903,388	)		132,623
Other assets		47,534			4,755,718
Accounts payable		11,156,105			(949,971	)
Accrued compensation		697,735			(1,191,856	)
Other accrued expenses		(2,173,142	)		(1,587,475	)
Net cash (used in) provided by operating activities		(3,318,447	)		19,433,756

Investing Activities
Marketable securities		28,951			7,741
Business disposition		—			(5,994,267	)
Issuance of notes receivable		—			(1,251,943	)
Payments received from notes receivable		694,962			54,069
Proceeds from sale of equipment		1,980,729			445,212
Purchases of property, plant and equipment		(2,112,990	)		(1,531,082	)
Net cash provided by (used in) investing activities		591,652			(8,270,270	)

Financing Activities
Principal payments on long-term debt		(4,424,757	)		(3,846,861	)
Financing leases, net		132,221			—
Purchase common stock for treasury		—			(368,864	)
Dividends paid		(2,062,492	)		(2,058,943	)
Net cash used in financing activities		(6,355,028	)		(6,274,668	)

Discontinued Operations
Cash provided by (used in) operating activities		3,546,530			(2,744,115	)
Cash used in investing activities		(794,519	)		(245,288	)
Cash provided by (used in) discontinued operations		2,752,011			(2,989,403	)

Effect of exchange rate changes on cash		239,561			(344,534	)
Net change in cash and cash equivalents		(6,090,251	)		1,554,881

Cash and cash equivalents at beginning of period		16,101,635			17,996,505
Cash and cash equivalents at end of period ¹	$	10,011,384		$	19,551,386

Supplemental disclosure of cash flow information:
Interest	$	1,839,729		$	2,085,953
Income taxes		866,850			1,453,775

Non-cash investing and financing activities
Right of use asset		(820,561	)		(428,510	)
Lease liability		688,341			428,510

¹ includes cash from assets held for sale of $1.3 million as of October 2, 2021 and $1.8 million as of October 3, 2020

See accompanying notes

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THE EASTERN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

October 2, 2021

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended January 2, 2021, filed with the Securities and Exchange Commission on March 16, 2021 (the “2020 Form 10-K”), for additional information.

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

The condensed consolidated balance sheet as of January 2, 2021 has been derived from the audited consolidated balance sheet at that date.

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2020 or the 2020 fiscal year mean the 53-week period ended on January 2, 2021 and references to 2021 or the 2021 fiscal year mean the 52-week period ending on January 1, 2022. In a 52-week fiscal year, each quarter is 13 weeks long. In a 53-week fiscal year, each of the first two fiscal quarters and the fourth quarter are 13 weeks long, and the third fiscal quarter is 14 weeks long. References to the third quarter of 2020, the third fiscal quarter of 2020 or the three months ended October 3, 2020 mean the period from June 28, 2020 to October 3, 2020. References to the third quarter of 2021, the third fiscal quarter of 2021 or the three months ended October 2, 2021 mean the 13-week period from July 4, 2021 to October 2, 2021. References to the nine months ended October 3, 2020 or the first nine months of fiscal 2020 mean the period from December 29, 2019 to October 3, 2020, and references to the nine months ended October 2, 2021 or the first nine months of fiscal 2021 mean the period from January 3, 2021 to October 2, 2021.

Certain amounts in the 2020 financial statements have been reclassified to conform with the 2021 presentation with no impact or change to previously reported net income or shareholder’s equity.

The Company now reports continuing operations as one segment – Engineered Solutions.

Note B – Discontinued Operations

We have determined that the companies included in our Diversified Products segment no longer fit with our long-term strategy and we have initiated the process of selling the companies within the Diversified Products segment. Selling the companies within this segment will allow management to focus on our core capabilities and offerings.

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

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

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Summarized Financial Information of Discontinued Operations

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

	Three Months Ended						Nine Months Ended
	October 2, 2021			October 3, 2020			October 2, 2021			October 3, 2020
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net sales	$	11,477,553		$	10,099,961		$	36,495,452		$	32,905,085
Cost of products sold		(8,749,365	)		(9,096,533	)		(29,793,971	)		(29,929,876	)
Gross margin		2,728,188			1,003,428			6,701,481			2,975,209

Selling and administrative expenses		(1,093,716	)		(1,064,433	)		(3,407,113	)		(7,509,147	)
Restructuring costs		1,308,639			-			(9,274,439	)		-
Operating income (loss)		2,943,111			(61,005	)		(5,980,071	)		(4,533,938	)

Interest expense		(142,409	)		(161,768	)		(462,838	)		(520,321	)
Gain (Loss) from discontinued operations before income taxes		2,800,702			(222,773	)		(6,442,909	)		(5,054,259	)

Income tax (expense) benefit		(659,285	)		51,833			1,516,661			1,167,345
Income (loss) from discontinued operations, net of tax	$	2,141,417		$	(170,940	)	$	(4,926,248	)	$	(3,886,914	)

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

	October 2, 2021		January 2, 2021
	(unaudited)
Cash	$	1,307,998	$	809,809
Accounts receivable		6,982,532		5,944,922
Inventory		11,006,353		9,990,656
Prepaid expenses		1,527,417		1,192,530
Property, plant and equipment, net		14,139,198		13,813,553
Patents and other intangibles net of accumulated amortization		-		6,935
Goodwill		-		5,900,837
Right of use assets		81,066		173,364
Total assets of discontinued operations	$	35,044,564	$	37,832,606

Current assets of discontinued operations¹	$	35,044,564	$	17,937,917
Non-current assets of discontinued operations		-		19,894,689
Total assets of discontinued operations	$	35,044,564	$	37,832,606

Accounts payable	$	3,125,295	$	2,196,101
Accrued compensation and other accrued expenses		3,804,230		960,074
Current portion of lease liability		75,547		125,049
Other long-term liabilities		81,066		48,315
Total liabilities of discontinued operations	$	7,086,138	$	3,329,539

Current liabilities of discontinued operations¹	$	7,086,138	$	3,281,224
Non-current liabilities of discontinued operations		-		48,315
Total liabilities of discontinued operations	$	7,086,138	$	3,329,539

¹ The total assets and liabilities of discontinued operations are presented as current in the October 2, 2021 balance sheet
as we expect to sell the discontinued operations and collect proceeds within one year.

Note C – Earnings Per Share

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

Three Months Ended

Nine Months Ended

October 2,

2021

October 3,

2020

October 2,

2021

October 3,

2020

Basic:

Weighted average shares outstanding

6,270,147

6,237,758

6,259,380

6,235,747

Diluted:

Weighted average shares outstanding

6,270,147

6,237,758

6,259,380

6,235,747

Dilutive stock appreciation rights

2,140

1,722

2,140

1,722

Denominator for diluted earnings per share

6,272,287

6,239,480

6,261,520

6,237,469

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Note D – Inventories

Inventories from continuing operations consist of the following components:

	October 2, 2021		January 2, 2021

Raw material and component parts	$	21,532,974	$	16,376,772
Work in process		6,999,016		5,323,059
Finished goods		28,166,562		21,421,906
Total inventories	$	56,698,552	$	43,121,737

Note E - Goodwill

The aggregate carrying amount of goodwill from continuing operations is approximately $71.0 million as of October 2, 2021. A goodwill write-off of approximately $5.9 million was recognized in discontinued operations in the second quarter of 2021 when classifying the disposal group as held for sale. See Note B – Discontinued Operations for further discussion.

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

Note F – Leases

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

The Company has operating leases for buildings, warehouses and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all 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 1-110 months. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability.

Currently, the Company has 28 operating leases and three finance leases with a lease liability of $11.9 million as of October 2, 2021. The finance lease arrangements are immaterial. The terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. There are no related party lease transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.

Total lease expense for each of the next five fiscal years is estimated to be as follows: remainder of 2021 - $0.8 million; 2022 - $2.6 million; 2023 - $2.1 million; 2024 - $1.7 million; 2025 - $1.0 million; and $3.7 million thereafter. The weighted average remaining lease term is6.4 years. The implicit interest rate used was 5.0%.

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Table of Contents

Note G - Debt

On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association and TD Bank, N.A. as lenders (the “Credit Agreement”), that included a $100 million term portion and a $20 million revolving commitment portion. Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with People’s United Bank, N.A. (approximately $19 million) and to acquire certain subsidiaries of Big 3 Holdings, LLC (collectively “Big 3 Precision”). The term portion of the loan required quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increased to $1,875,000 per quarter beginning September 30, 2021 and continuing through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023 and continuing through June 30, 2024. The term loan is a 5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. As of October 2, 2021, the Company has not borrowed any funds on the revolving commitment portion of the facility. The term loan bears interest at a variable rate based on the LIBOR rate plus an applicable margin of 1.25% to 2.25%, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.25% to 1.25% or the LIBOR rate plus an applicable margin of 1.25% to 2.25%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019 with Santander Bank, N.A., as administrative agent.

The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. The Company was in compliance with all of its covenants under the Credit Agreement at October 2, 2021 and through the date of filing this Form 10-Q.

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notional amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On October 2, 2021,the interest rate for approximately half ($39.7 million) of the term portion was 1.83%, using a one-month LIBOR rate, and 3.19% on the remaining balance ($44.7 million) of the term loan based on a one-month LIBOR rate. The interest rates under the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the phasing out of LIBOR. Information regarding the phasing out of LIBOR is provided below.

On July 27, 2017, the Financial Conduct Authority (the “FCA”) (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. In December 2020, the ICE Benchmark Administration (the “IBA”) announced a market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023 which the FCA supports. On March 5, 2021, the IBA released its feedback statement reporting the results of the market consultation. Pursuant to its feedback statement, the IBA intends to cease publication of all settings of non-US dollar LIBOR and only the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings being discontinued after June 30, 2023. The Alternative Reference Rates Committee (ARRC), a financial industry group convened by the Federal Reserve Board, has recommended the use of SOFR to replace LIBOR. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the interest rate is set at the beginning of the period with payment due at the end. SOFR is a backward-looking overnight rate which has implications for how interest and other payments are based. Changes in the method of calculating the replacement of LIBOR with an alternative rate or benchmark are still in flux, and once an alternate rate is adopted, may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect the Company’s results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks at this time. We are working with our senior lender and may need to renegotiate our credit facilities as LIBOR phases out in June 2023.

SEC Form 10-Q filed by Eastern Company (The)