Annual Report Final

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ERIEANNUAL REPORT: 2015 - 2021

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2016 - 2021 Performance Highlights

- Erie led the industry in operating efficiency and productivity every year in existence

- Erie currently has the highest stock price in the industry ($103.37) with the second highest market capitalization ($242 million)

- Investments totaling $73.2 billion dollars were allocated to plant improvements and developments in automation

- Erie is poised to gain significant Low-End market share due to a major competitor's scale back in low-technology segments

1 Letter to Shareholders2 Erie’s Strategic Plan3 Financial Performance 4 Forecasting6 Sensor Industry

Erie’s Value Chain7 Segment Breakdown

Traditional10 Low End11 Performance12 Size13 High End14 Looking ForwardA1 Appendix

TERESA LOTARSKIAMANDA MYERSSEAN POLOSKY

TY SHEEHANMATT SLIPPY

Dear Shareholder,

Over the past 6 years, Erie has grown to deliver solid profitability. We were founded in 2015 after the breakup of a major sensor monopoly. During these six years, Erie has grown to lead the sensor industry in the low-technology segments through our strategic focus on process improvement and employee development. Our strategy awarded us with the highest productivity rating every year since our inception in 2015. Productivity generates a higher level of per-unit profit. This competitive edge positioned us as front runners of the industry in regards to profitability and high profit margins.

Cumulative profit at year end in 2021 totaled over $34 million. After a shaky start in 2016, Erie has advanced to having the second highest profit in the industry. We also ended 2021 with earnings-per-share of $14.59. Erie emerged as the clear leader in the Traditional segment with two products and net margins totaling $34.6 for the segment in 2021--highest among our Traditional segment competitors.

Erie’s process-focused strategy gives us an advantage over competitors because of our balanced approach between customer satisfaction and company profitability--understanding that the two are unquestionably tied. We care about our customers’ expectations and we understand that providing them with the right products in the most efficient manner will lead to our profitability. Concentration on developing efficient processes allows us flexibility with pricing, which is most of our consumers’ primary concern.

Through heavy strategic investment in Research & Development, Total Quality Management, and recruitment and training programs early on, Erie set ourselves up for positive growth and cost-savings opportunities for the future. After noticing that we maintained a proportionally high cash position at the end of our first three years, we strategically allocated extra dollars in relevant promotion and extra capacity.

Having started the six year period with products in every segment, Erie noticed an opportunity in 2018 to shift our focus away from the High End market segment, selling off capacity and remaining inventory, in order to re-invest our dollars in our primary focus products: Edna, Eat, and Ebb. By allocating our resources and attention to our most profitable markets, we maintained control and set ourselves up for future growth moving forward.

On behalf of our Chairman, we thank our employees for their dedication to excellence, as well as our customers and shareholders for their support.

Sincerely,The Erie Management Team

Amanda MyersChief Executive Officer

Teresa Lotarski Sean Polosky Ty Sheehan Matthew SlippyVP Production VP Research & Development CFO Finance VP Marketing

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ERIE’S STRATEGIC PLANAs an emerging leader in the sensor industry, the Erie Company increased shareholder equity through increasing profitability and market share, with a specific focus on low-technology segments. Our mission is to stay ahead of trends as we see them in the sensor industry and exploit gaps in the market to gain and hold the majority of sales. Our specific market targets are in the Low End and Traditional segments. For the Low End segment we initially aimed to gain 25% market share in the first three years. In the Traditional segment we initially aimed for 30% market share by the end of year six. At first, we did not plan on pursuing more than 10% market share for the High, Size, and Performance Sectors as we focus on a niche cost leadership in the low-tech segments, but later incorporated the Performance segment into our secondary strategy. The focus on Traditional and Low End segments was chosen strategically due to the large proportion of the industry customer base and their potential growth moving forward.

We planned to maintain a balanced management approach to balance performance between customer satisfaction and company profitability. Our comprehensive strategy to gain a competitive edge was centered on maximizing plant productivity and decreasing input costs for our low-technology products. We established these core competencies by investing $40 million over six years in TQM, $30 million in recruitment and training of our employees, and $73.2 million in automation. Despite our aggressive investment strategy, we saw a return by 2021 the second highest cumulative profit in the industry. By pushing down costs and emphasizing high volume of sales, we positioned ourselves for maximum profitability in the industry. We made specific and measurable goals across all four of our performance categories: financials, internal business processes, customer satisfaction, and employee productivity. Our financial goals included raising our stock price from $34.25 to $115 over six years and establishing high contribution margins of 50% in the Low End segment and 40% in Traditional. For all the investments, we issued maximum long-term debt and issued max stock in the first three years.

Each segment was evaluated and given unique strategies that worked in tandem to accomplish our overall goals of increasing profitability to benefit our shareholders. In the Low End and Traditional segments we aimed to increase automation to industry-leading levels in order to decrease input costs and increase our margins in those segments. We chose the low-technology segments as our focus because they had the largest customer base, and therefore potential profit. For the Performance, Size, and High End segments we only planned to maintain a small amount of market share, in order to detract market share from our competitors. Though they had higher growth rates, the higher-end segments were not appealing as they had a small customer base and demanded a higher level of technology, leading to high input costs. With our cost-reduction strategy in place, the low-tech segments fit our goals and objectives the best.

FINANCIAL PERFORMANCE 2016 2017 2018 2019 2020 2021(thousands of dollars, except per share data and ratios)

$ $ $ $ $ $

Sales Revenues 112,768 115,870 122,781 155,405 185,551 212,765

Contribution Margin 32,013 41,553 54,380 69,655 86,620 99,517

Contribution Margin % 28.4% 35.9% 44.3% 44.8% 46.7% 46.8%

EBIT (17,493) (537) 14,525 24,037 46,570 61,714

Net Profit (17,890) (7,404) 2,861 8,885 24,381 34,213

Cumulative Profit (13,701,054) (21,105,150) (18,244,262) (9,359,397) 15,021,428 49,234,758

ROS (0.16) (0.06) 0.02 0.06 0.13 0.16

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FINANCIAL PERFORMANCE, CONT. 2016 2017 2018 2019 2020 2021Asset Turnover 0.86 0.90 0.97 1.15 1.33 1.27

ROA -13.6% -5.8% 2.3% 6.6% 17.5% 20.5%

ROE -40.9% -20.1% 7.2% 19.0% 36.3% 36.6%

Emergency Loan 15,747,186 0 0 0 0 0

Sales 112,767,670 115,870,289 122,781,420 155,404,796 185,551,398 212,765,153

EBIT (17,493,473) (537,428) 14,524,580 24,036,973 46,570,341 61,714,084

Profits (17,889,558) (7,404,097) 2,860,888 8,884,865 24,380,825 34,213,330

SG&A / Sales 21.9% 22.8% 19.1% 14.4% 13.0% 12.1%

In this figure, you can see selected financial performance metrics, showing Erie’s growth from 2016 to 2021.

We faced a couple challenges starting out in 2016, with fierce competition in the Low End from our competitors Baldwin and Andrews and a $16 million emergency loan. These threats postponed many of our initial aggressive investment projects. Max financing, through long-term debt and stock issue were not enough to cover the combination of R&D plus TQM investments made to reduce material and administrative costs early-on. We promptly reduced our investment spending, especially in TQM which led to an increase in overall material and administrative cost. The threat of another loan also discouraged us from investing in extra capital for our key segments, leading to profit-damaging stock outs that reduced our actual market share well below its potential in the early years.

Recovering into 2017 and 2018, Erie expected to dominate the Low End market due to our low input costs, but we entered into a “price war” with two of our competitors: Andrews (Acre) and Baldwin (Bead). Andrews had a similar low-input-cost strategy to Erie, investing in automation and increased human resource expenses. Baldwin bolstered their marketing and lowered their price to pass up our Low End product Ebb. Andrews came out in the lead with the lowest price. Along with not buying extra capacity, it took us a couple years to produce beyond our first shift, contributing to the stock outs and forfeited market share. As a young company, we were wary to produce beyond our first shift in the beginning. Competition took a significant turn toward the end of year 2021, with Andrews charging the highest price in the industry but cutting back their capacity.

Our strategy changed as we competed in the industry and observed our competitors’ strategies and implementation. One important change to our original plan was our debut of our new product Edna in the Traditional segment in 2018. It received significant R&D and automation investment dollars, following our low input cost strategy. Another shift in strategy was improving our Traditional product Eat to stay competitive in the Traditional segment instead of letting it age in size and performance measures that would better suit a Low End consumer. By providing two products in the Traditional segment, we lead in market share and contribution margin for that segment by the end of year 2021. Another change we observed was the opportunity in the performance segment. We also saw an opportunity in the Performance sector, which received more attention in R&D and marketing in the past three years than it had in years prior

Our individual competitors each had a slightly different strategy. There was heavy competition starting out in the Low End. One competitor, Andrews, began with a similar strategy of increased automation and TQM investment to lower input costs. Andrews was our greatest competitor in the Low End, passing us up for overall contribution margin just in the last year, 2021. Another competitor, Baldwin, had impressive sales numbers and market share, but had weak profits due to lack of plant productivity and high marketing costs. Chester’s main focus was in the high-tech segments. Digby changed their objective many times over the six years leading to significant inventory costs and a couple emergency loans.

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Erie saw significant growth and increased customer satisfaction over 2019 through 2021. We were excited to see increased cumulative profit of over $49 million and total company contribution margins above 45% every year. Specifically we accomplished our goal of high margins in the low-technology segments at 64% for Low End Ebb and 61% for our new Traditional product Edna. Because our margins were so high for Ebb in the Low End, we decided not to move forward with our proposal of moving Eat from the Traditional to the Low End. Instead, we kept both Eat and Edna in the Traditional segment making us the segment leader for both market share (36%) and contribution margins.

Our adjusted plan to sell off capacity and capital in the High End was a successful modification. The High End segment turned out to be saturated by the end of 2021, and because of our redirected focus, we were among the strongest in our specialty segments. Our company led the industry in productivity every year in existence, particularly as a result of our heavy investment in TQM in the early years of our company and strong recruitment and training programs within the company. Our Traditional segment boasted the highest automation technology, and we were matched for highest automation in the Low End. Our automation and heavy investment lead Erie to the attractive contribution margins and profitability that eventually led to an increase in our stock price.

We strategically bought back a large sum of our outstanding stock each of the past 3 years to work toward our stock price goal. Though we ended around $11 short of our initial goal, we held the highest stock price of the industry at $103.37 in 2016. We had the second highest market capitalization of $242 million dollars, behind our competitor Andrews (see Appendix for graph).

2020 was our strongest year, where we led the industry in nearly every meaningful metric, from contribution margin to profits to return on sales. In a surprising shift in strategy, our competitor Andrews decided to scale back in capacity and increase their prices to record high levels for the Low End segment, causing each company to stock out in that segment. The increased prices also sent their contribution margins and profits to industry record levels. Their resultant profits pushed them to the top at year end in 2021.

Forecasting

Being a new to the Sensor Industry, we did not have a good sense for the way customers would react to certain products and product changes. We struggled in 2016 and 2017 with forecasting because we did not completely understand that market and market changes. We recognized it was a significant problem, so we focused on finding an analytical measure to produce a much more accurate forecast. Our forecasting technique at the time looked like this:

(Total Industry Demand x (1+Expected Growth Rate) )x(% of market we expected to retain)

This proved to be a very bad way of forecasting because it did not take into account the competitors or the respective industry changes. Because of that, we had a massive amount of inventory in 2017 that caused us to produce a negative cash flow for the year. Having inventory just sit in the warehouse is very bad because we wasted the money we spent producing it, as well as the products value goes down with time and we would not be able to produce the maximum profit. After deciding we needed a new forecasting technique, we tried to find factual numbers regarding each segment which helped us provide reasoning for why we forecasted what we did as well. Our new forecasting technique was much more accurate and was one of the main reasons we were able to turn our company around in 2018. Our new formula contained information about each product in each segment using data that we received from customers who rated our product. Instead of multiplying by what percent of the market we thought we would retain, we multiplied it by how the customers viewed our product versus all other products in the industry. Our new forecasting formula looks like this:

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(Total Industry Demand x (1+Expected Growth Rate))x(% our product retained via customer surveys)

This formula enabled us to forecast an accurate number in terms of production so that we were very close to the demand each product had in each segment made it so that we did not obtain high inventory costs.

SENSOR INDUSTRYThe sensor industry has grown increasingly more popular with the rise in computer technology in the late 20th and early 21st century. The devices are used to observe physical conditions and are important inputs to many products people encounter every day including electronics, automobiles, aerospace manufacturing, and wireless networking technology. The increasing demand for sensors is only one small aspect of the industry attractiveness.

The size of our particular sensor industry has grown dramatically over the past 6 years. In 2015 the total demand for the industry, across all segments, was for 19,000 units. The current demand across the industry is 39,429 units--that is a 108% growth rate for the industry over a six year period. It is clear that sensor industries are in their growth stage of their own business life cycle, as there is not nearly enough capacity to satiate the demand for sensors where we are in 2021. The industry started as a monopoly fragmented into our different companies: Andrews, Baldwin, Chester, Digby, and ourselves.

The current competitors have the advantage of capital and technology to leverage without as much investment as a brand new entrant would. There’s heavy industry concentration in the oligopolistic market. Many competitors make similar products –especially in the high-tech segments. With such similar products, marketing and promotion play an important role in gaining market share. Market share contributes to profits, but, as we saw with Baldwin in this 6 year period, market share is not the only contributing factor to profitability. Baldwin’s high market share with low profits was attributed to high production costs and poor forecasting. The fast-paced change of the industry also provides a barrier to potential entrants, with new technology and new products being released almost yearly. The sheer size of the market and the relatively small number of current competitors shows the importance of complete capacity utilization.

The sensor industry is an attractive industry for a number of reasons. We face very little supplier bargaining, and there is extremely limited buyer bargaining power due to large amount of demand and only 5 companies producing. The sellers’ market is strengthened by not having any major substitute currently available and high barriers to entry deter startups and other new ventures from being a key danger. There is a high level of profitability potential in the sensor industry and it is only increasing every year.

Erie’s Value Chain

Our value chain portrays our primary and support activities that add overall value to our final products in each segment and how we use our support activities to increase our overall efficiency and to keep our costs at a minimum. We use our support activities to help increase the primary activities. Our primary activities are the ones that add instant value to our products directly while the support activities add value indirectly. Technological development is crucial to our company as we are in a very high technological driven industry. This is our main primary activity that we focus on and rely upon heavily to maintain and continue to gain our competitive advantage. We rely heavily on our firm’s infrastructure to retain and produce accurate information regarding our finances, production, and quality-control measure so that we have a base as to what we need to accomplish and how much capital we can bring in and invest. We invest highly in our human resources

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department so that we can attract the best employees available and that we give them a thorough understanding of how to properly produce our products. We require our employees to go through 40 hours of

training each year as well. All of our supporting activities are done to ensure our customers are aware of our products and can easily find them if they want to make a purchase. We believe that through successful marketing and promotion, we can maintain a high market share in all of our focused segments. We also believe in a high level of service that is offered to our customers. Without the customers, we will not be able to make any sales. Keeping them happy is our number one priority, and we reap the benefits of producing the highest customer rating scores on the majority of our sensors.

SEGMENT BREAKDOWN Traditional

Our initial strategy in the Sensor Industry was to focus on our Traditional product, Eat. The Traditional segment has the second largest percentage of the market equaling 32.4. With having 32.4% of the total market, we saw the potential for high profitability and market share. As we decided to pursue the Traditional segment, we set out to achieve four different objectives, which included: exceeding a 40% contribution margin at the end of 2018, a 30% market share by 2021, have the highest leading edge technology, and create a Niche Differentiator.

At the start of 2015 our only product within the Traditional segment was Eat. After the first two years, we were in a solid second place within the Traditional segment trailing behind our main competitor Baldwin. While we were continuously trailing behind Baldwin, this was preventing us from reaching the four objectives we set out to achieve. As we neared the end of 2017 all four objectives we had set out to achieve weren’t close to being met. In order to make sure that we reached those objectives by 2018 and 2021, we decided to create a new product Edna, heavily invested in marketing, TQM, training, buy capacity and increase automation.

At the start of 2018, we saw an opportunity for profitability within the Traditional segment, therefore we introduced our new product, Edna. With creating Edna, she gave us the Niche Differentiation that we were looking to obtain over our competitors by the end of 2021. In order to keep our Niche Differentiation the remaining years, we kept Edna along with Eat making us the only company with two products in the Traditional market setting us apart from our competitors.

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TRADITIONAL EAT 2016 2017 2018 2019 2020 2021

Contribution Margin 28% 33% 41% 39% 40% 39%

Market Share (Actual) 19.70% 20.70% 18.90% 25.10% 26.90% 25.40%

Market Share (Potential) 19.60% 20.50% 21.70% 26.00% 20.10% 19.60%

Price $25.99 $24.99 $24.49 $24.49 $25.19 $25.19

Customer Satisfaction (ranked among competing products)

2nd 2nd 2nd 2nd 3rd 2nd

Plant Capacity (units) 1,800,000 1,800,000 1,600,000 1,600,000 1,600,000 1,600,000

Stock Out NO NO YES YES YES NO

TRADITIONAL EDNA 2018 2019 2020 2021

Contribution Margin 50% 58% 62% 61%

Market Share (Actual) 1.10% 5.90% 8.00% 11.40%

Market Share (Potential) 3.70% 14.10% 14.60% 16.40%

Price $25.99 $25.99 $26.99 $26.48


5th 5th 5th 5th

Plant Capacity (units) 265,000 265,000 387,000 608,000

Stock Out YES YES YES YES

By the end of 2018, we achieved another objective which was to have a 40% contribution margin. We increased Eats contribution margin by 8% from the prior year to having now a 41% contribution margin. In addition, our new product Edna obtained a 50% contribution margin. To achieve such high contribution margins we heavily invested in TQM and in training so we could reduce our material and labor costs for both products. Once we hit our mark, we continued to invest in TQM until we maxed out our investment in 2020 and continued to do training to ensure that we made our mark up until the end of 2021. This allowed us to keep a 40% contribution margin for at least one of our products. Eat fell 2% by the end of 2021, while Edna continued to shine finishing 2021 with a 61% increasing 11% from the end of 2018. We noticed that at the end of 2018, we were not making any leeway on our number one competitor who is Baldwin, The customers within the Traditional segment were more receptive to their product Baker because it was available in more places, they were highly satisfied and their product was better overall. We knew that if we didn’t act fast, any chance we had of becoming the market leader of the Traditional segment was over. At the end of 2019 we successfully executed our objective of having the most leading edge technology within the Traditional segment. Our competitor Andrews had the highest leading edge technology until they changed their product Able into a Low End product. This move allowed our product Edna to have the highest leading edge technology.

By the end of 2019, all four objectives we had set out to complete were achieved. We broke the surface with a 31% market share, however this did not make us the market leader. Baldwin had the highest market share with their product Baker in the Traditional segment at the end of 2020, with 35%. By 2021, we had the highest overall market share between both of our products, Eat and Edna equaling 36% dropping Baldwin’s to 32%, 3% lower than the year prior. After six years, we finally become the market leader of the Traditional segment and plan to continue being later for the next several years.

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Competitive Strength Assessment (Traditional Segment)

Competitive Strength Assessment (Traditional Segment) KSF WT Adam Baker Dixie Eat Edna

Age 0.47 5(3.76) 3(1.41) 1(.47) 1(.47) 3(1.41)

Price 0.23 2(.46) 5(1.15) 1(.23) 3(.69) 4(.92)Performance & Size 0.21 3(.63) 1(.21) 5(1.05) 3(.63) 1(.21)

Reliability 0.09 3(.27) 5(.45) 3(.27) 1(.09) 1(.09)

Total/Rank-Unweighted (13/4) (14/5) (10/3) (8/1) (9/2)

(Total/Rank-Weighted) 5.12/5 3.22/4 2.02/2 1.88/1 2.63/3

Using 5 point comparative scale with 1 being the best (low numbers are better)

The assessment above shows how Erie’s Traditional product compares with the competition’s products last year. The results are based on what is most important to the customer. The most important criterion for the Traditional products is the age. The ideal age that the customers prefer is age two. With age being the most important criteria for the customers, this makes up about half of their consideration before purchase. In addition, price and performance / size make up almost the second half of what is important to the customer before they purchase a product within the Traditional segment. The last criterion that makes up a slim portion of what is important is that reliability of the product. This only constitutes about nine percent of what is important to the customer before purchase. The different products in the Traditional market are ranked one through five with one being the best that they could receive. The rankings are given based upon how well they fit the customer criteria to their importance. After the weights have been given, it shows that Eat is the best product within the Traditional market, both weighted and unweighted. This means that Erie’s product, Eat, was in the strongest position at the end of 2021. A competitor of ours who we were not threatened by is relatively close to being the number one product even though they do not have the largest market share. The results of this assessment are good for Erie going forward since our objective is to continue to be the market leader within the Traditional market.

FUTURE RECOMMENDATIONS TRADITIONAL As we continue to move forward, we would recommend focusing on the Traditional segment. At the end of 2021, we were finally able to pull ahead of our competitor Baldwin and be the leader of the Traditional segment. In order to stay ahead and continue to be the market leader of the Traditional segment, we strongly recommend maximizing automation, increasing capacity, and keeping both Eat and Edna within this segment. By increasing the automation to its maximum, this will allow you to have the best leading edge technology with in the Traditional segment. In addition, this will drive down the material and labor costs producing a greater profit margin for the future. With Baldwin being our strongest competitor, they currently have the capacity to produce 84,000 more units than we do. Even though we are selling more units combined between both of our products, we are not reaching the potential that they both have. Therefore, we recommend buying more capacity for both products so we can continue to produce more and avoid the risk of stock outs in the future. In addition, with capacity being expensive, we recommend that you have enough cash on hand to invest so you do not have to take out an emergency loan. Finally, with Baldwin still being a strong competitor for the future, continue to market Eat and Edna so the current customers and future customers know that they are there and that they are easily accessible. These recommendations will be costly if you look to pursue them, however; they will help ensure that you continue to be the market leader while making a substantial profit securing you for the future.

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Low End

The last six years have prepared Erie for domination in the Low End. In 2016, we maximized our automation for the plant that produced Ebb, our Low End product. This decision had the negative short term result of an emergency loan to bail us out of our debt. However, we managed to pay off our debt in one year and were immediately in a strong position to control prices in the Low End market. Our costs have been the lowest in the industry ever since this decision which has increased our contribution margin every year. From 2018 to the end of 2020, we had the highest contribution margin in the industry with the second highest in our last year. Last year, our contribution margin was 64% which was only lower than Andrews’ because they raised their prices and decreased production. Every year, Ebb remained in the top three ranked products in the Low End segment with 2018 and 2019 as the top product. We have made sure that Ebb is the strongest product according to customer criteria since 2016 and are going to continue with this strategy. The Low End segment is our second-most important segment with potential to become the most important. It contributes to a quarter of our annual sales and will become even more prevalent when we increase our capacity to meet the gap in demand in the coming years. Since 2016, we have improved our market share in the Low End from 20% to 25.2%. This steady increase should grow significantly next year since our primary competitor, Andrews, sold off capacity in this segment.

Andrews’s decision to sell off capacity has given Erie enormous potential for many different reasons. First, we will be able to gain access to nearly three times as many customers in the next year as any year before. The second is that now there will only be one other major competitor in this segment. Baldwin currently holds 32% market share but has the lowest contribution margin in the segment. This means we will be able to drive them out of the market by keeping our prices lower than theirs. However, we will still be able to raise Ebb’s price regardless because there will be fewer product options in the segment next year which will give us even higher profits.

LOW END EBB 2016 2017 2018 2019 2020 2021




Price $19.49 $16.75 $14.24 $14.96 $15.49 $15.24


3rd 2th 1st 1st 3rd (tied) 2nd

Plant Capacity (units) 1,400,000 1,400,000 1,400,000 1,400,000 1,735,000 2,038,000

Stock Out NO YES YES YES NO YES

This past year, we sold 3.4 million units in the Low End segment. Since we sold Ebb for $15.24, the third lowest in the market, we sold all of the units we had on hand and produced. The customers ranked our product second highest in the segment and had no issues finding our sellers. We managed to save expenses in our sales budget but reallocated the money to our promotion budget to increase customer awareness. We spent $2.5 million on promotions last year and $2.2 million on sales. In spite of this, we are 10% below our potential market share. Unfortunately, our plant capacity cannot increase fast enough to meet the growing demand.

To manage the increase of demand that will come next year, we recommend introducing a new product in 2023. Assuming our recommendation is accepted, Elena will be our new product that should strengthen our position over Baldwin and what’s left of Digby and Andrews. Elena will perform exactly as Ebb does and should be priced similarly in order to obtain the most market share from our competitors. Additionally, Ebb and Elena will be similar so as not to steal market share from one another. Continuing with our low input cost strategy, the new

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product will be produced in plants of the highest level of efficiency in order to ensure the future costs will be low enough to keep the price point flexible. Price flexibility will be crucial if we are to maintain an edge over our competitors. With the anticipated increase in sales, the Low End will become our primary focus in the coming years.

Competitive Strength Assessment (Low End)

KSF WT Able Acre Bead Daze Dixie Ebb

Price 0.53 5(2.65) 5(2.65) 2(1.06) 1(.53) 4(2.12) 3(1.59)

Age 0.24 2(.48) 2(.48) 2(.48) 2(.48) 1(.24) 1(.24)

Ideal Position 0.16

3(.48) 4(.64) 2(.32) 5(.80) 5(.80) 1(.16)

Reliability 0.07

1(.07) 1(.07) 3(.21) 1(.07) 5(.35) 1(.07)

Total/Rank-Unweighted (11/3) (12/4) (9/2) (9/2) (15/5) (6/1)

(Total/Rank-Weighted) 3.68/5 3.84/6 2.07/3 1.88/1 3.51/4 2.06/2Using 5 point comparative scale with 1 being the best (low numbers are better)

The assessment above shows how Erie’s Low End product compares with the competition’s products last year. The results are based on the criteria customers have said are most important to them. The most important criterion for Low End products is price according to consumers. It constitutes more than half of what weighs into their consideration before purchase. The next criterion is the age of the product. Age is about a quarter of what goes into their consideration. Other less influential criteria include the combined performance and size of a product. The average of these two attributes forms the ideal position in the market. Customers ranked this criterion at about one sixth of what they consider. The last criterion customers have listed as important is the reliability of the product. Evidently they do not expect high levels of reliability in the Low End market. The assessment ranks the criteria with weights based on how the customers ranked each aspect. The different products in the Low End market are ranked one through five with one being the best. The rankings are given based on how well each product fits within the customers’ ideal product definition. Before the weights are added to each criterion, Ebb is ranked the number one product in the Low End segment. After the weights, Ebb is ranked the second best by a narrow margin. This means that Erie’s product was in a strong position last year as far as ratings are concerned. Our sales volume was much higher than Digby’s product in the market which is the only product that comes close to ours in customer rating. Andrews’ two products, which form the largest market share, are not ranked very highly which is representative of the unmet customer demand in the Low End segment. Baldwin is a close competitor to us in volume and is only ranked behind us, in customer criteria, by a slim margin. The results of this assessment are good for Erie going forward since our objective is to dominate the Low End segment in the coming year. Having the right product for the market based on customer criteria is important to us and we will strive to keep their values at the forefront of our efforts in this industry.

Performance

Edge is our Performance product and is a leader in its own segment for customer satisfaction. Our initial strategy for our product in the Performance segment, Edge, was to maintain at least a 10% market share. We did not plan on investing a large portion of our money in this segment, just enough to maintain the desired market share, so that more money would be available for our primary focus markets. We maintained this strategy until we noticed an odd and recurring potential opportunity at the end of 2018. No other company was taking control of the market share of the market. This was giving us a 25% market share each year when our goal was just 10%. We came to the decision that Edge would now be our secondary focus product. If we were maintaining a 10% without much strategic investment, we knew we could we could increase performance more with strategically

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directed investment. We increased our marketing, and R&D spending in order to take control of our new goal of maintaining a 25% market share in the segment. We reached our goal from 2018-2021 and Edge was close to the top of market share and customer satisfaction.

PERFORMANCE EDGE 2016 2017 2018 2019 2020 2021Contribution Margin 25.0% 27.0% 30.0% 28.0% 29.0% 27.0%



Price $32.49 $32.49 $31.99 31.99 $32.49 $31.98


1st 2nd 2nd 2nd 3rd 1st

Plant Capacity (units) 600,000 600,000 600,000 600,000 600,000 600,000

Stock Out NO NO YES NO NO YES

We were able to change our focus and goals in the Performance segment because the lack of attention by our competitors. Digby has completely left the market. Andrews never showed the marketing or R&D advancements to maintain more than a 10-15% market share as they have only produced enough sensors to keep this percentage. This leaves about 85% of the market open to us Baldwin and Chester. Baldwin’s strategy was to eat up as much market share as they could. Chester’s strategy was to also be a market share leader and they aimed to do this by introducing a new product. Overall, the products in the market are almost identical. The performance of each product, the price, and the perceived age of each product are very similar and some are the same. The differentiator in the segment is the marketing of each product; it is the only way to separate yourself from the competition in the segment.

In the Future we would recommend keeping the Performance segment as a secondary focus. Chester has introduced a new product in the segment and Baldwin is a leader across the industry in market share. Our main focus needs to stay in the Low End and Traditional segments, as they need the majority of our budget allocations. But we do advise that in the very near future money is invested in automation of Edge. This will increase our profit margin for the product and also increase the profit we make on Edge while keeping the same market share. Capacity will need to be increased to keep pace with the growth of the industry as we stocked out of Edge in 2021 and we were producing our max capacity.

Size

We maintained our initial strategy for our Size segment product, Egg, to leave it at a 10% minimum market share, consistently performing above our conservative goal. As the segment was small and did not provide the attractive contribution margins that we accomplished in the Low End and Traditional segments, we chose to stay in the Size segment to detract market share from our competitors who looked to be competitive in this segment.

Our contribution margin stayed around 40% for the segment since 2016, despite having higher manufacturing and labor costs. Our across-the-board price increase for all of our products increased our Size contribution margin to 41%, and we still managed to beat our potential market share by 5.4%

The main priorities for the consumers in this segment are for product positioning as far as the size of the products and the level of performance. Age is also an important to these customers. You can see that the demand for the product relatively inelastic, as significant changes to the price does not change the number of units demanded within the segment.

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SIZE EGG 2016 2017 2018 2019 2020 2021




Price $32.49 $32.49 $32.49 $32.49 $32.99 $34.49


4th 5th 4th 4th 4th 4th

Plant Capacity (units) 600,000 600,000 350,000 350,000 350,000 350,000

Stock Out NO NO NO YES YES YES

Early on in year 2018 we decided to sell off a little under half of our Size product’s capacity in order to produce more units of our new Traditional product Edna. Though we sold off our inventory and began to stock out, we still saw appropriate amounts of return, increasing from $111,000 net margin in 2018 for Egg to $4.8 million net margin in 2021.

High End

Echo was our product produced in the High End from 2016-2018 until we made the strategic decision to drop this segment in order to focus our attention on our primary segments. Our original goals for this segment were to maintain roughly a 10% market share while also keeping our contribution margin at a minimum of 35%. We were able to exceed our goals and produce a 15%, 18%, and 11% market share from 2016-2018. We were also able to exceed our goals as well as annually increase our contribution margin producing a 39%, 40%, and 41% respectively. We were able to exceed our goals by using advertising and promotion to our advantage. We promoted this segment by taking advantage of email and web advertising enough to ensure that our targeted customers were highly aware of our product and that it was easily accessible. By strategically investing our capital, we were able to decrease our direct material and labor costs to make Echo, which helped us squeeze every penny of profit from our sales so that we could invest more capital in our primary segments.

Beginning in 2018, we noticed that this segment was being targeted as a priority segment by Chester, Baldwin, and Digby, as they were all beginning to produce multiple products. Because this segment was becoming very competitive and other companies were investing much more capital into their products, we strategically decided that an exit in the High End segment would be our best option. We started to sell our capacity in 2018, dropping from 900,000 units to 650,000 units and used the extra capacity to enhance the Traditional and Low End segments capacity. This was our first large strategic change from our original strategy. We recognized that basing our future strategy solely off of our initial strategy is foolish and we needed to make strategic changes based on how the market is changing year to year as well as keeping up and adapting to what our competitors strategies are.

Out of the five companies in the sensor industry, three of them, Chester, Baldwin, and Digby, were producing and selling multiple products in the High End segment from 2018 onwards. In 2018, Chester had already amassed a 37% market share, while Digby and Baldwin were increasing their market share as well. Even though we were exceeding our original goals in terms of market share and contribution margin, we decided that we could make more profit in the other four segments which is when we decided to drop the entire segment. This move enabled us to have more cash to invest in capacity in the Low End and Traditional segments.

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Moving forward, this decision to sell of our capacity in the High End showed itself to be very successful and lucrative as our companies profits began to increase by a large margin. Because of the high level of competition, the segment as a whole became very saturated in 2020 and did not provide the remaining companies that profits they wanted for one of their main segments. We also saw the Low End and Traditional segments make a huge leap to the top of their respective segments as we had some of the strongest products in them.

LOOKING FORWARDOur competitor, Andrews’, manipulation of capacity to decrease industry production below the market demand level allowed them to increase their price per unit by over 8 dollars. Even though Low End is the most price-sensitive segment, consumers were forced to buy the expensive Able and Acre products because there were only 3 producers in the segment total. After their scale back in the Low End Acre’s and Able’s combined capacity only reaches 51 units more than Erie’s total capacity for Ebb. Andrews made $49,365 in their partial plant liquidation, giving them extra cash for the years to come to invest in new technology or capacity in other segments.

The expected demand in the Low End for year 2022 is for 16,199 units for the three companies still with products in the segment: Andrews, Baldwin and Erie. If all three companies operated their plants at 200% utilization next year, there will still only be 11,342 units available to the market. Of all three companies, Erie is best positioned in terms of production costs, with input costs at 5.48 per unit. If Erie were to raise prices for our current Low End product Ebb, we would increase profits dramatically with potential contribution margins higher than Andrews’ 75%. The only problem with this plan is one that Andrews will face very soon: consumer backlash and new entrants.

It’s expected for more producers to enter this segment due to the sizeable gap between the current supply levels and the growing number of units demanded (a difference of 5,000 units), especially if Baldwin follows Andrews’ high price leadership. Rather than rely on the short term profitability in the segment, we suggest that the incoming management focus on maximizing customer satisfaction and making up the difference in profits with increasing high automation capacity for a new Low End product that will increase volume and market share. In the long run controlling the Low End and continuing our dominance in the Traditional segment will ensure the highest potential profitability in our industry.

To maintain segment leadership in the Low End and Traditional segments, we also recommend maximizing automation by investing $34 million dollars in Traditional production lines. The automation will continue with Erie’s strategy of low cost production. Our reputation for productivity will continue to be a core competency for

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HIGH END ECHO 2016 2017 2018

Contribution Margin 39% 40% 41%

Market Share (Actual) 15.00% 18.00% 11.00%

Market Share (Potential) 24.00% 16.00% 10.00%

Price $39.99 $39.49 $39.49


3rd 6th 4th

Plant Capacity (units) 900,000 900,000 650,000

Stock Out Yes No No

Erie even into years of new management. Our goal to pass along a profitable and stable company has been met, and we wish the new management the best moving forward with our recommended strategy.

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-- APPENDIX --Appendix 1 FINANCIAL HISTORICAL SUMMARY Cash Flow Statement 2016 2017 2018 2019 2020 2021(in thousands of dollars) $ $ $ $ $ $Net Income (17,890) (7,404) 2,861 8,885 24,381 34,213

Depreciation 9,693 9,933 9,729 10,319 11,866 11,866

Gain Loss Write offs 0 0 (1,363) (2,142) (4) 0

Accounts Payable 4,993 (4,973) 1,578 2,227 (2,285) 1,296

Inventory (16,111) 20,210 1,696 1,111 (144) (1,812)

Accounts Receivable (961) (255) (568) (2,681) (2,478) (19,141)

Cash Flow From Operations (20,275) 17,511 13,932 17,719 31,336 26,421

Plant Improvements (31,600) (5,500) 0 (12,941) (23,208) 0

Dividends 0 0 0 0 0 0

Stock Issue 13,700 480 0 0 0 0

Stock Retire 0 0 (144) (1,703) (3,940) (7,859)

Long Term Debt Issue 18,994 24,474 0 0 0 0

Long Term Debt Retire 0 (6,950) 0 (13,900) 0 (20,850)

Change In Current Debt 15,747 (8,797) (6,950) 13,900 (13,900) 20,850

Cash From Financing 48,441 9,207 (7,094) (1,703) (17,840) (7,859)

Change In Cash (3,434) 21,218 6,838 3,075 (9,712) 18,562

Closing Cash 0 21,218 28,057 31,131 21,419 39,982

Balance Sheet 2016 2017 2018 2019 2020 2021(in thousands of dollars) $ $ $ $ $ $Cash 0 21,218 28,057 31,131 21,419 39,982

Accounts Receivable 9,269 9,524 10,092 12,773 15,251 34,392

Inventory 24,728 4,518 2,822 1,712 1,855 3,667

Total Current Assets 33,997 35,260 40,971 45,616 38,525 78,041

Plant & Equipment 145,400 150,900 145,930 154,782 177,984 177,984

Accumulated Depreciation (47,627) (57,560) (60,955) (65,044) (76,899) (88,764)

Total Fixed assets 97,773 93,340 84,975 89,738 101,085 89,220

Total Assets 131,770 128,600 125,945 135,355 139,611 167,261

Accounts Payable 11,577 6,604 8,182 10,410 8,125 9,421

Current Debt 15,747 6,950 0 13,900 0 20,850

Long Debt 60,694 78,218 78,218 64,318 64,318 43,468

Total Liabilities 88,018 91,772 86,400 88,628 72,443 73,739

Common Stock 32,060 32,540 32,412 31,017 28,401 25,078

Retained Earnings 11,693 4,288 7,133 15,710 38,766 68,444

Total Equity 43,752 36,828 39,545 46,727 67,168 93,522

Total Liab And Equity 131,770 128,600 125,945 135,355 139,611 167,261

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Income Statement 2016 2017 2018 2019 2020 2021(in thousands of dollars) $ $ $ $ $ $Sales 112,768 115,870 122,781 155,405 185,551 212,765

Direct Labor 34,820 29,039 23,465 32,873 38,358 45,035

Direct Material 42,967 44,736 44,598 52,671 60,351 67,773

Inventory Carry 2,967 542 339 205 223 440

Total Variable Cost 80,755 74,317 68,401 85,749 98,932 113,248

Contribution Margin 32,013 41,553 54,380 69,655 86,620 99,517

Depreciation 9,693 9,933 9,729 10,319 11,866 11,866

R and D 1,455 2,637 2,250 2,084 2,777 2,655

Promo 9,500 9,750 9,675 9,075 10,650 11,550

Sales Budget 10,000 10,000 10,000 9,175 8,700 9,225

Admin 3,723 4,023 1,564 2,082 2,002 2,390

Total Period Costs 34,371 36,343 33,217 32,735 35,995 37,685

Net Margin (2,359) 5,210 21,163 36,921 50,625 61,832

Other 15,135 5,748 6,639 12,884 4,055 118

EBIT (17,493) (537) 14,525 24,037 46,570 61,714

Interest Short Term Debt 2,462 820 0 1,793 0 2,627

Interest Long Term Debt 7,567 10,033 10,033 8,296 8,296 5,377

Taxes (9,633) (3,987) 1,572 4,882 13,396 18,799

Profit Sharing 0 0 58 181 498 698

Net Profit (17,890) (7,404) 2,861 8,885 24,381 34,213

Appendix 2 NET PROFITS INDUSTRY WIDE

Charts taken from the Capstone Courier, Industry Reports Segment

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As seen in the charts above, we did not reach our six year goal of yielding the highest profits cumulatively, however, we began to make strides in terms of higher annual profits. The chart on the left shows the 2021 yielded profit and we just edged out Baldwin for the second largest profits yielded in the fiscal year. We have been consistently increasing our profits year in and year out since we found ourselves in the hole in 2017. Going forward, we are set up very nicely to continue this trend and show a promising financial future.

Appendix 3 MARKET SHARE COMPETIION

The charts above show how Erie compares with its competition in the sensor industry. Last year, our overall market share ended at 21.55%, the third highest in the industry. This is up over 1.5% from six years ago and should grow significantly in the next year. The second chart shows how each of our company is performing within each segment. Since we have two products in the Traditional segment, we have the highest market share of 36%. Our Low End product, Ebb, is the second most successful product in its segment at 25% with significant room for growth. Since we strategically left the High End segment, we have 0% market share. The performance segment is another strong point of ours. We have managed to obtain 25% of the market with our sole product which is the second best in the segment. In the size segment, we are currently at 16% market share. This is 6% above our goals for this segment and has forced our competitors to allocate necessary funds away from other segments to keep our product, Egg, at bay. These charts represent success across the industry with even better results predicted for the future.

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Appendix 4 YEAR-OVER-YEAR SALES GROWTH

Appendix 5 HISTORICAL STOCK PRICES ACROSS THE INDUSTRY

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Annual Report Final

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