UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	~~[X]~~	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the quarterly period ended ~~March 28,~~October 3, 2020

☐	~~[ ]~~	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~~ 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~~ CT		06770
(Address of principal executive offices)		(Zip Code)

(203)-729-2255

Registrant’s telephone number

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

Title of each class	~~Trading~~ 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 ~~[X]~~☒ 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 ~~[X]~~☒ 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~~[X]~~	☒
Non-accelerated filer ~~[ ]~~	☐	Smaller reporting company [X]	☒
		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 Act). Yes ~~[ ]~~☐ No ~~[X]~~

☒

As of ~~March 28,~~October 3, 2020 ~~6,230,731~~6,242,912 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 ~~MARCH 28,~~OCTOBER 3, 2020

TABLE OF CONTENTS

			Page

PART I


~~PART I~~
Item 1.	Financial Statements		3.

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~17.~~	19.

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	~~25.~~	32.

Item 4.	Controls and Procedures	~~25.~~	32.

PART II
Item 1.	Legal Proceedings	~~26.~~	33.

Item 1A.	Risk Factors	~~26.~~	33.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~28.~~	35.

Item 3.	Defaults Upon Senior Securities	~~28.~~	35.

Item 4.	Mine Safety Disclosures	~~28.~~	35.

Item 5.	Other Information		35.

Item 6	Exhibits		36.

	Signatures		37.


~~Item 5.~~	~~Other Information~~	~~28.~~ 2

~~Item 6.~~Table of Contents	~~Exhibits~~	~~28.~~

	~~Signatures~~	~~29.~~

PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

Three Months Ended
March 28, 2020 March 30, 2019
Net sales $ 65,325,616
$
60,883,148

Cost of products sold (50,663,943 )
(47,074,105
)
Gross margin
14,661,673
13,809,043

Product development expense
(775,444
)

(2,239,776
)
Selling and administrative expense (10,024,958 )
(8,398,265
)
Restructuring costs
—

(836,694
)
Operating profit 3,861,271
2,334,308

Interest expense (827,664 )
(292,540
)
Other income 744,793
13,925

Income before income taxes 3,778,400
2,055,693

Income taxes
882,583
484,733

Net income $ 2,895,817
$
1,570,960

Earnings per share:
Basic $ .46
$
.25

Diluted $ .46
$
.25

Cash dividends per share: $ .11
$
.11

	Three Months Ended						Nine Months Ended
	October 3, 2020			September 28, 2019			October 3, 2020			September 28, 2019
Net sales	$	65,805,558		$	60,692,645		$	179,964,582		$	183,015,723
Cost of products sold		(51,065,536	)		(45,754,911	)		(139,374,508	)		(139,243,164	)
Gross margin		14,740,022			14,937,734			40,590,074			43,772,559

Product development expense		(903,023	)		(825,425	)		(2,434,638	)		(5,240,004	)
Selling and administrative expenses		(9,592,569	)		(8,391,898	)		(27,452,391	)		(24,866,665	)
Goodwill impairment loss		0			0			(4,002,548	)		0
Restructuring costs		(8,618	)		0			(287,234	)		(2,651,877	)
Operating profit		4,235,812			5,720,411			6,413,263			11,014,013

Interest expense		(647,066	)		(420,377	)		(2,081,283	)		(974,536	)
Other income		365,703			188,623			969,024			789,371
Income before income taxes		3,954,449			5,488,657			5,301,004			10,828,848

Income taxes		969,774			1,295,575			1,309,295			2,535,033
Net income	$	2,984,675		$	4,193,082		$	3,991,709		$	8,293,815

Earnings per Share:
Basic	$	0.48		$	0.67		$	0.64		$	1.33

Diluted	$	0.48		$	0.67		$	0.64		$	1.33

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

See accompanying notes.

Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

Three Months Ended
March 28, 2020 March 30, 2019
Net income
$ 2,895,817
$
1,570,960

Other comprehensive income (loss):

Change in foreign currency translation (1,304,447 )
412,624

Change in pension and postretirement benefit costs, net of tax expense of: 2020 – $81,143 and 2019 - $70,938
260,295
222,681

Change in fair value of marketable securities, net of tax benefit of: 2020 - $2,897 and 2019 - $3,471
8,878
(10,639
)
Change in fair value of interest rate swap and marketable securities, net of tax benefit of: 2020 – $535,029 and 2019 – $24,619
(1,697,793 )
(77,961
)
Total other comprehensive income (loss)
(2,733,067
)

546,705

Comprehensive income $ 162,750
$
2,117,665

	Three Months Ended					Nine Months Ended
	October 3, 2020		September 28, 2019			October 3, 2020			September 28, 2019
Net income	$	2,984,675	$	4,193,082		$	3,991,709		$	8,293,815
Other comprehensive income/(loss):
Change in foreign currency translation		277,618		(537,751	)		(248,786	)		(346,657	)
Change in marketable securities, net of tax benefit (cost) of:
2020 – $159 and $(1,904) respectively
2019 – $176 and $(288) respectively		489		538			(5,836	)		(882	)
Change in fair value of interest rate swap, net of tax benefit (cost) of:
2020 – $(35,587) and $547,087 respectively
2019 – $15,720 and $85,537 respectively		112,691		(49,780	)		(1,734,606	)		(270,866	)
Change in pension and postretirement benefit costs, net of taxes of:
2020 – $81,144 and $243,429 respectively
2019 – $75,138 and $217,014 respectively		260,295		235,859			780,886			681,221
Total other comprehensive income (loss)		651,093		(351,134	)		(1,208,342	)		62,816
Comprehensive income	$	3,635,768	$	3,841,948		$	2,783,367		$	8,356,631

See accompanying notes.

Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

March 28, 2020 December 28, 2019
(unaudited)
Current Assets
Cash and cash equivalents $ 16,508,881
$
17,996,505

Marketable securities 23,154
34,305

Accounts receivable, less allowances: 2020 - $699,000;2019 - $556,000 39,873,177
37,941,900

Inventories 55,274,876
54,599,266

Prepaid expenses and other assets 3,955,872
4,343,507

Total Current Assets 115,635,960
114,915,483

Property, Plant and Equipment 88,409,321
88,336,243

Accumulated depreciation (46,482,754 )
(46,313,630
)
41,926,567
42,022,613

Goodwill 79,418,533
79,518,012

Trademarks 5,404,283
5,404,283

Patents and other intangibles net of accumulated amortization 25,699,680
26,460,110

Right of Use Assets 11,852,653
12,342,475

122,375,149
123,724,880

TOTAL ASSETS $ 279,937,676
$
280,662,976

ASSETS

	October 3, 2020			December 28, 2019

Current Assets
Cash and cash equivalents	$	19,551,386		$	17,996,505
Marketable securities		26,564			34,305
Accounts receivable, less allowances: 2020 - $726,000;2019 - $556,000		34,174,080			37,941,900
Inventories		49,448,612			54,599,266
Current portion of note receivable		224,985			0
Prepaid expenses and other assets		4,453,522			4,343,507
Total Current Assets		107,879,149			114,915,483

Property, Plant and Equipment		88,656,237			88,336,243
Accumulated depreciation		(48,593,969	)		(46,313,630	)
Property, Plant and Equipment, Net		40,062,268			42,022,613

Goodwill		77,792,863			79,518,012
Trademarks		5,404,283			5,404,283
Patents and other intangibles net of accumulated amortization		27,955,229			26,460,110
Long term note receivable, less current portion		972,889			0
Right of Use Assets		11,198,742			12,342,475
Other Assets		123,324,006			123,724,880

TOTAL ASSETS	$	271,265,423		$	280,662,976

See accompanying notes.

Table of Contents

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities
Accounts payable	$	17,390,131		$	19,960,507
Accrued compensation		2,505,568			3,815,186
Other accrued expenses		4,333,038			2,967,961
Current portion of lease liability		3,309,033			2,965,572
Current portion of long-term debt		5,812,689			5,187,689
Total Current Liabilities		33,350,459			34,896,915

Deferred income taxes		4,374,343			5,270,465
Other long-term liabilities		2,465,261			2,465,261
Lease liability		7,939,111			9,376,903
Long-term debt, less current portion		89,105,682			93,577,544
Accrued postretirement benefits		995,021			1,007,146
Accrued pension cost		26,947,804			28,631,485

Shareholders’ Equity

Voting Preferred Stock, no par value: Authorized and unissued: 1,000,000shares		0			0
Nonvoting Preferred Stock, no par value: Authorized and unissued: 1,000,000shares		0			0
Common Stock, no par value, Authorized: 50,000,000shares		31,304,047			30,651,815
Issued: 8,992,641shares in 2020 and 8,975,434shares in 2019
Outstanding: 6,242,912shares in 2020 and 6,240,705shares in 2019
Treasury Stock: 2,749,729shares in 2020 and 2,734,729shares in 2019		(20,537,962	)		(20,169,098	)
Retained earnings		121,764,570			120,189,111
Accumulated other comprehensive loss:
Foreign currency translation		(2,286,738	)		(2,037,952	)
Unrealized gain on marketable securities, net of tax		(6,307	)		(471	)
Unrealized gain (loss) on interest rate swap, net of tax		(1,567,117	)		167,489
Unrecognized net pension and postretirement benefit costs, net of tax		(22,582,751	)		(23,363,637	)
Accumulated other comprehensive loss		(26,442,913	)		(25,234,571	)
Total Shareholders’ Equity		106,087,742			105,437,257
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	271,265,423		$	280,662,976

See accompanying notes.

Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

LIABILITIES AND SHAREHOLDERS’ EQUITY

March 28, 2020 December 28, 2019
(unaudited)
Current Liabilities
Accounts payable $ 22,629,076
$
19,960,507

Accrued compensation 2,216,765
3,815,186

Other accrued expenses 3,797,178
2,967,961

Current portion of long-term debt 5,187,689
5,187,689

Total Current Liabilities 33,830,708
31,931,343

Deferred income taxes 5,270,465
5,270,465

Other long-term liabilities 2,465,260
2,465,261

Lease liability 11,852,653
12,342,475

Long-term debt, less current portion 92,356,121
93,577,544

Accrued postretirement benefits 1,001,509
1,007,146

Accrued pension cost 28,052,482
28,631,485

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 30,890,108
30,651,815

        Issued: 8,980,460 shares in 2020 and 8,975,434 shares in 2019
        Outstanding: 6,230,731 shares in 2020 and 6,240,705 shares in    2019
    Treasury Stock: 2,749,729 shares in 2020 and 2,734,729 shares in 2019
(20,537,962 )
(20,169,098
)
Retained earnings 122,723,970
120,189,111

Accumulated other comprehensive income (loss):
       Foreign currency translation (3,342,399 )
(2,037,952
)
Unrealized gain on marketable securities, net of tax 8,878
—

Unrealized gain (loss) on interest rate swap, net of tax (1,530,775 )
167,018

Unrecognized net pension and postretirement benefit costs, net of tax (23,103,342 )
(23,363,637
)
     Accumulated other comprehensive loss
(27,967,638 )
(25,234,571
)
Total Shareholders’ Equity 105,108,478
105,437,257

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 279,937,676
$
280,662,976

~~See accompanying notes.~~
6

~~THE EASTERN COMPANY AND SUBSIDIARIES~~

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Three Months Ended
March 28, 2020 March 30, 2019
Operating Activities
Net income
$ 2,895,817
$
1,570,960

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

Depreciation and amortization 2,055,782
1,438,799

Unrecognized pension and postretirement benefits (678,305
)

207,816

(Gain)/loss on sale of equipment and other assets (437,446
)

671,138

Provision for doubtful accounts 156,286
25,711

Stock compensation expense 238,293
104,992

Changes in operating assets and liabilities:
Accounts receivable (2,273,864 )
(2,123,227
)
Inventories (994,546 )
1,313,875

Prepaid expenses and other 341,582
(81,231
)
Other assets (415,415 )
101,919

Accounts payable 2,766,829
(27,186
)
Accrued compensation (1,585,976 )
(1,724,968
)
Other accrued expenses (564,572 )
11,718

Net cash provided by operating activities 1,504,465
1,490,316

Investing Activities
Marketable securities

11,151

(91,400
)
Capitalized software

—

(104,484
)
Proceeds from sale of equipment
445,212
—

Purchases of property, plant and equipment
(828,115 )
(743,622
)
Net cash used in investing activities (371,752 )
(939,506
)

Financing Activities
Principal payments on long-term debt
(1,221,423 )
(387,500
)
Purchase common stock for treasury
(368,864 )
—

Dividends paid
(686,614 )
(686,740
)
Net cash used in financing activities (2,276,901 )
(1,074,240
)

Effect of exchange rate changes on cash (343,436 )
144,954

Net change in cash and cash equivalents (1,487,624 )
(378,476
)

Cash and cash equivalents at beginning of period
17,996,505
13,925,765

Cash and cash equivalents at end of period $ 16,508,881
$
13,547,289

Non-cash investing and financing activities (489,822
)
Right of use asset 489,822

Lease liability

	Nine Months Ended
	October 3, 2020			September 28, 2019
Operating Activities
Net income	$	3,991,709		$	8,293,815
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		6,144,226			3,807,479
Unrecognized pension and postretirement benefits		(1,066,777	)		134,199
Goodwill impairment loss		4,002,548			0
(Gain) loss on sale of equipment and other assets		(414,078	)		1,727,788
Provision for doubtful accounts		156,286			51,711
Stock compensation expense		652,232			445,338
Changes in operating assets and liabilities:
Accounts receivable		3,270,585			359,606
Inventories		4,668,705			3,217,736
Prepaid expenses and other		(93,693	)		762,646
Other assets		753,170			(589,448	)
Accounts payable		(2,600,966	)		(1,815,309	)
Accrued compensation		(1,262,577	)		(1,680,668	)
Other accrued expenses		(1,511,729	)		(2,202,622	)
Net cash provided by operating activities		16,689,641			12,512,271

Investing Activities
Marketable securities		7,741			(33,759	)
Business disposition		1,378,602			0
Business acquisition, net of cash acquired		(7,172,868	)		(81,155,753	)
Proceeds from sale of equipment		445,211			0
Purchases of property, plant and equipment		(1,976,370	)		(1,896,128	)
Net cash provided by/used in investing activities		(7,317,684	)		(83,085,640	)

Financing Activities
Proceeds from long-term borrowings		0			100,000,000
Principal payments on long-term debt		(3,846,861	)		(29,009,769	)
Issuance of Note Receivable		(1,251,943	)		0
Payments Received from Note Receivable		54,069			0
Purchase common stock for treasury		(368,864	)		0
Dividends paid		(2,058,943	)		(2,058,697	)
Net cash used in financing activities		(7,472,542	)		68,931,534

Effect of exchange rate changes on cash		(344,534	)		(300,602	)
Net change in cash and cash equivalents		1,554,881			(1,942,437	)

Cash and cash equivalents at beginning of period		17,996,505			13,925,765
Cash and cash equivalents at end of period	$	19,551,386		$	11,983,328

Non-cash investing and financing activities
Right of use asset		(186,021	)		10,280,814
Lease liability		136,619			(10,280,814	)

See accompanying notes.

Table of Contents

THE EASTERN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~March 28,~~

October 3, 2020

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 ~~10-01~~ 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 December 28, 2019, filed with the Securities and Exchange Commission on March 5, 2020 (the “2019 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. ~~All intercompany accounts and transactions are eliminated.~~ 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 December 28, 2019 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 ~~fiscal~~ 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to ~~fiscal~~ 2020 or the 2020 fiscal year mean the 53-week period ending on January 2, 2021. In a 52-week fiscal year, each quarter is 13 weeks long. In a ~~53 week~~53-week fiscal year, each of the first ~~three~~two fiscal quarters ~~is a~~and the fourth quarter are 13 weeks long, and the ~~fourth~~third fiscal quarter is 14 weeks long. References to the ~~first~~third quarter of ~~fiscal~~ 2019, the ~~first~~third fiscal quarter of ~~2020~~2019 or the three months ended ~~March 30,~~September 28, 2019 mean the period from ~~December~~June 30, ~~2018~~2019 to ~~March 30,~~September 28, 2019. References to the ~~first~~third quarter of ~~fiscal~~ 2020, the ~~first~~third fiscal quarter of 2020 or the three months ended ~~March 28,~~October 3, 2020 mean the ~~13-week~~14-week period from June 28, 2020 to October 3, 2020. References to the nine months ended September 28, 2019 or the first nine months of fiscal 2019 mean the 39-week period from December 30, 2018 to September 28, 2019. References to the nine months ended October 3, 2020 or the first nine months of 2020 mean the 40-week period from December 29, 2019 to ~~March 28,~~October 3, 2020.

Certain amounts in the 2019 financial statements have been reclassified to conform with the 2020 presentation with no impact or change to previously reported net income or shareholder’s equity.

Note B – Earnings Per Share

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

Three Months Ended
March 28, 2020
March 30, 2019

Basic:

Weighted average shares outstanding

6,237,921

6,231,713

Diluted:

Weighted average shares outstanding

6,237,921

6,231,713

Dilutive stock appreciation rights

3,131

33,116

Denominator for diluted earnings per share

6,241,052

6,264,829

Three Months Ended

Nine Months Ended

October 3,

2020

September 28,

2019

October 3,

2020

September 28,

2019

Basic:

Weighted average shares outstanding

6,237,758

6,236,225

6,235,747

6,233,894

Diluted:

Weighted average shares outstanding

6,237,758

6,236,225

6,235,747

6,233,894

Dilutive stock appreciation rights

1,722

17,996

1,722

17,996

Denominator for diluted earnings per share

6,239,480

6,254,221

6,237,469

6,251,890

Table of Contents

Note C – Inventories

Inventories consist of the following components:

March 28, 2020 December 28, 2019

Raw material and component parts $ 17,438,617
$
17,225,469

Work in process 11,145,881
11,009,648

Finished goods 26,690,378
26,364,149

Total inventories $ 55,274,876
$
54,599,266

	October 3, 2020		December 28, 2019

Raw material and component parts	$	15,600,494	$	17,225,469
Work in process		9,971,046		11,009,648
Finished goods		23,877,072		26,364,149
Total inventories	$	49,448,612	$	54,599,266

Note D - Goodwill

The Company maintains 12 reporting units, seven of which comprise the goodwill balance. These seven units have an aggregate carrying amount of goodwill of approximately $77.8 million as of October 3, 2020.

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

In the second quarter of 2020, management determined that it was more likely than not that the estimated fair value of Greenwald Industries was 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 the third quarter of 2020, management performed assessments to determine if there were any events, circumstances or indicators of impairment among the Company’s reporting units as a result of the operating conditions resulting from the COVID-19 pandemic. Management concluded that the Company has not experienced any specific indicators of impairment for goodwill among its reporting units that would require additional impairment tests. There were no goodwill impairments in the third quarter of 2020.

Note E – Leases

The Company presents right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company elected ~~the transition method thereby not restating comparable periods. The Company elected~~ to account for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate.

The Company has operating leases for buildings, warehouse and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all of the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. The Company’s option to extend certain leases ranges from 122 – ~~120~~131 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 4236 operating leases and ~~one~~four finance ~~lease~~leases with ~~an ROU asset and~~a lease liability of ~~$11,852,653~~$11,248,144 as of ~~March 28,~~October 3, 2020. The finance lease ~~arrangement is~~arrangements are immaterial. The basis, terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants ~~that could~~ that could cause the Company to incur additional financial obligations. We rent or sublease a part of one real estate property to a third party. There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.

Total lease expense for each of the next five fiscal years is estimated to be as follows: remainder of 2020 - $824,251; 2021 - $3,011,067; 2022 - $2,067,173; 2023 - $1,699,249; 2024 - $1,223,651and $2,422,753thereafter. The weighted average remaining lease term is 6 years. The interest rate used was 5.0%.

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Note EF - 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 requires quarterly principal payments of ~~$1,250,000 for~~$1,250,000for an 18-month period beginning December 31, 2019. The repayment amount then increases to $1,875,000 per quarter beginning September 30, 2021 and continues through June 30, 2023. The repayment amount then increases to ~~$2,500,000 per~~$2,500,000per quarter beginning September 30, 2023 and continues through June 30, 2024. The term loan is a 5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. As of ~~March 28,~~October 3, 2020, 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

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 3, 2020 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 notational amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On ~~March 28,~~October 3, 2020, the interest rate for half ($~~49.4~~47.5 million) of the term portion was ~~3.35%~~1.66%, using a one month LIBOR rate, and ~~3.19%~~2.94% on the remaining balance ($~~49.4~~47.5 million) of the term loan based on a one month LIBOR rate.

The interest rates onunder the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the potential phasing out of LIBOR after 2021. Information regarding the potential phasing out of LIBOR is provided below.

On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In the United States, ~~efforts to identify a set of alternative U.S. Dollar reference interest rates have been initiated by the Alternative Reference Rates Committee of~~ the Federal Reserve Board and the Federal Reserve Bank of New ~~York.~~York, in conjunction with the Alternative Reference Rates Committee, identified the Secured Overnight Financing Rate (“SOFR”) as its preferred benchmark alternative to U.S. dollar LIBOR. SOFR represents a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is calculated based on directly observable U.S. Treasury-backed repurchase transactions. In March 2020, in response to this transition, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financing Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued by reference rate reform, and addresses operational issues likely to arise in modifying contracts to replace discontinued reference rates with new rates. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022. The Company is evaluating the potential impact of the replacement of LIBOR, which ultimately may or may not be SOFR, from both a risk management and financial reporting perspective, as well as the guidance under ASU 2020-04. At this time, it is not possible to predict whether any such changes to LIBOR will occur, whether SOFR will attain market traction as a LIBOR replacement, whether LIBOR will be phased out or any such alternative reference rates, other than SOFR, or other reforms to LIBOR will be enacted in the United Kingdom, the United States or elsewhere or the effect that any such changes, phase-out, SOFR or other alternative reference rates, or other reforms, if they occur, would have on the amount of interest paid on the Company’s LIBOR-based borrowings. Uncertainty as to the nature of such potential changes, phase-out, SOFR or other alternative reference rates, or other reforms may materially adversely affect interest rates paid by the Company on its borrowings. Reform of, or the replacement or phasing out of, LIBOR and proposed regulation of LIBOR and other “benchmarks”, including SOFR, may materially adversely affect the amount of interest paid on the Company’s LIBOR-based borrowings and could have a material adverse effect on the Company’s business, financial condition and results of operations.

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Note FG - Stock Options and Awards

The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers, other key employees, and non-employee Directors expired in February 2020. On February 19, 2020, the board of directors of the Company adopted ~~subject to shareholder approval at~~ the ~~2020 Annual Meeting of Shareholders, The~~ Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”)~~, which is intended to replace~~. On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The 2020 Plan replaced the 2010 Plan. The Company has no other ~~exiting~~existing plan pursuant to which equity awards may be granted.

Incentive stock options granted under the 2010 Plan and the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2010 Plan and the 2020 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. Under the 2010 Plan and 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 the first ~~quarter~~nine months of fiscal 2020 and 2019, no stock options or restricted stock were granted that were subject to the meeting of performance measurements. For the first ~~quarter~~nine months of fiscal 2019, the Company used several assumptions which included an expected term of 3.5 to 4 years, volatility deviation of 28.88% to 32.33% and a risk free rate of 1.42% to 2.48%.

For the first nine months of fiscal 2020, the Company used several assumptions which included an expected term of 4.0 years, volatility deviation of 38.62% and a risk free rate of 0.26% for the purposes of measuring compensation under the Black Scholes Method.

The 2010 Plan and the 2020 Plan also ~~permits~~permit the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During the first nine months of fiscal 2020, the Company ~~did not issue any~~issued 44,000 SARs under the 2020 Plan, and during the first nine months of fiscal 2019, ~~36,000~~96,000 SARs were ~~issued.~~

issued under the 2010 Plan.

Stock-based compensation expense in connection with SARs previously granted to employees was approximately $85,000 and $108,000 in the third quarter of 2020 and 2019 respectively and was approximately $279,000 and $281,000 in the first ~~quarter~~nine months of fiscal years 2020 ~~was $110,000,~~ and ~~for~~ 2019 ~~was $80,000.~~

respectively.

As of ~~March 28,~~October 3, 2020, there were no818,864 shares of Company common stock reserved and available for future grant under the ~~2010 Plan, as it has expired.~~

2020 Plan.

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

Three Months Ended
March 28, 2020

Year Ended
December 28, 2019

Units Weighted - Average Exercise Price Units Weighted - Average Exercise Price
Outstanding at beginning of period 276,000 $ 22.30
189,167

$
21.46

Issued -- --
96,000

23.65

Exercised -- --
(1,667
)

19.10

Forfeited (6,999 ) 19.10
(7,500
)

21.20

Outstanding at end of period 269,001 22.39
276,000

22.30

SARs Outstanding and Exercisable
Range of Exercise Prices
Outstanding as of
March 28, 2020
Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price
Exercisable as of
March 28, 2020
Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price
$
19.10-26.30

269,001

3.0

$
22.39

50,001

2.0

19.10

	Nine Months Ended October 3, 2020					Year Ended December 28, 2019
	Units			Weighted - Average Exercise Price		Units			Weighted - Average Exercise Price
Outstanding at beginning of period		276,000		$	22.30		189,167		$	21.46
Issued		44,000			19.44		96,000			23.65
Exercised		-			-		(1,667	)		19.10
Forfeited		(73,999	)		22.05		(7,500	)		21.20
Outstanding at end of period		246,001			21.87		276,000			22.30

SARs Outstanding and Exercisable

Range of Exercise Prices

Outstanding as of

October 3, 2020

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

Exercisable as of

October 3, 2020

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

19.10-26.30

246,001

2.5

21.87

71,172

1.5

20.45

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

Three Months Ended
March 28, 2020

Year Ended
December 28, 2019

Shares Weighted - Average Exercise Price Shares Weighted - Average Exercise Price
Outstanding at beginning of period 25,000
$
—

25,000

$
—

Issued
—

—

—

—

Forfeited —
—
—
—

Outstanding at end of period 25,000
—

25,000

—

Stock Grants Outstanding and Exercisable
Range of Exercise Prices
Outstanding as of
March 28, 2020
Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price
Exercisable as of
March 28, 2020
Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price
$
0.00

25,000

2.0

—

—

—

—

	Nine Months Ended October 3, 2020				Year Ended December 28, 2019
	Shares		Weighted - Average Exercise Price		Shares		Weighted - Average Exercise Price
Outstanding at beginning of period		25,000	$	0		25,000	$	0
Issued		0		0		0		0
Forfeited		0		0		0		0
Outstanding at end of period		25,000		0		25,000		0

Stock Grants Outstanding and Exercisable

Range of Exercise Prices

Outstanding as of

October 3, 2020

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

Exercisable as of

October 3, 2020

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

0.00

25,000

1.6

—

As of ~~March 28,~~October 3, 2020, outstanding SARs and grants had an intrinsic value of ~~$561,000.~~

$558,000.

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Note GH – Share Repurchase Program

On May 3, 2018, the Company announced that its Board of Directors had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. ~~During the first quarter of 2020, the Company repurchased 15,000 shares of its common stock in connection with the share repurchase program.~~ Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Period
Total
Number of
Shares
Purchased

Average
Price Paid
Per Share

Total Number of
Shares
Purchased As
Part of Publicly
Announced Plans
or Programs

Maximum Number
of Shares That May
Yet be Purchased
Under the Plans or
Programs

Balance as of December 28, 2019
40,000

$
26.58

40,000

160,000

December 29, 2019 – March 28, 2020

15,000

24.59

15,000

145,000

Balance as of March 28, 2020
55,000

$
26.04

55,000

145,000

The Company did not repurchase any shares under its share repurchase program during the third quarter of 2020.

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
Balance as of June 27, 2020		55,000	$	26.04		55,000		145,000
June 28, 2020 – October 3, 2020		—		—		—		—
Balance as of October 3, 2020		55,000	$	26.04		55,000		145,000

Note HI – Revenue Recognition

The Company’s revenues result from the sale of goods and services and reflect the consideration to which the Company expects to be entitled. The Company records revenues based on a five-step model in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers."” The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which isare delivering goods or services, ~~determining~~determines the transaction price, ~~allocating~~allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.

Customer volume rebates, product returns, discount and allowance are variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material.

Refer to Note KL for revenues reported by segment. Refer to Note D for a discussion of goodwill impairment. The Company ~~has not experienced any impairment losses,~~ has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.

Note IJ - Income Taxes

The Company files income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2015 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2013.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. 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. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company will adopt ASU 2019-12 in 2021.

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On March 27, 2020, ~~President Trump signed into law~~ the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“~~The~~the CARES Act”) became law). The CARES Act includes a variety of economic and tax relief measures intended to stimulate the economy, including loans for small businesses, payroll tax credits/deferrals, and corporate

income tax relief. We are analyzing the following components of the CARES Act to determine their effect on our income tax provision:

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 March 28, 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.

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.

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.

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. To the extent the Company has eligible improvements in 2020, the Company can claim bonus depreciation which would reduce taxes payable and increase the deferred tax liability for fixed assets.

~~Other CARES Act corporate income tax provisions will not significantly impact the company, including alternative minimum tax refunds and increases in the charitable contributions deduction limitation.~~

	·	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.

	·	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.

	·	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.

	·	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. To the extent the Company has eligible improvements in 2020, the Company can claim bonus depreciation which would reduce taxes payable and increase the deferred tax liability for fixed assets.

	·	Other CARES Act corporate income tax provisions will not significantly impact the company, including alternative minimum tax refunds and increases in the charitable contributions deduction limitation.

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

The total amount of unrecognized tax benefits could increase or decrease within the next 12 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 FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the amount of unrecognized tax benefits during the three months ended ~~March 28,~~October 3, 2020. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months.

Note JK - Retirement Benefit Plans

The Company has non-contributory defined benefit pension plans covering most U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law.

The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements.

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Significant disclosures relating to these benefit plans for the first ~~quarter~~nine months of fiscal years 2020 and 2019 are as follows:

Pension Benefits Postretirement Benefits
Three Months Ended Three Months Ended

March 28,
2020

March 30,
2019

March 28,
2020

March 30,
2019

Service cost $ 266,436
$
263,852
$ 10,855
$
8,216

Interest cost 714,143
879,080
11,667
20,346

Expected return on plan assets (1,365,261 )
(1,190,330
)
(5,589 )
(14,481
)
Amortization of prior service cost 24,845
24,845
(2,063 )
(1,268
)
Amortization of the net loss 325,034
290,549
(6,377 )
(20,507
)
Net periodic benefit cost (benefit) $ (34,803 )
$
267,996
$ 8,493
$
(7,694
)

	Pension Benefits
	Three Months Ended						Nine Months Ended
	October 3, 2020			September 28, 2019			October 3, 2020			September 28, 2019
Service cost	$	266,435		$	263,852		$	799,305		$	791,558
Interest cost		714,143			879,080			2,142,428			2,637,240
Expected return on plan assets		(1,365,261	)		(1,190,329	)		(4,095,784	)		(3,570,990	)
Amortization of prior service cost		24,845			24,845			74,535			74,535
Amortization of the net loss		325,033			290,548			975,101			871,647
Net periodic benefit cost (benefit)	$	(34,805	)	$	267,996		$	(104,415	)	$	803,990

	Postretirement Benefits
	Three Months Ended						Nine Months Ended
	October 3, 2020			September 28, 2019			October 3, 2020			September 28, 2019
Service cost		10,855			8,533			32,565			24,965
Interest cost		11,667			1,874			35,001			42,566
Expected return on plan assets		(5,589	)		7,938			(16,767	)		(21,025	)
Gain on significant event		0			(227,071	)		0			(227,071	)
Amortization of prior service cost		(2,063	)		(1,268	)		(6,189	)		(3,804	)
Amortization of the net loss		(6,377	)		5,560			(19,131	)		(35,454	)
Net periodic benefit cost (benefit)	$	8,493		$	(204,434	)	$	25,479		$	(219,823	)

The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In fiscal year 2020, the Company expects to contribute $2,690,000 into its pension plans and $50,000 into its postretirement plan. As of ~~March 20,~~October 3, 2020, the Company has made contributions of approximately ~~$400,000 into~~$400,000into its pension plans, has contributed ~~$11,000~~$10,000 to its postretirement plan and will make the remaining contributions as required during the remainder of fiscal the year.

The Company delayed its required pensions payments, as permitted, under the CARES Act until the fourth quarter of 2020.

The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion.

The Company made contributions to the plan as follows:

For the Three Months Ended
March 28, 2020 March 30, 2019
Regular matching contribution $ 204,992
$
156,267

Transitional credit contribution 82,127
103,524

Non-discretionary contribution 567,657
587,041

Total contributions made for the period $ 854,776
$
846,832

	Three Months Ended				Nine Months Ended
	October 3, 2020		September 28, 2019		October 3, 2020		September 28, 2019
Regular matching contribution	$	178,244	$	125,266	$	551,765	$	418,329
Transitional credit contribution		62,842		62,464		209,191		240,840
Non-discretionary contribution		13,036		17,390		593,084		622,519
Total contributions for the period	$	254,122	$	205,120	$	1,354,040	$	1,281,688

The non-discretionary contribution of $550,286 made in the ~~three~~nine months ended ~~March 28,~~October 3, 2020 was accrued for and expensed in the prior fiscal year.

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Note KL – Segment Information

~~Financial~~

For the third quarter of 2020, financial information by segment is as follows:

Three Months Ended
March 28, 2020 March 30, 2019
Revenues:
Sales to unaffiliated customers:
Industrial Hardware $ 47,236,605
$
38,403,343

Security Products 12,384,484
14,683,004

Metal Products 5,704,527
7,796,801

$ 65,325,616
$
60,883,148

Income before income taxes:
Industrial Hardware $ 3,458,893
$
1,268,140

Security Products 817,401
972,887

Metal Products (415,023 )
93,281

Operating Profit 3,861,271
2,334,308

Interest expense (827,664 )
(292,540
)
Other income 744,793
13,925

$ 3,778,400
$
2,055,693

	Three Months Ended						Nine Months Ended
	October 3, 2020			September 28, 2019			October 3, 2020			September 28, 2019
Revenues:
Sales to unaffiliated customers:
Industrial Hardware	$	47,141,513		$	39,427,301		$	128,249,908		$	115,321,597
Security Products		14,189,215			14,169,694			37,687,815			45,355,397
Metal Products		4,474,830			7,095,650			14,026,859			22,338,729
	$	65,805,558		$	60,692,645		$	179,964,582		$	183,015,723

Income (loss) before income taxes:
Industrial Hardware	$	3,350,139		$	3,419,052		$	9,168,330		$	6,369,647
Security Products		1,569,173			1,762,703			(724,125	)		3,703,098
Metal Products		(683,500	)		538,656			(2,030,942	)		941,268
Operating Profit (loss)		4,235,812			5,720,411			6,413,263			11,014,013
Interest expense		(647,066	)		(420,377	)		(2,081,283	)		(974,536	)
Other income		365,703			188,623			969,024			789,371
	$	3,954,449		$	5,488,657		$	5,301,004		$	10,828,848

Note LM - Recent Accounting Pronouncements

Upcoming

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. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company will adopt ASU 2019-12 inas of January 1, 2021. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements of the Company.

The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company.

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Note MN - Concentration of ~~risk~~

Risk

Credit Risk

Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As of ~~March 28,~~October 3, 2020, there was one significant concentration of credit risk with a customer, ~~that~~who has receivables ~~due of $4,205,000~~ representing ~~11%~~13% of our total accounts receivable. ~~As of December 28, 2019, there were no significant concentrations of credit risk. No~~One single customer represented more than 10% of the Company’s net accounts receivable as of December 28, 2019. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.

Interest Rate Risk

The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based on the LIBOR rate plus a margin spread of 1.25% ~~to 2.25%~~to2.25%. The Company has an interest rate swap with a notional amount of ~~$49,375,000~~$47,500,000 on ~~March 28,~~October 3, 2020, to convert a portion the borrowing under the Credit Agreement from variable to fixed rates. The valuation of this swap is determined using the one month LIBOR rate index and mitigates the ~~Company's~~Company’s exposure to interest rate risk. Additionally, interest rates on the ~~Company's~~Company’s debt are susceptible to changes to the method that LIBOR rates are determined and to the potential phasing out of LIBOR after 2021. The potential phasing out of LIBOR is discussed in greater detail in Note E—F — Debt hereof and under the heading “The phase out of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest rates” in Part I, Item 1A of the 2019 ~~Annual Report.~~

Form 10-K.

Currency Exchange Rate Risk

The Company’s currency exposure is concentrated in the British pound, Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB and the Hong Kong dollar. Because of the Company’s limited exposure to any single foreign market, any currency gains or losses have not been material and are not expected to be material in the future. As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments.

Note O – Business Acquisition

Effective August 10, 2020 the Company acquired certain assets of Hallink, RSB Inc. (“Hallink”) including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights, assumption of certain liabilities and rights existing under all sales and purchase agreements. Hallink is a leader in innovative injection blow mold tooling and is a leading 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.

Hallink is included in the Industrial Hardware segment of the Company from the date of the acquisition. The cost of the acquisition of Hallink was approximately $7,173,000.

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

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

Asset Class/Description	Amount		Weighted-Average Period in Years
Patents, technology, and licenses
Customer relationships	$	2,345,000		6
Intellectual property		591,000		6
Non-compete agreements		1,001,000		5
	$	3,937,000

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

Neither the actual results nor the pro forma effects of the acquisition of Hallink are material to the Company’s financial statements.

Note P – Subsequent Events

The Company evaluated its October 3, 2020 unaudited condensed consolidated financial statements for subsequent events through the date the financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements.

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to highlight significant changes in the financial position and results of operations of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or “our”) for the quarter ended ~~March 28,~~October 3, 2020. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 28, 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s 2019 Form 10-K, which was filed with the SEC on March 5, 2020 (the “2019 Form 10-K”).

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to ~~fiscal~~ 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to ~~fiscal~~ 2020 or the 2020 fiscal year mean the 53-week period ending on January 2, 2021. In a 52-week fiscal year, each quarter is 13 weeks long. In a ~~53 week~~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 ~~first~~third quarter of 2019, the third fiscal quarter of 2019 or the three months ended September 28, 2019 mean the period from June 30, 2019 to September 28, 2019. References to the third quarter of fiscal ~~2019,~~2020, the ~~first~~third fiscal quarter of 2020 or the three months ended ~~March 30,~~October 3, 2020 mean the 14-week period from June 28, 2020 to October 3, 2020. References to the nine months ended September 28, 2019, or the first nine months of fiscal 2019 mean the ~~13-week~~39-week period from December 30, 2018 to ~~March 30,~~September 28, 2019. References to the nine months ended October 3, 2020, or the first ~~quarter~~nine months of fiscal 2020 ~~the first fiscal quarter of 2020 or the three months ended March 28, 2020~~ mean the ~~13-week~~40-week period from December 29, 2019 to ~~March 28,~~October 3, 2020.

Safe Harbor for Forward-Looking Statements

Statements contained in this Quarterly Report on Form 10-Q that are not based on historical facts are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of forward-looking terminology such as “should,” “could,” “may,” “will,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar terms or variations of those terms or the negative of those terms. There are many factors that affect the Company’s business and the results of its operations and that may cause the actual results of operations in future periods to differ materially from those currently expected or anticipated. These factors include, but are not limited to: effects of the COVID-19 pandemic and the measures being taken to limit the spread and resurgence of COVID-19, including supply chain disruptions, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, ~~and~~ the availability, terms and cost of financing, including borrowings under the Credit ~~Agreement;~~Agreement, and risks associated with employees working remotely or operating with reduced workforce; the scope and duration of the COVID-pandemic, including the extent of any resurgences and how quickly and to what extent normal economic activity can resume; the timing of the development and distribution of effective vaccine or treatment of COVID-19; risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability; restrictions on operating flexibility imposed by the agreement governing our credit facility; the inability to achieve the savings expected from global sourcing of materials; the impact of higher raw material and component costs, particularly steel, plastics, scrap iron, zinc, copper and electronic components; lower-cost competition; our ability to design, introduce and sell new products and related components; market acceptance of our products; the inability to attain expected benefits from acquisitions or the inability to effectively integrate such acquisitions and achieve expected synergies; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, commercial laundry, mining and general industrial markets; costs and liabilities associated with environmental compliance; the impact of climate change or terrorist threats and the possible responses by the U.S. and foreign governments; failure to protect our intellectual property; cyberattacks; and materially adverse or unanticipated legal judgments, fines, penalties or settlements. Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions. Also, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses. The Company undertakes no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or ~~otherwise.~~

otherwise, except as required by law.

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Overview

COVID-19 ~~update~~

Update

As of ~~March~~October 2020, there have been significant impacts to the Company’s operations due to the COVID-19 pandemic and actions that have been taken to slow the spread and resurgence of COVID-19, and we expect those impacts to continue for some time.

Across the Company, we have implemented a broad range of policies and procedures to ensure that employees at all of our locations remain healthy. We listened to and learned a great deal from our colleagues in China, who began feeling the impact of COVID-19 in late 2019, and took early-on decisive action across our North American operations, accordingly. Steps that we have taken to reduce COVID-19 risk to our employees include, among others: implementing social distancing measures, staggering staff and shifts, enabling work from home for as many employees as possible, and implementing an enhanced cleaning program across all sites. We are advising our employees on the importance of wearing facemasks to reduce the spread COVID-19. As government authorities implement restrictions on commercial operations, we continue to ensure compliance with these directives in order to ~~maintaining~~maintain business continuity for our essential operations. We continue to seek and implement additional methods to further reduce COVID-19 risk to our employees.

The Company has operations in Shanghai and Dongguan China that ~~have been impacted~~were affected by ~~COVID-19.~~COVID-19 in the first six months of the year. The virus led to a chain of events that interfered with our ability, and the ability of certain suppliers of ours, to conduct business. We source approximately ~~15%~~10% of our products and components from China. As a result of government mandated shutdowns at our facilities, and those of certain suppliers, in China, many of the products that we have ordered ~~have been~~were delayed by approximately four to six weeks, which ~~has~~ resulted in ~~and is likely to continue to result in a comparable delay~~delays in our product shipments to our customers through May 2020. By mid-March 2020, COVID-19 ~~had begun to~~ spread across the United States, which precipitated the closure by government authorities of non-essential businesses. The majority of our businesses ~~are~~were deemed essential and ~~have~~ accordingly remained open, ~~albeit~~but at reduced levels. Many of our customers operating in both automotive/transportation and non-automotive/transportation markets experienced varying degrees of shutdowns beginning in the last week of March, and, ~~are,~~ on a case-by-case basis, ~~tentatively expected~~began to ~~begin reopening as soon as~~reopen at various dates beginning in May 4, 2020. We estimate the adverse financial impact of COVID-19 on our ~~first~~third quarter operating sales and profit to be an approximate ~~$0.6~~$6.1 million and $1.1 million reduction net of ~~tax.~~tax, respectively. The broader economic fallout caused by COVID-19 may result in unfavorable operating earnings and cash flow generation in the months to follow.

~~Any~~

Although we sustained delays orand disruptions in our supply chain and operations in China, ~~and any ongoing shutdowns~~in the first quarter of 2020, the ~~operations~~majority of our ~~customers would continue~~facilities returned to ~~have a negative effect on demand for~~normal operation but at reduced levels during the second fiscal quarter of 2020 and through the third quarter of 2020. We do not anticipate further disruption in our ~~products~~operations unless resurgence of COVID-19 were to appear, which could cause further disruptions in our business and ~~our ability to fulfill orders on a timely basis or at all, which in turn would~~could adversely affect our financial condition, results of operations and cash flow. In addition, the broader economic fallout caused by COVID-19 may result in unfavorable operating earnings and cash flow generation in the months to follow, ~~including~~ as a result of decreased consumer demand for our and our customers’ products. The future extent of the ~~pandemic’s~~ effect of COVID-19 on our operational and financial performance will depend in large part on ~~future~~ developments, ~~which~~that cannot be predicted with confidence at this time. Future developments include the ultimate duration, scope and severity of the pandemic and any resurgences, actions that may continue to be taken to contain or mitigate ~~its~~the impact of the pandemic, such as the extent of restrictions on gatherings and travel, the impact on governmental programs and budgets, the development of treatments or vaccines, and the resumption of widespread economic activity. Although the inherent uncertainty of the unprecedented and rapidly evolving crisis makes it difficult to predict with any confidence the likely impact of ~~the~~ COVID-19 ~~pandemic~~ on our future operations, ~~the~~ COVID-19 ~~pandemic~~ could have a material adverse impact on our consolidated business, results of operations and financial condition. For a discussion of certain COVID-19-related risks, see ~~Part II,~~ Item 1A, – Risk Factors, of Part II of this Form 10-Q.

~~Net~~

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General Overview

On August 7, 2020, the Company acquired certain assets of Hallink RSB Inc. (“Hallink”) including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights, and assumed certain liabilities and rights existing under all sales and purchase agreements. The transaction price was $7.2 million and was internally financed. Hallink is a leading supplier of blow molds and change parts to the food, beverage, healthcare and chemical industry. Hallink specializes in the ~~first~~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.

During the third quarter of 2020 the Company announced a change in its organization resulting from the combination of our Illinois Lock Division and Eberhard Manufacturing Division. As a result of this organizational change, the Company evaluated its segment reporting. Based on this evaluation, the Company determined that organizational change did not impact our internal reporting and reportable segments for the third quarter of 2020, but will impact our internal reporting and reportable segments for the fourth quarter of 2020. For the third quarter of 2020, as reflected in prior periods, we had three reportable segments: Industrial Products Segment, Security Product Segment and Metal Product Segment. Beginning in the fourth quarter of 2020, we will report in two segments: Engineered Solutions Segment and Diversified Products Segment. The Engineered Solutions Segment will consist of our combined Illinois Lock and Eberhard Manufacturing Division; Big 3 Precision including Big 3 Products, Big 3 Mold, Associated Toolmakers Ltd, and the newly named Hallink Moulds, Inc.; Eastern Industrial Ltd.; Velvac Holdings and Dongguan Reeworld Security Products Ltd. The Diversified Products Segment will consist of Frazer and Jones Division; Greenwald Industries Division; Argo EMS and Sesamee Mexicana, S.A. de C.V.

Net sales in the third quarter of 2020 increased 7%8% to ~~$65.3~~$65.8 million from ~~$60.9~~$60.7 million, and net sales in the first nine months of 2020 decreased 2% to $180.0 million from $183.0 million, compared to the corresponding periods in 2019. Excluding Big 3 Precision, sales in the third quarter and first nine months of 2020 declined $5.0 million or 9%, to $51.0 million from sales of $56.0 million and $38.4 million or 22%, to $140.0 million from sales of $178.4 million from the corresponding periods in 2019, respectively. The sales decline is primarily due to the divestiture of a subsidiary, Canadian Commercial Vehicle, in the second quarter of 2020. Sales in 2019 included Canadian Commercial Vehicles Corporation of $2.7 million in the ~~prior year period. Sales growth includes~~third quarter and $7.6 million in the ~~impact~~first nine months of 2019 whereas in 2020 there were no sales in the third quarter of 2020 and $2.6 million in the first nine months of 2020. In addition, the decline in sales in the first nine months of 2020 can be attributed to the fact that many of our industrial and consumer goods customers closed their operations in the second quarter of 2020 as a result of the ~~acquisition~~COVID-19 pandemic.

Net sales in the third quarter of ~~certain subsidiaries of Big 3 Holdings LLC (collectively, Big 3 Precision), which the Company acquired on August 30, 2019. Sales~~2020 increased in the Industrial Hardware segment by ~~23%~~20% to ~~$47.2~~$47.1 million from $39.4 million in the third fiscal quarter of 2019 and increased by 11% to $128.2 million for the first ~~quarter~~nine months of 2020 from ~~$38.4~~$115.3 million in the ~~first quarter~~corresponding period of 2019. Excluding Big 3 Precision, sales in the third quarter of 2020 decreased ~~11%~~7% in the Industrial Hardware segment to $32.3 million from sales of $34.7 million in the third quarter of 2019, and sales in the first nine months of 2020 decreased 20% to $88.3 million from sales of $110.6 million in the first nine months of 2019. Lower sales in the third quarter of 2020 were due to the sale of Canadian Commercial Vehicles Corporation in the second quarter of 2020 and continued softness in the majority of the markets into which we sell. For the first nine months of 2020, sales decreases were attributable to (i) the sale of Canadian Commercial Vehicles Corporation in the second quarter of 2020, (ii) the temporary customer closures in April and May of 2020 and (iii) the continued softness in the majority of our markets we serve through the first nine months of 2020. These declines were partially offset by third quarter sales in military products which were up by 14%, off-highway products which were up by 18%, and truck and recreational vehicle mirror sales, which were up by 18% and 14%, respectively.

Net sales in the Security Products segment in the third quarter of 2020 were comparable to the sales in the third quarter of 2019. Increases in storage, distribution vehicular accessories and medical markets were more than offset by decreases in sales to our point of sales, network technology equipment and commercial laundry markets. Sales for the first nine months of 2020 were down 17% compared to the same periods of 2019. The impact of COVID-19 in the first half of the year can be attributed to lower demand across all of our markets as businesses we serve dramatically curtailed purchasing. In addition, sales for the first nine months of fiscal 2020 were down due to the loss of several supply contracts that generated sales in the first half of 2019 that did not reoccur in 2020.

Sales in the Metal Products segment decreased 37% in the third quarter and for the first nine months of 2020 compared to sales in the first quarter of 2019, due to lower sales to distribution, Class 8 truck, recreational vehicles, and aftermarket truck replacement part. Increased sales into the specialty vehicle, off-highway and military markets were insufficient to offset declines in the aforementioned markets in the second half of March when certain of our customers closed their operations due to actions taken to help stop the spread of COVID-19. Sales in the Security Products segment decreased 16% in the first quarter of 2020 compared to the first quarter of 2019, due to lower demand across the majority of the markets we serve including distribution, industrial, vehicular accessories and commercial laundry, as well as a loss of supply contracts for

mechatronic padlock systems and recreational vehicles door latches, which generated sales in the first quarter of 2019, that did not recur in 2020. Sales in the Metal Products segment decreased 27% in the first quarter of 2020, compared to sales in the first quartercorresponding periods of 2019. ~~Sales of mining~~Mining products decreased ~~21%~~40%, and sales of industrial casting products decreased ~~35%,~~36% in both the third quarter and first ~~quarter~~nine months of ~~2020 compared to the first quarter of 2019.~~2020. Mining product sales in the third quarter and first ~~quarter~~nine months were impacted by a combination of growing renewable energy capacity and extremely low natural gas prices, ~~and unusually warm weather in the first quarter,~~ which led utilities to cut back on coal ~~usage.~~usage in addition to COVID-19 which forced many mine closures and resulted in further loss of sales. Mines began to open up in the third quarter and sales of mining product improved by 24% from the second quarter of 2020. Sales of industrial castings in the first ~~quarter~~nine months were negatively impacted by the loss of a customer ~~who~~that had temporarily sourced products from us in 2019 due to a fire at its facility in 2018, which temporarily shut down production of products that would otherwise have been sourced internally. In addition, sales were negatively impacted due to the completion of contract from a customer serving the transit industry.

2018.

Net sales of existing products increased 3% in the third quarter and decreased 6% in the first nine months of 2020 compared to the corresponding periods in 2019. Price increases and new products increased net sales in the third quarter by 5% and ~~price increases and new products effected 2% increase in net sales~~4% in the ~~2020 period.~~first nine months of 2020. New products included numerous mirror assemblies, compression latches, a handle and finger pull assembly, ~~emergency door latch,~~ mount plate latch, ~~top mount power~~canopy lock ~~module,~~assembly, handle assembly and crossbar lock assembly and ~~various industrial castings~~hospital bed frames for use in the ~~water and gas industries.~~

field hospitals established due to COVID-19.

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Cost of products sold increased $5.3 million, or 12%, in the ~~first~~third quarter of ~~2020 increased $3.6 million, or 8% compared to the first quarter of 2019.~~2020. The primary reason for the increase in cost of products sold in the third quarter is due to an increase in sales from the ~~inclusion of~~ Big 3 Precision acquisition in ~~the first quarter of 2020.~~2019. Excluding Big 3 Precision cost of products sold ~~would have~~in the third quarter of 2020, decreased ~~by 14%, reflecting~~$2.4 million or 6% to $40.4 million from costs of products sold of $42.8 million in the ~~decrease in sales.~~third quarter of 2019. Material costs decreased ~~by $6.3~~$3.0 million in the third quarter as we reduced inventory and curtailed replenishing stock in order to improve our cash flow generation. For the first nine months of 2020 cost of products sold was comparable to the same periods in 2019. Excluding Big 3 Precision cost of products sold decreased $29.5 million or 21% to $110.7 million from cost of products sold of $140.2 in the first nine months of 2019 on lower sales volume and lower material costs incurred in producing a new Class 8 truck mirror program that was awarded to us in 2018. We have been successful in securing more favorable pricing from new suppliers on all of the components related to this program, which has enabled us to realize comparatively higher margins on products sold in the first quarter of 2020 compared to those sold in the first quarter of 2019.costs. In addition, raw material costs have decreased year-over-year, hot-rolled steel decreased ~~16%~~3%, cold-rolled steel decreased 7%8%, ~~aluminum~~nickel decreased ~~11%~~9%, ~~and~~scrap iron decreased 4% while copper and zinc increased 11% and ~~scrap iron decreased 7%, 17%, and 17%,~~5% respectively. However raw material prices are starting to show signs of price increases in the third quarter of 2020. Also favorably impacting the third quarter and first ~~quarter was~~nine months of 2020 were lower freight ~~cost~~costs of ~~$0.6~~$0.5 million, or a ~~33% reduction~~27% decrease, and $1.9 million, or a 36% decrease, over the ~~first quarter of~~comparable periods in 2019, ~~due to the elimination of certain supplier quality issues and expedited shipping costs.~~respectively. Lower production levels resulted in the under-absorption of operating costs in the amount of ~~$0.3~~$1.4 million during the third quarter and $1.6 million in the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods in 2019.

Further, foreign currency exchange losses increased $0.6 million and $0.4 million for the third quarter and first nine months as compared to the same periods of 2019 respectively.

Finally, the ~~company experienced~~Company paid tariff costs on China-sourced products of approximately ~~$1.4~~$0.6 million in the ~~first~~third quarter of 2020 compared to ~~$0.2~~$0.9 million incurred in the third quarter of 2019, and $2.4 million for the first ~~quarter~~nine months of 2020 compared to $1.5 million in the first nine months of 2019, all of which have been recovered through price increases.

Gross margin as a percent of sales was 22% in the third quarter and 23% in the first ~~quarter~~nine months of 2020 compared to ~~23%~~25% in the third quarter and 24% in the first ~~quarter~~nine months of 2019.

Product development expense in the third quarter of 2020 was comparable to that of the third quarter of 2019 at $0.9 million and decreased ~~$1.5~~$2.6 million or ~~65%,~~52% in the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods of 2019. The reduction in this expense relates to the closure of the Velvac Road-iQ development operation in Bellingham, Washington, ~~which took place~~ in the second quarter of 2019, ~~a strategic decision that we made~~ to adopt a leaner approach to the development of new vision products.

Selling and administrative expense increased ~~$1.6~~$1.2 million or ~~19%,~~14% in the third quarter and increased $2.4 million or 10% in the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods of 2019, primarily as a result of the inclusion of Big 3 Precision in the 2020 period. For the first nine months of 2020 the most significant factor contributing to the overall increase was payroll and payroll related expenses of $1.1 million and amortization expense related to the acquisition of Big 3 Precision in the amount of $1.7 million. Excluding Big 3 Precision, selling and administrative ~~expense~~expenses in the third quarter of 2020 increased 5% to $7.0 million from selling and administrative expenses of $6.7 million in the third quarter of 2019, and selling and administrative expenses in the first ~~quarter~~nine months of 2020 ~~would have~~ decreased ~~by $0.5~~10% to $21.1 million ~~or 6%,~~ from selling and administrative expenses of $23.3 million in the first ~~quarter~~nine months of 2019. The most significant factor contributing to ~~this reduction~~the increase in the third quarter of 2020 was athe reclassification of acquisition related cost for the Big 3 acquisition in 2019. For the first nine months of 2020, the decrease in selling and administrative expenses was due to payroll and payroll related expenses of $1.6 million, and travel expenses of $0.5 million respectively, as compared to the same periods of 2019.

Restructuring costs of $0.3 ~~million.~~

Wemillion incurred ~~no restructuring costs during~~in the first nine months of 2020 related to the divestiture of Canadian Commercial Vehicles Corporation in the second quarter of fiscal 2020, compared to restructuring costs of ~~$0.8~~$2.7 million during for the first ~~quarter~~nine months of 2019, which were related to the ~~consolidation~~discontinuance of our Road iQ development operations based in Bellingham, Washington and the relocation costs of our Composite Panels Technologies division in Salisbury, North Carolina ~~composite panel business into our~~to the Canadian ~~composite panel business~~Commercial Vehicles Corporation located in Kelowna, British Columbia. ~~Costs~~

Goodwill impairment loss of $4.0 million was incurred ~~related~~in the second quarter of 2020. The Company determined that it was more likely than not that the estimated fair value of one of its 12 reporting units (Greenwald Industries) was 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 payment systems away from the ~~write off~~higher cost electronic smart card payment systems resulted in the carrying value of ~~inventory and fixed assets, moving, severance and~~Greenwald exceeding its fair value. As a result, an independent valuation was conducted which estimated that the ~~termination~~carrying value exceeded the fair value by approximately $4.0 million. Management has recognized this non-cash impairment charge in the second fiscal quarter of ~~a lease.~~

2020. There were no goodwill impairment charges in the third quarter of 2020.

Table of Contents

Interest expense increased ~~$0.5~~$0.3 million in the third quarter and $1.1 million for the first ~~quarter~~nine months of 2020 compared to the ~~first quarter of~~same periods in 2019 as a result of increased debt related to our acquisition of Big 3 Precision in August of 2019.

Other income increased ~~$0.7~~$0.2 million in the third and the first ~~quarter~~nine months of 2020 compared to the ~~first quarter of~~corresponding periods in 2019 due to a favorable return on our pension plan assets and a onetime sale-leaseback transaction ~~gain.~~

~~Net income~~ ~~for~~gain in the first quarter of fiscal 2020.

Net income for the third quarter of fiscal 2020 ~~increased to $2.9~~was $3.0 million, or ~~$0.46~~$0.48 per diluted share ~~from $1.6~~compared to income of $4.2 million, or ~~$0.25~~$0.67 per diluted share, for the comparable period in 2019. In the first nine months of 2020 net income was $4.0 million, or $0.64 per diluted share, compared to $8.3 million, or $1.33 per diluted share, for the comparable period in 2019. During the ~~first~~second quarter of ~~2019,~~2020, the Company had a significant non-recurring ~~restructuring costs~~goodwill impairment loss of ~~$0.8 million, as well as project startup costs related to~~$4.0 million. There were no goodwill impairment charges in the ~~new Class 8 truck mirror program awarded to our Velvac subsidiary.~~

third quarter of 2020.

A more detailed analysis of the Company’s results of operations and financial condition follows:

Results of Operations

The following table shows, for the periods indicated, selected line items from the condensed consolidated statements of operations as a percentage of net sales, by segment for the period indicated:

Three Months Ended March 28, 2020

Industrial Security Metal
Hardware Products Products Total
Net sales
100.0
%

100.0
%

100.0
%

100.0
%
Cost of products sold
77.4
%

68.9
%

97.6
%

77.6
%
Gross margin
22.6
%

31.1
%

2.4
%

22.4
%

Product development expense
0.2
%

5.5
%

—

1.2
%
Selling and administrative expense
15.1
%

19.0
%

9.7
%

15.3
%
Restructuring cost
—

—

—

—

Operating profit
7.3
%

6.6
%

-7.3
%

5.9
%

Three Months Ended March 30, 2019

Industrial Security Metal
Hardware Products Products Total
Net sales
100.0
%

100.0
%

100.0
%

100.0
%
Cost of products sold
76.9
%

70.9
%

91.3
%

78.7
%
Gross margin
23.1
%

29.1
%

8.7
%

22.7
%

Product development expense
4.2
%

4.3
%

—

3.7
%
Selling and administrative expense
13.4
%

18.1
%

7.5
%

13.8
%
Restructuring cost
2.2
%

1.4
%
Operating profit
3.3
%

6.7
%

1.2
%

3.8
%

	Three Months Ended October 3, 2020
	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		77.6	%		68.9	%		105.7	%		77.6	%
Gross margin		22.4	%		31.1	%		-5.7	%		22.4	%

Product development expense		0.4	%		4.9	%		—			1.4	%
Selling and administrative expense		14.9	%		15.1	%		9.6	%		14.6	%
Operating profit (loss)		7.1	%		11.1	%		-15.3	%		6.4	%

	Three Months Ended September 28, 2019
	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		76.1	%		67.8	%		86.6	%		75.4	%
Gross margin		23.9	%		32.2	%		13.4	%		24.6	%

Product development expense		0.4	%		4.7	%		—			1.4	%
Selling and administrative expense		14.8	%		15.2	%		5.8	%		13.8	%
Operating profit		8.7	%		12.3	%		7.6	%		9.4	%

Table of Contents

The following table shows the change in sales and operating profit by segment for the ~~first~~third quarter of fiscal 2020 compared to the third quarter of fiscal 2019 (dollars in thousands):

	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales	$	7,714		$	20		$	(2,621	)	$	5,113

Volume		12.7	%		-3.1	%		-38.2	%		3.1	%
Prices		0.6	%		0.9	%		0.6	%		0.6	%
New products		6.3	%		2.3	%		0.7	%		4.7	%
		19.6	%		0.1	%		-36.9	%		8.4	%

Operating profit (loss)	$	(69	)	$	(194	)	$	(1,222	)	$	(1,485	)
		-1.6	%		-1.4	%		-22.9	%		-3.0	%

The following table displays selected line items from the condensed consolidated statements of operations as a percentage of net sales, by segment, for the periods indicated:

	Nine Months Ended October 3, 2020
	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		77.0	%		69.0	%		104.2	%		77.4	%
Gross margin		23.0	%		31.0	%		-4.2	%		22.6	%

Product development expense		0.3	%		5.4	%		—			1.4	%
Selling and administrative expense		15.3	%		16.9	%		10.3	%		15.3	%
Goodwill impairment loss		—			10.6	%					2.2	%
Restructuring costs		0.3	%		—			—			0.1	%
Operating profit (loss)		7.1	%		-1.9	%		-14.5	%		3.6	%

		Nine Months Ended September 28, 2019
		Industrial		Security			Metal
		Hardware		Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		76.4	%		69.0	%		88.7	%		76.1	%
Gross margin		23.6	%		31.0	%		11.3	%		23.9	%

Product development expense		2.9	%		4.2	%		—			2.9	%
Selling and administrative expense		13.7	%		16.6	%		7.1	%		13.6	%
Restructuring costs		1.5	%		2.0	%					1.4	%
Operating profit		5.5	%		8.2	%		4.2	%		6.0	%

Table of Contents

The following table displays the change in net sales and operating profit by segment for the first nine months of fiscal 2020 compared to the first ~~quarter~~nine months of fiscal 2019 (dollars in thousands):

Industrial Security Metal
Hardware Products Products Total
Net sales $ 8,833 $ (2,299 ) $ (2,092 ) $ 4,442

         Volume
20.9
%

-17.0
%

-30.2
%

5.2
%
         Prices
1.1
%

1.0
%

0.7
%

1.0
%
         New products
1.0
%

0.4
%

2.6
%

1.1
%

23.0
%

-15.6
%

-26.9
%

7.3
%

Operating profit $ 2,191 $ (156 ) $ (508 ) $ 1,527

172.7
%

-16.0
%

-544.9
%

65.4
%

	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales	$	12,928		$	(7,667	)	$	(8,312	)	$	(3,051	)

Volume		6.3	%		-18.8	%		-39.0	%		-5.5	%
Prices		1.0	%		0.8	%		0.6	%		0.9	%
New products		3.9	%		1.1	%		1.2	%		2.8	%
		11.2	%		-16.9	%		-37.2	%		-1.7	%

Operating profit (loss)	$	3,734		$	(5,362	)	$	(2,972	)	$	(4,600	)
		2.4	%		-12.1	%		-18.7	%		-2.5	%

Table of Contents

Industrial Hardware Segment

Net sales in the Industrial Hardware segment increased ~~23%~~$7.7 million or 20% in the third quarter and increased $12.9 million or 11% in the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods of 2019. ~~Sales increased due to the inclusion of Big 3 Precision in the 2020 period.~~ Excluding Big 3 Precision, sales ~~would have~~ decreased ~~11%. Increased~~7% in the third quarter from $34.7 million to $32.3 million and decreased 20% for the first nine months of 2020 from $110.6 million to $88.4 million compared to the same periods in 2019.

The sales decline is primarily due to the divestiture of a subsidiary, Canadian Commercial Vehicles Corporation, in the second quarter of 2020. Sales in 2019 included of Canadian Commercial Vehicles Corporation of $2.7 million in the third quarter and $7.6 million in the first nine months of 2019 whereas in 2020 there were no sales in the ~~specialty~~third quarter of 2020 and $2.6 million in the first nine months of 2020. Sales increased in the third quarter of 2020 in heavy truck by 12% recreational vehicle ~~military,~~by 17%, government by 14% and off-highway by 18%, offset by declines in sales in other markets ~~were not sufficient to offset sales reduction in the distribution, Class 8 truck, recreational vehicle, and aftermarket truck parts markets~~we serve. Sales decreased in the second ~~half of March~~quarter when certain of our customers closed operations due to actions taken to help stop the spread of ~~COVID-19. Excluding Big 3 Precision, net~~COVID-19, which negatively affected our overall year to date sales ~~decreased 13%, which was~~results. Sales increases in military off-highway markets were not sufficient to offset ~~by price increases~~a sales reduction in distribution, Class 8 truck, and ~~sales~~aftermarket truck parts markets in the first nine months of 2020. Sales of new products ~~contributing 2%~~contributed 6.3% in the ~~2020 period.~~third quarter and 3.9% in the first nine months of fiscal 2020. New products include numerous mirror assemblies, compression latches, a handle and finger pull assembly, ~~emergency door latch and~~rotary lock assembly, a mount plate ~~latch.~~

latch and hospital beds frames for use in field hospitals established due to COVID-19.

Cost of products sold increased ~~23%~~$6.5 million or 22% in the third quarter and increased $10.6 million or 12% in the first ~~quarter~~nine months of 2020 as compared to the ~~first quarter~~corresponding periods of 2019. Excluding Big 3 Precision, cost of products sold ~~would have~~ decreased by ~~11%~~5% in the third quarter of 2020 from $26.5 million to $25.2 million and decreased 20% in the first nine months of 2020 from $84.6 million to $68.1 million compared to the ~~first~~same periods of 2019. Excluding Big 3 Precision, material costs in the third quarter of ~~2019. Material costs~~2020 decreased ~~$3.4~~16% or $2.7 million to $14.2 million from $16.9 million and decreased 31% or $17.0 million in the first nine months of 2020 to $38.4 million from $55.4 million, compared to the same periods of 2019, due to lower sales volume and lower material ~~costs incurred in producing a new Class 8 truck mirror that was awarded in 2018. Many of the components sourced during the first quarter of 2019 were at higher than normal material~~ costs. ~~As of the first quarter of 2020, all components have been sourced to more favorable suppliers and costs have normalized.~~ Also impacting the ~~first~~third quarter were ~~more favorable~~lower freight costs, which were down ~~$0.6~~25% or $0.4 million in the third quarter and down 35% or $1.8 million in the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods of 2019 due to non-recurring expedited shipping costs. ~~Payroll and payroll-related costs decreased $0.3 million offset by $0.3 million due to the under absorption of operating costs.~~

Finally, we ~~experienced tariff costs~~paid tariffs on China-sourced products of approximately ~~$0.8~~$0.3 million in the third quarter of 2020 compared to ~~$0.2~~$0.5 million in the third quarter of 2019 and for the first nine months of 2020 we experienced $1.4 million in tariff costs compared to $1.0 million in the first nine months of 2019 all of which have been recovered through price increases.

Restructuring costs for the first nine months of 2020 were $0.3 million related to severance pay in the sale of Canadian Commercial Vehicles Corporation in the second quarter of ~~2019.~~

2020 compared to restructuring costs of $2.6 million for the first nine months of 2019 related to the discontinuance of our Road iQ development operations based in Bellingham, Washington and the relocation cost of our Composite Panels Technologies division in Salisbury, North Carolina to the Canadian Commercial Vehicles Corporation division located in Kelowna, British Columbia.

Gross margin as a percentage of net sales in the third quarter and first ~~quarter~~nine months of 2020 was ~~comparable~~22% and 23% respectively as compared to the ~~first quarter~~corresponding periods of 2019 of ~~23%~~24%.

Product development expense increased by $46 thousand in the third quarter and decreased by ~~$1.5~~$2.8 million infor the first ~~quarter~~nine months of 2020 compared to the ~~first quarter in~~corresponding periods of 2019 due primarily to the closure of the Velvac Road-iQ development operation in Bellingham, Washington in the second quarter of 2019, as we adopted a leaner approach to the development of new vision products.

~~We incurred no~~ ~~restructuring costs~~ during the first quarter of 2020 compared to restructuring costs of $0.8 million during the first quarter of 2019, which were related to the consolidation of our Salisbury, North Carolina composite panel business into our Canadian composite panel business in Kelowna, British Columbia. Costs incurred related to the write off of inventory and fixed assets, moving, severance and the termination of a lease.

Selling and administrative expense increased ~~38%~~$1.2 million or 21% in the third quarter and increased $3.7 million or 23% for the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods of fiscal 2019 due primarily to the inclusion of Big 3 Precision. Excluding Big 3 Precision, selling and administrative ~~expenses~~expense decreased 2%24% in the third quarter of 2020 from $5.8 million to $4.5 million and decreased 17% for the first nine months of 2020 from $15.9 million to $13.3 million compared to the ~~first~~corresponding periods of fiscal 2019. Excluding Big 3 Precision, payroll and payroll-related expense in the third quarter of ~~2019. Payroll and payroll-related expenses~~2020, decreased by $0.3 million, or 8%13%, to $2.3 million from $2.6 million, and decreased $1.2 million, or 15%, in the first nine months of 2020 to $6.7 million from $7.9 million, compared to the ~~first quarter~~corresponding periods of 2019.

Table of Contents

Security Products Segment

Net sales in the Security Products segment were comparable in the third quarter and decreased ~~16%~~$7.7 million or 17% in the first ~~quarter~~nine months of 2020 compared to the ~~first quarter of~~corresponding periods in 2019. ~~Sales growth attributable~~The sales decline was due to ~~Load N Lock, which we acquired in June of 2018, partially offset the impact of~~ lower demand across the majority of the markets we serve including distribution, industrial, vehicular accessories and commercial laundry, as well as ~~a loss of supply contracts for mechatronic padlock systems and recreational vehicles door latches, which generated sales~~continued business closures in the ~~first~~second quarter of ~~2019, that did not recur in 2020.~~2020 resulting from the COVID-19 pandemic. Net sales of existing products decreased ~~17%~~3.1%, while price increases and sales of new products contributed 1%3.2% in the third quarter of fiscal 2020 period. New product sales included a ~~top mount power~~canopy lock ~~module and~~assembly, a handle assembly, a crossbar lock assembly, a push button lock assembly and a power lock assembly.

Cost of products sold increased $0.2 million or 2% in the third quarter of 2020 and decreased ~~18%~~$5.3 million or 17% in the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods of 2019, primarily as a result of lower sales volume ~~reduced payroll and payroll-related costs of $0.2 million, or 8%,~~ and the mix of products sold.

Raw materials increased $0.2 million or 3% in the third quarter and decreased $4.1 million or 20% in the first nine months of 2020 compared to the corresponding periods of 2019. Payroll and payroll related expenses decreased $0.2 million or 3% in the third quarter and decreased $0.7 million or 10% in the first nine months of fiscal 2020 compared to the corresponding periods of fiscal 2019.

We paid tariffs on China-sourced products of approximately $0.2 million in the third quarter of 2020 compared to $0.4 million in the third quarter of 2019 and for the first nine months of 2020 we experienced $1.0 million in tariff costs compared to $0.5 million in the first nine months of 2019 all of which have been recovered through price increases.

Gross margin as a percentage of net sales was 31% in the third quarter and for the first ~~quarter~~nine months of 2020 compared to ~~29%~~32% in the third quarter and 31% in the first ~~quarter~~nine months of fiscal 2019.

Product development expense as a percentage of net sales was 6%5% in the third quarter and first ~~quarter~~nine months of fiscal 2020 compared to 4% in the ~~first quarter~~corresponding periods of fiscal 2019. This increase reflects a continuation in the development of a Bluetooth locking system, ~~and~~ a new cable lock ~~system.~~

system, continued development of GPay, a multi-pay reader and an electronic drop.

Selling and administrative expenses was comparable in the third quarter and decreased ~~11%~~$1.1 million or 15% in the first ~~quarter~~nine months of 2020, compared to the ~~first quarter~~corresponding periods of 2019. ~~The~~For the first nine months, the most significant driver inof this reduction was ~~due to~~ decreased payroll and payroll related ~~costs~~expenses of $0.3 million or 8%, travel expenses of $0.3 million or 65% which were offset by an increase in our bad debt reserve in the amount of ~~$152,000~~$93 thousand related to a customer that filed for ~~chapter~~Chapter 11 bankruptcy during the first quarter of fiscal 2020.

Goodwill impairment loss of $4.0 million was incurred in the second quarter of fiscal 2020. The Company determined that it was more likely than not that the estimated fair value of one of its 12 reporting units (Greenwald Industries) was 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 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. The valuation estimated that the carrying value exceeded the fair value by approximately $4.0 million. Management has recognized this non-cash impairment charge in the second quarter of fiscal 2020. There were no goodwill impairment charges in the third quarter of 2020.

Metal Products Segment

Net sales in the Metal Products segment decreased ~~27% to $5.7~~$2.6 million or 37% in the third quarter and decreased $8.3 million or 37% in the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods of 2019. Sales of our mining products decreased by ~~21%~~40%, while sales of industrial casting products decreased by ~~35%.~~36%, in the third quarter of 2020, and mining products declined 39% and industrial castings declined 36% for the first nine months of 2020, compared to the corresponding periods of 2019. Mining sales in the third quarter improved by 24% from the second quarter of 2020 as mines began opening after closing due to COVID-19 and sales of mining products in the first ~~quarter~~nine months of 2020 were impacted by a combination of growing renewable energy capacity and extremely low natural gas prices ~~and unusually warm weather in the first quarter,~~ which led utilities to cut back on coal ~~usage.~~usage in addition to COVID-19, which forced many mine closures resulting in further loss of sales. Sales of industrial castings in the first ~~quarter~~nine months of fiscal 2020 were negatively impacted by the loss of a customer who had temporarily sourced products from us during 2019 due to a fire at its facility in 2018 ~~which~~that temporarily shut down production of product that would otherwise have been sourced ~~internally. In addition, sales were negatively impacted due to~~internally and continued softness in the ~~completion of contracts from a customer serving the transit industry.~~

oil, water, gas, rail and construction markets.

Table of Contents

Cost of products sold decreased ~~22%~~$1.4 million or 23% in the third quarter and decreased $5.2 million or 26% for the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods of 2019, as a result of lower sales volume.

Raw materials decreased $0.5 million or 20% in the third quarter and decreased $1.9 million or 22% in the first nine months of 2020 compared to the corresponding periods of 2019. Payroll and payroll related expenses decreased $0.6 million or 28% in the third quarter and decreased $1.9 million or 26% in the first nine months of 2020 compared to the corresponding periods of 2019.

Gross margin as a percentage of net sales was 2%a negative 6% in the third quarter and a negative 4% for the first ~~quarter~~nine months of 2020 compared to 9%13% and 11% in the ~~first quarter~~corresponding periods of 2019.

Due to the high fixed operating cost structure of operating a foundry and the severe reduction in sales productive capacity could not be consumed resulting in the negative gross margin.

Selling and administrative expenses ~~decreased 6%~~ increased 4% in the third quarter and decreased $0.1 million or 9% for the first ~~quarter~~nine months of 2020 compared to the ~~first quarter~~corresponding periods of 2019. The ~~most significant drivers~~third quarter increase relates to pension costs. For the first nine months of ~~this reduction were~~2020 the decrease was from reduced payroll and payroll-related ~~costs.~~

~~Impact~~expenses of ~~Inflation~~

As$0.1 million or 12% compared to the corresponding periods of ~~the end of the first quarter of 2020, we do not believe that inflation has had a material impact on the Company’s business, revenues or operating results during the periods presented.~~

2019.

Liquidity and Sources of Capital

The Company generated approximately ~~$1.5~~$16.7 million of cash from operations during the first ~~quarter~~nine months of fiscal 2020 compared to approximately ~~$1.5~~$12.2 million during the first ~~quarter~~nine months of fiscal 2019. The Company allocated approximately $7.2 million of its cash ~~flows in~~for the ~~first quarter~~acquisition of ~~2020 period were comparable to the first quarter of 2019 period.~~Hallink. Cash flow from operations coupled with cash at the beginning of the 2020 fiscal year was sufficient to fund capital expenditures, debt service, and dividend payments.

Additions to property, plant and equipment were approximately ~~$0.8~~$2.0 million for the first ~~quarter~~nine months of fiscal 2020 and ~~$0.7~~$1.9 million for the first ~~quarter~~nine months of fiscal 2019. As of ~~March 28,~~October 3, 2020, there ~~was~~were approximately $0.1 million of outstanding commitments for capital expenditures.

The following table shows key financial ratios at the end of each specified period:

First
Quarter
2020

First
Quarter
2019

Year
End
2019

Current ratio

3.4

3.6

3.6

Average days’ sales in accounts receivable

57

49

51

Inventory turnover

3.6

3.7

4.2

Total debt to shareholders’ equity

92.8
%

28.8
%

93.7
%

	Third Quarter 2020			Third Quarter 2019			Year End 2019
Current ratio		3.2			3.2			3.3
Average days’ sales in accounts receivable		53			54			51
Inventory turnover		3.8			4.3			4.2
Total debt to shareholders’ equity		89.5	%		96.6	%		93.7	%

The following table shows important liquidity measures as of the balance sheet date for each specified period (in millions):

First First Year
Quarter Quarter End
2020 2019 2019
Cash and cash equivalents

  - Held in the United States

$
9.6

$
4.1

$
9.0

  - Held by a foreign subsidiary

6.9

9.5

9.0

16.5

13.6

18.0

Working capital

81.8

72.8

83.0

Net cash provided by operating activities

1.5

1.5

23.0

Change in working capital impact on net cash
    (used) in operating activities

(2.7
)

(2.5
)

(0.3
)
Net cash (used) in investing activities

(0.4
)

(0.9
)

(85.8
)
Net cash (used) in financing activities

(2.3
)

(1.1
)

(67.0
)

	Third			Third			Year
	Quarter			Quarter			End
	2020			2019			2019
Cash and cash equivalents
- Held in the United States	$	13.8		$	4.5		$	9.0
- Held by a foreign subsidiary		5.8			7.5			9.0
		19.6			12.0			18.0

Working capital		74.5			78.8			80.0
Net cash provided by operating activities		16.7			12.5			23.0
Change in working capital impact on net cash (used) in operating activities		3.2			(2.0	)		(0.3	)
Net cash provided (used) in investing activities		7.3			(83.1	)		(85.8	)
Net cash (used) in financing activities		(7.5	)		68.9			(67.0	)

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Inventories of ~~$55.3~~$49.4 million represent ~~an increase~~a decrease of ~~1% at March 28,~~9.5% as of October 3, 2020 as compared to $54.6 million at the end of fiscal year 2019. Inventories ~~increased 7%~~decreased 6% in the first ~~quarter~~nine months of fiscal 2020, as compared to ~~$51.6~~$52.8 million at the end of the first nine months of fiscal ~~quarter~~2019. This was primarily due to the acquisition of ~~2019.~~Big 3 Precision. Accounts receivable, less allowances, were ~~$39.9~~$34.2 million ~~at March 28,~~as of October 3, 2020, as compared to $37.9 million at 2019 fiscal year end and ~~$32.4~~$43.5 million at the end of the first nine months of fiscal ~~quarter of~~ 2019.

Cash, cash flow from operating activities and funds available under the revolving credit portion of the Credit Agreement are expected to be sufficient to cover future foreseeable working capital requirements. However, based on current macroeconomic conditions resulting from the uncertainty caused by COVID-19, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available. In addition, the interest rate on borrowings under the Credit Agreement varies based on our senior net leverage ratio, and the Credit Agreement requires us to maintain a senior net leverage ratio not to exceed 4.25 to 1 and a fixed charge coverage ratio to be not less than 1.25 to 1. A decrease in earnings due to responses to contain the spread of COVID-19 or the resulting harm to the financial condition of our customers or economic conditions generally, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and our fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and tocould cause us to fail to comply with the covenants under our Credit Agreement.

Off-Balance Sheet Arrangements

As of the end of the fiscal quarter ended ~~March 28,~~October 3, 2020, the Company does not have any ~~material~~ transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons, as described by Item 303(a)(4) of Regulation S-K, that have or are reasonably likely to have a material current or future impact on the Company’s financial condition, results of operations, liquidity, capital expenditures, capital resources or significant components of revenues or expenses.

Non-GAAP Financial Measures

The non-GAAP financial measures we provide in this report should be viewed in addition to, and not as an alternative for, results prepared in accordance U.S. GAAP.

To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted EPS and Adjusted EBITDA, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable GAAP financial measures, such as net sales, net income, diluted earnings per common share, or other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures. We also present certain results “excluding Big 3 Precision” because we believe this allows for more effective comparability to the corresponding prior year period.

Adjusted EPS is defined as diluted earnings per share excluding, when they occur, the impacts of impairment losses and restructuring expenses. We believe that Adjusted EPS provides important comparability of underlying operational results, allowing investors and management to access operating performance on a consistent basis.

Adjusted EBITDA is defined as net income from continuing operations before interest expense, provision for income taxes, and depreciation and amortization. In addition to these adjustments, we exclude, when they occur, the impacts of impairment losses and restructuring expenses. Adjusted EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

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Reconciliation of expenses from GAAP to Non-GAAP EPS calculation

For the Three and Nine Months ended October 3, 2020 and September 28, 2019

	Three Months Ended						Nine Months Ended
	October 3, 2020			September 28, 2019			October 3, 2020			September 28, 2019

Net Income as reported per generally accepted accounting principles (GAAP)	$	2,984,675		$	4,193,082		$	3,991,709		$	8,293,815

Earnings Per Share as reported under generally accepted accounting principles (GAAP):
Basic	$	0.48		$	0.67		$	0.64		$	1.33
Diluted	$	0.48		$	0.67		$	0.64		$	1.33

Adjustments for one-time expenses
Goodwill impairment loss, net of tax	$	-		$	-		$	-2,993,906	A	$	-

Transaction expenses		-183,616	E		-765,543	G		-203,682	E		-1,183,943	G

Factory relocation, net of tax		-187,688	C		-			-187,688	C		-
Restructuring costs, net of tax	$	-6,446	B	$	-		$	-214,851	B	$	-2,036,642	D,F
	$	-377,750		$	-765,543		$	-3,600,127		$	-3,220,585

Adjustment to Net Income (related to one time expenses); (Non-GAAP)	$	3,362,425		$	4,958,625		$	7,591,836		$	11,514,400

Adjustment to Earnings per share (related to one time expenses); (Non-GAAP)
Basic	$	0.54		$	0.80		$	1.22		$	1.85
Diluted	$	0.54		$	0.79		$	1.22		$	1.84

A) Goodwill impairment

B) Cost incurred on disposition of Canadian Commercial Vehicles

C) Cost incurred on relocation of factory in Reynosa, Mexico

D) Cost incurred on the relocation of Composite Panels Technology

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

F) Costs incurred in the closure of Road IQ in Bellingham, WA

G) Costs incurred on the acquisition of Big 3 Precision

Use of Non-GAAP Financial Measures

To supplement our consolidated financial statements presented in accordance with generally accepted accounting principles in the United States (“GAAP”), we disclose certain non-GAAP financial measures including adjusted net income and adjusted earnings per diluted share. Adjusted net income and adjusted earnings per diluted share exclude one time related expenses. These measures are not in accordance with GAAP.

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

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

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Reconciliation of expenses from GAAP to Non-GAAP EBITDA calculation

For the Three and Nine Months ended October 3, 2020 and September 28, 2019

	Three Months Ended						Nine Months Ended
	October 3, 2020			September 28, 2019			October 3, 2020			September 28, 2019

Net Income/(loss) as reported per generally accepted accounting principles (GAAP)	$	2,984,675		$	4,193,082		$	3,991,709		$	8,293,815

Interest expense		647,066			420,377			2,081,283			974,536

Provision for/(benefit from) income taxes		969,774			1,295,575			1,309,295			2,535,033

Depreciation and amortization		2,093,976			1,416,165			6,144,226			3,807,479

Goodwill impairment loss		-			-			4,002,548	A		-

Factory relocation		250,920	C		-			250,920	C		-

Restructuring costs		8,618	B		-			287,234	B		2,651,877	D,F

Transaction costs		183,616	E		765,543	G		203,682	E		1,183,943	G

Adjusted EBITDA	$	7,138,645		$	8,090,742		$	18,270,897		$	19,446,683

A) Goodwill impairment

B) Cost incurred on disposition of Canadian Commercial Vehicles

C) Cost incurred on relocation of factory in Reynosa, Mexico

D) Cost incurred on the relocation of Composite Panels Technology

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

F) Costs incurred in the closure of Road IQ in Bellingham, WA

G) Costs incurred in the acquisition of Big 3 Precision

Use of Non-GAAP Financial Measures

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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a result of the Company’s status as a smaller reporting company pursuant to Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is not required to provide the information under this Item 3 of Form 10-Q pursuant to Item 305 of Regulation S-K.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

As of ~~March 28,~~October 3, 2020, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures ~~pursuant to Exchange Act Rule 240.13a-15. As~~(as defined in Exchange Act Rules 240.13a-15(e) and 240.15d-15(e)~~, “the term disclosure controls and procedures means controls and other procedures of an issuer that are designed~~) pursuant to ~~ensure that information required to be disclosed by the issuer in the reports that it files or submits under the~~Exchange Act ~~(15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms.~~Rule 13a-15. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the ~~issuer's~~issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.”

The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. The Company’s disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives, and the CEO and CFO have concluded that these controls and procedures are effective at the “reasonable assurance” level as of ~~March 28,~~October 3, 2020.

Changes in Internal Control Over Financial Reporting:

During the period covered by this Quarterly Report on Form 10-Q, there ~~have been~~were no changes in the ~~Company's~~Company’s internal control over financial reporting that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

The Company is a party to various legal proceedings from time to time related to its normal business operations. As of the end of the quarter ended ~~March 28,~~October 3, 2020, the Company does not have any material pending legal ~~proceedings.~~

proceedings, other than as set forth below.

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. This plan was agreed to by the New York State Department of Environmental Conservation (the ~~“DEC”~~“NYSDEC”) on March 27, 2018. Based on estimates provided by the Company’s environmental engineers, the anticipated cost to remediate and monitor the landfill was $430,000. The Company accrued for and expensed the entire $430,000 in the first quarter of 2018 and fiscal 2017. In the ~~fall~~Fall of 2018, detailed construction drawings were prepared by an outside consultant in conjunction with informal progress reviews by the ~~New York State Department of Environmental Conservation (the “NYSDEC”).~~NYSDEC. Long-term groundwater monitoring commenced in April of 2019. Verbal approval for the closure plan was received from the NYSDEC in May of 2019. Written approval ~~is anticipated~~was received in ~~the first quarter~~October of 2020. Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap, is anticipated in ~~the spring~~November of 2020. In the ~~summer~~fourth quarter of 2020, 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 ~~will document~~documents the work done and ~~request~~requests acknowledgment of satisfactory completion of the Order on Consent between Frazer and Jones, and the NYSDEC.

ITEM 1A – RISK FACTORS

The Company’s business is subject to a number of risks, some of which are beyond its control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the Company’s shareholders should carefully consider the risk factors discussed in Part I, Item ~~1A.~~1A “Risk Factors” of the Company’s 2019 Form ~~10-K.~~10-K, as amended by Part II, Item 1A, “Risk Factors” of the Company’s Quarterly Reports on Form 10-Q filed on May 6, 2020 and August 5, 2020. These risk factors could have a material adverse effect on the Company’s business, results of operations, financial condition and/or liquidity and could cause our operating results to vary significantly from period to period. In light of recent developments relating to the COVID-19 pandemic, the Company is supplementing the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in our 2019 Form 10-K, as amended by Part II, Item 1A, “Risk Factors” of the Company’s Quarterly Reports on Form 10-Q filed on May 6, 2020 and August 5, 2020, to include the following risk factor:

RISK RELATED TO COVID-19

The Company’s business has been and is expected to continue to be negatively impacted by the ongoing coronavirus (COVID-19) pandemic.

As a result of the COVID-19 pandemic, the Company has experienced and can be expected to continue to experience disruptions to its business, its operations, the delivery of its products and customer demand for its products, including the following:

The Company has operations in Shanghai and Dongguan, China that have been adversely affected by the impact of COVID-19. The virus interfered with the ability of Company employees and suppliers to conduct business. We source approximately 15% of our products and components from China. As a result of government mandated shutdowns at the Company’s and its suppliers’ factories in China, many of the products ordered have been delayed by approximately 4 to 6 weeks, which has resulted and will continue to result in corresponding delays in delivery of the Company’s products to its customers. These delays have had and are likely to continue to have an adverse impact on our business, operations, fulfillment of production requirements and operating results,

On March 11, 2020, the World Health Organization declared the rapidly spreading COVID-19 outbreak to be a global pandemic, and shortly thereafter government authorities in the United States began closing non-essential business. The majority of the Company’s businesses are considered essential and have remained open but are operating at reduced levels. This reduction in operations has exacerbated delays in delivery of customer orders and, to the extent we continue to operate at reduced levels, is likely to cause further delays. Any sustained reduction in operations could impair the Company’s ability to meet production requirements in a timely manner or at all. These effects have had and are likely to continue to have an adverse impact on the Company’s business, financial condition and operating results.

Many of the Company’s customers in both automotive and non-automotive industries experienced varying degrees of shutdowns beginning in the last week of March 2020, with some of these customers tentatively expected to begin reopening as soon as May 4, 2020. These temporary shutdowns have had and, for so long as they remain in place, are likely to continue to have, an adverse impact on demand for our products. A sustained decrease in demand would negatively impact our business, financial condition and operating results. In addition, the COVID-19 pandemic has had and may continue to have an adverse impact on the operations, financial results and finances of many of our customers, which has impacted and could continue to impact customer payment cycles and payments due from customers.

The broader economic impact of the COVID-19 may result in unfavorable operating earnings and cash flow generation in the months to follow. Current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in economic slowdowns that [have caused and] [may]/[are likely to] [continue to] cause contractions in some or all of the markets we serve, which [has led to]/[may lead to]/[is likely to lead to] decreased demand for the Company’s products, which in turn is expected to negatively impact the Company’s financial condition and operating results. Other macroeconomic factors also remain dynamic, and any causes of market size contraction, including economic uncertainty related to the United Kingdom's exit from the European Union, and overall economic slowdowns, could reduce the Company’s sales or erode operating margin, in either case reducing earnings. In addition, volatile global economic conditions may cause foreign exchange rate fluctuations, which could result in increases or decreases in earnings and may adversely affect the value of the Company’s assets outside the United States. Increased pricing in response to fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on demand for the Company’s products, which would affect sales and profits. Exchange rate fluctuations could also increase pricing pressure and impair the ability of the Company’s products to compete with products imported from regions with favorable exchange rates.

Shutdowns or other restrictions imposed to slow the spread of COVID-19 have impacted and may continue to impact the prices and availability of certain of the raw materials used in the production of the Company’s products, which could impair the Company’s ability to procure the required raw materials for its operations or increase the cost of manufacturing its products. If the price of raw materials increases, the Company may be unable to pass these increases on to its customers and could experience reductions to its profit margins. Also, any decrease in the availability of raw materials could impair the Company’s ability to meet production requirements in a timely manner or at all.

The Company’s management has been focused on mitigating the impact of the COVID-19 pandemic on our employees and operations, which has required and will continue to require a substantial investment of time and resources. This has resulted and can be expected to continue to result in a diversion of management attention and resources away from strategic, initiatives, new business opportunities, potential acquisitions, and the overall profitability of our business, and the Company cannot predict how long this may continue.

~~The economic downturn could also result in the carrying value of goodwill or other intangible assets exceeding their fair value, which could require the Company to recognize asset impairment.~~

To the extent the Company draws under the revolving portion of the Credit Agreement, debt of the Company would increase. Such an increase in indebtedness could adversely affect the Company’s financial results or ability to incur additional debt and could negatively impact credit ratings. The continuing impact of the COVID-19 pandemic could also negatively impact the Company’s compliance with the financial covenants under the Credit Agreement or the interest rate of borrowings under the Credit Agreement. In addition, as a result of the risks described above, the Company may in the future be required to raise additional debt or equity financing, and the availability, terms and cost of such financing would depend on, among other things, global economic conditions, conditions in the global financing markets, trading prices of the Company’s common stock, the credit ratings of the Company, and the outlook for the industries in which the Company operates, all of which could be negatively impacted by the COVID-19 pandemic. There can be no assurance that such financing would be available on acceptable terms, in sufficient quantities, or at all.

	·	The Company has operations in Shanghai and Dongguan, China that were adversely affected by the impact of COVID-19. The virus interfered with the ability of Company employees and suppliers to conduct business. We source approximately 10% of our products and components from China. As a result of government mandated shutdowns at the Company’s and its suppliers’ factories in China, many of the products ordered were delayed by approximately 4 to 6 weeks, which resulted in corresponding delays in delivery of the Company’s products to its customers. These delays had an adverse impact on our business, operations, fulfillment of production requirements and operating results. There may be similar delays in the future as a result of the COVID-19 pandemic, which may have an adverse impact on our business, operations, fulfillment of production requirements and operating results.

	·	On March 11, 2020, the World Health Organization declared the rapidly spreading COVID-19 outbreak to be a global pandemic, and shortly thereafter government authorities in the United States began closing non-essential business. The majority of the Company’s businesses are considered essential and have remained open but are operating at reduced levels. This reduction in operations has exacerbated delays in delivery of customer orders and, to the extent we continue to operate at reduced levels, is likely to cause further delays. Any sustained reduction in operations could impair the Company’s ability to meet production requirements in a timely manner or at all. These effects have had and are likely to continue to have an adverse impact on the Company’s business, financial condition and operating results.

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	·	Many of the Company’s customers in both automotive and non-automotive industries experienced varying degrees of shutdowns beginning in the last week of March 2020, with some of these customers tentatively expected to begin reopening as soon as May 4, 2020. These temporary shutdowns have had and, for so long as they remain in place, are likely to continue to have, an adverse impact on demand for our products. A sustained decrease in demand would negatively impact our business, financial condition and operating results. In addition, the COVID-19 pandemic has had and may continue to have an adverse impact on the operations, financial results and finances of many of our customers, which has impacted and could continue to impact customer payment cycles and payments due from customers.

	·	The broader economic impact of the COVID-19 pandemic, including any resurgences, may result in unfavorable operating earnings and cash flow generation in the months to follow. Current global economic conditions are highly volatile due to the COVID-19 pandemic, resulting in economic slowdowns that have caused and are likely to continue to cause contractions in some or all of the markets we serve, which has led to and is likely continued to lead to decreased demand for the Company’s products, which in turn is expected to negatively impact the Company’s financial condition and operating results. Other macroeconomic factors also remain dynamic, and any causes of market size contraction, including economic uncertainty related to the United Kingdom’s exit from the European Union, and overall economic slowdowns, could reduce the Company’s sales or erode operating margin, in either case reducing earnings. In addition, volatile global economic conditions may cause foreign exchange rate fluctuations, which could result in increases or decreases in earnings and may adversely affect the value of the Company’s assets outside the United States. Increased pricing in response to fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on demand for the Company’s products, which would affect sales and profits. Exchange rate fluctuations could also increase pricing pressure and impair the ability of the Company’s products to compete with products imported from regions with favorable exchange rates.

	·	Shutdowns or other restrictions imposed to slow the spread and resurgence of COVID-19 have impacted and may continue to impact the prices and availability of certain of the raw materials used in the production of the Company’s products, which could impair the Company’s ability to procure the required raw materials for its operations or increase the cost of manufacturing its products. If the price of raw materials increases, the Company may be unable to pass these increases on to its customers and could experience reductions to its profit margins. Also, any decrease in the availability of raw materials could impair the Company’s ability to meet production requirements in a timely manner or at all.

	·	The Company’s management has been focused on mitigating the impact of the COVID-19 pandemic on our employees and operations, which has required and will continue to require a substantial investment of time and resources. This has resulted and can be expected to continue to result in a diversion of management attention and resources away from strategic, initiatives, new business opportunities, potential acquisitions, and the overall profitability of our business, and the Company cannot predict how long this may continue.

	·	The economic downturn has resulted and could continue to result in the carrying value of goodwill or other intangible assets exceeding their fair value, which has required and could continue to require the Company to recognize asset impairment.

	·	To the extent the Company draws under the revolving portion of the Credit Agreement, debt of the Company would increase. Such an increase in indebtedness could adversely affect the Company’s financial results or ability to incur additional debt and could negatively impact credit ratings. The continuing impact of the COVID-19 pandemic, including any resurgences, could also negatively impact the Company’s compliance with the financial covenants under the Credit Agreement or the interest rate of borrowings under the Credit Agreement. In addition, as a result of the risks described above, the Company may in the future be required to raise additional debt or equity financing, and the availability, terms and cost of such financing would depend on, among other things, global economic conditions, conditions in the global financing markets, trading prices of the Company’s common stock, the credit ratings of the Company, and the outlook for the industries in which the Company operates, all of which could be negatively impacted by the COVID-19 pandemic, including the extent of any resurgences. There can be no assurance that such financing would be available on acceptable terms, in sufficient quantities, or at all.

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Pension plan funded status, the ratio of plan assets over plan liabilities, is largely influenced by current market conditions. To the extent asset returns and interest rates, which are used to discount future plan benefits, change from prior measurement periods, the plan’s funded ratio has the potential to change significantly.

The COVID-19 pandemic continues to evolve rapidly, and additional material impacts and disruptions are likely to occur. The factors described above, which may worsen, and other factors that the Company cannot predict, can be expected to have a material adverse impact on the business, operations, financial results and capital resources of the

Company. The ultimate impact of the COVID-19 pandemic on the Company is highly uncertain and subject to change and will depend on future developments, which cannot be accurately predicted, including, but limited to: (i) the duration of the pandemic, including: (a) the extent of any resurgences particularly in those regions that were previously impacted, bur are now reopening, (b) new outbreaks in the regions previously unaffected and (c) how quickly and to what extent normal economic activity can resume; (ii) additional or modified government ~~actions,~~actions; (iii) the timing of the development and distribution of an effective vaccine or treatments for COVID-19; (iv) new information that may emerge concerning the severity and impact of the COVID-19 pandemic and (v) the actions taken to contain COVID-19 pandemic or address its impact in the short and long term, among others. We do not yet know and cannot predict the full extent of potential impacts on the business, operations, financial results and capital resources of the Company.

In addition, any of the risks and uncertainties set forth in Part I, Item 1A of the 2019 Form 10-K, as amended by Part II, Item 1A of the Company’s Quarterly Reports on Form 10-Q filed on May 6, 2020 and August 5, 2020, can be expected to be further heightened by the COVID-19 pandemic and have a material adverse effect on the Company’s business, prospects, financial condition, results of operations and capital resources.

The Company may also disclose changes to risk factors or disclose additional risk factors from time to time in its future filings with the SEC. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also may materially adversely affect its business, financial condition, or operating results.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

None

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ITEM 6 – EXHIBITS

3.1) Restated Certificate of Incorporation of the Company, as amended (conformed copy).*

3.2) Amended and Restated By-Laws of the Company, as amended through April 27, 2016 (conformed copy).*

4) Description of Securities.*

~~31) Certifications required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002~~

~~32) Certifications pursuant to Rule 13a-14(b) and 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~

101) The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2020, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Consolidated Statements of Operations (Unaudited) for the three months ended March 28, 2020 and March 30, 2019 (2) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 28, 2020, and March 30, 2019; (ii) Condensed Consolidated Balance Sheet (Unaudited) as of March 28, 2020 and December 28, 2019; (iii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 28, 2020 and March 30, 2019; and (iv) Notes to the Condensed Consolidated Financial Statements (Unaudited)**.

3.1)		Restated Certificate of Incorporation of the Company, as amended (conformed copy) (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed on May 6, 2020).

3.2)		Amended and Restated By-Laws of the Company, as amended through April 27, 2016 (conformed copy) (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q filed on May 6, 2020).

31)		Certifications required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32)		Certifications pursuant to Rule 13a-14(b) and 18 USC 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101)		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended October 3, 2020, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations (Unaudited) for the three and nine months ended October 3, 2020 and September 28, 2019; (ii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended October 3, 2020, and September 28, 2019; (iii) Condensed Consolidated Balance Sheets (Unaudited) as of October 3, 2020 and December 28, 2019; (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended October 3, 2020 and September 28, 2019; and (iv) Notes to the Condensed Consolidated Financial Statements (Unaudited).**

104)		Cover Page Interactive Data File (formatted as Inline XBRL and included in Exhibit 101). **

___________

* Filed herewith.

**Furnished herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		THE EASTERN COMPANY
		(Registrant)

DATE: ~~May 6,~~November 9, 2020		/s/August M. Vlak
		August M. Vlak President and Chief Executive Officer

DATE: ~~May 6,~~November 9, 2020		/s/John L. Sullivan III
		John L. Sullivan III Vice President and Chief Financial Officer


37

	Three Months Ended
	March 28, 2020			March 30, 2019
Net sales	$	65,325,616		$	60,883,148
Cost of products sold		(50,663,943	)		(47,074,105	)
Gross margin		14,661,673			13,809,043

Product development expense		(775,444	)		(2,239,776	)
Selling and administrative expense		(10,024,958	)		(8,398,265	)
Restructuring costs		—			(836,694	)
Operating profit		3,861,271			2,334,308

Interest expense		(827,664	)		(292,540	)
Other income		744,793			13,925
Income before income taxes		3,778,400			2,055,693

Income taxes		882,583			484,733
Net income	$	2,895,817		$	1,570,960

Earnings per share:
Basic	$	.46		$	.25

Diluted	$	.46		$	.25

Cash dividends per share:	$	.11		$	.11

ASSETS	March 28, 2020			December 28, 2019
	(unaudited)
Current Assets
Cash and cash equivalents	$	16,508,881		$	17,996,505
Marketable securities		23,154			34,305
Accounts receivable, less allowances: 2020 - $699,000;2019 - $556,000		39,873,177			37,941,900
Inventories		55,274,876			54,599,266
Prepaid expenses and other assets		3,955,872			4,343,507
Total Current Assets		115,635,960			114,915,483

Property, Plant and Equipment		88,409,321			88,336,243
Accumulated depreciation		(46,482,754	)		(46,313,630	)
		41,926,567			42,022,613

Goodwill		79,418,533			79,518,012
Trademarks		5,404,283			5,404,283
Patents and other intangibles net of accumulated amortization		25,699,680			26,460,110
Right of Use Assets		11,852,653			12,342,475
		122,375,149			123,724,880
TOTAL ASSETS	$	279,937,676		$	280,662,976

LIABILITIES AND SHAREHOLDERS’ EQUITY	March 28, 2020			December 28, 2019
	(unaudited)
Current Liabilities
Accounts payable	$	22,629,076		$	19,960,507
Accrued compensation		2,216,765			3,815,186
Other accrued expenses		3,797,178			2,967,961
Current portion of long-term debt		5,187,689			5,187,689
Total Current Liabilities		33,830,708			31,931,343

Deferred income taxes		5,270,465			5,270,465
Other long-term liabilities		2,465,260			2,465,261
Lease liability		11,852,653			12,342,475
Long-term debt, less current portion		92,356,121			93,577,544
Accrued postretirement benefits		1,001,509			1,007,146
Accrued pension cost		28,052,482			28,631,485

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		30,890,108			30,651,815
Issued: 8,980,460 shares in 2020 and 8,975,434 shares in 2019
Outstanding: 6,230,731 shares in 2020 and 6,240,705 shares in 2019
Treasury Stock: 2,749,729 shares in 2020 and 2,734,729 shares in 2019		(20,537,962	)		(20,169,098	)
Retained earnings		122,723,970			120,189,111
Accumulated other comprehensive income (loss):
Foreign currency translation		(3,342,399	)		(2,037,952	)
Unrealized gain on marketable securities, net of tax		8,878			—
Unrealized gain (loss) on interest rate swap, net of tax		(1,530,775	)		167,018
Unrecognized net pension and postretirement benefit costs, net of tax		(23,103,342	)		(23,363,637	)
Accumulated other comprehensive loss		(27,967,638	)		(25,234,571	)
Total Shareholders’ Equity		105,108,478			105,437,257
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	279,937,676		$	280,662,976

	March 28, 2020		December 28, 2019

Raw material and component parts	$	17,438,617	$	17,225,469
Work in process		11,145,881		11,009,648
Finished goods		26,690,378		26,364,149
Total inventories	$	55,274,876	$	54,599,266

	Three Months Ended March 28, 2020					Year Ended December 28, 2019
	Units			Weighted - Average Exercise Price		Units			Weighted - Average Exercise Price
Outstanding at beginning of period		276,000		$	22.30		189,167		$	21.46
Issued		--			--		96,000			23.65
Exercised		--			--		(1,667	)		19.10
Forfeited		(6,999	)		19.10		(7,500	)		21.20
Outstanding at end of period		269,001			22.39		276,000			22.30

SARs Outstanding and Exercisable
Range of Exercise Prices		Outstanding as of March 28, 2020		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price		Exercisable as of March 28, 2020		Weighted- Average Remaining Contractual Life		Weighted- Average Exercise Price
$	19.10-26.30		269,001		3.0	$	22.39		50,001		2.0		19.10

	Three Months Ended March 28, 2020				Year Ended December 28, 2019
	Shares		Weighted - Average Exercise Price		Shares		Weighted - Average Exercise Price
Outstanding at beginning of period		25,000	$	—		25,000	$	—
Issued		—		—		—		—
Forfeited		—		—		—		—
Outstanding at end of period		25,000		—		25,000		—

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs
Balance as of December 28, 2019		40,000	$	26.58		40,000		160,000
December 29, 2019 – March 28, 2020		15,000		24.59		15,000		145,000
Balance as of March 28, 2020		55,000	$	26.04		55,000		145,000

	Pension Benefits						Postretirement Benefits
	Three Months Ended						Three Months Ended
	March 28, 2020			March 30, 2019			March 28, 2020			March 30, 2019
Service cost	$	266,436		$	263,852		$	10,855		$	8,216
Interest cost		714,143			879,080			11,667			20,346
Expected return on plan assets		(1,365,261	)		(1,190,330	)		(5,589	)		(14,481	)
Amortization of prior service cost		24,845			24,845			(2,063	)		(1,268	)
Amortization of the net loss		325,034			290,549			(6,377	)		(20,507	)
Net periodic benefit cost (benefit)	$	(34,803	)	$	267,996		$	8,493		$	(7,694	)

	For the Three Months Ended
	March 28, 2020		March 30, 2019
Regular matching contribution	$	204,992	$	156,267
Transitional credit contribution		82,127		103,524
Non-discretionary contribution		567,657		587,041
Total contributions made for the period	$	854,776	$	846,832

	Three Months Ended March 28, 2020
	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		77.4	%		68.9	%		97.6	%		77.6	%
Gross margin		22.6	%		31.1	%		2.4	%		22.4	%

	Three Months Ended March 30, 2019
	Industrial			Security			Metal
	Hardware			Products			Products			Total
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of products sold		76.9	%		70.9	%		91.3	%		78.7	%
Gross margin		23.1	%		29.1	%		8.7	%		22.7	%

Product development expense		4.2	%		4.3	%		—			3.7	%
Selling and administrative expense		13.4	%		18.1	%		7.5	%		13.8	%
Restructuring cost		2.2	%								1.4	%
Operating profit		3.3	%		6.7	%		1.2	%		3.8	%

	First Quarter 2020			First Quarter 2019			Year End 2019
Current ratio		3.4			3.6			3.6
Average days’ sales in accounts receivable		57			49			51
Inventory turnover		3.6			3.7			4.2
Total debt to shareholders’ equity		92.8	%		28.8	%		93.7	%

	First			First			Year
	Quarter			Quarter			End
	2020			2019			2019
Cash and cash equivalents
- Held in the United States	$	9.6		$	4.1		$	9.0
- Held by a foreign subsidiary		6.9			9.5			9.0
		16.5			13.6			18.0

Working capital		81.8			72.8			83.0
Net cash provided by operating activities		1.5			1.5			23.0
Change in working capital impact on net cash (used) in operating activities		(2.7	)		(2.5	)		(0.3	)
Net cash (used) in investing activities		(0.4	)		(0.9	)		(85.8	)
Net cash (used) in financing activities		(2.3	)		(1.1	)		(67.0	)