UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the quarterly period ended ~~October~~July 3, ~~2020~~2021

	☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	for the transition period from ________________ to _______________

Commission File Number 001-35383

THE EASTERN COMPANY

(Exact name of registrant as specified in its charter)

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

112 Bridge Street, Naugatuck, CTConnecticut		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 Symbol(s)	Name of each exchange on which registered
Common Stock, No Par Value	EML	NASDAQ Global Market

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

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

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

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

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

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

As of ~~October~~July 3, ~~2020 6,242,912~~2021, 6,268,754 shares of the registrant’s common stock, no par value per share, were issued and outstanding.

The Eastern Company

Form 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~OCTOBER~~JULY 3, ~~2020~~2021

TABLE OF CONTENTS

		Page



PART I

Item 1.	Financial Statements	3.3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~19.~~18

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	~~32.~~26

Item 4.	Controls and Procedures	~~32.~~26

PART II

Item 1.	Legal Proceedings	~~33.~~27

Item 1A.	Risk Factors	~~33.~~27

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~35.~~27

Item 3.	Defaults Upon Senior Securities	~~35.~~27

Item 4.	Mine Safety Disclosures	~~35.~~27

Item 5.	Other Information	~~35.~~27

Item 6	Exhibits	~~36.~~28

	Signatures	~~37.~~29

-2-

~~Table of Contents~~

PART 1 – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

         Three Months Ended

Nine Months Ended

October 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.~~

Three Months Ended

Six Months Ended

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

Net sales

$ 61,247,592

$ 39,507,800

$ 123,021,025

$ 91,353,901

Cost of products sold

(47,270,990 )

(29,188,182 )

(93,535,153 )

(68,111,738 )
Gross margin

13,976,602

10,319,618

29,485,872

23,242,163

Product development expense

(1,088,380 )

(917,513 )

(2,105,942 )

(1,839,464 )
Selling and administrative expenses

(9,375,537 )

(6,545,525 )

(18,319,931 )

(14,752,316 )
Operating profit

3,512,685

2,856,580

9,059,999

6,650,383

Interest expense

(434,147 )

(454,915 )

(961,291 )

(1,075,663 )
Other income

525,124

303,741

2,951,873

603,322

Income from continuing operations before income taxes

3,603,662

2,705,406

11,050,581

6,178,042

Income taxes

(848,302 )

(624,949 )

(2,601,424 )

(1,455,033 )
Net income from continuing operations

2,755,360

2,080,457

8,449,157

4,723,009

Discontinued Operations (see note B )

Gain (loss) from operations of discontinued units

1,128,286

(5,137,249 )

1,339,467

(4,831,485 )
Loss on classification as held for sale

(10,583,078 )

0

(10,583,078 )

0

Income tax benefit

2,225,658

1,168,011

2,175,946

1,115,512

Loss on discontinued operations

(7,229,134 )

(3,969,238 )

(7,067,665 )

(3,715,973 )

Net (loss) income

$ (4,473,774 )

$ (1,888,781 )

$ 1,381,491

$ 1,007,036

Earnings per share from continuing operations:

Basic

$ 0.44

$ 0.33

$ 1.35

$ 0.76

Diluted

$ 0.44

$ 0.33

$ 1.35

$ 0.76

Loss per share from discontinued operations:

Basic

$ (1.15 )

$ (0.64 )

$ (1.13 )

$ (0.60 )

Diluted

$ (1.15 )

$ (0.64 )

$ (1.13 )

$ (0.60 )

Total (loss) earnings per share:

Basic

$ (0.71 )

$ (0.30 )

$ 0.22

$ 0.16

Diluted

$ (0.71 )

$ (0.30 )

$ 0.22

$ 0.16

Cash dividends per share:

$ 0.11

$ 0.11

$ 0.22

$ 0.22

See accompanying notes.

3-3-
Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

         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.~~

Three Months Ended

Six Months Ended

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

Net (loss) income

$ (4,473,774 )

$ (1,888,781 )

$ 1,381,491

$ 1,007,036

Other comprehensive income/(loss):

Change in foreign currency translation

363,848

765,195

284,795

(526,404 )
Change in marketable securities, net of taxes of:

2021 - $(25) and $42 respectively; 2020 - $679 and $(2,063) respectively

(77 )

2,083

128

(6,325 )
Change in fair value of interest rate swap, net of tax cost (benefit) of:

2021 - $26,560 and $156,994 respectively; 2020 - $48,169 and $582,673 respectively

84,107

(152,519 )

497,147

(1,847,297 )
Change in pension and postretirement benefit costs, net of taxes of:

2021 - $107,961 and $200,155 respectively; 2020 - $81,142 and $162,285 respectively

346,329

260,295

642,073

520,591

Total other comprehensive income (loss)

794,207

875,054

1,424,143

(1,859,435 )
Comprehensive (loss) income

$ (3,679,567 )

$ (1,013,727 )

$ 2,805,634

$ (852,399 )

See accompanying notes.



4-4-
Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

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.~~

July 3,
2021

January 2,
2021

(unaudited)

ASSETS

Current Assets

Cash and cash equivalents

$ 16,890,642

$ 15,291,825

Marketable securities

29,121

28,951

Accounts receivable, less allowances: 2021 - $564,061; 2020 - $486,707

35,109,931

31,804,207

Inventories

48,830,376

43,121,737

Current portion of notes receivable

459,863

398,414

Prepaid expenses and other assets

6,470,105

3,152,720

Current assets held for sale

33,268,203

17,937,918

Total Current Assets

141,058,241

111,735,772

Property, Plant and Equipment

51,395,884

52,173,305

Accumulated depreciation

(25,381,312 )

(25,976,187 )
Property, Plant and Equipment, Net

26,014,572

26,197,118

Goodwill

71,061,057

70,994,178

Trademarks

5,404,284

5,404,284

Patents and other intangibles net of accumulated amortization

24,908,099

27,089,071

Long term notes receivable, less current portion

985,916

1,677,277

Right of Use Assets

12,109,866

12,594,663

Long-term assets held for sale

0

19,894,688

Other Assets

114,469,222

137,654,161

TOTAL ASSETS

$ 281,542,035

$ 275,587,051

See accompanying notes.



5-5-
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

THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

~~See accompanying notes.~~

July 3,
2021

January 2,
2021

(unaudited)

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current Liabilities

Accounts payable

$ 27,223,679

$ 21,311,619

Accrued compensation

3,364,766

3,474,686

Other accrued expenses

3,496,332

3,362,032

Current portion of lease liability

2,951,252

2,798,712

Current portion of long-term debt

7,687,689

6,437,689

Current liabilities held for sale

5,697,064

3,281,225

Total Current Liabilities

50,420,782

40,665,963

Deferred income taxes

2,957,771

2,957,771

Other long-term liabilities

1,144,127

1,144,126

Lease liability

9,367,281

9,834,853

Long-term debt, less current portion

78,672,380

82,255,803

Accrued postretirement benefits

1,154,279

1,185,139

Accrued pension cost

30,929,978

33,188,623

Long-term liabilities held for sale

0

48,315

Total Liabilities

174,646,598

171,280,593

Shareholders’ Equity

Voting Preferred Stock, no par value:

Authorized and unissued: 1,000,000 shares

Nonvoting Preferred Stock, no par value:

Authorized and unissued: 1,000,000 shares

Common Stock, no par value, Authorized: 50,000,000 shares

32,181,055

31,501,041

Issued: 9,018,483 shares in 2021 and 8,996,625 shares in 2020

Outstanding: 6,268,754 shares in 2021 and 6,246,896 shares in 2020

Treasury Stock: 2,749,729 shares in 2021 and 2,749,729 shares in 2020

(20,537,962 )

(20,537,962 )
Retained earnings

123,324,953

122,840,131

Accumulated other comprehensive income (loss):

Foreign currency translation

1,238,658

953,863

Unrealized loss on marketable securities, net of tax

(4,379 )

(4,507 )
Unrealized loss on interest rate swap, net of tax

(889,938 )

(1,387,085 )
Unrecognized net pension and postretirement benefit costs, net of tax

(28,416,950 )

(29,059,023 )
Accumulated other comprehensive loss

(28,072,609 )

(29,496,752 )
Total Shareholders’ Equity

106,895,437

104,306,458

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$ 281,542,035

$ 275,587,051

See accompanying notes.

6-6-
Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended

Six Months Ended

October 3,
2020

September 28,
2019

July 3,
2021

June 27,
2020

Operating Activities

Net income

$ 3,991,709

$ 8,293,815

$ 1,381,491

$ 1,007,036

Less: Loss from discontinued operations

(7,067,665 )

(3,715,973 )
Income from continuing operations

$ 8,449,156

$ 4,723,009

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

Depreciation and amortization

6,144,226

3,807,479

3,531,159

3,212,648

Unrecognized pension and postretirement benefits

(1,066,777 )

134,199

(1,722,275 )

(962,094 )
Goodwill impairment loss

4,002,548

0

(Gain) loss on sale of equipment and other assets

(414,078 )

1,727,788

(Gain) on sale of equipment and other assets

(1,555,983 )

(424,211 )
Provision for doubtful accounts

156,286

51,711

73,097

156,286

Stock compensation expense

652,232

445,338

680,014

448,669

Changes in operating assets and liabilities:

Accounts receivable

3,270,585

359,606

(3,343,695 )

2,949,581

Inventories

4,668,705

3,217,736

(5,763,475 )

(2,379,330 )
Prepaid expenses and other

(93,693 )

762,646

(3,057,099 )

420,134

Other assets

753,170

(589,448 )

(143,156 )

734,790

Accounts payable

(2,600,966 )

(1,815,309 )

6,047,550

256,484

Accrued compensation

(1,262,577 )

(1,680,668 )

(144,509 )

(1,527,149 )
Other accrued expenses

(1,511,729 )

(2,202,622 )

1,215,384

(1,057,698 )
Net cash provided by operating activities

16,689,641

12,512,271

4,266,168

6,551,119

Investing Activities

Marketable securities

7,741

(33,759 )

(171 )

8,389

Business disposition

1,378,602

0

0

1,178,601

Business acquisition, net of cash acquired

(7,172,868 )

(81,155,753 )
Issuance of notes receivable

0

(1,251,943 )
Payments received from notes receivable

629,912

0

Proceeds from sale of equipment

445,211

0

2,044,338

445,212

Purchases of property, plant and equipment

(1,976,370 )

(1,896,128 )

(1,810,434 )

(830,077 )
Net cash provided by/used in investing activities

(7,317,684 )

(83,085,640 )

863,645

(449,818 )

Financing Activities

Proceeds from long-term borrowings

0

100,000,000

Principal payments on long-term debt

(3,846,861 )

(29,009,769 )

(2,336,564 )

(2,622,745 )
Issuance of Note Receivable

(1,251,943 )

0

Payments Received from Note Receivable

54,069

0

Financing leases, net

169,765

0

Purchase common stock for treasury

(368,864 )

0

0

(368,864 )
Dividends paid

(2,058,943 )

(2,058,697 )

(1,375,509 )

(1,372,673 )
Net cash used in financing activities

(7,472,542 )

68,931,534

(3,542,308 )

(4,364,282 )

Discontinued Operations

Cash provided by operating activities

1,261,868

805,880

Cash used in investing activities

(571,945 )

(153,342 )
Cash provided by discontinued operations

689,923

652,538

Effect of exchange rate changes on cash

(344,534 )

(300,602 )

147,050

(400,006 )
Net change in cash and cash equivalents

1,554,881

(1,942,437 )

2,424,478

1,989,551

Cash and cash equivalents at beginning of period

17,996,505

13,925,765

16,101,635

14,883,954

Cash and cash equivalents at end of period

$ 19,551,386

$ 11,983,328

Cash and cash equivalents at end of period ¹

$ 18,526,113

$ 16,873,505

Supplemental disclosure of cash flow information:

Interest

$ 1,264,023

$ 1,400,035

Income taxes

284,075

209,100

Non-cash investing and financing activities

Right of use asset

(186,021 )

10,280,814

(484,797 )

(299,567 )
Lease liability

136,619

(10,280,814 )

315,032

299,567

¹ includes cash from assets held for sale of $1.6 million as of July 3, 2021 and $1.7 million as of June 27, 2020

See accompanying notes


~~See accompanying notes.~~

7-7-
Table of Contents

THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
~~October~~July 3, ~~2020~~2021

Note A – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended ~~December 28, 2019,~~January 2, 2021, filed with the Securities and Exchange Commission on March ~~5, 2020~~16, 2021 (the ~~“2019~~“2020 Form 10-K”), for additional information.

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

The condensed consolidated balance sheet as of ~~December 28, 2019~~January 2, 2021 has been derived from the audited consolidated balance sheet at that date.

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to ~~2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to~~ 2020 or the 2020 fiscal year mean the 53-week period ended on January 2, 2021 and references to 2021 or the 2021 fiscal year mean the 52-week period ending on January ~~2, 2021.~~1, 2022. In a 52-week fiscal year, each quarter is 13 weeks long. In a 53-week fiscal year, each of the first two fiscal quarters and the fourth quarter are 13 weeks long, and the third fiscal quarter is 14 weeks long. References to the ~~third quarter of 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~~second quarter of 2020, the ~~third~~second fiscal quarter of 2020 or the three months ended ~~October 3,~~June 27, 2020 mean the ~~14-week~~ period from ~~June 28,~~March 29, 2020 to ~~October 3,~~June 27, 2020. References to the ~~nine~~second quarter of 2021, the second fiscal quarter of 2021 or the three months ended ~~September 28, 2019 or the first nine months of fiscal 2019~~July 3, 2021 mean the ~~39-week~~13-week period from ~~December 30, 2018~~April 4, 2021 to ~~September 28, 2019. References to the nine months ended October~~July 3, ~~2020 or the first nine months of 2020 mean the 40-week period from December 29, 2019 to October 3, 2020.~~2021.

Certain amounts in the ~~2019~~2020 financial statements have been reclassified to conform with the ~~2020~~2021 presentation with no impact or change to previously reported net income or shareholder’s equity.

The Company now reports continuing operations as one segment – Engineered Solutions.
Note B – Discontinued Operations
We have determined that the companies included in our Diversified Products segment no longer fit with our long-term strategy and we have initiated the process of selling the companies within the Diversified Products segment. Selling the companies within this segment will allow management to focus on our core capabilities and offerings.
The Diversified Products segment met the criteria to be held for sale and furthermore, we determined that the assets held for sale qualify for discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.
-8-
Table of Contents
Summarized Financial Information of Discontinued Operations
The following table represents income from discontinued operations, net of tax:

Three Months Ended

Six Months Ended

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

(unaudited)

(unaudited)

(unaudited)

(unaudited)

Net sales

$ 13,693,457

$ 9,325,609

$ 25,017,899

$ 22,805,124

Cost of products sold

(11,139,886 )

(9,179,960 )

(21,044,606 )

(20,833,343 )
Gross margin

2,553,571

145,649

3,973,293

1,971,781

Selling and administrative expenses

(1,280,570 )

(5,131,259 )

(2,313,397 )

(6,444,713 )
Restructuring costs

(10,583,078 )

0

(10,583,078 )

0

Operating loss

(9,310,077 )

(4,985,610 )

(8,923,182 )

(4,472,932 )

Interest expense

(144,715 )

(151,639 )

(320,429 )

(358,553 )
Loss from discontinued operations before income taxes

(9,454,792 )

(5,137,249 )

(9,243,611 )

(4,831,485 )

Income tax benefit

2,225,658

1,168,011

2,175,946

1,115,512

Loss from discontinued operations, net of tax

$ (7,229,134 )

$ (3,969,238 )

$ (7,067,665 )

$ (3,715,973 )
The following table represents the assets and liabilities from discontinued operations:

July 3,
2021

January 2,
2021

(unaudited)

Cash

$ 1,635,481

$ 809,809

Accounts receivable

8,578,397

5,944,922

Inventory

10,426,383

9,990,656

Prepaid expenses

1,086,981

1,192,530

Property, plant and equipment, net

11,428,744

13,813,553

Patents and other intangibles net of accumulated amortization

0

6,935

Goodwill

0

5,900,837

Right of use assets

112,217

173,364

Total assets of discontinued operations

$ 33,268,203

$ 37,832,606

Current assets of discontinued operations¹

$ 33,268,203

$ 17,937,917

Non-current assets of discontinued operations

0

19,894,689

Total assets of discontinued operations

$ 33,268,203

$ 37,832,606

Accounts payable

$ 3,515,373

$ 2,196,101

Accrued compensation

2,069,474

960,074

Current portion of lease liability

101,243

125,049

Other long-term liabilities

10,974

48,315

Total liabilities of discontinued operations

$ 5,697,064

$ 3,329,539

Current liabilities of discontinued operations¹

$ 5,697,064

$ 3,281,224

Non-current liabilities of discontinued operations

0

48,315

Total liabilities of discontinued operations

$ 5,697,064

$ 3,329,539

¹ The total assets and liabilities of discontinued operations are presented as current in the July 3, 2021 balance sheet as we expect to sell the discontinued operations and collect proceeds within one year.
-9-
Table of Contents
Note C – Earnings Per Share

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

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

8
~~Table of Contents~~

Three Months Ended

Six Months Ended

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

Basic:

Weighted average shares outstanding

6,259,654

6,246,410

6,253,996

6,234,665

Diluted:

Weighted average shares outstanding

6,259,654

6,246,410

6,253,996

6,234,665

Dilutive stock appreciation rights

17,751

-

17,751

-

Denominator for diluted earnings per share

6,277,405

6,246,410

6,271,747

6,234,665

Note CD – Inventories

Inventories from continuing operations consist of the following components:

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

July 3,
2021

January 2,
2021

Raw material and component parts

$ 18,544,799

$ 16,376,772

Work in process

6,027,748

5,323,059

Finished goods

24,257,829

21,421,906

Total inventories

$ 48,830,376

$ 43,121,737

Note DE - Goodwill

The ~~Company maintains 12 reporting units, seven of which comprise the goodwill balance. These seven units have an~~ aggregate carrying amount of goodwill offrom continuing operations is approximately ~~$77.8~~$71.1 million as of ~~October~~July 3, ~~2020.~~2021. A goodwill write-off of approximately $5.9 million was recognized in discontinued operations when classifying the disposal group as held for sale. See Note B – Discontinued Operations for further discussion.

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

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 EF – 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 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~~warehouses and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all of the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. The Company’s option to extend certain leases ranges from 24 – ~~131~~113 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.

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Table of Contents
Currently, the Company has 3627 operating leases and ~~four~~three finance leases with a lease liability of ~~$11,248,144~~$12.3 million as of ~~October~~July 3, ~~2020.~~2021. The finance lease arrangements are immaterial. The ~~basis,~~ terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. ~~We rent or sublease a part of one real estate property to a third party.~~ There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.

Total lease expense for each of the next five fiscal years is estimated to be as follows: remainder of ~~2020 - $824,251;~~ 2021 - ~~$3,011,067;~~$1.5 million; 2022 - ~~$2,067,173;~~$2.5 million; 2023 - ~~$1,699,249;~~$2.1 million; 2024 - ~~$1,223,651and $2,422,753thereafter.~~$1.6 million; 2025 - $0.9 million; and $3.7 million thereafter. The weighted average remaining lease term is 66.5 years. The implicit interest rate used was 5.0%.

9
~~Table of Contents~~
Note FG - 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 ~~$1,250,000for~~$1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increases to $1,875,000 per quarter beginning September 30, 2021 and continues through June 30, 2023. The repayment amount then increases to ~~$2,500,000per~~$2,500,000 per quarter beginning September 30, 2023 and continues through June 30, 2024. The term loan is a 5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. As of ~~October~~July 3, ~~2020,~~2021, the Company has not borrowed any funds on the revolving commitment portion of the facility. The term loan bears interest at a variable rate based on the LIBOR rate plus an applicable margin of 1.25% to 2.25%, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.25% to 1.25% or the LIBOR rate plus an applicable margin of 1.25% to 2.25%, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of the Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019 with Santander Bank, N.A., as administrative agent.

The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. The Company was in compliance with all of its covenants under the Credit Agreement at ~~October~~July 3, ~~2020~~2021 and through the date of filing this Form 10-Q.

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original ~~notational~~notional amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On ~~October~~July 3, ~~2020,~~2021, the interest rate for half ($~~47.5~~40.6 million) of the term portion was ~~1.66%~~1.84%, using a ~~one month~~one-month LIBOR rate, and ~~2.94%~~3.19% on the remaining balance ($~~47.5~~45.6 million) of the term loan based on a ~~one month~~one-month LIBOR rate.
The interest rates under the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the 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 (the “FCA”) (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. In December 2020, the ICE Benchmark Administration (the “IBA”) announced a market consultation regarding the extension of US dollar LIBOR tenors through June 30, 2023 which the FCA supports. On March 5, 2021, the IBA released its feedback statement reporting the results of the market consultation. Pursuant to its feedback statement, the IBA intends to ~~stop persuading or compelling banks to submit~~cease publication of all settings of non-US dollar LIBOR ~~rates~~and only the one-week and two-month U.S. dollar LIBOR settings on December 31, 2021, with the publication of the remaining U.S. dollar LIBOR settings being discontinued after ~~2021. In the United States,~~June 30, 2023. The Alternative Reference Rates Committee (ARRC), a financial industry group convened by the Federal Reserve Board, has recommended the use of SOFR to replace LIBOR. The difference between LIBOR and SOFR is that LIBOR is a forward-looking rate which means the ~~Federal Reserve Bank of New York, in conjunction with~~interest rate is set at 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~~beginning of the ~~cost of borrowing cash~~period with payment due at the end. SOFR is a backward-looking 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,rate which ~~provides optional expedients and exceptions~~has implications for ~~applying U.S. GAAP to contracts, hedging relationships~~how interest 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~~payments are based. Changes in ~~modifying contracts to replace discontinued reference rates with new rates. ASU 2020-04 is effective as~~the method of ~~March 12, 2020 through December 31, 2022. The Company is evaluating the potential impact of~~calculating the replacement of LIBOR ~~which ultimately~~with an alternative rate or benchmark are still in flux, and once an alternate rate is adopted, 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~~result in higher borrowing costs. This could materially 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.~~operations, cash flows and liquidity. We cannot predict the effect of the potential changes to LIBOR or the establishment and use of alternative rates or benchmarks at this time. We are working with our senior lender and may need to renegotiate our credit facilities as LIBOR phases out in June 2023.

10-11-
Table of Contents

Note GH - 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 the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”). 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 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 ~~nine~~six months of fiscal ~~2020 and 2019, no~~2021, the Company issued 24,600 stock options ~~or restricted stock~~that were granted that were subject to the meeting of performance measurements. The Company did not issue any stock options or restricted stock in the first six months of fiscal 2020. For the first ~~nine~~six 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 2020,2021, the Company used several assumptions which included an expected term of 4.0 years, volatility deviation ~~of 38.62%~~between 47.25% to 48.55% and a ~~risk free~~risk-free rate ~~of 0.26%~~between 0.18% to 0.35% for the purposes of measuring compensation under the Black Scholes Method.

The ~~2010 Plan and the~~ 2020 Plan also ~~permit~~permits the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During the first ~~nine~~six months of fiscal 2021 the Company did not issue any SARs. During the first six months of fiscal 2020 the company issued 44,000 SARs. For the first six months of fiscal 2020, the Company ~~issued 44,000 SARs~~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 ~~2020 Plan, and during the first nine months of fiscal 2019, 96,000 SARs were issued under the 2010 Plan.~~Black Scholes Method.

Stock-based compensation expense in connection with SARs previously granted to employees was approximately ~~$85,000~~$100,000 and ~~$108,000~~$85,000 in the ~~third~~second quarter of ~~2020~~2021 and ~~2019~~the second quarter of 2020, respectively and was approximately ~~$279,000~~$214,000 and ~~$281,000~~$195,000 in the first ~~nine~~six months of fiscal years 2021 and 2020, ~~and 2019~~ respectively.

As of ~~October~~July 3, ~~2020,~~2021, there were ~~818,864~~811,072 shares of Company common stock reserved and available for future grant under the 2020 Plan.

11
~~Table of Contents~~
The following tables set forth the outstanding SARs for the period specified:

Six Months Ended

Year Ended

July 3, 2021

January 2, 2021

Units

Weighted-
Average
Exercise Price

Units

Weighted-
Average
Exercise Price

Outstanding at beginning of period

244,001

$ 21.87

276,000

$ 22.30

Issued

-

0

44,000

20.20

Exercised

(50,667 )

19.33

-

-

Forfeited

(6,000 )

21.20

(75,999 )

22.00

Outstanding at end of period

187,334

22.77

244,001

21.87



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

-12-
Table of Contents

SARs Outstanding and Exercisable
SARs Outstanding and Exercisable
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

Range of
Exercise Prices

Outstanding
as of July 3,
2021

Weighted
Average
Remaining
Contractual Life

Weighted
Average
Exercise Price

Exercisable
as of July 3,
2021

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

19.10 - $26.30

187,334

2.0

$ 22.77

87,335

1.0

$
22.33

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


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

0

0

—

—

Six Months Ended
Year Ended
July 3, 2021
January 2, 2021
Units
Units
Outstanding at beginning of period
25,000
25,000
Issued
27,300
-
Exercised
-
-
Forfeited
-
-
Outstanding at end of period
52,300
25,000

As of ~~October~~July 3, ~~2020,~~2021, outstanding SARs and grants had an intrinsic value of ~~$558,000.~~$3,105,000.
12
~~Table of Contents~~

Note HI – Share Repurchase Program

On May 3,2, 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. 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”). The Company did not repurchase any shares under its share repurchase program during the ~~third~~second quarter of ~~2020.~~2021.
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

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 April 3, 2021

55,000

$ 26.04

55,000

145,000

April 4, 2021 - July 3, 2021

-

-

-

Balance as of July 3, 2021

55,000

$ 26.04

55,000

145,000

-13-
Table of Contents

Note IJ – 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.”~~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 are delivering goods or services, determines the transaction price, 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 LM for revenues reported by segment. ~~Refer to Note D for a discussion of goodwill impairment.~~ The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts.

Note JK - 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~~2016 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to ~~2013.~~2014.

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~~adopted ASU 2019-12 in the first quarter of 2021.
13
~~Table of Contents~~

On March 27, 2020, the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“(the “CARES Act”) became law. For additional information on 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 componentsimpact of the CARES Act ~~to determine their effect~~ on ~~our income tax provision:~~the Company see Note 8 – Income Taxes in the 2020 Form 10-K.
·
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~~six months ended ~~October~~July 3, ~~2020.~~2021. 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 KL - Retirement Benefit Plans

The Company has four non-contributory defined benefit pension plans covering most U.S. employees. Three of these pension plans are frozen and participants in these three plans have not accrued benefits since the date on which these plans were frozen. A fourth pension plan does not permit new participants but existing participants in this fourth pension plan continue to accrue benefits. 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.

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

14
~~Table of Contents~~
Significant disclosures relating to these benefit plans for the first ~~nine~~six months of fiscal years ~~2020~~2021 and ~~2019~~2020 are as follows:

Pension Benefits

Pension Benefits

Three Months Ended

Nine Months Ended

Three Months Ended

Six Months Ended

October 3,
2020

September 28,
2019

October 3,
2020

September 28,
2019

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

Service cost

$ 266,435

$ 263,852

$ 799,305

$ 791,558

$ 271,835

$ 266,434

$ 543,668

$ 532,870

Interest cost

714,143

879,080

2,142,428

2,637,240

504,254

714,142

1,008,509

1,428,285

Expected return on plan assets

(1,365,261 )

(1,190,329 )

(4,095,784 )

(3,570,990 )

(1,448,675 )

(1,365,262 )

(2,897,349 )

(2,730,523 )
Amortization of prior service cost

24,845

24,845

74,535

74,535

24,845

24,845

49,690

49,690

Amortization of the net loss

325,033

290,548

975,101

871,647

432,536

325,034

865,075

650,068

Net periodic benefit cost (benefit)

$ (34,805 )

$ 267,996

$ (104,415 )

$ 803,990

Net periodic benefit

$ (215,205 )

$ (34,807 )

$ (430,407 )

$ (69,610 )

Postretirement Benefits

Postretirement Benefits

Postretirement Benefits

Three Months Ended

Nine Months Ended

Three Months Ended

Six Months Ended

October 3,
2020

September 28,
2019

October 3,
2020

September 28,
2019

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

Service cost

10,855

8,533

32,565

24,965

$
13,626

$
10,855

$
27,252

$
21,710

Interest cost

11,667

1,874

35,001

42,566

9,842

11,667

19,684

23,334

Expected return on plan assets

(5,589 )

7,938

(16,767 )

(21,025 )

(6,420 )

(5,589 )

(12,840 )

(11,178 )
Gain on significant event

0

(227,071 )

0

(227,071 )

0

0

0

0

Amortization of prior service cost

(2,063 )

(1,268 )

(6,189 )

(3,804 )

0

(2,063 )

0

(4,126 )
Amortization of the net loss

(6,377 )

5,560

(19,131 )

(35,454 )

(3,094 )

(6,377 )

(6,188 )

(12,754 )
Net periodic benefit cost (benefit)

$ 8,493

$ (204,434 )

$ 25,479

$ (219,823 )
Net periodic benefit cost

$ 13,954

$ 8,493

$ 27,908

$ 16,986

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,~~2021, the Company expects to contribute ~~$2,690,000~~$3,100,000 into its pension plans and $50,000 into its postretirement plan. The Company is currently reviewing the American Rescue Plan Act for applicable pension funding relief for the minimum required contributions and will adjust accordingly. As of ~~October~~July 3, ~~2020,~~2021, the Company has made contributions of approximately ~~$400,000into~~$1,171,000 into its pension plans, has contributed ~~$10,000~~$8,000 to its postretirement plan and ~~will~~expects to make the remaining contributions as required during the remainder of the 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:

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 nine months ended October 3, 2020 was accrued for and expensed in the prior fiscal year.~~

Three Months Ended

Six Months Ended

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

Regular matching contribution

$ 144,081

$ 132,016

$ 297,397

$ 294,808

Transitional credit contribution

33,102

40,529

75,870

95,200

Non-discretionary contribution

14,895

12,390

362,484

371,613

Total contributions for the period

$ 192,078

$ 184,935

$ 735,751

$ 761,621

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Table of Contents

~~Note L – Segment Information~~
~~For~~The non-discretionary contribution of $332,092 made in the ~~third quarter of 2020, financial information by segment is as follows:~~

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

six months ended July 3, 2021 was accrued for and expensed in the prior fiscal year.

Note M - Recent Accounting Pronouncements

~~Upcoming~~Adopted

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~~adopted ASU 2019-12 as of January 1,3, 2021. The adoption of this guidance isdid 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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~~Table of Contents~~

Note N - Concentration of 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 ~~October~~July 3, ~~2020,~~2021, there was one significant concentration of credit risk with a customer, who has receivables representing ~~13%~~15% of our total accounts receivable. One single customer represented more than 10% of the Company’s net accounts receivable as of ~~December 28, 2019.~~January 2, 2021. 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% ~~to2.25%~~to 2.25%. The Company has an interest rate swap with a notional amount of ~~$47,500,000~~$45.6 million on ~~October~~July 3, ~~2020,~~2021, to convert a portion of the borrowing under the Credit Agreement from variable to fixed rates. The valuation of this swap is determined using the ~~one month~~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 FG — Debt hereof and under the heading “The ~~phase out~~phaseout 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~~8of the ~~2019~~2020 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.

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Table of Contents
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.~~agreements, and assumed certain liabilities, of Hallink, ~~is a leader~~RSB Inc. These assets are held in ~~innovative~~our subsidiary, Hallink Moulds, Inc. (“Hallink Moulds”). Hallink Moulds produces injection blow mold tooling and is a ~~leading~~ supplier of blow molds and change parts to the food, beverage, healthcare and chemical industry. Hallink Moulds specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry offering integrated turnkey solutions to its customers worldwide.

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

The above acquisition was accounted for under ASU 2014-18, Business Combinations (Topic 805). The acquired business is included in the consolidated operating results of the Company from the effective date of the acquisition. The excess of the cost of Hallink Moulds over the fair market value of the net assets acquired of $2,302,000 has been recorded as goodwill. An independent third party was utilized to establish the fair market value of net assets acquired.
17
~~Table of Contents~~

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

Asset Class/Description

Amount

Weighted-Average Period in Years

Amount

Weighted-
Average
Period in Years

Patents, technology, and licenses

Customer relationships

$ 2,345,000

6

$ 2,345,000

6

Intellectual property

591,000

6

591,000

6

Non-compete agreements

1,001,000

5

1,001,000

5

$ 3,937,000

$ 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 theseCompany's financial statements.

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Table of Contents

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 ~~October~~July 3, ~~2020.~~2021. 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~~January 2, 2021 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~~Annual Report on Form 10-K for the fiscal year ended January 2, 2021, which was filed with the ~~SEC~~Securities and Exchange Commission (the “SEC”) on March ~~5, 2020~~16, 2021 (the ~~“2019~~“2020 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 ~~2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to~~ 2020 or the 2020 fiscal year mean the 53-week period ended on January 2, 2021 and references to 2021 or the 2021 fiscal year mean the 52-week period ending on January ~~2, 2021.~~1, 2022. In a 52-week fiscal year, each quarter is 13 weeks long. In a 53-week fiscal year, each of the first two fiscal quarters and the fourth quarter are 13 weeks long, and the third fiscal quarter is 14 weeks long. References to the ~~third~~second 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~~ 2020, the ~~third~~second fiscal quarter of 2020 or the three months ended ~~October 3,~~June 27, 2020 mean the ~~14-week~~ period from ~~June 28,~~March 29, 2020 to ~~October 3,~~June 27, 2020. References to the ~~nine~~second quarter of 2021, the second fiscal quarter of 2021 or the three months ended ~~September 28, 2019, or the first nine months of fiscal 2019~~July 3, 2021 mean the ~~39-week~~13-week period from ~~December 30, 2018~~April 4, 2021 to ~~September 28, 2019. References to the nine months ended October~~July 3, ~~2020, or the first nine months of fiscal 2020 mean the 40-week period from December 29, 2019 to October 3, 2020.~~2021.

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, vaccination rates, the emergence of virus variants 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, the availability, terms and cost of financing, including borrowings under ~~the Credit Agreement,~~credit arrangements or agreements, and risks associated with employees working remotely or operating with reduced workforce; the scope and duration of the ~~COVID-pandemic,~~COVID-19 pandemic, including the extent of ~~any~~ resurgences, the development of variants and how quickly and to what extent normal economic activity can resume; the timing of the ~~development and~~ distribution of ~~effective vaccine or treatment~~COVID-19 vaccines and rates of ~~COVID-19;~~vaccination; 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.~~settlements; and other risks identified and discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 1A, Risk Factors, and Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of the 2020 Form 10-K and that may be identified from time to time in our quarterly reports on Form 10-Q, current reports on Form 8-K and other filings we make with the SEC. 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, except as required by law.

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Table of Contents

Overview

COVID-19 Update

AsThe direct impact of ~~October 2020, there have been significant impacts to the Company’s operations due to~~ the COVID-19 pandemic has been minimal at most of our operations through the second quarter of 2021. We continue to follow CDC guidelines, including the use of proper personal protection equipment, social distancing and ~~actions that~~sanitizing work areas. All of these measures allowed the majority of our facilities to operate at full capacity where possible barring supply chain issues, port congestion, and labor shortages. Many of the Company’s employees have ~~been taken~~received their first COVID-19 vaccination, and we will continue to ~~slow the spread and~~encourage our workforce to continue to get vaccinated. We do not anticipate further significant interruption in our operations unless a resurgence of the COVID-19 pandemic occurs. A significant resurgence of the COVID-19 pandemic could cause further disruptions in our business and ~~we expect those impacts to continue for some time.~~could adversely affect our financial condition, results of operations and cash flow.

~~Across~~During 2020 and continuing into 2021 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 the risk of COVID-19 ~~risk~~ to our employees include, among others: ~~implementing social distancing measures, staggering staff~~protecting employee health by instructing employees to stay home if they exhibit symptoms of COVID-19; requiring employees to wear masks upon entry into the workplace; providing standard surgical masks, unless this conflicts with OSHA requirements; and ~~shifts, enabling~~educating employees on hand hygiene to help stop the spread. We maintain a clean work environment by frequently cleaning all touch points with products that meet EPA criteria for use against COVID-19; educating employees to clean their personal workspace at the beginning and the end of every shift; and providing hand sanitizer and disposable wipes. We have minimized in-person contact between employees and with visitors; required essential employees to work from home if they are able to do so effectively; developed and implemented practices for ~~as many employees as~~social distancing in our facilities; and reduced the number and size of in-person meetings. We have eliminated all non-essential workplace travel, discouraged carpooling, and where we have multiple shifts, staggered shift start and stop times, break times, and lunchtimes to minimize congregations at the time clocks or break areas. Where possible, we have closed or restricted break rooms and ~~implementing an enhanced cleaning program across all sites. We are advising our employees on the importance of wearing facemasks~~cafeterias or used extra rotations to reduce the ~~spread COVID-19. As government authorities implement restrictions on commercial operations, we continue~~number of employees in the break rooms or cafeterias at one time to ~~ensure compliance with these directives in order to maintain business continuity for our essential operations.~~achieve social distancing norms. We continue to seek and implement additional methods to further reduce the risk of COVID-19 ~~risk~~ to our employees.
The Company has operations in Shanghai and Dongguan China that were affected by 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 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 were delayed by approximately four to six weeks, which resulted in delays in our product shipments to our customers through May 2020. By mid-March 2020, COVID-19 spread across the United States, which precipitated the closure by government authorities of non-essential businesses. The majority of our businesses were deemed essential and accordingly remained open, 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, on a case-by-case basis, began to reopen at various dates beginning in May 4, 2020. We estimate the adverse financial impact of COVID-19 on our third quarter operating sales and profit to be an approximate $6.1 million and $1.1 million reduction net of 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.

Although we sustained delays and disruptions in 2020 to our supply chain and operations, ~~in China, in the first quarter of 2020,~~ the majority of our facilities have returned to normal ~~operation but~~operations however, one facility experienced an outbreak of COVID-19 among several employees resulting in closure of the factory for a few days at ~~reduced levels during~~ the ~~second fiscal quarter~~end of ~~2020 and through the third quarter of 2020. We~~June 2021. Currently, we do not anticipate further ~~disruption in~~interruption of our operations unless a resurgence of the COVID-19 ~~were to appear,~~pandemic (including variants) occurs, which could cause further disruptions in our business and 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, as a result of decreased consumer demand for our and our customers’ products. The future extent of the effect of the COVID-19 pandemic on our operational and financial performance will depend in large part on the emergence of virus variants, vaccination rates, continued mask wearing, social distancing and other developments, 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 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. AlthoughWith the inherent uncertainty of the ~~unprecedented and rapidly evolving crisis makes~~COVID-19 pandemic it is difficult to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations ~~COVID-19~~and the extent it 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 I, Item 1A, ~~Risk Factors,~~“Risk Factors”, of ~~Part II~~the 2020 Form 10-K.
General Overview
We have determined that the companies included in our Diversified Products segment no longer fit with our long-term strategy, and we have initiated the process of divesting the companies within the Diversified Products segment. Selling the companies within this segment will allow management to focus on our core capabilities and offerings.
The Diversified Products segment meets the criteria to be held for sale and, furthermore, we determined that the assets held for sale qualify as discontinued operations. As such, the financial results of the Diversified Products segment are reflected in our unaudited condensed consolidated statements of operations as discontinued operations for all periods presented. Additionally, current and non-current assets and liabilities of discontinued operations are reflected in the unaudited condensed consolidated balance sheets for both periods presented.
The loss recognized in the write-down of the Diversified Products segment to fair value in the second quarter of 2021 was $8.1 million, net of tax with anticipated cash flow over the next twelve months of approximately $25.0 million. The majority of this ~~Form 10-Q.~~cash will be used to pay down debt.

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Table of Contents

~~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 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.following analysis excludes discontinued operations.

Net sales in the third quarter of 2020 increased 8% to $65.8 million from $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 third quarter and $7.6 million in the 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 attributed2021 increased 55% 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 COVID-19 pandemic.~~
~~Net sales in the third quarter of 2020 increased in the Industrial Hardware segment by 20% to $47.1~~$61.2 million from ~~$39.4 million in the third fiscal quarter of 2019 and increased by 11% to $128.2 million for the first nine months of 2020 from $115.3~~$39.5 million in the corresponding period ~~of 2019. Excluding Big 3 Precision, sales~~ in the third quarter of 2020 decreased 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,net sales for the first ~~nine~~six months of ~~fiscal 2020 were down due~~2021 increased 35% to ~~the loss of several supply contracts that generated sales~~$123 million from $91.4 million in the ~~first half of 2019 that did not reoccur in 2020.~~
same period last year. Sales ~~in the Metal Products segment decreased 37% in the third quarter and~~increased for ~~the first nine months of 2020 compared to sales in the corresponding periods of 2019. Mining products decreased 40%, and sales of industrial casting products decreased 36% in~~ both the third quarter and first nine months of 2020. Mining product sales in the third quarter and first nine months were impacted by a combination of growing renewable energy capacity and extremely low natural gas prices, which led utilities to cut back on coal 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 nine months were negatively impacted by the loss of a customer that had temporarily sourced products from us in 2019~~and six-month periods due to ~~a fire at its facility~~increased demand for truck accessories, automotive returnable packaging, blow mold tooling, and distribution products. Backlog as of July 3, 2021 was up 61% to $89.2 million from $55.3 million in ~~2018.~~2020.

Net sales of existing products increased 3%44% in the ~~third~~second quarter of 2021 and ~~decreased 6% in~~26% for the first ~~nine~~six months of ~~2020~~2021 compared to the corresponding periods in ~~2019.~~2020. Price increases and new products increased net sales by 11% in the ~~third~~second quarter ~~by 5%~~of 2021 and ~~4% in~~9% for the first ~~nine~~six months of 2021, compared to the corresponding periods in 2020. New products included ~~numerous~~various truck mirror assemblies, truck compression latches, a ~~handle~~cable lock, and ~~finger pull assembly, mount plate latch, canopy lock assembly, handle assembly and crossbar lock assembly and hospital bed frames for use in the field hospitals established due to COVID-19.~~a mirror cam.
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~~Table of Contents~~

Cost of products sold increased ~~$5.3~~$18.1 million, or ~~12%~~62%, in the ~~third~~second quarter of ~~2020. The primary reason~~2021 and increased $25.4 million, or 37% for the increase in cost of products sold in the third quarter is due to an increase in sales from the Big 3 Precision acquisition in 2019. Excluding Big 3 Precision cost of products sold in the third quarter of 2020, decreased $2.4 million or 6% to $40.4 million from costs of products sold of $42.8 million in the third quarter of 2019. Material costs decreased $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~~six 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. In addition, raw material costs have decreased year-over-year, hot-rolled steel decreased 3%, cold-rolled steel decreased 8%, nickel decreased 9%, scrap iron decreased 4% while copper and zinc increased 11% and 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 nine months of 2020 were lower freight costs of $0.5 million, or a 27% decrease, and $1.9 million, or a 36% decrease, over the comparable periods in 2019, respectively. Lower production levels resulted in the under-absorption of operating costs in the amount of $1.4 million during the third quarter and $1.6 million in the first nine months of 20202021 compared to the corresponding periods in ~~2019. Further, foreign currency exchange losses~~2020. The increases are primarily due to higher sales volume, increases in the prices of material, and increases in freight rates. The prices of several frequently used raw materials prices have increased ~~$0.6~~significantly, year-over-year. For example, the price of most common forms of hot-rolled steel increased 236% between Q2 2020 and Q2 2021; cold-rolled steel increased 174%; nickel increased 42%; scrap iron increased 178%; and copper and zinc increased 81% and 49% respectively. Additionally, our freight costs increased $1.4 million, or 148%, in the second quarter of 2021 and ~~$0.4~~increased $2.1 million, ~~for~~or 97%, in the ~~third quarter and~~ first ~~nine~~six months asof 2021 when compared to the ~~same~~corresponding periods in 2020. This increase is due to increased sales volume and freight rates as shipping demand has exceeded available carriers. Price increases to our customers recovered a portion of ~~2019 respectively.~~
the increase in raw material prices and freight rates. Finally, the Company paid tariff costs on China-sourced products of approximately ~~$0.6~~$0.8 million and $1.4 million in the ~~third~~second quarter and first six months of ~~2020~~2021 respectively, compared to ~~$0.9~~$0.5 million ~~incurred in the third quarter of 2019,~~ and ~~$2.4 million for the first nine months of 2020 compared to $1.5~~$1.7 million in the second quarter and first ~~nine~~six months of ~~2019, all of which~~fiscal 2020 respectively. All tariffs on China-sourced products have been recovered through price increases.

Gross margin as a percent of sales was ~~22% in the third quarter and~~ 23% in the ~~first nine months of 2020 compared to 25% in the third~~second quarter and 24% in the first ~~nine~~six months of ~~2019.~~fiscal 2021 compared to 26% in the second quarter and 25% in the first six months of fiscal 2020.

Product development expense increased $0.2 million, or 19% in the ~~third~~second quarter of ~~2020 was comparable to that of the third quarter of 2019 at $0.9 million~~2021 and ~~decreased $2.6~~increased $0.3 million, or ~~52%~~15%, in the first ~~nine~~six months of ~~2020~~2021 compared to the corresponding periods in 2020. As a percentage of ~~2019. The reduction in this expense relates to the closure of the Velvac Road-iQ~~net sales, product development ~~operation in Bellingham, Washington, in~~costs were 1.8% and 1.7% for the second quarter and first six months of ~~2019, to adopt a leaner approach to~~2021, respectively, and 2.3%, and 2.0% for the ~~development of new vision products.~~corresponding periods in 2020, respectively.

Selling and administrative expense increased ~~$1.2~~$2.8 million, or ~~14%~~43%, in the ~~third~~second quarter of 2021 and increased ~~$2.4~~$3.6 million, or ~~10%~~24% in the first ~~nine~~six months of 2021 compared to the corresponding period in 2020 primarily due to increased commissions and other selling costs, amortization expense, payroll-related expenses, and incentive costs, which were suspended in the first quarter of fiscal 2020.
Interest expense was flat in the second quarter and decreased $0.1 million for the first six months of 2021 compared to the 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 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 nine months of 2020 decreased 10% to $21.1 million from selling and administrative expenses of $23.3 million in the first nine months of 2019. The most significant factor contributing to the increase in the third quarter of 2020 was the 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 incurred 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 $2.7 million during for the first nine months of 2019, which were related to the 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 to the Canadian Commercial Vehicles Corporation located in Kelowna, British Columbia.
~~Goodwill impairment loss~~ ~~of $4.0 million was incurred 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 higher cost electronic smart card payment systems resulted in the carrying value of Greenwald exceeding 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 has recognized this non-cash impairment charge in the second fiscal quarter of 2020. There were no goodwill impairment charges in the third quarter of 2020.
22
~~Table of Contents~~
~~Interest expense~~ increased $0.3 million in the third quarter and $1.1 million for the first nine months of 2020 compared to the same periods in 2019 as a result of increased debt related to our acquisition of Big 3 Precision in August 2019.

Other income increased $0.2 million in the ~~third~~second quarter and increased $2.3 million in the first ~~nine~~six months of ~~2020~~2021 compared to the corresponding periods in ~~2019~~2020. The increase in the second quarter was due to an increase in the favorable return in our pension plan assets of $0.2 million. The increase in other income of $2.3 million in the first six months was driven by a gain on the sale of the Eberhard Hardware Ltd. Building of $1.8 million, a favorable return on ~~our~~ pension plan assets ~~and~~of $1.0 million less offset by a ~~onetime~~one-time sale-leaseback transaction gain in the first quarter of ~~fiscal~~ 2020.

Net income for the ~~third~~second quarter of fiscal ~~2020~~2021 was ~~$3.0~~$2.8 million, or ~~$0.48~~$0.44 per diluted share compared to net income of ~~$4.2~~$2.1 million, or ~~$0.67~~$0.33 per diluted share, for the comparable period in ~~2019.~~2020. In the first ~~nine~~six months of ~~2020~~2021 net income was ~~$4.0~~$8.5 million, or ~~$0.64~~$1.34 per diluted share compared to ~~$8.3~~net income of $4.8 million, or ~~$1.33~~$0.76 per diluted share for the comparable period in ~~2019. During the second quarter of 2020, the Company had a significant non-recurring goodwill impairment loss of $4.0 million. There were no goodwill impairment charges in the third quarter of~~ 2020.

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

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:~~sales:

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 %
23
~~Table of Contents~~

Three Months Ended

Six Months Ended

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

Net sales

100.0 %

100.0 %

100.0 %

100.0 %
Cost of products sold

77.2 %

73.9 %

76.0 %

74.6 %
Gross margin

22.8 %

26.1 %

24.0 %

25.4 %
Product development expense

1.8 %

2.3 %

1.7 %

2.0 %
Selling and administrative expense

15.3 %

16.6 %

14.9 %

16.1 %
Operating Profit

5.7 %

7.2 %

7.4 %

7.3 %

The following table shows the change in sales and operating profit ~~by segment~~ for the ~~third~~second quarter and first six months of fiscal 2021 compared to the second quarter and first six months 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 %
24
~~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 nine months of fiscal 2019 (dollars in thousands):~~

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 %
25
~~Table of Contents~~
~~Industrial Hardware Segment~~
~~Net sales~~ in the Industrial Hardware segment increased $7.7 million or 20% in the third quarter and increased $12.9 million or 11% in the first nine months of 2020 compared to the corresponding periods of 2019. Excluding Big 3 Precision, sales decreased 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 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 by 17%, government by 14% and off-highway by 18%, offset by declines in sales in other markets we serve. Sales decreased in the second quarter when certain of our customers closed operations due to actions taken to help stop the spread of COVID-19, which negatively affected our overall year to date sales results. Sales increases in military off-highway markets were not sufficient to offset a sales reduction in distribution, Class 8 truck, and aftermarket truck parts markets in the first nine months of 2020. Sales of new products contributed 6.3% in the 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, rotary lock assembly, a mount plate latch and hospital beds frames for use in field hospitals established due to COVID-19.
~~Cost of products sold~~ increased $6.5 million or 22% in the third quarter and increased $10.6 million or 12% in the first nine months of 2020 compared to the corresponding periods of 2019. Excluding Big 3 Precision, cost of products sold decreased by 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 same periods of 2019. Excluding Big 3 Precision, material costs in the third quarter of 2020 decreased 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. Also impacting the third quarter were lower freight costs, which were down 25% or $0.4 million in the third quarter and down 35% or $1.8 million in the first nine months of 2020 compared to the corresponding periods of 2019 due to non-recurring expedited shipping costs.
Finally, we paid tariffs on China-sourced products of approximately $0.3 million in the third quarter of 2020 compared to $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 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 nine months of 2020 was 22% and 23% respectively as compared to the corresponding periods of 2019 of 24%.~~
~~Product development expense~~ increased by $46 thousand in the third quarter and decreased by $2.8 million for the first nine months of 2020 compared to the 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.
~~Selling and administrative expense~~ increased $1.2 million or 21% in the third quarter and increased $3.7 million or 23% for the first nine months of 2020 compared to the corresponding periods of fiscal 2019 due primarily to the inclusion of Big 3 Precision. Excluding Big 3 Precision, selling and administrative expense decreased 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 corresponding periods of fiscal 2019. Excluding Big 3 Precision, payroll and payroll-related expense in the third quarter of 2020, decreased by $0.3 million, or 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 corresponding periods of 2019.
26
~~Table of Contents~~
~~Security Products Segment~~
~~Net sales~~ in the Security Products segment were comparable in the third quarter and decreased $7.7 million or 17% in the first nine months of 2020 compared to the corresponding periods in 2019. The sales decline was due to lower demand across the majority of the markets we serve including distribution, industrial, vehicular accessories and commercial laundry, as well as continued business closures in the second quarter of 2020 resulting from the COVID-19 pandemic. Net sales of existing products decreased 3.1%, while price increases and sales of new products contributed 3.2% in the third quarter of fiscal 2020 period. New product sales included a canopy lock 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 $5.3 million or 17% in the first nine months of 2020 compared to the corresponding periods of 2019, primarily as a result of lower sales volume 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 nine months of 2020 compared to 32% in the third quarter and 31% in the first nine months of fiscal 2019.~~
~~Product development expense~~ as a percentage of net sales was 5% in the third quarter and first nine months of fiscal 2020 compared to 4% in the corresponding periods of fiscal 2019. This increase reflects a continuation in the development of a Bluetooth locking system, a new cable lock 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 $1.1 million or 15% in the first nine months of 2020, compared to the corresponding periods of 2019. For the first nine months, the most significant driver of this reduction was decreased payroll and payroll related 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 $93 thousand related to a customer that filed for 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 $2.6 million or 37% in the third quarter and decreased $8.3 million or 37% in the first nine months of 2020 compared to the corresponding periods of 2019. Sales of our mining products decreased by 40%, while sales of industrial casting products decreased by 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 nine months of 2020 were impacted by a combination of growing renewable energy capacity and extremely low natural gas prices which led utilities to cut back on coal usage in addition to COVID-19, which forced many mine closures resulting in further loss of sales. Sales of industrial castings in the first 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 that temporarily shut down production of product that would otherwise have been sourced internally and continued softness in the oil, water, gas, rail and construction markets.
27
~~Table of Contents~~
~~Cost of products sold~~ decreased $1.4 million or 23% in the third quarter and decreased $5.2 million or 26% for the first nine months of 2020 compared to the 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 a negative 6% in the third quarter and a negative 4% for the first nine months of 2020 compared to 13% and 11% in the 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~~ increased 4% in the third quarter and decreased $0.1 million or 9% for the first nine months of 2020 compared to the corresponding periods of 2019. The third quarter increase relates to pension costs. For the first nine months of 2020 the decrease was from reduced payroll and payroll-related expenses of $0.1 million or 12% compared to the corresponding periods of 2019.

Three Months

Six Months

Ended

Ended

July 3,
2021

July 3,
2021

Net Sales

$ 21,740

$ 31,667

Volume

44.5 %

25.6 %
Price

2.0 %

1.1 %
New products

8.6 %

8.0 %

55.1 %

34.7 %

Operating Profit

$ 656

$ 2,410

Liquidity and Sources of Capital

The Company generated approximately ~~$16.7~~$4.3 million of cash from operations during the first ~~nine~~six months of fiscal ~~2020~~2021 compared to approximately ~~$12.2~~$6.6 million during the first ~~nine~~six months of fiscal ~~2019.~~2020. The ~~Company allocated approximately $7.2 million~~cash flows in the first six months of ~~its cash for~~fiscal 2021 were lower when compared to the ~~acquisition of Hallink.~~corresponding period last year due to an increase in inventory and accounts receivable partially offset by an increase in accounts payable. Cash flow from operations coupled with cash at the beginning of the ~~2020~~2021 fiscal year was sufficient to fund capital expenditures, debt service, and dividend ~~payments.~~payments for the first six months of fiscal 2021.

Additions to property, plant and equipment were approximately ~~$2.0~~$1.8 million for the first ~~nine~~six months of fiscal ~~2020~~2021 and ~~$1.9~~$0.8 million for the first ~~nine~~six months of fiscal ~~2019.~~2020. Additionally, in the first six months of 2021 the company received proceeds of $2.0 million from the sale of one of its facilities in Canada. As of ~~October~~July 3, ~~2020,~~2021, there were approximately ~~$0.1~~$0.4 million of outstanding commitments for capital expenditures.

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

Third
Quarter
2020

Third
Quarter
2019

Year
End
2019

Second
Quarter
2021

Second
Quarter
2020

Fiscal
Year
2020

Current ratio

3.2

3.2

3.3

2.8

3.7

2.8

Average days’ sales in accounts receivable

53

54

51

53

58

56

Inventory turnover

3.8

4.3

4.2

3.8

3.2

3.6

Total debt to shareholders’ equity

89.5 %

96.6 %

93.7 %

80.8 %

105.8 %

85.0 %
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The following table shows important liquidity measures as of the balance sheet date for each specified period (in millions):

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 )
28
~~Table of Contents~~

Second

Second

Fiscal

Quarter

Quarter

Year

2021

2020

2020

Cash and cash equivalents

- Held in the United States

$ 13.4

$ 13.7

$ 10.0

- Held by a foreign subsidiary

5.1

6.3

6.1

18.5

20.0

16.1

Working capital

90.6

67.2

71.1

Net cash provided by operating activities

4.3

6.6

20.7

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

(5.3 )

(0.6 )

2.0

Net cash provided by (used in) investing activities

0.9

0.8

(9.1 )
Net cash used in financing activities

(3.5 )

(5.6 )

(13.2 )

Inventories of ~~$49.4~~$48.8 million ~~represent a decrease of 9.5%~~ as of ~~October~~July 3, ~~2020~~2021 represent an increase of 13.0% as compared to ~~$54.6~~$43.1 million at the end of fiscal year ~~2019. Inventories decreased 6% in the first nine months~~2020 and an increase of ~~fiscal 2020,~~12.0% as compared to ~~$52.8~~$43.7 million at the end of the ~~first nine months~~second quarter of fiscal ~~2019. This was primarily due to the acquisition of Big 3 Precision.~~2020. Accounts receivable, less allowances, were ~~$34.2~~$35.1 million as of ~~October~~July 3, ~~2020,~~2021, as compared to ~~$37.9~~$31.8 million at ~~2019~~2020 fiscal year end and ~~$43.5~~$28.4 million at the end of the ~~first nine months~~second quarter of fiscal ~~2019.~~2020.

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~~impact 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 could 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 ~~October~~July 3, ~~2020,~~2021, the Company does not have any ~~transactions,~~off-balance sheet 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~~effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital ~~resources or significant components of revenues or expenses.~~resources.

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 with accounting principles generally accepted in the United States (“U.S. ~~GAAP.~~GAAP”).

To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted ~~EPS~~Net Income from Continuing Operations, Adjusted Earnings Per Share from Continuing Operations and Adjusted EBITDA from Continuing Operations, 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~~Net Income from Continuing Operations is defined as ~~diluted earnings per share~~net income from continuing operations excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, factory relocation expenses and restructuring ~~expenses. We believe that~~costs. 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~~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 EBITDAContinuing Operations 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.

29-22-
Table of Contents

~~Reconciliation~~Adjusted Earnings Per Share from Continuing Operations is defined as diluted earnings per share from continuing operations excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, factory relocation expenses and restructuring costs. We believe that Adjusted Earnings Per Share from ~~GAAP~~Continuing Operations provides important comparability of underlying operational results, allowing investors and management 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~~access operating performance on a consistent basis.

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 adjustedAdjusted EBITDA from Continuing Operations is defined as net income from continuing operations before interest expense, provision for income taxes, and ~~adjusted earnings per diluted share.~~depreciation and amortization and excluding, when they occur, the impacts of impairment losses, losses on sale of subsidiaries, transaction expenses, gain on sale of building, factory relocation expenses and restructuring expenses. Adjusted ~~net income~~EBITDA from Continuing Operations is a tool that can assist management and ~~adjusted earnings per diluted share exclude one time related expenses. These measures are~~investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not ~~in accordance with GAAP.~~directly reflect our underlying operations.

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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Table of Contents

~~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

Reconciliation of Net Income from Continuing Operations to Adjusted Net Income from Continuing Operations and Adjusted Earnings Per Share from Continuing Operations Calculation For the Three and Six Months ended July 3, 2021 and June 27, 2020
($000's)

Three Months Ended

Six Months Ended

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

Net income from continuing operations as reported per generally accepted accounting principles (GAAP)

$ 2,755

$ 2,080

$ 8,449

$ 4,723

Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP):

Basic

$ 0.44

$ 0.33

$ 1.35

$ 0.76

Diluted

$ 0.44

$ 0.33

$ 1.35

$ 0.76

Adjustments:

Gain on sale of Eberhard Hardware Ltd building, net of tax

-

-

(1,353 )A

-

Total adjustments (Non-GAAP)

-

-

(1,353 )

-

Adjusted net income from continuing operations

$ 2,755

$ 2,080

$ 7,096

$ 4,723

Adjusted earnings per share from continuing operations ; (Non-GAAP):

Basic

$ 0.44

$ 0.33

$ 1.13

$ 0.76

Diluted

$ 0.44

$ 0.33

$ 1.13

$ 0.76

A) Gain on sale of Eberhard Hardware Ltd building


-24-
~~A) Goodwill impairment~~
~~B) Cost incurred on disposition~~Table 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~~
Contents

~~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.
Reconciliation of Net Income from Continuing Operations to Adjusted EBITDA from Continuing Operations calculation For the Three and Six Months ended July 3, 2021 and June 27, 2020
($000's)

Three Months Ended

Six Months Ended

July 3,
2021

June 27,
2020

July 3,
2021

June 27,
2020

Net income from continuing operations as reported per generally accepted accounting principles (GAAP)

$ 2,755

$ 2,080

$ 8,449

$ 4,723

Interest expense

434

455

961

1,076

Provision for income taxes

848

625

2,601

1,455

Depreciation and amortization

1,721

1,577

3,531

3,213

Gain on sale of Eberhard Hardware Ltd Building

-

-

(1,841 )A

-

Adjusted EBITDA from continuing operations

$ 5,758

$ 4,737

$ 13,701

$ 10,467

A) Gain on sale of Eberhard Hardware Ltd building

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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.~~3.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

As of ~~October~~July 3, ~~2020,~~2021, 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 (as defined in Exchange Act Rules 240.13a-15(e) and 240.15d-15(e)) pursuant to Exchange Act Rule 13a-15. 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 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 SEC’s rules and forms. 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.~~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 ~~October~~July 3, ~~2020.~~2021.

Changes in Internal Control Over Financial Reporting:

During the period covered by this Quarterly Report on Form 10-Q, there 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 ~~October~~July 3, ~~2020,~~2021, the Company does not have any material pending legal proceedings, other than as set forth ~~below.~~below, or any material legal proceedings known to be contemplated by governmental authorities.

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 “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 NYSDEC. Long-term groundwater monitoring commenced in April 2019. Verbal approval for the closure plan was received from the NYSDEC in May 2019. Written approval was received in October of 2020. Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap, is ~~anticipated~~expected to be completed in ~~November of 2020.~~August 2021. In the fourth fiscal quarter of ~~2020, following the completion of construction work,~~2021 a closure report and maintenance plan isare expected to be prepared for the NYSDEC. This closure report and maintenance plan ~~documents~~will document the work done and ~~requests~~request 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 “Risk Factors” of the ~~Company’s 2019~~2020 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.~~10-K. 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~~As of ~~recent developments relating~~July 3, 2021, there have been no material changes to ~~the COVID-19 pandemic, the Company is supplementing~~ the risk factors ~~previously~~ disclosed in ~~Part I, Item 1A, “Risk Factors” in our 2019~~the 2020 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 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.
33
~~Table of Contents~~
·
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.
34
~~Table of Contents~~
·
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; (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.
10-K. The Company may ~~also~~ disclose changes to such 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

35-27-
Table of Contents

ITEM 6 – EXHIBITS

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~~July 3, ~~2020,~~2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations (Unaudited) for the three and ~~nine~~six months ended ~~October~~July 3, ~~2020~~2021 and ~~September 28, 2019;~~June 27, 2020; (ii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three ~~and nine~~ months ended ~~October~~July 3, ~~2020,~~2021, and ~~September 28, 2019;~~June 27, 2020; (iii) Condensed Consolidated Balance Sheets (Unaudited) as of ~~October~~July 3, ~~2020~~2021 and ~~December 28, 2019;~~January 2, 2021; (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~six months ended ~~October~~July 3, ~~2020~~2021 and ~~September 28, 2019;~~June 27, 2020; 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

36-28-
Table of Contents

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: ~~November 9, 2020~~
August 12, 2021
/s/August M. Vlak

August M. Vlak
President and Chief Executive Officer

DATE: ~~November 9, 2020~~
August 12, 2021
/s/John L. Sullivan III

John L. Sullivan III
Vice President and Chief Financial Officer



37-29-

	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

	Three Months Ended						Six Months Ended
	July 3, 2021			June 27, 2020			July 3, 2021			June 27, 2020
Net sales	$	61,247,592		$	39,507,800		$	123,021,025		$	91,353,901
Cost of products sold		(47,270,990	)		(29,188,182	)		(93,535,153	)		(68,111,738	)
Gross margin		13,976,602			10,319,618			29,485,872			23,242,163

Product development expense		(1,088,380	)		(917,513	)		(2,105,942	)		(1,839,464	)
Selling and administrative expenses		(9,375,537	)		(6,545,525	)		(18,319,931	)		(14,752,316	)
Operating profit		3,512,685			2,856,580			9,059,999			6,650,383

Interest expense		(434,147	)		(454,915	)		(961,291	)		(1,075,663	)
Other income		525,124			303,741			2,951,873			603,322
Income from continuing operations before income taxes		3,603,662			2,705,406			11,050,581			6,178,042

Income taxes		(848,302	)		(624,949	)		(2,601,424	)		(1,455,033	)
Net income from continuing operations		2,755,360			2,080,457			8,449,157			4,723,009

Discontinued Operations (see note B )
Gain (loss) from operations of discontinued units		1,128,286			(5,137,249	)		1,339,467			(4,831,485	)
Loss on classification as held for sale		(10,583,078	)		0			(10,583,078	)		0
Income tax benefit		2,225,658			1,168,011			2,175,946			1,115,512
Loss on discontinued operations		(7,229,134	)		(3,969,238	)		(7,067,665	)		(3,715,973	)

Net (loss) income	$	(4,473,774	)	$	(1,888,781	)	$	1,381,491		$	1,007,036

Earnings per share from continuing operations:
Basic	$	0.44		$	0.33		$	1.35		$	0.76

Diluted	$	0.44		$	0.33		$	1.35		$	0.76

Loss per share from discontinued operations:
Basic	$	(1.15	)	$	(0.64	)	$	(1.13	)	$	(0.60	)

Diluted	$	(1.15	)	$	(0.64	)	$	(1.13	)	$	(0.60	)

Total (loss) earnings per share:
Basic	$	(0.71	)	$	(0.30	)	$	0.22		$	0.16

Diluted	$	(0.71	)	$	(0.30	)	$	0.22		$	0.16

Cash dividends per share:	$	0.11		$	0.11		$	0.22		$	0.22

See accompanying notes.

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

	July 3, 2021			January 2, 2021
	(unaudited)
ASSETS

Current Assets
Cash and cash equivalents	$	16,890,642		$	15,291,825
Marketable securities		29,121			28,951
Accounts receivable, less allowances: 2021 - $564,061; 2020 - $486,707		35,109,931			31,804,207
Inventories		48,830,376			43,121,737
Current portion of notes receivable		459,863			398,414
Prepaid expenses and other assets		6,470,105			3,152,720
Current assets held for sale		33,268,203			17,937,918
Total Current Assets		141,058,241			111,735,772

Property, Plant and Equipment		51,395,884			52,173,305
Accumulated depreciation		(25,381,312	)		(25,976,187	)
Property, Plant and Equipment, Net		26,014,572			26,197,118

Goodwill		71,061,057			70,994,178
Trademarks		5,404,284			5,404,284
Patents and other intangibles net of accumulated amortization		24,908,099			27,089,071
Long term notes receivable, less current portion		985,916			1,677,277
Right of Use Assets		12,109,866			12,594,663
Long-term assets held for sale		0			19,894,688
Other Assets		114,469,222			137,654,161

TOTAL ASSETS	$	281,542,035		$	275,587,051

See accompanying notes.

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

	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

	Six Months Ended					Year Ended
	July 3, 2021					January 2, 2021
	Units			Weighted- Average Exercise Price		Units			Weighted- Average Exercise Price
Outstanding at beginning of period		244,001		$	21.87		276,000		$	22.30
Issued		-			0		44,000			20.20
Exercised		(50,667	)		19.33		-			-
Forfeited		(6,000	)		21.20		(75,999	)		22.00
Outstanding at end of period		187,334			22.77		244,001			21.87

	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	SARs Outstanding and Exercisable													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
														Range of Exercise Prices	Outstanding as of July 3, 2021		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Exercisable as of July 3, 2021		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	19.10 - $26.30		187,334		2.0	$	22.77		87,335		1.0	$	22.33

	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

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

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 April 3, 2021		55,000	$	26.04		55,000		145,000

April 4, 2021 - July 3, 2021		-				-		-

Balance as of July 3, 2021		55,000	$	26.04		55,000		145,000

	·	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.~~

	Pension Benefits												Pension Benefits
	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 3, 2020			September 28, 2019			October 3, 2020			September 28, 2019			July 3, 2021			June 27, 2020			July 3, 2021			June 27, 2020
Service cost	$	266,435		$	263,852		$	799,305		$	791,558		$	271,835		$	266,434		$	543,668		$	532,870
Interest cost		714,143			879,080			2,142,428			2,637,240			504,254			714,142			1,008,509			1,428,285
Expected return on plan assets		(1,365,261	)		(1,190,329	)		(4,095,784	)		(3,570,990	)		(1,448,675	)		(1,365,262	)		(2,897,349	)		(2,730,523	)
Amortization of prior service cost		24,845			24,845			74,535			74,535			24,845			24,845			49,690			49,690
Amortization of the net loss		325,033			290,548			975,101			871,647			432,536			325,034			865,075			650,068
Net periodic benefit cost (benefit)	$	(34,805	)	$	267,996		$	(104,415	)	$	803,990
Net periodic benefit													$	(215,205	)	$	(34,807	)	$	(430,407	)	$	(69,610	)

	Postretirement Benefits												Postretirement Benefits						Postretirement Benefits
	Three Months Ended						Nine Months Ended						Three Months Ended						Six Months Ended
	October 3, 2020			September 28, 2019			October 3, 2020			September 28, 2019			July 3, 2021			June 27, 2020			July 3, 2021			June 27, 2020
Service cost		10,855			8,533			32,565			24,965		$	13,626		$	10,855		$	27,252		$	21,710
Interest cost		11,667			1,874			35,001			42,566			9,842			11,667			19,684			23,334
Expected return on plan assets		(5,589	)		7,938			(16,767	)		(21,025	)		(6,420	)		(5,589	)		(12,840	)		(11,178	)
Gain on significant event		0			(227,071	)		0			(227,071	)		0			0			0			0
Amortization of prior service cost		(2,063	)		(1,268	)		(6,189	)		(3,804	)		0			(2,063	)		0			(4,126	)
Amortization of the net loss		(6,377	)		5,560			(19,131	)		(35,454	)		(3,094	)		(6,377	)		(6,188	)		(12,754	)
Net periodic benefit cost (benefit)	$	8,493		$	(204,434	)	$	25,479		$	(219,823	)
Net periodic benefit cost													$	13,954		$	8,493		$	27,908		$	16,986

Asset Class/Description	Amount		Weighted-Average Period in Years		Amount		Weighted- Average Period in Years
Patents, technology, and licenses

Customer relationships	$	2,345,000		6	$	2,345,000		6
Intellectual property		591,000		6		591,000		6
Non-compete agreements		1,001,000		5		1,001,000		5
	$	3,937,000			$	3,937,000

	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	%

	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	%

	Three Months			Six Months
	Ended			Ended
	July 3, 2021			July 3, 2021

Net Sales	$	21,740		$	31,667

Volume		44.5	%		25.6	%
Price		2.0	%		1.1	%
New products		8.6	%		8.0	%
		55.1	%		34.7	%

Operating Profit	$	656		$	2,410

	Third Quarter 2020			Third Quarter 2019			Year End 2019			Second Quarter 2021			Second Quarter 2020			Fiscal Year 2020
Current ratio		3.2			3.2			3.3			2.8			3.7			2.8
Average days’ sales in accounts receivable		53			54			51			53			58			56
Inventory turnover		3.8			4.3			4.2			3.8			3.2			3.6
Total debt to shareholders’ equity		89.5	%		96.6	%		93.7	%		80.8	%		105.8	%		85.0	%

	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	)

	Second			Second			Fiscal
	Quarter			Quarter			Year
	2021			2020			2020
Cash and cash equivalents
- Held in the United States	$	13.4		$	13.7		$	10.0
- Held by a foreign subsidiary		5.1			6.3			6.1
		18.5			20.0			16.1

Working capital		90.6			67.2			71.1
Net cash provided by operating activities		4.3			6.6			20.7
Change in working capital impact on net cash provided by (used in) operating activities		(5.3	)		(0.6	)		2.0
Net cash provided by (used in) investing activities		0.9			0.8			(9.1	)
Net cash used in financing activities		(3.5	)		(5.6	)		(13.2	)

	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

Reconciliation of Net Income from Continuing Operations to Adjusted Net Income from Continuing Operations and Adjusted Earnings Per Share from Continuing Operations Calculation For the Three and Six Months ended July 3, 2021 and June 27, 2020
($000's)
	Three Months Ended				Six Months Ended
	July 3, 2021		June 27, 2020		July 3, 2021			June 27, 2020
Net income from continuing operations as reported per generally accepted accounting principles (GAAP)	$	2,755	$	2,080	$	8,449		$	4,723

Earnings per share from continuing operations as reported under generally accepted accounting principles (GAAP):

Basic	$	0.44	$	0.33	$	1.35		$	0.76
Diluted	$	0.44	$	0.33	$	1.35		$	0.76

Adjustments:
Gain on sale of Eberhard Hardware Ltd building, net of tax		-		-		(1,353	)A		-
Total adjustments (Non-GAAP)		-		-		(1,353	)		-

Adjusted net income from continuing operations	$	2,755	$	2,080	$	7,096		$	4,723

Adjusted earnings per share from continuing operations ; (Non-GAAP):

Basic	$	0.44	$	0.33	$	1.13		$	0.76
Diluted	$	0.44	$	0.33	$	1.13		$	0.76

A) Gain on sale of Eberhard Hardware Ltd building

	·	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.

	·	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.

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~~July 3, ~~2020,~~2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations (Unaudited) for the three and ~~nine~~six months ended ~~October~~July 3, ~~2020~~2021 and ~~September 28, 2019;~~June 27, 2020; (ii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three ~~and nine~~ months ended ~~October~~July 3, ~~2020,~~2021, and ~~September 28, 2019;~~June 27, 2020; (iii) Condensed Consolidated Balance Sheets (Unaudited) as of ~~October~~July 3, ~~2020~~2021 and ~~December 28, 2019;~~January 2, 2021; (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~six months ended ~~October~~July 3, ~~2020~~2021 and ~~September 28, 2019;~~June 27, 2020; 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). **

		THE EASTERN COMPANY
		(Registrant)

DATE: ~~November 9, 2020~~	August 12, 2021	/s/August M. Vlak
		August M. Vlak President and Chief Executive Officer

DATE: ~~November 9, 2020~~	August 12, 2021	/s/John L. Sullivan III
		John L. Sullivan III Vice President and Chief Financial Officer