UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

	~~[X]~~ ☒	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		for the quarterly period ended ~~March 28, 2020~~April 3, 2021

	~~[ ]~~
OR

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

Commission File Number 001-35383

~~THE EASTERN COMPANY~~

~~(Exact name of registrant as specified in its charter)~~

~~Connecticut~~	~~06-0330020~~ THE EASTERN COMPANY
(Exact name of registrant as specified in its charter)

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

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

~~(203)-729-2255~~

~~Registrant’s telephone number~~

(203)-729-2255

Registrant’s telephone number

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

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

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

☐

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

☐

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

Large accelerated filer ~~[ ]~~	☐	Accelerated filer~~[X]~~	☒
Non-accelerated filer ~~[ ]~~	☐	Smaller reporting company [X]	☒
		Emerging growth company ~~[ ]~~	☐

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

☐

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

☒

As of ~~March 28, 2020, 6,230,731~~April 3, 2021, 6,253,501 shares of the registrant’s common stock, no par value per share, were issued and outstanding.

The Eastern Company

Form 10-Q

FOR THE QUARTERLY PERIOD ENDED ~~MARCH 28, 2020~~

APRIL 3, 2021

TABLE OF CONTENTS

			Page
PART I



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

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	~~25.~~	26.

Item 4.	Controls and Procedures	~~25.~~	26.

PART II

Item 1.	Legal Proceedings	~~26.~~	27.

Item 1A.	Risk Factors	~~26.~~	27.

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	~~28.~~	27.

Item 3.	Defaults Upon Senior Securities	~~28.~~	27.

Item 4.	Mine Safety Disclosures	~~28.~~	27.

Item 5.	Other Information		27.

Item 6	Exhibits		28.

Signatures			29.


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

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

	~~Signatures~~	~~29.~~

PART 1 –- FINANCIAL INFORMATION

ITEM 1 –- FINANCIAL STATEMENTS

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

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

Product development expense
(775,444
)

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

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

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

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

Income taxes
882,583
484,733

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

Earnings per share:
Basic $ .46
$
.25

Diluted $ .46
$
.25

Cash dividends per share: $ .11
$
.11

	Three Months Ended
	April 3, 2021			March 28, 2020
Net sales	$	73,097,875		$	65,325,616
Cost of products sold		(55,839,321	)		(50,663,943	)
Gross margin		17,258,554			14,661,673

Product development expense		(838,825	)		(775,444	)
Selling and administrative expenses		(10,485,520	)		(10,024,958	)
Operating profit		5,934,209			3,861,271

Interest expense		(702,859	)		(827,664	)
Other income		2,426,741			744,793
Income before income taxes		7,658,091			3,778,400

Income taxes		(1,817,264	)		(882,583	)
Net income	$	5,840,827		$	2,895,817

Earnings per share:
Basic	$	0.93		$	0.46

Diluted	$	0.93		$	0.46

Cash dividends per share:	$	0.11		$	0.11

See accompanying notes.

Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

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

Other comprehensive income (loss):

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

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

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

546,705

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

	Three Months Ended
	April 3, 2021			March 28, 2020
Net income	$	5,840,827		$	2,895,817
Other comprehensive income/(loss):
Change in foreign currency translation		(79,054	)		(1,304,447	)
Change in marketable securities, net of taxes of:
2021 - $67 and 2020 - $2,897		205			8,878
Change in fair value of interest rate swap, net of tax cost (benefit) of:
2021 - $130,434 and 2020 - $(535,029)		413,040			(1,697,793	)
Change in pension and postretirement benefit costs, net of taxes of:
2021 - $92,194 and 2020 - $81,143		295,744			260,295
Total other comprehensive income (loss)		629,935			(2,733,067	)
Comprehensive income	$	6,470,762		$	162,750

See accompanying notes.

Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

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

Marketable securities 23,154
34,305

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

Inventories 55,274,876
54,599,266

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

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

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

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

Goodwill 79,418,533
79,518,012

Trademarks 5,404,283
5,404,283

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

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

122,375,149
123,724,880

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

ASSETS

	April 3, 2021			January 2, 2021
	(unaudited)
Current Assets
Cash and cash equivalents	$	17,464,669		$	16,101,635
Marketable securities		29,224			28,951
Accounts receivable, less allowances: 2021 - $618,000; 2020 - $545,000		42,228,264			37,749,129
Inventories		53,960,426			53,112,393
Current portion of notes receivable		459,863			398,414
Prepaid expenses and other assets		5,341,214			4,345,250
Total Current Assets		119,483,660			111,735,772

Property, Plant and Equipment		86,539,328			88,198,093
Accumulated depreciation		(47,244,599	)		(48,246,120	)
Property, Plant and Equipment, Net		39,294,729			39,951,973

Goodwill		76,921,385			76,895,015
Trademarks		5,404,284			5,404,284
Patents and other intangibles, net of accumulated amortization		25,958,715			27,096,006
Long term notes receivable, less current portion		1,547,503			1,677,277
Right of Use Assets		12,882,498			12,768,027
Other Assets		122,714,385			123,840,609

TOTAL ASSETS	$	281,492,774		$	275,528,354

See accompanying notes.

Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND SHAREHOLDERS’ EQUITY

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

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

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

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

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

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

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

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

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

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

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

Shareholders’ Equity

     Voting Preferred Stock, no par value:

        Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
        Authorized and unissued: 1,000,000 shares
Common Stock, no par value, Authorized: 50,000,000 shares 30,890,108
30,651,815

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

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

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

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

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

LIABILITIES AND SHAREHOLDERS’ EQUITY

	April 3, 2021			January 2, 2021
	(unaudited)
Current Liabilities
Accounts payable	$	25,357,557		$	23,507,719
Accrued compensation		2,520,725			3,675,223
Other accrued expenses		4,785,793			4,121,568
Current portion of lease liability		3,039,689			2,923,761
Current portion of long-term debt		7,062,689			6,437,689
Total Current Liabilities		42,766,453			40,665,960

Deferred income taxes		2,899,074			2,899,075
Other long-term liabilities		1,144,127			1,144,127
Lease liability		9,871,835			9,883,168
Long-term debt, less current portion		80,468,737			82,255,803
Accrued postretirement benefits		1,168,262			1,185,139
Accrued pension cost		32,443,297			33,188,623
Total Liabilities		170,761,785			171,221,895

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 Issued:9,003,230 shares in 2021 and 8,996,625 shares in 2020 Outstanding: 6,253,501 shares in 2021 and 6,246,896 shares in 2020		31,779,299			31,501,041
Treasury Stock: 2,749,729 shares in 2021 and 2,749,729 shares in 2020		(20,537,962	)		(20,537,962	)
Retained earnings		128,356,468			122,840,131
Accumulated other comprehensive income (loss):
Foreign currency translation		874,810			953,864
Unrealized loss on marketable securities, net of tax		(4,302	)		(4,507	)
Unrealized loss on interest rate swap, net of tax		(974,045	)		(1,387,085	)
Unrecognized net pension and postretirement benefit costs, net of tax		(28,763,279	)		(29,059,023	)
Accumulated other comprehensive loss		(28,866,816	)		(29,496,751	)
Total Shareholders’ Equity		110,730,989			104,306,459
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	281,492,774		$	275,528,354

See accompanying notes.

Table of Contents

THE EASTERN COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

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

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

Unrecognized pension and postretirement benefits (678,305
)

207,816

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

671,138

Provision for doubtful accounts 156,286
25,711

Stock compensation expense 238,293
104,992

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

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

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

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

Investing Activities
Marketable securities

11,151

(91,400
)
Capitalized software

—

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

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

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

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

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

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

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

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

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

Lease liability

	Three Months Ended
	April 3, 2021			March 28, 2020
Operating Activities
Net income	$	5,840,827		$	2,895,817
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,192,622			2,055,782
Unrecognized pension and postretirement benefits		(674,262	)		(678,305	)
(Gain) loss on sale of equipment and other assets		(1,600,288	)		(437,446	)
Provision for doubtful accounts		73,097			156,286
Stock compensation expense		278,258			238,293
Changes in operating assets and liabilities:
Accounts receivable		(4,551,399	)		(2,273,864	)
Inventories		(1,015,663	)		(994,546	)
Prepaid expenses and other		(744,138	)		341,582
Other assets		(156,726	)		(415,415	)
Accounts payable		2,063,182			2,766,829
Accrued compensation		(1,159,489	)		(1,585,976	)
Other accrued expenses		1,554,036			(564,572	)
Net cash provided by operating activities		2,100,057			1,504,465

Investing Activities
Marketable securities		(273	)		11,151
Payments received from notes receivable		68,325			0
Proceeds from sale of equipment		1,994,017			445,212
Purchases of property, plant and equipment		(919,589	)		(828,115	)
Net cash provided by/used in investing activities		1,142,480			(371,752	)

Financing Activities
Principal payments on long-term debt		(1,162,045	)		(1,221,423	)
Lease payments		(9,875	)		0
Purchase common stock for treasury		0			(368,864	)
Dividends paid		(684,702	)		(686,614	)
Net cash used in financing activities		(1,856,622	)		(2,276,901	)

Effect of exchange rate changes on cash		(22,881	)		(343,436	)
Net change in cash and cash equivalents		1,363,034			(1,487,624	)

Cash and cash equivalents at beginning of period		16,101,635			17,996,505
Cash and cash equivalents at end of period	$	17,464,669		$	16,508,881

Supplemental disclosure of cash flow information:
Interest	$	685,520		$	827,664
Income taxes		21,100			21,000

Non-cash investing and financing activities
Right of use asset		114,471			(489,822	)
Lease liability		(104,595	)		489,822

See accompanying ~~notes.~~

notes

Table of Contents

THE EASTERN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~March 28, 2020~~

April 3, 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 ~~10-01~~ and do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended ~~December 28, 2019,~~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. ~~All intercompany accounts and transactions are eliminated.~~ Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year.

All intercompany accounts and transactions are eliminated.

The condensed consolidated balance sheet as of ~~December 28, 2019~~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 ~~fiscal 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to fiscal~~ 2020 or the 2020 fiscal year mean the 53-week period 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~~53-week fiscal year, each of the first ~~three~~two fiscal quarters ~~is a~~and the fourth quarter are 13 weeks long, and the ~~fourth~~third fiscal quarter is 14 weeks long. References to the first quarter of ~~fiscal 2019, the first quarter of 2020 or the three months ended March 30, 2019 mean the period from December 30, 2018 to March 30, 2019. References to the first quarter of fiscal~~ 2020, the first fiscal quarter of 2020 or the three months ended March 28, 2020 mean the ~~13-week~~ period from December 29, 2019 to March 28, 2020.

References to the first quarter of 2021, the first fiscal quarter of 2021 or the three months ended April 3, 2021 mean the 13-week period from January 3, 2021 to April 3, 2021.

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

Note B –- Earnings Per Share

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

Three Months Ended
March 28, 2020
March 30, 2019

Basic:

Weighted average shares outstanding

6,237,921

6,231,713

Diluted:

Weighted average shares outstanding

6,237,921

6,231,713

Dilutive stock appreciation rights

3,131

33,116

Denominator for diluted earnings per share

6,241,052

6,264,829

	Three Months Ended
	April 3, 2021		March 28, 2020
Basic:
Weighted average shares outstanding		6,248,339		6,237,921

Diluted:
Weighted average shares outstanding		6,248,339		6,237,921
Dilutive stock appreciation rights		30,998		3,131
Denominator for diluted earnings per share		6,279,337		6,241,052

Table of Contents

Note C –- Inventories

Inventories consist of the following components:

March 28, 2020 December 28, 2019

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

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

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

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

	April 3, 2021		January 2, 2021

Raw material and component parts	$	20,333,551	$	20,013,992
Work in process		11,891,191		11,704,311
Finished goods		21,735,684		21,394,090
Total inventories	$	53,960,426	$	53,112,393

Note D –- Goodwill

The Company maintains 11 reporting units, five of which comprise the goodwill balance. These six units have an aggregate carrying amount of goodwill of approximately $76.9 million as of April 3, 2021.

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

Note E - Leases

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

The Company has operating leases for buildings, ~~warehouse~~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 ~~12 – 120~~1 - 116 months. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability.

Currently, the Company has 4232 operating leases and ~~one~~two finance ~~lease~~leases with ~~an ROU asset and~~a lease liability of ~~$11,852,653~~$12.9 million as of ~~March 28, 2020.~~April 3, 2021. The finance lease ~~arrangement is~~arrangements are immaterial. The ~~basis,~~ terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants ~~that could~~ that could cause the Company to incur additional financial obligations. We rent or sublease a part of one real estate property to a third party. There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company.

Total lease expense for each of the next five fiscal years is estimated to be as follows: remainder of 2021 - $2.3 million; 2022 - $2.4 million; 2023 - $2.0 million; 2024 - $1.6 million; 2025 - $0.9 million; and $3.7 million thereafter. The weighted average remaining lease term is 6.7 years. The interest rate used was 5.0%.

Table of Contents

Note EF - Debt

On August 30, 2019, the Company entered into a credit agreement with Santander Bank, N.A., for itself, People’s United Bank, National Association and TD Bank, N.A. as lenders (the “Credit Agreement”), that included a $100 million term portion and a $20 million revolving commitment portion. Proceeds of the term loan were used to repay the Company’s remaining outstanding term loan (and to terminate its existing credit facility) with People’s United Bank, N.A. (approximately $19 million) and to acquire certain subsidiaries of Big 3 Holdings, LLC (collectively “Big 3 Precision”). The term portion of the loan requires quarterly principal payments of $1,250,000 for an 18-month period beginning December 31, 2019. The repayment amount then increases to $1,875,000 per quarter beginning September 30, 2021 and continues through June 30, 2023. The repayment amount then increases to $2,500,000 per quarter beginning September 30, 2023 and continues through June 30, 2024. The term loan is a 5-year loan with the remaining balance due on August 30, 2024. The revolving commitment portion has an annual commitment fee of 0.25% based on the unused portion of the revolver. The revolving commitment portion has a maturity date of August 30, 2024. As of ~~March 28, 2020,~~April 3, 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 April 3, 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 $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%. On ~~March 28, 2020,~~April 3, 2021, the interest rate for half ($~~49.4~~41.3 million) of the term portion was ~~3.35%~~2.36%, using a ~~one month~~one-month LIBOR rate, and ~~3.19%~~3.69% on the remaining balance ($~~49.4~~46.3 million) of the term loan based on a ~~one month~~one-month LIBOR rate.

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

On July 27, 2017, the ~~U.K.~~ Financial Conduct Authority (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, efforts to identify a set of alternative U.S. Dollar reference interest rates have been initiated by the~~June 30, 2023. The Alternative Reference Rates Committee of(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~~interest rate is set at the beginning of ~~New York. At this time, it~~the period with payment due at the end. SOFR is ~~not possible to predict whether any such changes will occur, whether LIBOR will be phased out or any such alternative reference rates or~~a backward-looking overnight rate which has implications for how interest and other ~~reforms to LIBOR will be enacted~~payments are based. Changes in the ~~United Kingdom,~~method of calculating the ~~United States~~replacement of LIBOR with an alternative rate or elsewhere or the effect that any such changes, phase-out, 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, alternative reference rates or other reformsbenchmark are still in flux, and once an alternate rate is adopted, 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” 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.

Table of Contents

Note FG - Stock Options and Awards

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

Incentive stock options granted under the ~~2010~~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~~2020 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. Under the ~~2010~~2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors. During the first ~~quarter~~three months of ~~2020 and 2019, no~~fiscal 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 3 months of fiscal 2020. For the first ~~quarter~~three months of ~~2019,~~fiscal 2021, the Company used several assumptions which included an expected term of ~~3.5~~4.0 years, volatility deviation ~~of 28.88%~~between 47.25% to 47.54% and a ~~risk free~~risk-free rate between 0.18% to 0.20% for the purposes of ~~2.48%.~~

measuring compensation under the Black Scholes Method.

The ~~2010~~2020 Plan also ~~permits~~permit the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During the first three months of fiscal 2021 and the first three months of fiscal 2020, the Company did not issue any ~~SARs, and during 2019 36,000 SARs were issued.~~

SARs.

Stock-based compensation expense in connection with SARs previously granted to employees was approximately $113,000 and $110,000 in the first quarter of 2021 and 2020, ~~was $110,000, and for 2019 was $80,000.~~

respectively.

As of ~~March 28, 2020,~~April 3, 2021, there were no788,358 shares of Company common stock reserved and available for future grant under the ~~2010 Plan, as it has expired.~~

2020 Plan.

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

Three Months Ended
March 28, 2020

Year Ended
December 28, 2019

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

$
21.46

Issued -- --
96,000

23.65

Exercised -- --
(1,667
)

19.10

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

21.20

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

22.30

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

269,001

3.0

$
22.39

50,001

2.0

19.10

	Three Months Ended April 3, 2021					Year Ended 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		--			--		44,000			20.20
Exercised		(10,000	)		19.10		--			--
Forfeited		(6,000	)		21.20		(75,999	)		22.00
Outstanding at end of period		228,001			22.17		244,001			21.87

SARs Outstanding and Exercisable

Range of

Exercise Prices

Outstanding as of

April 3, 2021

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

Exercisable as of

April 3, 2021

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

19.10-26.30

228,001

2.1

22.17

115,172

1.3

21.64

Table of Contents

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

Three Months Ended
March 28, 2020

Year Ended
December 28, 2019

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

25,000

$
—

Issued
—

—

—

—

Forfeited —
—
—
—

Outstanding at end of period 25,000
—

25,000

—

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

25,000

2.0

—

—

—

—

	Three Months Ended April 3, 2021				Year Ended January 2, 2021
	Shares		Weighted - Average Exercise Price		Shares		Weighted - Average Exercise Price
Outstanding at beginning of period		25,000	$	-		25,000	$	-
Issued		24,600		-		-		-
Forfeited		-		-		-		-
Outstanding at end of period		49,600		-		25,000		-

Stock Grants Outstanding and Exercisable

Range of Exercise Prices

Outstanding as of

April 3, 2021

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

Exercisable as of

April 3, 2021

Weighted- Average Remaining Contractual Life

Weighted- Average Exercise Price

0.00

49,600

3.1

As of ~~March 28, 2020,~~April 3, 2021, outstanding SARs and grants had an intrinsic value of ~~$561,000.~~

$1,776,000.

Note ~~G –~~H - 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. ~~During the first quarter of 2020, the Company repurchased 15,000 shares of its common stock in connection with the share repurchase program.~~ Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Period
Total
Number of
Shares
Purchased

Average
Price Paid
Per Share

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

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

Balance as of December 28, 2019
40,000

$
26.58

40,000

160,000

December 29, 2019 – March 28, 2020

15,000

24.59

15,000

145,000

Balance as of March 28, 2020
55,000

$
26.04

55,000

145,000

The Company did not repurchase any shares under its share repurchase program during the first quarter of 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 January 2, 2021		55,000	$	26.04		55,000		145,000
January 3, 2021 - April 3, 2021		-		-		-		-
Balance as of April 3, 2021		55,000	$	26.04		55,000		145,000

Note ~~H –~~I - 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 isare delivering goods or services, ~~determining~~determines the transaction price, ~~allocating~~allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped.

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

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

Table of Contents

Note IJ - Income Taxes

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

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

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

Net operating losses arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years, which may result in refunds of prior period corporate income tax. The Company had taxable income in 2018 and 2019, thus we would only benefit from this item of CARES Act relief to the extent we incur a tax net operating loss in 2020 that can be carried back. As of March 28, 2020, a tax net operating loss is not expected for taxable year 2020. In addition, this item of CARES Act relief increased the positive evidence supporting utilization of our gross deferred tax assets due to available income in carryback years; this did not change our overall assessment as we do not have a valuation allowance recorded against our deferred tax assets.

~~Furthermore, for taxable years beginning before 2021, net operating loss carryforwards and carrybacks to that year may offset 100% of taxable income~~ACT impact see Note 8 - Income Taxes 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.~~

Form 10-K.

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

The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for a number of reasons, including the closure of federal, state and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the amount of unrecognized tax benefits during the three months ended ~~March 28, 2020.~~April 3, 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 JK - 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.

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

Significant disclosures relating to these benefit plans for the first ~~quarter~~three months of fiscal years ~~2020~~2021 and ~~2019~~2020 are as follows:

Pension Benefits Postretirement Benefits
Three Months Ended Three Months Ended

March 28,
2020

March 30,
2019

March 28,
2020

March 30,
2019

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

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

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

	Pension Benefits
	Three Months Ended
	April 3, 2021			March 28, 2020
Service cost	$	271,833		$	266,436
Interest cost		504,255			714,143
Expected return on plan assets		(1,448,674	)		(1,365,261	)
Amortization of prior service cost		24,845			24,845
Amortization of the net loss		432,539			325,034
Net periodic benefit	$	(215,202	)	$	(34,803	)

Table of Contents

	Postretirement Benefits
	Three Months Ended
	April 3, 2021			March 28, 2020
Service cost	$	13,626		$	10,855
Interest cost		9,842			11,667
Expected return on plan assets		(6,420	)		(5,589	)
Gain on significant event		0			0
Amortization of prior service cost		0			(2,063	)
Amortization of the net loss		(3,094	)		(6,377	)
Net periodic benefit cost	$	13,954		$	8,493

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 ~~March 20, 2020,~~April 3, 2021, the Company has made contributions of approximately ~~$400,000~~$521,000 into its pension plans, has contributed ~~$11,000~~$5,000 to its postretirement plan and ~~will~~expects to make the remaining contributions as required during the remainder of the fiscal ~~the~~ year.

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

The Company made contributions to the plan as follows:

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

Transitional credit contribution 82,127
103,524

Non-discretionary contribution 567,657
587,041

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

	Three Months Ended
	April 3, 2021		March 28, 2020
Regular matching contribution	$	191,808	$	204,992
Transitional credit contribution		66,929		82,127
Non-discretionary contribution		534,675		567,657
Total contributions for the period	$	793,412	$	854,776

The non-discretionary contribution of ~~$550,286~~$519,177 made in the three months ended ~~March 28, 2020~~April 3, 2021 was accrued for and expensed in the prior fiscal year.

Table of Contents

Note ~~K –~~L - Segment Information

~~Financial~~

For the first quarter of 2021, financial information by segment is as follows:

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

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

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

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

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

Security Products 817,401
972,887

Metal Products (415,023 )
93,281

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

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

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

	Three Months Ended
	April 3, 2021			March 28, 2020
Revenues:
Sales to unaffiliated customers:
Engineered Solutions	$	61,773,432		$	51,846,102
Diversified Products		11,324,443			13,479,514
	$	73,097,875		$	65,325,616

Income (loss) before income taxes:
Engineered Solutions	$	6,118,508		$	3,789,504
Diversified Products		(98,199	)		71,767
Operating Profit (loss)		6,020,309			3,861,271
Interest expense		(702,859	)		(827,664	)
Other income		2,340,641			744,793
Income before income taxes	$	7,658,091		$	3,778,400

Segment income (loss) before income taxes include the allocation of corporate expenses to the Engineered Solutions and Diversified Products segments.

Note LM - 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 inas of January 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.

Note MN - Concentration of ~~risk~~

Risk

Credit Risk

Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As of ~~March 28, 2020,~~April 3, 2021, there was one significant concentration of credit risk with a customer, ~~that~~who has receivables ~~due of $4,205,000~~ representing ~~11%~~12% of our total accounts receivable. ~~As of December 28, 2019, there were no significant concentrations of credit risk. No~~One single customer represented more than 10% of the Company’s net accounts receivable as of ~~December 28, 2019.~~January 2, 2021. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable.

Table of Contents

Interest Rate Risk

The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based on the LIBOR rate plus a margin spread of 1.25% to 2.25%. The Company has an interest rate swap with a notional amount of ~~$49,375,000~~$46.3 million on ~~March 28, 2020,~~April 3, 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 exposure to interest rate risk. Additionally, interest rates on the Company's debt are susceptible to changes to the method that LIBOR rates are determined and to the potential phasing out of LIBOR after 2021. The potential phasing out of LIBOR is discussed in greater detail in Note E—F - Debt hereof and under the heading “The phase out of the London Interbank Offered Rate (LIBOR), or the replacement of LIBOR with a different reference rate, may adversely affect interest rates” in Part I, Item 1A of the ~~2019 Annual Report.~~

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.

Note O - Business Acquisition

Effective August 10, 2020 the Company acquired certain assets, including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights and rights existing under all sales and purchase agreements, and assumed certain liabilities, of Hallink, RSB Inc. These assets are held in our subsidiary, Hallink Moulds, Inc. (“Hallink Moulds”). Hallink Moulds produces injection blow mold tooling and is a supplier of blow molds and change parts to the food, beverage, healthcare and chemical industry. Hallink Moulds specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry offering integrated turnkey solutions to its customers worldwide.

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

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.

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

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

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

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

Note P - Subsequent Events

The Company evaluated its April 3, 2021 unaudited condensed consolidated financial statements for subsequent events through the date the financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements.

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 ~~March 28, 2020.~~April 3, 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 ~~fiscal 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to fiscal~~ 2020 or the 2020 fiscal year mean the 53-week period 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~~53-week fiscal year, each of the first two fiscal quarters and the fourth quarter are 13 weeks long, and the third fiscal quarter is 14 weeks long. References to the first quarter of ~~fiscal 2019, the first fiscal quarter of 2020 or the three months ended March 30, 2019 mean the 13-week period from December 30, 2018 to March 30, 2019. References to the first quarter of fiscal~~ 2020, the first fiscal quarter of 2020 or the three months ended March 28, 2020 mean the ~~13-week~~ period from December 29, 2019 to March 28, 2020.

References to the first quarter of 2021, the first fiscal quarter of 2021 or the three months ended April 3, 2021 mean the 13-week period from January 3, 2021 to April 3, 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 and the measures being taken to limit the spread and resurgence of COVID-19, including supply chain disruptions, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, ~~and~~ the availability, terms and cost of financing, including borrowings under credit arrangements or agreements, and risks associated with employees working remotely or operating with reduced workforce; the ~~Credit Agreement;~~scope and duration of the COVID-19 pandemic, including the extent of resurgences and how quickly and to what extent normal economic activity can resume; the timing of the development and distribution of effective vaccine or treatment of COVID-19; risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability; restrictions on operating flexibility imposed by the agreement governing our credit facility; the inability to achieve the savings expected from global sourcing of materials; the impact of higher raw material and component costs, particularly steel, plastics, scrap iron, zinc, copper and electronic components; lower-cost competition; our ability to design, introduce and sell new products and related components; market acceptance of our products; the inability to attain expected benefits from acquisitions or the inability to effectively integrate such acquisitions and achieve expected synergies; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, commercial laundry, mining and general industrial markets; costs and liabilities associated with environmental compliance; the impact of climate change or terrorist threats and the possible responses by the U.S. and foreign governments; failure to protect our intellectual property; cyberattacks; ~~and~~ materially adverse or unanticipated legal judgments, fines, penalties or ~~settlements.~~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.~~

otherwise, except as required by law.

Table of Contents

Overview

COVID-19 ~~update~~

AsUpdate

The direct impact of ~~March 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 first quarter of 2021. We continue to follow CDC guidelines, including the use of proper personal protection equipment, social distancing and ~~actions taken~~sanitizing work areas. All of these measures allowed the majority of our facilities to ~~slow~~operate at full capacity where possible barring supply chain issues, port congestion, and labor shortages. Many of the ~~spread of~~Company’s employees have received their first COVID-19 vaccination, and we ~~expect those impacts~~will continue to encourage our workforce to continue ~~for some time.~~

~~Across~~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 could adversely affect our financial condition, results of operations and cash flow.

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~~protecting employee health by instructing employees 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 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 who are able to work effectively from home, to work from home; developed and implemented practices for social distancing ~~measures, staggering staff~~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, ~~enabling work from home for as many employees as~~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 maintaining 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 have been impacted by COVID-19. The virus led to a chain of events that interfered with our ability, and the ability of certain suppliers of ours, to conduct business. We source approximately 15% 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

Although we have ordered have been delayed by approximately four to six weeks, which has resulted in and is likely to continue to result in a comparable delay in our product shipments to our customers through May 2020. By mid-March 2020, COVID-19 had begun to spread across the United States, which precipitated the closure by government authorities of non-essential businesses. The majority of our businesses are deemed essential and have accordingly remained open, albeit at reduced levels. Many of our customers operating in both automotive/transportation and non-automotive/transportation markets experienced varying degrees of shutdowns beginning in the last week of March, and are, on a case-by-case basis, tentatively expected to begin reopening as soon as May 4, 2020. We estimate the adverse financial impact of COVID-19 on our first quarter operating profit to be an approximate $0.6 million reduction net of tax. The broader economic fallout caused by COVID-19 may result in unfavorable operating earnings and cash flow generation in the months to follow.

~~Any~~ sustained delays orand disruptions in 2020 to our supply chain and operations, the majority of our facilities have returned to normal operations. Currently, we do not anticipate further disruption in ~~China, and any ongoing shutdowns~~our operations unless a resurgence of the ~~operations of~~COVID-19 pandemic occurs, which could cause further disruptions in our ~~customers would continue to have a negative effect on demand for our products~~business and ~~our ability to fulfill orders on a timely basis or at all, which in turn would~~could adversely affect our financial condition, results of operations and cash flow. In addition, the broader economic fallout caused by COVID-19 may result in unfavorable operating earnings and cash flow generation in the months to follow, including as a result of decreased consumer demand for our and our customers’ products. The future extent of the ~~pandemic’s~~ effect of the COVID-19 pandemic on our operational and financial performance will depend in large part on ~~future~~the effectiveness of the vaccines, continued mask wearing, social distancing and other developments, ~~which~~that cannot be predicted with confidence at this time. Future developments include the duration, scope and severity of the pandemic, actions that may continue to be taken to contain or mitigate its impact, 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 and the ~~COVID-19 pandemic~~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 II,~~ Item 1A, – Risk Factors, of Part II of this Form 10-Q.

General Overview

Net sales in the first quarter of ~~2020~~2021 increased 7%12% to ~~$65.3~~$73.1 million from ~~$60.9~~$65.3 million in the ~~prior year period. Sales growth includes the impact of the acquisition of certain subsidiaries of Big 3 Holdings LLC (collectively, Big 3 Precision), which the Company acquired on August 30, 2019.~~corresponding period in 2020. Sales increased in the ~~Industrial Hardware~~Engineered Solutions segment in the first quarter of 2021 by ~~23%~~19% to ~~$47.2~~$61.8 million from $51.8 million in the first quarter of 2020 ~~from $38.4 million in the first~~due to increased demand for truck accessories, automotive returnable packaging, blow mold tooling, and distribution products. First quarter ~~of 2019. Excluding Big 3 Precision, sales decreased 11% in the Industrial Hardware segment first quarter of 2020 compared to~~2021 sales in the first quarter of 2019, due to lower sales to distribution, Class 8 truck, recreational vehicles, and aftermarket truck replacement part. Increased sales into the specialty vehicle, off-highway and military markets were insufficient to offset declines in the aforementioned markets in the second half of March when certain of our customers closed their operations due to actions taken to help stop the spread of COVID-19. Sales in the SecurityDiversified Products segment of $11.3 million decreased 16% ~~in the first quarter of 2020~~when compared to the first quarter of ~~2019,~~2020 sales of $13.5 million primarily due to the sale of Canadian Commercial Vehicles and Sesamee Mexicana in June and November 2020 respectively, and lower demand ~~across the majority of the markets we serve including distribution, industrial, vehicular accessories and~~for commercial laundry ~~as well as a loss~~products, partially offset by increased demand for mining products and industrial castings.

Net sales of ~~supply contracts for~~

~~mechatronic padlock systems and recreational vehicles door latches, which generated sales~~existing products increased 5% in the first quarter of ~~2019, that did not recur~~2021 compared to the corresponding period in 2020. ~~Sales in the Metal Products segment decreased 27%~~Price increases and new products increased net sales by 7% in the first quarter of ~~2020, compared to sales in the first quarter~~2021. New products included various truck mirror assemblies, truck compression latches, a cable lock, and a mirror cam.

Table of Contents

Cost of ~~2019. Sales of mining~~ products ~~decreased 21%, and sales of industrial casting products decreased 35%~~sold increased $5.2 million, or 10%, in the first quarter of ~~2020~~2021 primarily due to increased sales volume and increases in material costs. Raw material costs have increased year-over-year: hot-rolled steel increased 147%, cold-rolled steel increased 103%, nickel increased 38%, scrap iron increased 168% while copper and zinc increased 51% and 29% respectively, in the first quarter of 2021 compared to the first quarter of ~~2019. Mining sales in~~2020. Additionally, the first quarter were impacted by a combination of growing renewable energy capacity, extremely low natural gas prices and unusually warm weather in the first quarter, which led utilities to cut back on coal usage. Sales of industrial castings in the first quarter were negatively impacted by the loss of a customer who temporarily sourced products from us due to a fire at its facility in 2018, which temporarily shut down production of products that would otherwise have been sourced internally. In addition, sales were negatively impacted due to the completion of contract from a customer serving the transit industry.

Net sales of existing products increased in the first quarter by 5% and price increases and new products effected 2% increase in net sales in the 2020 period. New products included a handle and finger pull assembly, emergency door latch, mount plate latch, top mount power lock module, crossbar lock assembly and various industrial castings for the water and gas industries.

~~Cost of products sold~~ in the first quarter of 2020 increased $3.6 million, or 8% compared to the first quarter of 2019. The primary reason for the increase is due to the inclusion of Big 3 Precision in the first quarter of 2020. Excluding Big 3 Precision, cost of products sold would have decreased by 14%, reflecting the decrease in sales. Material costs decreased by $6.3 million on lower sales volume and lower material costs incurred in producing a new Class 8 truck mirror program that was awarded to us in 2018. We have been successful in securing more favorable pricing from new suppliers on all of the components related to this program, which has enabled us to realize comparatively higher margins on products sold in the first quarter of 2020 compared to those sold in the first quarter of 2019. In addition, raw material costs have decreased year-over-year, hot-rolled steel decreased 16%, cold-rolled steel decreased 7%, aluminum decreased 11%, and copper and zinc and scrap iron decreased 7%, 17%, and 17%, respectively. Also, favorably impacting the first quarter was lower freight cost of $0.6 million, a 33% reduction over the first quarter of 2019, due to the elimination of certain supplier quality issues and expedited shipping costs. Lower production levels resulted in the under-absorption of operating costs in the amount of $0.3 million during the first quarter of 2020 compared to the first quarter in 2019.

~~Finally, the company experienced~~Company paid tariff costs on China-sourced products of approximately ~~$1.4~~$0.7 million in the first quarter of ~~2020~~2021 compared to ~~$0.2~~$1.4 million incurred in the first quarter of ~~2019,~~2020, all of which have been recovered through price increases.

Gross margin as a percent of sales was 24% in the first quarter of 2021 compared to 22% in the first quarter of ~~2020 compared to 23%~~2020.

Product development expense of $0.8 million increased $0.1 million, or 8% in the first quarter of ~~2019.~~

~~Product development expense~~ ~~decreased $1.5 million, or 65%, in the first quarter of 2020~~2021 compared to the first quarter of ~~2019. The reduction in this expense relates to~~2020. As a percentage of net sales, product development costs were 1.1% and 1.2% for the ~~closure of the Velvac Road-iQ development operation in Bellingham, Washington, which took place in the second~~first quarter of ~~2019, a strategic decision that we made to adopt a leaner approach to the development of new vision products.~~

2021 and 2020 respectively.

Selling and administrative expense increased ~~$1.6 million, or 19%,~~5% in the first quarter of ~~2020~~2021 compared to the ~~first quarter of 2019,~~corresponding period in 2020 primarily ~~as a result of the inclusion of Big 3 Precision in the 2020 period. Excluding Big 3 Precision, selling~~due to increased amortization expense, and ~~administrative expense~~increased incentive costs, which were suspended in the first quarter of fiscal 2020, ~~would have decreased~~offset by ~~$0.5 million, or 6%, from the first quarter of 2019. The most significant factor contributing to this reduction was a decrease in payroll~~reduced travel and other payroll related ~~costs~~expenses.

Interest expense of ~~$0.3 million.~~

~~We incurred no restructuring costs during the first quarter of 2020 compared to restructuring costs of $0.8~~$0.7 million during the first quarter of 2019, which were related to the consolidation of our Salisbury, North Carolina composite panel business into our Canadian composite panel business in Kelowna, British Columbia. Costs incurred related to the write off of inventory and fixed assets, moving, severance and the termination of a lease.

~~Interest expense~~ ~~increased $0.5~~decreased $0.1 million in the first quarter of ~~2020~~2021 compared to the same period in 2020.

Other income of $2.3 million in the first quarter of ~~2019 as a~~2021 was the result of ~~increased debt related to our acquisition~~a gain on sale of ~~Big 3 Precision in August~~the Eberhard Hardware Ltd. building of ~~2019.~~

$1.8 million and a $0.5 million favorable return on pension plan assets. Other income ~~increased~~ of $0.7 million in the first quarter of 2020 ~~compared to the first quarter~~was comprised of ~~2019 due to~~ a favorable return on our pension plan assets and a ~~onetime~~one-time sale-leaseback transaction ~~gain.~~

gain in the first quarter of fiscal 2020.

Net incomefor the first quarter of ~~2020 increased~~fiscal 2021 was $5.8 million, or $0.93 per diluted share compared to income of $2.9 million, or $0.46 ~~per diluted share, from $1.6 million, or $0.25~~ per diluted share, for the comparable period in 2019. During the first quarter of 2019, the Company had significant non-recurring restructuring costs of $0.8 million, as well as project startup costs related to the new Class 8 truck mirror program awarded to our Velvac subsidiary.

2020.

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

Results of Operations

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

Three Months Ended March 28, 2020

Industrial Security Metal
Hardware Products Products Total
Net sales
100.0
%

100.0
%

100.0
%

100.0
%
Cost of products sold
77.4
%

68.9
%

97.6
%

77.6
%
Gross margin
22.6
%

31.1
%

2.4
%

22.4
%

Product development expense
0.2
%

5.5
%

—

1.2
%
Selling and administrative expense
15.1
%

19.0
%

9.7
%

15.3
%
Restructuring cost
—

—

—

—

Operating profit
7.3
%

6.6
%

-7.3
%

5.9
%

Three Months Ended March 30, 2019

Industrial Security Metal
Hardware Products Products Total
Net sales
100.0
%

100.0
%

100.0
%

100.0
%
Cost of products sold
76.9
%

70.9
%

91.3
%

78.7
%
Gross margin
23.1
%

29.1
%

8.7
%

22.7
%

Product development expense
4.2
%

4.3
%

—

3.7
%
Selling and administrative expense
13.4
%

18.1
%

7.5
%

13.8
%
Restructuring cost
2.2
%

1.4
%
Operating profit
3.3
%

6.7
%

1.2
%

3.8
%

	2021 First Quarter
	Engineered			Diversified
	Solutions			Products			Total
Net Sales		100.0	%		100.0	%		100.0	%
Cost of Products Sold		74.7	%		85.7	%		76.4	%
Gross Margin		25.3	%		14.3	%		23.6	%
Product Development Expense		0.8	%		2.9	%		1.1	%
Selling and Administrative Expense		14.7	%		12.3	%		14.3	%
Operating Profit		9.8	%		(0.9	)%		8.2	%

	2020 First Quarter
	Engineered			Diversified
	Solutions			Products			Total
Net Sales		100.0	%		100.0	%		100.0	%
Cost of Products Sold		75.7	%		84.6	%		77.6	%
Gross Margin		24.3	%		15.4	%		22.4	%
Product Development Expense		0.8	%		2.7	%		1.2	%
Selling and Administrative Expense		16.2	%		12.2	%		15.3	%
Operating Profit		7.3	%		0.5	%		5.9	%

Table of Contents

The following table shows the change in sales and operating profit by segment for the first quarter of ~~2020~~fiscal 2021 compared to the first quarter of ~~2019~~fiscal 2020 (dollars in thousands):

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

         Volume
20.9
%

-17.0
%

-30.2
%

5.2
%
         Prices
1.1
%

1.0
%

0.7
%

1.0
%
         New products
1.0
%

0.4
%

2.6
%

1.1
%

23.0
%

-15.6
%

-26.9
%

7.3
%

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

172.7
%

-16.0
%

-544.9
%

65.4
%

~~Industrial Hardware Segment~~

	Engineered		Diversified
	Solutions		Products		Total
Net sales	$	9,927	$	(2,155)	$	7,772

Volume		11.2%		(16.9)%		5.4%
Price		0.4%		0.9%		0.5%
New products		7.6%		0.0%		6.0%
		19.2%		(16.0)%		11.9%

Operating profit (loss)	$	2,329	$	(170)	$	2,159
		2.6%		(1.4)%		2.3%

Engineered Solutions

Net sales in the ~~Industrial Hardware~~Engineered Solutions segment of $61.8 million increased ~~23%~~$9.9 million or 19% in the first quarter of 2021 compared to the corresponding period of 2020 primarily due to increased demand for truck accessories, automotive returnable packaging, blow mold tooling, and distribution of industrial hardware products.

Sales of new products contributed 8% in the first quarter of fiscal 2021. New products include numerous mirror assemblies, compression latches, a cable lock, and a mirror cam.

Cost of products sold increased $6.9 million or 18% in the first quarter of 2021 compared to the corresponding period of 2020. Material costs in the first quarter of 2021 increased 15% or $4.1 million to $31.4 million from $27.3 million in the first quarter of 2020, ~~compared~~primarily due to increased sales volume and higher material costs. Also impacting the first quarter of 2019. Sales increased due to the inclusion of Big 3 Precision in the 2020 period. Excluding Big 3 Precision, sales would have decreased 11%. Increased sales in the specialty vehicle, military, and off-highway markets2021 were not sufficient to offset sales reduction in the distribution, Class 8 truck, recreational vehicle, and aftermarket truck parts markets in the second half of March when certain of our customers closed operations due to actions taken to help stop the spread of COVID-19. Excluding Big 3 Precision, net sales decreased 13%,higher freight costs, which ~~was offset by price increases and sales of new products contributing 2% in the 2020 period. New products include a handle and finger pull assembly, emergency door latch and a mount plate latch.~~

~~Cost of products sold~~ ~~increased 23%~~were up 44% or $1.4 million in the first quarter of ~~2020 as~~2021 compared to the ~~first quarter~~corresponding period of ~~2019. Excluding Big 3 Precision, cost of products sold would have decreased by 11% compared to the first quarter of 2019. Material costs decreased $3.4 million~~2020 due to ~~lower sales~~increased volume and ~~lower material~~non-recurring expedited shipping costs ~~incurred in producing a new Class 8 truck mirror that was awarded in 2018. Many~~related to port congestion at all U.S. ports.

Finally, we paid tariffs on China-sourced products of the components sourced during the first quarter of 2019 were at higher than normal material costs. As of the first quarter of 2020, all components have been sourced to more favorable suppliers and costs have normalized. Also impacting the first quarter were more favorable freight costs, which were downapproximately $0.6 million in the first quarter of ~~2020~~2021 compared to the first quarter of 2019 due to non-recurring expedited shipping costs. Payroll and payroll-related costs decreased $0.3 million offset by $0.3 million due to the under absorption of operating costs. Finally, we experienced tariff costs on China-sourced products of approximately $0.8 ~~million compared to $0.2~~ million in the first quarter of ~~2019.~~

2020, all of which have been recovered through price increases.

Gross margin as a percentage of net sales in the first quarter of ~~2020~~2021 was ~~comparable~~25% as compared to the corresponding period of 2020 of 24%.

Product development expense increased $0.1 million first quarter of ~~2019 of 23%.~~

~~Product development expense~~ ~~decreased by $1.5 million in the first quarter 2020~~2021 compared to the ~~first quarter in 2019 due primarily to the closure~~corresponding period of ~~the Velvac Road-iQ development operation in Bellingham, Washington in the second quarter of 2019, as we adopted a leaner approach to the development of new vision products.~~

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

2020.

Selling and administrative expense increased ~~38%~~$0.7 million or 9% in the first quarter of ~~2020~~2021 compared to the corresponding period of fiscal 2020 due primarily to increased amortization expense, increased incentive costs, which were suspended in the first quarter of ~~2019 due primarily to the inclusion of Big 3 Precision. Excluding Big 3 Precision, selling~~fiscal 2020, offset by reduced travel and ~~administrative expenses decreased 2% compared to the first quarter of 2019. Payroll and payroll-related expenses decreased by $0.3 million, or 8%, compared to the first quarter of 2019.~~

~~Security~~other payroll related expenses.

Diversified Products ~~Segment~~

Net sales in the ~~Security~~Diversified Products segment decreased $2.2 million or 16% in the first quarter of ~~2020~~2021 compared to the ~~first quarter~~corresponding period in 2020. The sales decline was due to the sale of ~~2019. Sales growth attributable to Load N Lock, which we acquired~~the Canadian Commercial Vehicles Corporation and Sesamee Mexicana in June ~~of 2018,~~and November 2020 respectively, and lower demand for commercial laundry products, partially offset ~~the impact of lower~~by increased demand ~~across the majority of the markets we serve including distribution,~~for mining products and industrial vehicular accessories and commercial laundry, as well as a loss of supply contracts for mechatronic padlock systems and recreational vehicles door latches, which generated sales in the first quarter of 2019, that did not recur in 2020.castings. Net sales of existing products decreased 17%, while price increases ~~and sales of new products~~ contributed 1% ~~in the 2020 period. New product sales included a top mount power lock module and a crossbar lock assembly.~~

~~Cost of products sold~~ ~~decreased 18%~~ in the first quarter of ~~2020 compared to~~fiscal 2021.

Table of Contents

Cost of products sold decreased $1.7 million or 15% in the first quarter of ~~2019,~~2021 compared to the corresponding period of 2020, primarily as a result of lower sales volume ~~reduced payroll and payroll-related costs of $0.2 million, or 8%,~~ and the mix of products sold.

Raw materials decreased $1.6 million or 32% in the first quarter of 2021 compared to the corresponding period of 2020. Payroll and payroll related expenses decreased $0.2 million or 7% in the first quarter of fiscal 2021 compared to the corresponding period of fiscal 2020.

We paid minimal tariffs on China-sourced products in the first quarter of 2021 compared to $0.6 million in the first quarter of 2020, all of which have been recovered through price increases.

Gross margin as a percentage of net sales was ~~31%~~14% in the first quarter of ~~2020~~2021 compared to ~~29%~~15% in the first quarter of ~~2019.~~

fiscal 2020.

Product development expense as a percentage of net sales was ~~6% in the first quarter 2020 compared to 4%~~3% in the first quarter of ~~2019.~~fiscal 2021 compared to 3% in the corresponding period of fiscal 2020. This increase reflects a continuation in the development of GPay, a ~~Bluetooth locking system~~multi-pay reader and ~~a new cable lock system.~~

an electronic drop.

Selling and administrative expenses decreased ~~11%~~$0.3 million or 16% in the first quarter of ~~2020,~~2021 compared to the ~~first quarter~~corresponding period of ~~2019. The most significant driver in this reduction was~~2020, primarily due to ~~decreased~~lower payroll and payroll related ~~costs offset by an increase in our bad debt reserve in the amount of $152,000 related to a customer that filed for chapter 11 bankruptcy during the first quarter of 2020.~~

~~Metal Products Segment~~

~~Net sales~~ in the Metal Products segment decreased 27% to $5.7 million in the first quarter of 2020 compared to the first quarter of 2019. Sales of our mining products decreased by 21%, while sales of industrial casting products decreased by 35%. Mining sales in the first quarter of 2020 were impacted by a combination of growing renewable energy capacity, extremely low natural gas pricesexpenses and unusually warm weather in the first quarter, which led utilities to cut back on coal usage. Sales of industrial castings in the first quarter were negatively impacted by the loss of a customer who temporarily sourced products from us due to a fire at its facility in 2018, which temporarily shut down production of product that would otherwise have been sourced internally. In addition, sales were negatively impacted due to the completion of contracts from a customer serving the transit industry.

~~Cost of products sold~~ ~~decreased 22% in the first quarter of 2020, compared to the first quarter of 2019, as a result of lower sales volume.~~

~~Gross margin~~ ~~as a percentage of net sales was 2% in the first quarter of 2020 compared to 9% in the first quarter of 2019.~~

~~Selling and administrative expenses~~ ~~decreased 6% in the first quarter of 2020 compared to the first quarter of 2019. The most significant drivers of this reduction were payroll and payroll-related costs.~~

~~Impact of Inflation~~

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

reduced travel expenses.

Liquidity and Sources of Capital

The Company generated approximately ~~$1.5~~$2.1 million of cash from operations during the first ~~quarter~~three months of ~~2020~~fiscal 2021 compared to approximately $1.5 million during the first ~~quarter~~three months of ~~2019. The cash flows in the first quarter of 2020 period were comparable to the first quarter of 2019 period.~~fiscal 2020. 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 quarter of fiscal 2021.

Additions to property, plant and equipment were approximately $0.9 million for the first three months of fiscal 2021 and $0.8 million for the first ~~quarter~~three months of ~~2020 and $0.7 million for~~fiscal 2020. Additionally, in the first ~~quarter~~three months of ~~2019.~~2021 the company received proceeds of $2.0 million from the sale of one of its facilities in Canada. As of ~~March 28, 2020,~~April 3, 2021, there ~~was~~were approximately ~~$0.1~~$0.3 million of outstanding commitments for capital expenditures.

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

First
Quarter
2020

First
Quarter
2019

Year
End
2019

Current ratio

3.4

3.6

3.6

Average days’ sales in accounts receivable

57

49

51

Inventory turnover

3.6

3.7

4.2

Total debt to shareholders’ equity

92.8
%

28.8
%

93.7
%

	First Quarter 2021		First Quarter 2020		Year End 2020
Current ratio		2.8		3.4		2.8
Average days’ sales in accounts receivable		53		57		56
Inventory turnover		4.2		3.6		3.6
Total debt to shareholders’ equity		79.0%		92.8%		85.1%

Table of Contents

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

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

  - Held in the United States

$
9.6

$
4.1

$
9.0

  - Held by a foreign subsidiary

6.9

9.5

9.0

16.5

13.6

18.0

Working capital

81.8

72.8

83.0

Net cash provided by operating activities

1.5

1.5

23.0

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

(2.7
)

(2.5
)

(0.3
)
Net cash (used) in investing activities

(0.4
)

(0.9
)

(85.8
)
Net cash (used) in financing activities

(2.3
)

(1.1
)

(67.0
)

	First			First			Year
	Quarter			Quarter			End
	2021			2020			2020
Cash and cash equivalents
- Held in the United States	$	8.0		$	9.6		$	10.0
- Held by a foreign subsidiary		9.5			6.9			6.1
		17.5			16.5			16.1

Working capital		76.7			81.8			71.1
Net cash provided by operating activities		2.1			1.5			20.7
Change in working capital impact on net cash provided by (used in) operating activities		(4.0	)		(2.7	)		2.0
Net cash provided by (used in) investing activities		1.1			(0.4	)		(9.1	)
Net cash used in financing activities		(1.9	)		(2.3	)		(13.2	)

Inventories of ~~$55.3~~$54.0 million represent an increase of ~~1% at March 28, 2020~~1.6% as of April 3, 2021 as compared to ~~$54.6~~$53.1 million at the end of fiscal year ~~2019.~~2020. Inventories ~~increased 7%~~decreased 2.3% in the first ~~quarter~~three months of ~~2020,~~fiscal 2021, as compared to ~~$51.6 at the end of the first fiscal quarter of 2019. Accounts receivable, less allowances were $39.9 million at March 28, 2020, as compared to $37.9 million at 2019 fiscal year end and $32.4~~$55.3 million at the end of the first ~~fiscal~~ quarter of ~~2019.~~

fiscal 2020. Accounts receivable, less allowances, were $42.2 million as of April 3, 2021, as compared to $37.7 million at 2020 fiscal year end and $39.9 million at the end of the first quarter of fiscal 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 of COVID-19 or the resulting harm to the financial condition of our customers or economic conditions generally, or an increase in indebtedness incurred to offset such a decrease in earnings, would have a negative impact on our senior net leverage ratio and our fixed charge coverage ratio, which in turn would increase the cost of borrowing under the Credit Agreement and tocould cause us to fail to comply with the covenants under our Credit Agreement.

Table of Contents

Off-Balance Sheet Arrangements

As of the end of the fiscal quarter ended ~~March 28, 2020,~~April 3, 2021, the Company does not have any ~~material 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~~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”).

To supplement the consolidated financial statements prepared in accordance with U.S. GAAP, we have presented Adjusted Net Income, Adjusted EPS and Adjusted EBITDA, which are considered non-GAAP financial measures. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable GAAP financial measures, such as net sales, net income, diluted earnings per common share, or ~~significant components~~other measures prescribed by U.S. GAAP, and there are limitations to using non-GAAP financial measures.

Adjusted Net Income is defined as net income excluding, when they occur, the impacts of ~~revenues~~impairment losses, losses on sale of subsidiaries, transaction expenses, factory relocation expenses and restructuring costs. Adjusted Net Income 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.

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

Adjusted EBITDA is defined as net income before interest expense, provision for income taxes, and 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 EBITDA is a tool that can assist management and investors in comparing our performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect our underlying operations.

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 ~~expenses.~~

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.

Table of Contents

Reconciliation of Net Income to Adjusted Net Income - EPS Calculation

For the Three Months ended April 3, 2021 and March 28, 2020

($000's)

	April 3, 2021			March 28, 2020

Net Income as reported per generally accepted accounting principles (GAAP)	$	5,841		$	2,896

Earnings Per Share as reported under generally accepted accounting principles (GAAP):
Basic	$	0.93		$	0.46
Diluted	$	0.93		$	0.46

Adjustments for one-time items:

Gain on sale of Eberhard Hardware Ltd building, net of tax		(1,353	)A		-

Total adjustments for one-time items (Non-GAAP)		(1,353	)		-

Adjusted Net Income (related for one-time items);	$	4,488		$	2,896

Adjusted earnings per share (related to one-time items); (Non-GAAP)
Basic	$	0.72		$	0.46
Diluted	$	0.71		$	0.46

_________

A) Gain on sale of Eberhard Hardware Ltd building

Table of Contents

Reconciliation of one-time items from GAAP to Non-GAAP EBITDA calculation

For the Three Months ended April 3, 2021 and March 28, 2020

($000's)

	April 3, 2021			March 28, 2020

Net Income/(loss) as reported per generally accepted accounting principles (GAAP)	$	5,841		$	2,896

Interest expense		703			828

Provision for income taxes		1,817			883

Depreciation and amortization		2,193			2,056

Gain on sale of Eberhard Hardware Ltd Building		(1,841	)A		-

Adjusted EBITDA	$	8,713		$	6,663

___________

A) Gain on sale of Eberhard Hardware Ltd building

Table of Contents

ITEM 3 –- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4 –- CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

As of ~~March 28, 2020,~~April 3, 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 ~~240.13a-15.~~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 ~~Commission's~~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 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 ~~March 28, 2020.~~

April 3, 2021.

Changes in Internal Control Over Financial Reporting:

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

Table of Contents

PART II –- OTHER INFORMATION

ITEM 1 –- LEGAL PROCEEDINGS

The Company is a party to various legal proceedings from time to time related to its normal business operations. As of the end of the quarter ended ~~March 28, 2020,~~April 3, 2021, the Company does not have any material pending legal ~~proceedings.~~

proceedings, other than as set forth 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 ~~“DEC”~~“NYSDEC”) on March 27, 2018. Based on estimates provided by the Company’s environmental engineers, the anticipated cost to remediate and monitor the landfill was $430,000. The Company accrued for and expensed the entire $430,000 in the first quarter of 2018 and fiscal 2017. In the fall of 2018, detailed construction drawings were prepared by an outside consultant in conjunction with informal progress reviews by the ~~New York State Department of Environmental Conservation (the “NYSDEC”).~~NYSDEC. Long-term groundwater monitoring commenced in April of 2019. Verbal approval for the closure plan was received from the NYSDEC in May of 2019. Written approval ~~is anticipated~~was received in ~~the first quarter of~~October 2020. Construction of the closure remedies, including improved drainage system, regrading, and installation of a low permeability cap, is anticipated in ~~the spring of 2020.~~May 2021. In the ~~summer~~third fiscal quarter of ~~2020,~~2021, following the completion of construction work, a closure report and maintenance plan is expected to be prepared for the NYSDEC. This closure report and maintenance plan will document the work done and 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.~~1A “Risk Factors” of the ~~Company’s 2019~~2020 Form 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~~April 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 to include the following risk factor:~~

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

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

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

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

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

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

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

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

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

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

The 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 the duration of the pandemic, additional or modified government actions, new information that may emerge concerning the severity and impact of the COVID-19 and the actions taken to contain COVID-19 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 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

Table of Contents

ITEM 6 –- EXHIBITS

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

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

4) Description of Securities.*

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

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

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

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

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

10)		Change in Control Agreement, dated as of March 8, 2021, between the Company and James P. Woidke (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 12, 2021).†

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 April 3, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Operations (Unaudited) for the three months ended April 3, 2021 and March 28, 2020; (ii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended April 3, 2021, and March 28, 2020; (iii) Condensed Consolidated Balance Sheets (Unaudited) as of April 3, 2021 and January 2, 2021; (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the three months ended April 3, 2021 and March 28, 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

†Management contract, compensatory plan or arrangement.

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: May ~~6, 2020~~11, 2021		/s/August M. Vlak
		August M. Vlak President and Chief Executive Officer

DATE: May ~~6, 2020~~ 11, 2021		/s/John L. Sullivan III
		John L. Sullivan III Vice President and Chief Financial Officer


29

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

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

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

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

Earnings per share:
Basic	$	.46		$	.25

Diluted	$	.46		$	.25

Cash dividends per share:	$	.11		$	.11

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

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

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

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

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

Shareholders’ Equity

Voting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Nonvoting Preferred Stock, no par value:
Authorized and unissued: 1,000,000 shares
Common Stock, no par value, Authorized: 50,000,000 shares		30,890,108			30,651,815
Issued: 8,980,460 shares in 2020 and 8,975,434 shares in 2019
Outstanding: 6,230,731 shares in 2020 and 6,240,705 shares in 2019
Treasury Stock: 2,749,729 shares in 2020 and 2,734,729 shares in 2019		(20,537,962	)		(20,169,098	)
Retained earnings		122,723,970			120,189,111
Accumulated other comprehensive income (loss):
Foreign currency translation		(3,342,399	)		(2,037,952	)
Unrealized gain on marketable securities, net of tax		8,878			—
Unrealized gain (loss) on interest rate swap, net of tax		(1,530,775	)		167,018
Unrecognized net pension and postretirement benefit costs, net of tax		(23,103,342	)		(23,363,637	)
Accumulated other comprehensive loss		(27,967,638	)		(25,234,571	)
Total Shareholders’ Equity		105,108,478			105,437,257
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	279,937,676		$	280,662,976

	March 28, 2020		December 28, 2019

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

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

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

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

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

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

Product development expense	0.2	%	5.5	%	—		1.2	%
Selling and administrative expense	15.1	%	19.0	%	9.7	%	15.3	%
Restructuring cost	—		—		—		—
Operating profit	7.3	%	6.6	%	-7.3	%	5.9	%

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

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

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