EASTERN CO 10-Q

ITEM 1 – FINANCIAL STATEMENTS THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended Nine Months Ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Net sales $ 65,805,558 $ 60,692,645 $ 179,964,582 $ 183,015,723 Cost of products sold ( 51,065,536 ) ( 45,754,911 ) ( 139,374,508 ) ( 139,243,164 ) Gross margin 14,740,022 14,937,734 40,590,074 43,772,559 Product development expense ( 903,023 ) ( 825,425 ) ( 2,434,638 ) ( 5,240,004 ) Selling and administrative expenses ( 9,592,569 ) ( 8,391,898 ) ( 27,452,391 ) ( 24,866,665 ) Goodwill impairment loss — — ( 4,002,548 ) — Restructuring costs ( 8,618 ) — ( 287,234 ) ( 2,651,877 ) Operating profit 4,235,812 5,720,411 6,413,263 11,014,013 Interest expense ( 647,066 ) ( 420,377 ) ( 2,081,283 ) ( 974,536 ) Other income 365,703 188,623 969,024 789,371 Income before income taxes 3,954,449 5,488,657 5,301,004 10,828,848 Income taxes 969,774 1,295,575 1,309,295 2,535,033 Net income $ 2,984,675 $ 4,193,082 $ 3,991,709 $ 8,293,815 Earnings per Share: Basic $ 0.48 $ 0.67 $ 0.64 $ 1.33 Diluted $ 0.48 $ 0.67 $ 0.64 $ 1.33 Cash dividends per share: $ 0.11 $ 0.11 $ 0.33 $ 0.33 See accompanying notes. 3 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) Three Months Ended Nine Months Ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Net income $ 2,984,675 $ 4,193,082 $ 3,991,709 $ 8,293,815 Other comprehensive income/(loss): Change in foreign currency translation 277,618 ( 537,751 ) ( 248,786 ) ( 346,657 ) Change in marketable securities, net of tax benefit (cost) of: 2020 – $159 and $(1,904) respectively 2019 – $176 and $(288) respectively 489 538 ( 5,836 ) ( 882 ) Change in fair value of interest rate swap, net of tax benefit (cost) of: 2020 – $(35,587) and $547,087 respectively 2019 – $15,720 and $85,537 respectively 112,691 ( 49,780 ) ( 1,734,606 ) ( 270,866 ) Change in pension and postretirement benefit costs, net of taxes of: 2020 – $81,144 and $243,429 respectively 2019 – $75,138 and $217,014 respectively 260,295 235,859 780,886 681,221 Total other comprehensive income (loss) 651,093 ( 351,134 ) ( 1,208,342 ) 62,816 Comprehensive income $ 3,635,768 $ 3,841,948 $ 2,783,367 $ 8,356,631 See accompanying notes. 4 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS October 3, 2020 December 28, 2019 Current Assets Cash and cash equivalents $ 19,551,386 $ 17,996,505 Marketable securities 26,564 34,305 Accounts receivable, less allowances: 2020 - $726,000;2019 - $556,000 34,174,080 37,941,900 Inventories 49,448,612 54,599,266 Current portion of note receivable 224,985 — Prepaid expenses and other assets 4,453,522 4,343,507 Total Current Assets 107,879,149 114,915,483 Property, Plant and Equipment 88,656,237 88,336,243 Accumulated depreciation ( 48,593,969 ) ( 46,313,630 ) Property, Plant and Equipment, Net 40,062,268 42,022,613 Goodwill 77,792,863 79,518,012 Trademarks 5,404,283 5,404,283 Patents and other intangibles net of accumulated amortization 27,955,229 26,460,110 Long term note receivable, less current portion 972,889 — Right of Use Assets 11,198,742 12,342,475 Other Assets 123,324,006 123,724,880 TOTAL ASSETS $ 271,265,423 $ 280,662,976 See accompanying notes. 5 Table of Contents LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities Accounts payable $ 17,390,131 $ 19,960,507 Accrued compensation 2,505,568 3,815,186 Other accrued expenses 4,333,038 2,967,961 Current portion of lease liability 3,309,033 2,965,572 Current portion of long-term debt 5,812,689 5,187,689 Total Current Liabilities 33,350,459 34,896,915 Deferred income taxes 4,374,343 5,270,465 Other long-term liabilities 2,465,261 2,465,261 Lease liability 7,939,111 9,376,903 Long-term debt, less current portion 89,105,682 93,577,544 Accrued postretirement benefits 995,021 1,007,146 Accrued pension cost 26,947,804 28,631,485 Shareholders’ Equity Voting Preferred Stock, no par value: Authorized and unissued: 1,000,000 shares - - Nonvoting Preferred Stock, no par value: Authorized and unissued: 1,000,000 shares - - Common Stock, no par value, Authorized: 50,000,000 shares 31,304,047 30,651,815 Issued: 8,992,641 shares in 2020 and 8,975,434 shares in 2019 Outstanding: 6,242,912 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 121,764,570 120,189,111 Accumulated other comprehensive loss: Foreign currency translation ( 2,286,738 ) ( 2,037,952 ) Unrealized gain on marketable securities, net of tax ( 6,307 ) ( 471 ) Unrealized gain (loss) on interest rate swap, net of tax ( 1,567,117 ) 167,489 Unrecognized net pension and postretirement benefit costs, net of tax ( 22,582,751 ) ( 23,363,637 ) Accumulated other comprehensive loss ( 26,442,913 ) ( 25,234,571 ) Total Shareholders’ Equity 106,087,742 105,437,257 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 271,265,423 $ 280,662,976 See accompanying notes. 6 Table of Contents THE EASTERN COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended October 3, 2020 September 28, 2019 Operating Activities Net income $ 3,991,709 $ 8,293,815 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 6,144,226 3,807,479 Unrecognized pension and postretirement benefits ( 1,066,777 ) 134,199 Goodwill impairment loss 4,002,548 — (Gain) loss on sale of equipment and other assets ( 414,078 ) 1,727,788 Provision for doubtful accounts 156,286 51,711 Stock compensation expense 652,232 445,338 Changes in operating assets and liabilities: Accounts receivable 3,270,585 359,606 Inventories 4,668,705 3,217,736 Prepaid expenses and other ( 93,693 ) 762,646 Other assets 753,170 ( 589,448 ) Accounts payable ( 2,600,966 ) ( 1,815,309 ) Accrued compensation ( 1,262,577 ) ( 1,680,668 ) Other accrued expenses ( 1,511,729 ) ( 2,202,622 ) Net cash provided by operating activities 16,689,641 12,512,271 Investing Activities Marketable securities 7,741 ( 33,759 ) Business disposition 1,378,602 — Business acquisition, net of cash acquired ( 7,172,868 ) ( 81,155,753 ) Proceeds from sale of equipment 445,211 — Purchases of property, plant and equipment ( 1,976,370 ) ( 1,896,128 ) Net cash provided by/used in investing activities ( 7,317,684 ) ( 83,085,640 ) Financing Activities Proceeds from long-term borrowings — 100,000,000 Principal payments on long-term debt ( 3,846,861 ) ( 29,009,769 ) Issuance of Note Receivable ( 1,251,943 ) — Payments Received from Note Receivable 54,069 — Purchase common stock for treasury ( 368,864 ) — Dividends paid ( 2,058,943 ) ( 2,058,697 ) Net cash used in financing activities ( 7,472,542 ) 68,931,534 Effect of exchange rate changes on cash ( 344,534 ) ( 300,602 ) Net change in cash and cash equivalents 1,554,881 ( 1,942,437 ) Cash and cash equivalents at beginning of period 17,996,505 13,925,765 Cash and cash equivalents at end of period $ 19,551,386 $ 11,983,328 Non-cash investing and financing activities Right of use asset ( 186,021 ) 10,280,814 Lease liability 136,619 ( 10,280,814 ) See accompanying notes. 7 Table of Contents THE EASTERN COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) October 3, 2020 Note A – Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X and do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2019, filed with the Securities and Exchange Commission on March 5, 2020 (the “2019 Form 10-K”), for additional information. The accompanying condensed consolidated financial statements are unaudited. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for interim periods have been reflected therein. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year. All intercompany accounts and transactions are eliminated. The condensed consolidated balance sheet as of December 28, 2019 has been derived from the audited consolidated balance sheet at that date. The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to 2020 or the 2020 fiscal year mean the 53-week period ending on January 2, 2021. In a 52-week fiscal year, each quarter is 13 weeks long. In a 53-week fiscal year, each of the first two fiscal quarters and the fourth quarter are 13 weeks long, and the third fiscal quarter is 14 weeks long. References to the third quarter of 2019, the third fiscal quarter of 2019 or the three months ended September 28, 2019 mean the period from June 30, 2019 to September 28, 2019. References to the third quarter of 2020, the third fiscal quarter of 2020 or the three months ended October 3, 2020 mean the 14-week period from June 28, 2020 to October 3, 2020. References to the nine months ended September 28, 2019 or the first nine months of fiscal 2019 mean the 39-week period from December 30, 2018 to September 28, 2019. References to the nine months ended October 3, 2020 or the first nine months of 2020 mean the 40-week period from December 29, 2019 to October 3, 2020. Certain amounts in the 2019 financial statements have been reclassified to conform with the 2020 presentation with no impact or change to previously reported net income or shareholder’s equity. Note B – Earnings Per Share The denominators used to calculate earnings per share are as follow: Three Months Ended Nine Months Ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Basic: Weighted average shares outstanding 6,237,758 6,236,225 6,235,747 6,233,894 Diluted: Weighted average shares outstanding 6,237,758 6,236,225 6,235,747 6,233,894 Dilutive stock appreciation rights 1,722 17,996 1,722 17,996 Denominator for diluted earnings per share 6,239,480 6,254,221 6,237,469 6,251,890 8 Table of Contents Note C – Inventories Inventories consist of the following components: October 3, 2020 December 28, 2019 Raw material and component parts $ 15,600,494 $ 17,225,469 Work in process 9,971,046 11,009,648 Finished goods 23,877,072 26,364,149 Total inventories $ 49,448,612 $ 54,599,266 Note D - Goodwill The Company maintains 12 reporting units, seven of which comprise the goodwill balance. These seven units have an aggregate carrying amount of goodwill of approximately $ 77.8 million as of October 3, 2020. The Company tests its reporting units for impairment annually in December, or more frequently if events or circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Such events and circumstances could include, among other things, increased competition or unexpected loss of market share, significant adverse changes in the markets in which the Company operates, or unexpected business disruptions. The Company tests reporting units for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its estimated fair value, the Company records an impairment loss based on the difference between fair value and carrying amount not to exceed the associated carrying amount of goodwill. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The values assigned to the key assumptions represent management’s assessment of future trends in the relevant industry and have been based on historical data from both external and internal sources. In the second quarter of 2020, management determined that it was more likely than not that the estimated fair value of Greenwald Industries was below its carrying amount. The factors that led to this determination included additional competition, industry movement away from legacy products and intense competition in new mobile payment apps. This fundamental shift in lower cost mobile payment systems away from the higher cost electronic smart card payment systems resulted in our belief that the carrying value of Greenwald exceeded its fair value. As a result, an independent valuation was conducted which estimated that the carrying value exceeded the fair value by approximately $ 4.0 million. Management recognized this impairment charge in the second quarter. In the third quarter of 2020, management performed assessments to determine if there were any events, circumstances or indicators of impairment among the Company’s reporting units as a result of the operating conditions resulting from the COVID-19 pandemic. Management concluded that the Company has not experienced any specific indicators of impairment for goodwill among its reporting units that would require additional impairment tests. There were no goodwill impairments in the third quarter of 2020. Note E – Leases The Company presents right-of-use (ROU) assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months, in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases. The Company elected to account for non-lease components as part of the lease component to which they relate. Lease accounting involves significant judgements, including making estimates related to the lease term, lease payments, and discount rate. The Company has operating leases for buildings, warehouse and office equipment. The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all of the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Most leases include one or more options to renew. The exercise of lease renewal options is at our sole discretion. The Company’s option to extend certain leases ranges from 2 – 131 months. All options to extend, when it is reasonably certain the option will be exercised, have been included in the calculation of the ROU asset and lease liability. Currently, the Company has 36 operating leases and four finance leases with a lease liability of $ 11,248,144 as of October 3, 2020. The finance lease arrangements are immaterial. The basis, terms and conditions of the leases are determined by the individual agreements. The leases do not contain residual value guarantees, restrictions, or covenants that could cause the Company to incur additional financial obligations. We rent or sublease a part of one real estate property to a third party. There are no related party transactions. There are no leases that have not yet commenced that could create significant rights and obligations for the Company. Total lease expense for each of the next five fiscal years is estimated to be as follows: remainder of 2020 - $ 824,251 ; 2021 - $ 3,011,067 ; 2022 - $ 2,067,173 ; 2023 - $ 1,699,249 ; 2024 - $ 1,223,651 and $ 2,422,753 thereafter. The weighted average remaining lease term is 6 years. The interest rate used was 5.0 %. 9 Table of Contents Note F - 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 October 3, 2020, the Company has not borrowed any funds on the revolving commitment portion of the facility. The term loan bears interest at a variable rate based on the LIBOR rate plus an applicable margin of 1.25 % to 2.25 %, depending on the Company’s senior net leverage ratio. Borrowings under the revolving portion bear interest at a variable rate based on, at the Company’s election, a base rate plus an applicable margin of 0.25 % to 1.25 % or the LIBOR rate plus an applicable margin of 1.25 % to 2.25 %, with such margins determined based on the Company’s senior net leverage ratio. The Company’s obligations under the Credit Agreement are secured by a lien on certain of Company’s and its subsidiaries’ assets pursuant to a Pledge and Security Agreement, dated August 30, 2019 with Santander Bank, N.A., as administrative agent. The Company’s loan covenants under the Credit Agreement require the Company to maintain a senior net leverage ratio not to exceed 4.25 to 1. In addition, the Company is required to maintain a fixed charge coverage ratio to be not less than 1.25 to 1. The Company was in compliance with all of its covenants under the Credit Agreement at October 3, 2020 and through the date of filing this Form 10-Q. On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notational amount of $ 50,000,000 , which was equal to 50% of the outstanding balance of the term loan on that date. The Company has a fixed interest rate of 1.44 % on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44 % and will receive interest when the LIBOR rate exceeds 1.44 %. On October 3, 2020, the interest rate for half ($47.5 million) of the term portion was 1.66 %, using a one month LIBOR rate, and 2.94 % on the remaining balance ($ 47.5 million) of the term loan based on a one month LIBOR rate. The interest rates under the Credit Agreement and the interest rate swap contract are susceptible to changes to the method of determining LIBOR rates and to the potential phasing out of LIBOR after 2021. Information regarding the potential phasing out of LIBOR is provided below. On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In the United States, the Federal Reserve Board and the Federal Reserve Bank of New York, in conjunction with the Alternative Reference Rates Committee, identified the Secured Overnight Financing Rate (“SOFR”) as its preferred benchmark alternative to U.S. dollar LIBOR. SOFR represents a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is calculated based on directly observable U.S. Treasury-backed repurchase transactions. In March 2020, in response to this transition, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financing Reporting, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued by reference rate reform, and addresses operational issues likely to arise in modifying contracts to replace discontinued reference rates with new rates. ASU 2020-04 is effective as of March 12, 2020 through December 31, 2022. The Company is evaluating the potential impact of the replacement of LIBOR, which ultimately may or may not be SOFR, from both a risk management and financial reporting perspective, as well as the guidance under ASU 2020-04. At this time, it is not possible to predict whether any such changes to LIBOR will occur, whether SOFR will attain market traction as a LIBOR replacement, whether LIBOR will be phased out or any such alternative reference rates, other than SOFR, or other reforms to LIBOR will be enacted in the United Kingdom, the United States or elsewhere or the effect that any such changes, phase-out, SOFR or other alternative reference rates, or other reforms, if they occur, would have on the amount of interest paid on the Company’s LIBOR-based borrowings. Uncertainty as to the nature of such potential changes, phase-out, SOFR or other alternative reference rates, or other reforms may materially adversely affect interest rates paid by the Company on its borrowings. Reform of, or the replacement or phasing out of, LIBOR and proposed regulation of LIBOR and other “benchmarks”, including SOFR, may materially adversely affect the amount of interest paid on the Company’s LIBOR-based borrowings and could have a material adverse effect on the Company’s business, financial condition and results of operations. 10 Table of Contents Note G - Stock Options and Awards The Eastern Company 2010 Executive Stock Incentive Plan (the “2010 Plan”), for officers, other key employees, and non-employee Directors expired in February 2020. On February 19, 2020, the board of directors of the Company adopted the Eastern Company 2020 Stock Incentive Plan (the “2020 Plan”). On April 29, 2020, at the Company’s 2020 Annual Meeting of Shareholders, the shareholders of the Company approved and adopted the 2020 Plan. The 2020 Plan replaced the 2010 Plan. The Company has no other existing plan pursuant to which equity awards may be granted. Incentive stock options granted under the 2010 Plan and the 2020 Plan must have exercise prices that are not less than 100% of the fair market value of the Company’s common stock on the dates the stock options are granted. Restricted stock awards may also be granted to participants under the 2010 Plan and the 2020 Plan with restrictions determined by the Compensation Committee of the Company’s Board of Directors. Under the 2010 Plan and the 2020 Plan, non-qualified stock options granted to participants will have exercise prices determined by the Compensation Committee of the Company’s Board of Directors. During the first nine months of fiscal 2020 and 2019, no stock options or restricted stock were granted that were subject to the meeting of performance measurements. For the first nine months of fiscal 2019, the Company used several assumptions which included an expected term of 3.5 to 4 years, volatility deviation of 28.88% to 32.33 % and a risk free rate of 1.42% to 2.48 %. For the first nine months of fiscal 2020, the Company used several assumptions which included an expected term of 4.0 years, volatility deviation of 38.62 % and a risk free rate of 0.26 % for the purposes of measuring compensation under the Black Scholes Method. The 2010 Plan and the 2020 Plan also permit the issuance of Stock Appreciation Rights (“SARs”). The SARs are in the form of an option with a cashless exercise price equal to the difference between the fair value of the Company’s common stock at the date of grant and the fair value as of the exercise date resulting in the issuance of the Company’s common stock. During the first nine months of fiscal 2020, the Company issued 44,000 SARs under the 2020 Plan, and during the first nine months of fiscal 2019, 96,000 SARs were issued under the 2010 Plan. Stock-based compensation expense in connection with SARs previously granted to employees was approximately $ 85,000 and $ 108,000 in the third quarter of 2020 and 2019 respectively and was approximately $ 279,000 and $ 281,000 in the first nine months of fiscal years 2020 and 2019 respectively. As of October 3, 2020, there were 818,864 shares of Company common stock reserved and available for future grant under the 2020 Plan. 11 Table of Contents The following tables set forth the outstanding SARs for the period specified: Nine Months Ended October 3, 2020 Year Ended December 28, 2019 Units Weighted - Average Exercise Price Units Weighted - Average Exercise Price Outstanding at beginning of period 276,000 $ 22.30 189,167 $ 21.46 Issued 44,000 19.44 96,000 23.65 Exercised - - ( 1,667 ) 19.10 Forfeited ( 73,999 ) 22.05 ( 7,500 ) 21.20 Outstanding at end of period 246,001 21.87 276,000 22.30 SARs Outstanding and Exercisable Range of Exercise Prices Outstanding as of October 3, 2020 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Exercisable as of October 3, 2020 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price $ 19.10 - 26.30 246,001 2.5 $ 21.87 71,172 1.5 20.45 The following tables set forth the outstanding stock grants for the period specified: Nine Months Ended October 3, 2020 Year Ended December 28, 2019 Shares Weighted - Average Exercise Price Shares Weighted - Average Exercise Price Outstanding at beginning of period 25,000 $ — 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 October 3, 2020 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price Exercisable as of October 3, 2020 Weighted- Average Remaining Contractual Life Weighted- Average Exercise Price $ 0.00 25,000 1.6 — — — — As of October 3, 2020, outstanding SARs and grants had an intrinsic value of $ 558,000 . 12 Table of Contents Note H – Share Repurchase Program On May 3, 2018, the Company announced that its Board of Directors had authorized a new program to repurchase up to 200,000 shares of the Company’s common stock. The Company’s share repurchase program does not obligate it to acquire the Company’s common stock at any specific cost per share. Under this program, shares may be repurchased in privately negotiated and/or open market transactions, including under plans complying with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company did not repurchase any shares under its share repurchase program during the third quarter of 2020. Period Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Purchased As Part of Publicly Announced Plans or Programs Maximum Number of Shares That May Yet be Purchased Under the Plans or Programs Balance as of June 27, 2020 55,000 $ 26.04 55,000 145,000 June 28, 2020 – October 3, 2020 — — — — Balance as of October 3, 2020 55,000 $ 26.04 55,000 145,000 Note 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.” The Company has defined purchase orders as contracts in accordance with ASC Topic 606. For its customer contracts, the Company identifies its performance obligations, which are delivering goods or services, determines the transaction price, allocates the contract transaction price to the performance obligations (when applicable), and recognizes the revenue when (or as) the performance obligation is transferred to the customer. A good or service is transferred when the customer obtains control of that good or service. The Company’s revenues are recorded at a point in time from the sale of tangible products. Revenues are recognized when products are shipped. Customer volume rebates, product returns, discount and allowance are variable consideration and are recorded as a reduction of revenue in the same period that the related sales are recorded. The Company has reviewed the overall sales transactions for variable consideration and has determined that these costs are not material. Refer to Note L for revenues reported by segment. Refer to Note D for a discussion of goodwill impairment. The Company has no future performance obligations and does not capitalize costs to obtain or fulfill contracts. Note J - Income Taxes The Company files income tax returns in the U.S. federal jurisdiction, and in various states and foreign jurisdictions. With limited exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2015 and is no longer subject to non-U.S. income tax examinations by foreign tax authorities for years prior to 2013. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The changes implemented in ASU 2019-12 include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to employee stock ownership plans. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company will adopt ASU 2019-12 in 2021. 13 Table of Contents On March 27, 2020, the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“the CARES Act” became law). The CARES Act includes a variety of economic and tax relief measures intended to stimulate the economy, including loans for small businesses, payroll tax credits/deferrals, and corporate income tax relief. We are analyzing the following components of the CARES Act to determine their effect on our income tax provision: · Net operating losses arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years, which may result in refunds of prior period corporate income tax. The Company had taxable income in 2018 and 2019, thus we would only benefit from this item of CARES Act relief to the extent we incur a tax net operating loss in 2020 that can be carried back. As of October 3, 2020, a tax net operating loss is not expected for taxable year 2020. In addition, this item of CARES Act relief increased the positive evidence supporting utilization of our gross deferred tax assets due to available income in carryback years; this did not change our overall assessment as we do not have a valuation allowance recorded against our deferred tax assets. · Furthermore, for taxable years beginning before 2021, net operating loss carryforwards and carrybacks to that year may offset 100% of taxable income in the year. Previously, net operating losses generated through 2017 could offset 100% of taxable income, while losses generated after 2017 could only offset 80% of taxable income. The Company had taxable income in 2018 and 2019 and would carry back a loss generated in 2020 if applicable, leaving minimal opportunity to benefit from this item of CARES Act relief. · For taxable years beginning in 2019 and 2020, the interest deduction limitation is increased from 30% to 50% of “adjusted taxable income” (taxable income without interest, tax depreciation and tax amortization) plus interest income. Furthermore, the Company may choose to use the 2019 adjusted taxable income (instead of 2020) in determining the 2020 interest expense limitation. The Company was not subject to an interest limitation in 2019 and therefore expects to use the 2019 adjusted taxable income if needed to avoid or reduce an interest expense limitation in 2020. · A technical correction to the Tax Cuts and Jobs Act permits bonus depreciation and a 15-year straight-line recovery period on qualified improvement property placed in service after December 31, 2017. Prior to this technical correction, such property placed in service after 2017 was subject to the 39-year straight-line recovery period and was ineligible for bonus depreciation. To the extent the Company has eligible improvements in 2020, the Company can claim bonus depreciation which would reduce taxes payable and increase the deferred tax liability for fixed assets. · Other CARES Act corporate income tax provisions will not significantly impact the company, including alternative minimum tax refunds and increases in the charitable contributions deduction limitation. The Company will also continue to assess the effect of state level tax relief provisions as enacted, such as state net operating loss rule changes and conformity to the federal interest, depreciation and charitable contribution deduction changes. The total amount of unrecognized tax benefits could increase or decrease within the next 12 months for a number of reasons, including the closure of federal, state and foreign tax years by expiration of the statute of limitations and the recognition and measurement considerations under FASB ASC Topic 740, “Income Taxes.” There have been no significant changes to the amount of unrecognized tax benefits during the three months ended October 3, 2020. The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will not increase or decrease significantly over the next twelve months. Note K - Retirement Benefit Plans The Company has non-contributory defined benefit pension plans covering most U.S. employees. Plan benefits are generally based upon age at retirement, years of service and, for the plan covering salaried employees, the level of compensation. The Company also sponsors unfunded non-qualified supplemental retirement plans that provide certain former officers with benefits in excess of limits imposed by federal tax law. The Company also provides health care and life insurance for retired salaried employees in the United States who meet specific eligibility requirements. 14 Table of Contents Significant disclosures relating to these benefit plans for the first nine months of fiscal years 2020 and 2019 are as follows: Pension Benefits Three Months Ended Nine Months Ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Service cost $ 266,435 $ 263,852 $ 799,305 $ 791,558 Interest cost 714,143 879,080 2,142,428 2,637,240 Expected return on plan assets ( 1,365,261 ) ( 1,190,329 ) ( 4,095,784 ) ( 3,570,990 ) Amortization of prior service cost 24,845 24,845 74,535 74,535 Amortization of the net loss 325,033 290,548 975,101 871,647 Net periodic benefit cost (benefit) $ ( 34,805 ) $ 267,996 $ ( 104,415 ) $ 803,990 Postretirement Benefits Three Months Ended Nine Months Ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Service cost 10,855 8,533 32,565 24,965 Interest cost 11,667 1,874 35,001 42,566 Expected return on plan assets ( 5,589 ) 7,938 ( 16,767 ) ( 21,025 ) Gain on significant event — ( 227,071 ) — ( 227,071 ) Amortization of prior service cost ( 2,063 ) ( 1,268 ) ( 6,189 ) ( 3,804 ) Amortization of the net loss ( 6,377 ) 5,560 ( 19,131 ) ( 35,454 ) Net periodic benefit cost (benefit) $ 8,493 $ ( 204,434 ) $ 25,479 $ ( 219,823 ) The Company’s funding policy with respect to its qualified plans is to contribute at least the minimum amount required by applicable laws and regulations. In fiscal year 2020, the Company expects to contribute $ 2,690,000 into its pension plans and $ 50,000 into its postretirement plan. As of October 3, 2020, the Company has made contributions of approximately $ 400,000 into its pension plans, has contributed $ 10,000 to its postretirement plan and will make the remaining contributions as required during the remainder of fiscal the year. The Company delayed its required pensions payments, as permitted, under the CARES Act until the fourth quarter of 2020. The Company has a contributory savings plan under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) covering substantially all U.S. non-union employees. The 401(k) Plan allows participants to make voluntary contributions from their annual compensation on a pre-tax basis, subject to limitations under the Internal Revenue Code. The 401(k) Plan provides for contributions by the Company at its discretion. The Company made contributions to the plan as follows: Three Months Ended Nine Months Ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Regular matching contribution $ 178,244 $ 125,266 $ 551,765 $ 418,329 Transitional credit contribution 62,842 62,464 209,191 240,840 Non-discretionary contribution 13,036 17,390 593,084 622,519 Total contributions for the period $ 254,122 $ 205,120 $ 1,354,040 $ 1,281,688 The non-discretionary contribution of $ 550,286 made in the nine months ended October 3, 2020 was accrued for and expensed in the prior fiscal year. 15 Table of Contents Note L – Segment Information For the third quarter of 2020, financial information by segment is as follows: Three Months Ended Nine Months Ended October 3, 2020 September 28, 2019 October 3, 2020 September 28, 2019 Revenues: Sales to unaffiliated customers: Industrial Hardware $ 47,141,513 $ 39,427,301 $ 128,249,908 $ 115,321,597 Security Products 14,189,215 14,169,694 37,687,815 45,355,397 Metal Products 4,474,830 7,095,650 14,026,859 22,338,729 $ 65,805,558 $ 60,692,645 $ 179,964,582 $ 183,015,723 Income (loss) before income taxes: Industrial Hardware $ 3,350,139 $ 3,419,052 $ 9,168,330 $ 6,369,647 Security Products 1,569,173 1,762,703 ( 724,125 ) 3,703,098 Metal Products ( 683,500 ) 538,656 ( 2,030,942 ) 941,268 Operating Profit (loss) 4,235,812 5,720,411 6,413,263 11,014,013 Interest expense (647,066 ) (420,377 ) (2,081,283 ) (974,536 ) Other income 365,703 188,623 969,024 789,371 $ 3,954,449 $ 5,488,657 $ 5,301,004 $ 10,828,848 Note M - Recent Accounting Pronouncements Upcoming In December 2019, FASB issued ASU 2019-12, Simplifying the Accounting for Income Tax. The changes implemented in ASU 2019-12 include removing exceptions to incremental intraperiod tax allocation of losses and gains from different financial statement components, exceptions to the method of recognizing income taxes on interim period losses and exceptions to deferred tax liability recognition related to foreign subsidiary investments. In addition, ASU 2019-12 requires that entities recognize franchise tax based on an incremental method, requires an entity to evaluate the accounting for step-ups in the tax basis of goodwill as inside or outside of a business combination, and removes the requirement to allocate the current and deferred tax provision among entities in standalone financial statement reporting. The ASU also now requires that an entity reflect enacted changes in tax laws in the annual effective rate, and other codification adjustments have been made to employee stock ownership plans. For public business entities, the amendments in ASU 2019-12 are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption of ASU 2019-12 is permitted, including adoption in any interim period for public business entities for periods for which financial statements have not yet been issued. The Company will adopt ASU 2019-12 as of January 1, 2021. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements of the Company. The Company has implemented all new accounting pronouncements that are in effect and that could impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued, but are not yet effective, that might have a material impact on the consolidated financial statements of the Company. 16 Table of Contents Note N - Concentration of Risk Credit Risk Credit risk is the potential financial loss resulting from the failure of a customer or counterparty to settle its financial and contractual obligations to the Company, as and when they become due. The primary credit risk for the Company is its accounts receivable due from customers. The Company has established credit limits for customers and monitors their balances to mitigate the risk of loss. As of October 3, 2020, there was one significant concentration of credit risk with a customer, who has receivables representing 13 % of our total accounts receivable. One single customer represented more than 10 % of the Company’s net accounts receivable as of December 28, 2019. The maximum exposure to credit risk is primarily represented by the carrying amount of the Company’s accounts receivable. Interest Rate Risk The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s debt, which bears interest at variable rates based on the LIBOR rate plus a margin spread of 1.25 % to 2.25 %. The Company has an interest rate swap with a notional amount of $ 47,500,000 on October 3, 2020, to convert a portion the borrowing under the Credit Agreement from variable to fixed rates. The valuation of this swap is determined using the one month LIBOR rate index and mitigates the Company’s 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 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 Form 10-K. Currency Exchange Rate Risk The Company’s currency exposure is concentrated in the British pound, Canadian dollar, Mexican peso, New Taiwan dollar, Chinese RMB and the Hong Kong dollar. Because of the Company’s limited exposure to any single foreign market, any currency gains or losses have not been material and are not expected to be material in the future. As a result, the Company does not attempt to mitigate its foreign currency exposure through the acquisition of any speculative or leveraged financial instruments. Note O – Business Acquisition Effective August 10, 2020 the Company acquired certain assets of Hallink, RSB Inc. (“Hallink”) including accounts receivable, inventories, furniture, fixtures and equipment, intellectual property rights, assumption of certain liabilities and rights existing under all sales and purchase agreements. Hallink is a leader in innovative injection blow mold tooling and is a leading supplier of blow molds and change parts to the food, beverage, healthcare and chemical industry. Hallink specializes in the design, development and manufacture of 2-step stretch blow molds, and related components for the stretch blow molding industry offering integrated turnkey solutions to its customers worldwide. Hallink is included in the Industrial Hardware segment of the Company from the date of the acquisition. The cost of the acquisition of Hallink was approximately $ 7,173,000 . The above acquisition was accounted for under ASU 2014-18, Business Combinations (Topic 805). The acquired business is included in the consolidated operating results of the Company from the effective date of the acquisition. The excess of the cost of Hallink over the fair market value of the net assets acquired of $ 2,302,000 has been recorded as goodwill. 17 Table of Contents In connection with the above acquisition, the Company recorded the following intangible assets: Asset Class/Description Amount Weighted-Average Period in Years Patents, technology, and licenses Customer relationships $ 2,345,000 6 Intellectual property 591,000 6 Non-compete agreements 1,001,000 5 $ 3,937,000 There is no anticipated residual value relating to these intangible assets. Neither the actual results nor the pro forma effects of the acquisition of Hallink are material to the Company’s financial statements. Note P – Subsequent Events The Company evaluated its October 3, 2020 unaudited condensed consolidated financial statements for subsequent events through the date the financial statements were issued, and has determined that it does not have any material subsequent events to disclose in these financial statements. 18 Table of Contents