SEC Filing

Form 10-Q

filed this form 10-Q on 05/06/2020



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

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
(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

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

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


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           Yes [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 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

TABLE OF CONTENTS

   
Page
     
     
     
     
PART I
   
  3.
     
17.
     
25.
     
25.
     
 
PART II
   
26.
     
26.
     
28.
     
28.
 
28.
     
28.
     
28.
     
 
29.

2

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
 




See accompanying notes.

3


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
 
                 
See accompanying notes.
4


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
 
                 



See accompanying notes.

5

THE EASTERN COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS





LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
March 28, 2020
   
December 28, 2019
 
   
(unaudited)
       
Current Liabilities
           
Accounts payable
 
$
22,629,076
   
$
19,960,507
 
Accrued compensation
   
2,216,765
     
3,815,186
 
Other accrued expenses
   
3,797,178
     
2,967,961
 
Current portion of long-term debt
   
5,187,689
     
5,187,689
 
Total Current Liabilities
   
33,830,708
     
31,931,343
 
                 
Deferred income taxes
   
5,270,465
     
5,270,465
 
Other long-term liabilities
   
2,465,260
     
2,465,261
 
Lease liability
   
11,852,653
     
12,342,475
 
Long-term debt, less current portion
   
92,356,121
     
93,577,544
 
Accrued postretirement benefits
   
1,001,509
     
1,007,146
 
Accrued pension cost
   
28,052,482
     
28,631,485
 
                 
Shareholders’ Equity
               
                 
     Voting Preferred Stock, no par value:
               
        Authorized and unissued: 1,000,000 shares
               
Nonvoting Preferred Stock, no par value:
               
        Authorized and unissued: 1,000,000 shares
               
Common Stock, no par value, Authorized: 50,000,000 shares
   
30,890,108
     
30,651,815
 
        Issued: 8,980,460 shares in 2020 and 8,975,434 shares in 2019
               
        Outstanding: 6,230,731 shares in 2020 and 6,240,705 shares in     2019
               
    Treasury Stock: 2,749,729 shares in 2020 and 2,734,729 shares in 2019
   
(20,537,962
)
   
(20,169,098
)
Retained earnings
   
122,723,970
     
120,189,111
 
Accumulated other comprehensive income (loss):
               
       Foreign currency translation
   
(3,342,399
)
   
(2,037,952
)
Unrealized gain on marketable securities, net of tax
   
8,878
     
 
Unrealized gain (loss) on interest rate swap, net of tax
   
(1,530,775
)
   
167,018
 
Unrecognized net pension and postretirement benefit costs, net of tax
   
(23,103,342
)
   
(23,363,637
)
     Accumulated other comprehensive loss
   
(27,967,638
)
   
(25,234,571
)
Total Shareholders’ Equity
   
105,108,478
     
105,437,257
 
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
 
$
279,937,676
   
$
280,662,976
 


See accompanying notes.
6



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


   
Three Months Ended
 
   
March 28, 2020
   
March 30, 2019
 
Operating Activities
           
Net income
 
$
2,895,817
   
$
1,570,960
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
   
2,055,782
     
1,438,799
 
Unrecognized pension and postretirement benefits
   
(678,305
)
   
207,816
 
(Gain)/loss on sale of equipment and other assets
   
(437,446
)
   
671,138
 
Provision for doubtful accounts
   
156,286
     
25,711
 
Stock compensation expense
   
238,293
     
104,992
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(2,273,864
)
   
(2,123,227
)
Inventories
   
(994,546
)
   
1,313,875
 
Prepaid expenses and other
   
341,582
     
(81,231
)
Other assets
   
(415,415
)
   
101,919
 
Accounts payable
   
2,766,829
     
(27,186
)
Accrued compensation
   
(1,585,976
)
   
(1,724,968
)
Other accrued expenses
   
(564,572
)
   
11,718
 
Net cash provided by operating activities
   
1,504,465
     
1,490,316
 
                 
Investing Activities
               
Marketable securities
   
11,151
     
(91,400
)
Capitalized software
   
     
(104,484
)
Proceeds from sale of equipment
   
445,212
     
 
Purchases of property, plant and equipment
   
(828,115
)
   
(743,622
)
Net cash used in investing activities
   
(371,752
)
   
(939,506
)
                 
Financing Activities
               
Principal payments on long-term debt
   
(1,221,423
)
   
(387,500
)
Purchase common stock for treasury
   
(368,864
)
   
 
Dividends paid
   
(686,614
)
   
(686,740
)
Net cash used in financing activities
   
(2,276,901
)
   
(1,074,240
)
                 
Effect of exchange rate changes on cash
   
(343,436
)
   
144,954
 
Net change in cash and cash equivalents
   
(1,487,624
)
   
(378,476
)
                 
Cash and cash equivalents at beginning of period
   
17,996,505
     
13,925,765
 
Cash and cash equivalents at end of period
 
$
16,508,881
   
$
13,547,289
 
                 
                 
 Non-cash investing and financing activities      (489,822
)        
 Right of use asset      489,822
         
 Lease liability                


See accompanying notes.
7


THE EASTERN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 28, 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 Regulation S-X 10-01 and do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Refer to the consolidated financial statements of The Eastern Company (together with its consolidated subsidiaries, the “Company,” “we,” “us” or our”) and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2019, filed with the Securities and Exchange Commission on March 5, 2020 (the “2019 Form 10-K”), for additional information.

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

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

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to fiscal 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to fiscal 2020 or the 2020 fiscal year mean the 53-week period ending on January 2, 2021. In a 52-week fiscal year, each quarter is 13 weeks long.  In a 53 week fiscal year, each of the first three fiscal quarters is a 13 weeks long, and the fourth 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.

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
 

8


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
 


Note D – Leases

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

The Company has operating leases for buildings, warehouse and office equipment.  The Company determines whether an arrangement is, or contains, a lease at contract inception. An arrangement contains a lease if the Company has the right to direct the use of and obtain substantially all of the economic benefits of an identified asset. ROU assets and lease liabilities are recognized at lease commencement based on the present value of lease payments over the lease term.  Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term.  Most leases include one or more options to renew.  The exercise of lease renewal options is at our sole discretion.  The Company’s option to extend certain leases ranges from 12 – 120 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 42 operating leases and one finance lease with an ROU asset and lease liability of $11,852,653 as of March 28, 2020.  The finance lease arrangement is 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.


Note E - 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, 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
9

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.

On August 30, 2019, the Company entered into an interest rate swap contract with Santander Bank, N.A., with an original notational amount of $50,000,000, which was equal to 50% of the outstanding balance of the term loan on that date.  The Company has a fixed interest rate of 1.44% on the swap contract and will pay the difference between the fixed rate and LIBOR when LIBOR is below 1.44% and will receive interest when the LIBOR rate exceeds 1.44%.  On March 28, 2020, the interest rate for half ($49.4 million) of the term portion was 3.35%, using a one month LIBOR rate, and 3.19% on the remaining balance ($49.4 million) of the term loan based on a one month LIBOR rate.

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

On July 27, 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021. In the United States, efforts to identify a set of alternative U.S. Dollar reference interest rates have been initiated by the Alternative Reference Rates Committee of the Federal Reserve Board and the Federal Reserve Bank of New York. At this time, it is not possible to predict whether any such changes will occur, whether LIBOR will be phased out or any such alternative reference rates 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, 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 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” 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.


Note F - 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 the 2010 Plan.  The Company has no other exiting plan pursuant to which equity awards may be granted.

Incentive stock options granted under the 2010 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 with restrictions determined by the Compensation Committee of the Company’s Board of Directors.  Under the 2010 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 of 2020 and 2019, no stock options or restricted stock were granted that were subject to the meeting of performance measurements.  For the first quarter of 2019, the Company used several assumptions which included an expected term of 3.5 years, volatility deviation of 28.88% and a risk free rate of 2.48%.

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

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

As of March 28, 2020, there were no shares of Company common stock reserved and available for future grant under the 2010 Plan, as it has expired.
10


  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
 

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
     
     
     
     
 

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


Note G – Share Repurchase Program

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


11

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
 


Note H – 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 is delivering goods or services, determining the transaction price, allocating 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 K 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.


Note I - 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.

On March 27, 2020, President Trump signed into law the $2 trillion bipartisan Coronavirus Aid, Relief, and Economic Security Act (H.R. 748) (“The CARES Act”). 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
12

income tax relief. We are analyzing the following components of the CARES Act to determine their effect on our income tax provision:
Net operating losses arising in 2018, 2019, and 2020 taxable years may be carried back to each of the preceding five years, which may result in refunds of prior period corporate income tax. The Company had taxable income in 2018 and 2019, thus we would only benefit from this item of CARES Act relief to the extent we incur a tax net operating loss in 2020 that can be carried back. As of March 28, 2020, a tax net operating loss is not expected for taxable year 2020. In addition, this item of CARES Act relief increased the positive evidence supporting utilization of our gross deferred tax assets due to available income in carryback years; this did not change our overall assessment as we do not have a valuation allowance recorded against our deferred tax assets.
Furthermore, for taxable years beginning before 2021, net operating loss carryforwards and carrybacks to that year may offset 100% of taxable income in the year. Previously, net operating losses generated through 2017 could offset 100% of taxable income, while losses generated after 2017 could only offset 80% of taxable income. The Company had taxable income in 2018 and 2019 and would carry back a loss generated in 2020 if applicable, leaving minimal opportunity to benefit from this item of CARES Act relief.
For taxable years beginning in 2019 and 2020, the interest deduction limitation is increased from 30% to 50% of “adjusted taxable income” (taxable income without interest, tax depreciation and tax amortization) plus interest income. Furthermore, the Company may choose to use the 2019 adjusted taxable income (instead of 2020) in determining the 2020 interest expense limitation. The Company was not subject to an interest limitation in 2019 and therefore expects to use the 2019 adjusted taxable income if needed to avoid or reduce an interest expense limitation in 2020.
A technical correction to the Tax Cuts and Jobs Act permits bonus depreciation and a 15-year straight-line recovery period on qualified improvement property placed in service after December 31, 2017. Prior to this technical correction, such property placed in service after 2017 was subject to the 39-year straight-line recovery period and was ineligible for bonus depreciation. To the extent the Company has eligible improvements in 2020, the Company can claim bonus depreciation which would reduce taxes payable and increase the deferred tax liability for fixed assets.
Other CARES Act corporate income tax provisions will not significantly impact the company, including alternative minimum tax refunds and increases in the charitable contributions deduction limitation.

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.  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 J - 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.
13


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

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


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

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

14


Note K – Segment Information

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
 


Note L - 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 in 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.

15


Note M - Concentration of 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, there was one significant concentration of credit risk with a customer that has receivables due of $4,205,000 representing 11% of our total accounts receivable.  As of December 28, 2019, there were no significant concentrations of credit risk. No 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 $49,375,000 on March 28, 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 E—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.


Currency Exchange Rate Risk

The Company’s currency exposure is concentrated in the 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.


16



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. The interim financial statements and this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and Notes thereto for the fiscal year ended December 28, 2019 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in the Company’s 2019 Form 10-K, which was filed with the SEC on March 5, 2020 (the “2019 Form 10-K”).

The Company’s fiscal year is a 52-53-week fiscal year ending on the Saturday nearest to December 31. References to fiscal 2019 or the 2019 fiscal year mean the 52-week period ended on December 28, 2019 and references to fiscal 2020 or the 2020 fiscal year mean the 53-week period ending on January 2, 2021. In a 52-week fiscal year, each quarter is 13 weeks long. In a 53 week 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.

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 of COVID-19, including supply chain disruptions, delays in delivery of our products to our customers, impact on demand for our products, reductions in production levels, increased costs, including costs of raw materials, the impact on global economic conditions, and the availability, terms and cost of financing, including borrowings under the Credit Agreement; risks associated with doing business overseas, including fluctuations in exchange rates and the inability to repatriate foreign cash, the impact on cost structure and on economic conditions as a result of actual and threatened increases in trade tariffs and the impact of political, economic and social instability; restrictions on operating flexibility imposed by the agreement governing our credit facility; the inability to achieve the savings expected from global sourcing of materials; the impact of higher raw material and component costs, particularly steel, plastics, scrap iron, zinc, copper and electronic components; lower-cost competition; our ability to design, introduce and sell new products and related components; market acceptance of our products;  the inability to attain expected benefits from acquisitions or the inability to effectively integrate such acquisitions and achieve expected synergies; domestic and international economic conditions, including the impact, length and degree of economic downturns on the customers and markets we serve and more specifically conditions in the automotive, construction, aerospace, energy, oil and gas, transportation, electronic, commercial laundry, mining and general industrial markets; costs and liabilities associated with environmental compliance; the impact of climate change or terrorist threats and the possible responses by the U.S. and foreign governments; failure to protect our intellectual property; cyberattacks; and materially adverse or unanticipated legal judgments, fines, penalties or settlements.  Although the Company believes it has an appropriate business strategy and the resources necessary for its operations, future revenue and margin trends cannot be reliably predicted and the Company may alter its business strategies to address changing conditions. Also, the Company makes estimates and assumptions that may materially affect reported amounts and disclosures. These relate to valuation allowances for accounts receivable and excess and obsolete inventories, accruals for pensions and other postretirement benefits (including forecasted future cost increases and returns on plan assets), provisions for depreciation (estimating useful lives), uncertain tax positions, and, on occasion, accruals for contingent losses. The Company undertakes no obligation to update, alter, or otherwise revise any forward-looking statements, whether written or oral, that may be made from time to time, whether as a result of new information, future events, or otherwise.

17

Overview

COVID-19 update

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

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

The Company has operations in Shanghai and Dongguan China that have been impacted 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 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 or disruptions in our supply chain and operations in China, and any ongoing shutdowns of the operations of our customers would continue to have a negative effect on demand for our products and our ability to fulfill orders on a timely basis or at all, which in turn would 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 extent of the pandemic’s effect on our operational and financial performance will depend in large part on future developments, which 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. Although the inherent uncertainty of the unprecedented and rapidly evolving crisis makes it difficult to predict with any confidence the likely impact of the COVID-19 pandemic on our future operations, the COVID-19 pandemic could have a material adverse impact on our consolidated business, results of operations and financial condition. For a discussion of certain COVID-19-related risks, see Part II, Item 1A – Risk Factors of this Form 10-Q.

Net sales in the first quarter of 2020 increased 7% to $65.3 million from $60.9 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.  Sales increased in the Industrial Hardware segment by 23% to $47.2 million in the first quarter of 2020 from $38.4 million in the first quarter of 2019.  Excluding Big 3 Precision, sales decreased 11% in the Industrial Hardware segment first quarter of 2020 compared to sales in the first quarter of 2019, due to lower sales to distribution, Class 8 truck, recreational vehicles, and aftermarket truck replacement part. Increased sales into the specialty vehicle, off-highway and military markets were insufficient to offset declines in the aforementioned markets in the second half of March when certain of our customers closed their operations due to actions taken to help stop the spread of COVID-19.  Sales in the Security Products segment decreased 16% in the first quarter of 2020 compared to the first quarter of 2019, due to lower demand across the majority of the markets we serve including distribution, industrial, vehicular accessories and commercial laundry, as well as a loss of supply contracts for
18

mechatronic padlock systems and recreational vehicles door latches, which generated sales in the first quarter of 2019, that did not recur in 2020.  Sales in the Metal Products segment decreased 27% in the first quarter of 2020, compared to sales in the first quarter of 2019.  Sales of mining products decreased 21%, and sales of industrial casting products decreased 35%, in the first quarter of 2020 compared to the first quarter of 2019.  Mining sales in 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 tariff costs on China-sourced products of approximately $1.4 million in the first quarter of 2020 compared to $0.2 million incurred in the first quarter of 2019, all of which have been recovered through price increases.

Gross margin as a percent of sales was 22% in the first quarter of 2020 compared to 23% in the first quarter of 2019.

Product development expense decreased $1.5 million, or 65%, in the first quarter of 2020 compared to the first quarter of 2019.  The reduction in this expense relates to the closure of the Velvac Road-iQ development operation in Bellingham, Washington, which took place in the second quarter of 2019, a strategic decision that we made to adopt a leaner approach to the development of new vision products.

Selling and administrative expense increased $1.6 million, or 19%, in the first quarter of 2020 compared to the first quarter of 2019, primarily as a result of the inclusion of Big 3 Precision in the 2020 period.  Excluding Big 3 Precision, selling and administrative expense in the first quarter of 2020 would have decreased 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 and payroll related costs of $0.3 million.

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.

Interest expense increased $0.5 million in the first quarter of 2020 compared to the first quarter of 2019 as a result of increased debt related to our acquisition of Big 3 Precision in August of 2019.

Other income increased $0.7 million in the first quarter of 2020 compared to the first quarter of 2019 due to a favorable return on our pension plan assets and a onetime sale-leaseback transaction gain.
19


Net income for the first quarter of 2020 increased to $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.

A more detailed analysis of the Company’s results of operations and financial condition follows:
20


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
%

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

   
Industrial
   
Security
   
Metal
       
   
Hardware
   
Products
   
Products
   
Total
 
Net sales
 
$
8,833
   
$
(2,299
)
 
$
(2,092
)
 
$
4,442
 
                                 
         Volume
   
20.9
%
   
-17.0
%
   
-30.2
%
   
5.2
%
         Prices
   
1.1
%
   
1.0
%
   
0.7
%
   
1.0
%
         New products
   
1.0
%
   
0.4
%
   
2.6
%
   
1.1
%
     
23.0
%
   
-15.6
%
   
-26.9
%
   
7.3
%
                                 
Operating profit
 
$
2,191
   
$
(156
)
 
$
(508
)
 
$
1,527
 
     
172.7
%
   
-16.0
%
   
-544.9
%
   
65.4
%

21


Industrial Hardware Segment

Net sales in the Industrial Hardware segment increased 23% in the first quarter of 2020 compared to 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 markets 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%, 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% in the first quarter of 2020 as compared to the first quarter 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 due to lower sales volume and lower material costs incurred in producing a new Class 8 truck mirror that was awarded in 2018.  Many of the components sourced during the first quarter of 2019 were at higher than normal material costs.  As of the first quarter of 2020, all components have been sourced to more favorable suppliers and costs have normalized.  Also impacting the first quarter were more favorable freight costs, which were down $0.6 million in the first quarter of 2020 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.

Gross margin as a percentage of net sales in the first quarter of 2020 was comparable to the first quarter of 2019 of 23%.

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

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

Selling and administrative expense increased 38% in the first quarter of 2020 compared to the first quarter of 2019 due primarily to the inclusion of Big 3 Precision.  Excluding Big 3 Precision, selling 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 Products Segment

Net sales in the Security Products segment decreased 16% in the first quarter of 2020 compared to the first quarter of 2019.  Sales growth attributable to Load N Lock, which we acquired in June of 2018, partially offset the impact of lower demand across the majority of the markets we serve including distribution, industrial, vehicular accessories and commercial laundry, as well as a loss of supply contracts for mechatronic padlock systems and recreational vehicles door latches, which generated sales in the first quarter of 2019, that did not recur in 2020.  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 the first quarter of 2019, primarily as a result of lower sales volume, reduced payroll and payroll-related costs of $0.2 million, or 8%, and the mix of products sold.

Gross margin as a percentage of net sales was 31% in the first quarter of 2020 compared to 29% in the first quarter of 2019.
22

Product development expense as a percentage of net sales was 6% in the first quarter 2020 compared to 4% in the first quarter of 2019.  This increase reflects a continuation in the development of a Bluetooth locking system and a new cable lock system.

Selling and administrative expenses decreased 11% in the first quarter of 2020, compared to the first quarter of 2019. The most significant driver in this reduction was due to decreased 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 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 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.


23

Liquidity and Sources of Capital

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

Additions to property, plant and equipment were approximately $0.8 million for the first quarter of 2020 and $0.7 million for the first quarter of 2019.  As of March 28, 2020, there was approximately $0.1 million of outstanding commitments for capital expenditures.

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

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


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
)


Inventories of $55.3 million represent an increase of 1% at March 28, 2020 as compared to $54.6 million at the end of fiscal year 2019.  Inventories increased 7% in the first quarter of 2020, 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 million at the end of the first fiscal quarter of 2019.

Cash, cash flow from operating activities and funds available under the revolving credit portion of the Credit Agreement are expected to be sufficient to cover future foreseeable working capital requirements.  However, based on current macroeconomic conditions resulting from the uncertainty caused by COVID-19, the Company cannot provide any assurances of the availability of future financing or the terms on which it might be available. In addition, the interest rate on borrowings under the Credit Agreement varies based on our senior net leverage ratio, and the Credit Agreement requires us to maintain a senior net leverage ratio not to exceed 4.25 to 1 and a fixed charge coverage ratio to be not less than 1.25 to 1. A decrease in earnings due to responses to contain the spread of COVID-19 or 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 to cause us to fail to comply with the covenants under our Credit Agreement.
24


Off-Balance Sheet Arrangements

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


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, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (the “CEO”) and the Chief Financial Officer (the “CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 240.13a-15.  As 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 Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. 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 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.”

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.

Changes in Internal Control Over Financial Reporting:

During the period covered by this Quarterly Report on Form 10-Q, there have been 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.

25


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, the Company does not have any material pending legal proceedings.

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 Department of Environmental Conservation (the “DEC”) 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”).  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 in the first quarter of 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.  In the summer of 2020, following the completion of construction work, a closure report and maintenance plan is expected to be prepared for the NYSDEC.  This closure report and maintenance plan will document 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 factors discussed in Item 1A.  “Risk Factors” of the Company’s 2019 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 of recent developments relating to the COVID-19 pandemic, the Company is supplementing the risk factors previously disclosed in Part I, Item 1A, “Risk Factors” in our 2019 Form 10-K 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.
26


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
27

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.

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


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

None


ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None


ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5 – OTHER INFORMATION

None


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)**.


* Filed herewith.
**Furnished herewith
28




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
/s/August M. Vlak
 
August M. Vlak
President and Chief Executive Officer
   
DATE:  May 6, 2020
/s/John L. Sullivan III
 
John L. Sullivan III
Vice President and Chief Financial Officer
   


29
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
THE EASTERN COMPANY
(Conformed Copy – As of April 29, 2016)
FIRST:
That the name of the corporation is The Eastern Company.
SECOND:
That said corporation is to be located in the Town of Naugatuck, in the State of Connecticut.
THIRD:
That the nature of the business to be transacted and the purposes to be promoted or carried out by the said corporation are as follows:
To manufacture, cast, alter, mold, or otherwise employ malleable or other iron, steel, manganese, nickel, copper, brass, or other composition metal, coke, and all or any articles consisting or partly consisting, of malleable or other iron, steel, manganese, nickel, copper, brass or other composition metal, wood, and all or any products thereof, either in this state or in any other state, territory or country; to buy, sell, manufacture, and deal in minerals, plant, machinery, implements, and things capable of being used in connection with metallurgical operations, or required by workmen and others employed by the company in such operations, either in this state or in any other state, territory or country; to own, acquire, construct, enlarge, improve, operate and carry on works for smelting, parting, refining, or working any such metals, or the products thereof, either in this state or in any other state, territory or country; to acquire by contracts, purchase, subscription, or otherwise, and to sell or hold as an investment any bonds or other securities or evidence of indebtedness of any other corporation or corporations, association, or associations, either of this state or of any other state, territory or country; and in furtherance of such business and purposes it shall have the power to do all and everything necessary, suitable, convenient or proper for the accomplishment of any of the purposes, or the attainment of one or more of the objects herein enumerated, or incidental to the powers herein named, or which shall at any time appear conducive or expedient for the protection or benefit of the corporation.
FOURTH:
The authorized capital stock of the corporation shall consist of fifty million (50,000,000) shares of common stock, having no par value, one million (1,000,000) shares of a single class of voting preferred stock having no par value, and one million (1,000,000) shares of a single class of non-voting preferred stock having no par value.
FIFTH:
The terms, limitations and relative rights and preferences of each class of shares and series thereof are as follows:

(a)
Subject to the rights of the preferred stock, dividends may be paid upon the common stock as and when declared by the Board of Directors out of funds legally available for payment of dividends. In the event of any liquidation, dissolution or winding-up of the corporation, whether voluntary or involuntary, subject to the rights of the preferred stock, the remainder of the assets of the corporation shall be distributed pro rata to the holders of the common stock. Each outstanding share of common stock shall be entitled to one vote on each matter submitted to a vote at all meetings of shareholders.

(b)
Shares of the class of voting preferred stock may be divided into and issued in series. Shares of the class of voting preferred stock, or any series thereof, may be convertible into the same or a different number of authorized shares of common stock or of non-voting preferred stock or any combination thereof. The Board of Directors is authorized to fix and determine the terms, limitations and relative rights and preferences, including conversion rights, if any, or the class of voting preferred stock and to establish series within such class and to fix and determine the variations as among series. Each outstanding share of voting preferred stock shall be entitled to one vote on each matter submitted to a vote at all meetings of shareholders.

(c)
Shares of the class of non-voting preferred stock may be divided into and issued in series. Shares of the class of non-voting preferred stock, or any series thereof, may be convertible into the same or a different number of authorized shares of common stock or of voting preferred stock or any combination thereof. The Board of Directors is authorized to fix and determine the terms, limitations and relative rights and preferences, including conversion rights, if any, of the class of non-voting preferred stock and to establish series within such class and to fix and determine the variations as among series. The shares of said class of non-voting preferred stock shall not be entitled to vote except when required under the General Statutes of the State of Connecticut.
SIXTH:
That the amount of capital stock with which this corporation shall commence business is Ten Million Dollars ($10,000,000)
SEVENTH:
That the duration of said corporation is unlimited.
EIGHTH:
No stockholder of the corporation shall by reason of his holding shares of capital stock of the corporation have any pre-emptive or preferential rights to purchase or subscribe to any shares of any class of stock of the corporation, now or hereafter to be authorized, or to any notes, debentures, bonds or other securities (whether or not convertible into or carrying options or warrants to purchase shares of any class of capital stock) now or hereafter to be authorized, excepting only such pre-emptive or preferential rights, warrants or options as the Board of Directors in its discretion may grant from time to time.
NINTH:
Each member of the Board of Directors of the corporation shall be elected by the stockholders at the annual meeting of the stockholders, and shall serve for a term of one year.  Except in a contested election, directors shall be elected by a majority of the votes cast by the shares entitled to vote in the election of directors at the annual meeting of the stockholders at which a quorum is present (that is, if the votes cast for a nominee’s election as a director exceed the votes cast against such nominee’s election as a director).  In a contested election, directors shall be elected by a plurality of the votes cast at such annual meeting.  An election shall be considered to be contested if, as of the record date for such annual meeting, there are more nominees for election to the Board of Directors than there are positions on the Board of Directors to be filled by election at the annual meeting.  Any director elected to fill a vacancy shall hold office until the next annual meeting of stockholders.
At the annual meeting of stockholders in 2017, the term of the directors elected in 2014 shall expire, and their successors shall be elected for a term of one year.  At the annual meeting of stockholders in 2018, the term of the directors elected in 2015 and 2017 shall expire, and their successors shall be elected for a term of one year.  At the annual meeting of stockholders in 2019, the term of the directors elected in 2016, 2017 and 2018 shall expire, and their successors shall be elected for a term of one year.  At each annual meeting thereafter, the term of all of the directors shall expire and their successors shall be elected for a term of one year.
TENTH:
To the extent permitted by Section 33-290(c)(2) of the Connecticut General Statutes  and  as the same may be amended or supplemented from time to time, the personal liability of the directors to the corporation or its shareholders for  monetary damages for breach  of duty as a director shall be limited to an amount equal to the compensation received by the director for serving the corporation during the year of the violation.
Exhibit 3.2
BYLAWS
OF
THE EASTERN COMPANY
As Amended Through April 27, 2016
ARTICLE I. SHAREHOLDERS
Section 1. The annual meeting of the Shareholders of this Corporation for the election of Directors and for the transaction of such other business as may properly come before such meeting shall be held on such date during the months of April or May, or at such other time, in each year as may be fixed by the President or by the Board of Directors, to be held at such place within the State of Connecticut and at such time as shall be specified in the notice of such meeting.
(a) To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a Shareholder of the Corporation who was a Shareholder of record at the time of giving of notice provided for in this Section 1 who is entitled to vote at the meeting and who complied with the notice procedures set forth in Section 5.
(b) Any annual meeting of the Shareholders may be postponed to a specified date and time by resolution of the Board of Directors upon public announcement given on or prior to the date previously scheduled for such annual meeting of Shareholders.
Section 2. Notice of the annual meeting shall be given to each Shareholder of record entitled to vote at such meeting by sending by mail, postage prepaid, to his address appearing in the corporate records, not less than seven (7) days, nor more than fifty (50) days, prior to the date of such meeting, a written or printed notice, stating the date, time and place of such meeting.
Section 3. Special meetings of the Shareholders may be called at any time by the Chairman of the Board, the President or by a majority of the Board of Directors, and it shall also be the duty of the President to call such meeting upon the written request of the holders of not less than thirty-five percent (35%) of the voting power of all shares entitled to vote at the meeting. A notice of such special meeting, stating the time, place and purpose, shall be given in the same manner as prescribed for the notice of annual meetings.
(a) Any previously scheduled special meeting of the Shareholders may be postponed to a specified date and time by resolution of the Board of Directors upon public announcement given on or prior to the date previously scheduled, for such special meeting of Shareholders.


(b) The purpose or purposes of any special meeting of Shareholders shall be set forth in the notice of meeting, and, except as otherwise required by law or by the Certificate of Incorporation, No business shall be transacted at any special meeting of Shareholders other than the items of business stated in the notice of meeting.
Section 4. At all meetings of Shareholders a quorum shall be had when there shall be present in person or by proxy the holders of a majority of the voting power of the shares entitled to vote at such meeting. If there shall not be a quorum present at any duly called meeting, the holders of a majority of such shares present in person or by proxy may adjourn the meeting from time to time until a quorum is present, and the actions of the meeting to which adjournment is taken shall be valid as if a quorum had been present in the first instance. Except when otherwise required by law, the Certificate of Incorporation or these By-Laws, the affirmative vote, at a meeting of Shareholders duly held and at which a quorum is present, of a majority of the voting power of the shares represented at such meeting entitled to vote on the subject matter shall be the act of the Shareholders.
Section 5. For business to be properly brought before any annual or special meeting by a Shareholder, if such business is related to the election of Directors of the Corporation, the procedures in Article III, Section 7 of these by-Laws must be complied with; if such business relates to any other matter, the Shareholder must have given timely notice thereof in writing to the Secretary of the Corporation.
(i) Such Shareholder's notice shall be timely if delivered to or mailed to and received at the principal executive offices of the Corporation not less than sixty (60) nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting, provided, however, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the Shareholder to be timely must be so delivered not earlier than the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the sixtieth (60th) day prior to such annual meeting or the tenth (10th) day following the date on which public announcement of the date of such meeting is first made.
(ii) Such Shareholder's notice shall set forth in writing as to each matter the Shareholder proposes to bring before the annual meeting: (A) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and any material interest in such business of such Shareholder and the beneficial owner, if any, on whose behalf the proposal is made; and (B) as to the Shareholder giving notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, the name and address of such Shareholder as they appear in the Corporation's books and of such beneficial owner and the class and number of shares of the Corporation which are owned beneficially and of record by such Shareholder and such beneficial owner.
(iii) Notwithstanding anything in these by-laws to the contrary, No business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 5. The

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Chairman of the meeting shall, if facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 5, and if he should so determine, the Chairman shall declare to the meeting that any such business not properly brought before the meeting shall not be transacted.
(iv) For purposes of Sections 1, 3 and 5 of this Article I and Section 7 of Article III, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition to the provisions of this Section 1, a Shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth herein. Nothing in these by-laws shall be deemed to affect any rights of Shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act and to put before such meeting any such proposals so included in the Corporation's proxy statement.
ARTICLE II. STOCK CERTIFICATES
Section 1. All stock certificates shall be signed by the Chairman, President or a Vice President and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer, provided further that the signature of any such officer may be a facsimile thereof and the seal of the Corporation may be a facsimile of such seal, as provided by law.
Section 2. The Board of Directors shall have power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the Corporation. The Board of Directors may appoint a Transfer Agent and a Registrar of Transfers, or either, and may require all stock certificates to bear the signature of such Transfer Agent and of such Registrar of Transfers, or of either.
ARTICLE III. DIRECTORS
Section 1. The business, property and affairs of the Corporation shall be under the management and direction of the Board of Directors who shall have power to direct all business affairs of the Corporation not inconsistent with these By-laws, the Certificate of Incorporation or the laws of the State of Connecticut. All of the powers and duties of said Board of Directors may be delegated by said Board to committees established by these By-laws or established by vote of the Board of Directors. It shall have the power further to fix and to determine and vary the amount of the working capital of the Corporation, to direct and determine the use and disposition of any surplus or net profits, to determine whether any, and if any, what part of any, accumulated profits shall be declared as dividends and the time or times for the declaration and payment of dividends. Subject to the provisions of the Connecticut Stock Corporation Act, the Board of Directors shall have the further power from time to time to determine whether and to what extent, and at what times and
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places, and under what conditions and regulations, the accounts and books of the Corporation, or any of them, shall be open to the inspection of individual shareholders.
Section 2. The Board of Directors shall consist of not less than five (5) nor more than ten (10) persons serving for a term of one year, as provided in the Certificate of Incorporation.  At each Annual Meeting of the Shareholders, the Shareholders shall elect Directors to serve for a term of one year and until their respective successors shall be duly elected and qualified.
Except in a contested election, Directors shall be elected by a majority of the votes cast by the shares entitled to vote in the election of directors at the Annual Meeting of the Shareholders at which a quorum is present (that is, if the votes cast for a nominee’s election as a Director exceed the votes cast against such nominee’s election as a Director).  The Board of Directors shall adopt a policy under which, in an uncontested election, any Director who is not reelected by a majority of the votes cast shall tender his or her resignation to the Board of Directors, and the Board of Directors shall determine whether to accept or reject the resignation, or whether other action should be taken.
In a contested election, Directors shall be elected by a plurality of the votes cast at an Annual Meeting of the Shareholders at which a quorum is present.
An election shall be considered to be contested if, as of the record date for such Annual Meeting, there are more nominees for election to the Board of Directors than there are positions on the Board of Directors to be filled by election at the Annual Meeting.
Notwithstanding the foregoing, the number of persons constituting the Board of Directors may be increased or decreased by vote of the Directors then in office; provided, however, a decrease in the number of Directorships shall not affect the unexpired term of any Director in office who shall continue until the expiration of his or her term.
Section 3. Whenever any vacancy shall occur in the Board of Directors (including vacancies created by an increase in the number of Directors), the remaining Directors in office, although less than a quorum, may fill the vacancy by majority vote. The person elected to fill such vacancy shall hold office until the next Annual Meeting of the Shareholders, and until his successor shall be duly elected and qualified.
Section 4. The annual meeting of the Board of Directors shall be held each year immediately following the adjournment of the Annual Meeting of Shareholders at the place where such Shareholders' meeting shall have been held, No notice of said meeting being required. Regular meetings of the Board of Directors shall be held in the months of February, August and November, at such date, time and place as may be determined in the call for such meeting and may be held either in or out of the State of Connecticut. Notice of said regular meetings and of the date, time and place at which they are to be held shall be given each Director by leaving such notice with him or at his residence or usual place of business or by mailing it to him, postage prepaid, at his last known post office address at least two (2) days prior to such meeting.
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Section 5. Special meetings of the Board of Directors may be called by the Chairman of the Board or by the President and shall be called by the President or Secretary when requested in writing by any two (2) of the Directors then in office. Special meetings shall be held at such time and place, either within or without of the State of Connecticut, as shall be specified in the notice of meeting. At least two (2) days' notice, written or oral, shall be given to each Director, and if written shall be given by leaving such notice with him or at his residence or usual place of business, or by delivering it to a national courier service, or by mailing it to him, postage prepaid, at his last known post office address at least two (2) days prior to such meeting.
Section 6. A majority of the total number of Directorships shall constitute a quorum, and the vote of a majority of those present at a meeting at which a quorum is present shall be the act of the Board of Directors. If there shall not be a quorum present at any Annual Meeting or any other duly called meeting, those present may adjourn the meeting from time to time until a quorum is present, and the actions of the meetings to which adjournment is taken shall be valid as if a quorum had been present in the first instance. If a quorum is present, officers may be elected and other business transacted without further action.
Section 7.
(a) Only persons who are nominated in accordance with the procedures set forth in this Section 7 shall be eligible for election as Directors of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation may be made at any annual meeting of Shareholders by or at the direction of the Board of Directors or by any Shareholder of the Corporation entitled to vote for the election of Directors at the meeting who was a Shareholder of record at the time of giving of notice provided for in this Section 7 and who complies with the notice procedures set forth in this Section 7. Any such nomination by a Shareholder shall be made pursuant to timely notice in writing to the Secretary of the Corporation.
(i) To be timely notice for an annual meeting, a Shareholder's notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary date, notice by the Shareholder to be timely must be so delivered not earlier than the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such annual meeting or the tenth (10th) day following the day on which public announcement (as defined in Article I, Section 5) of the date of such meeting is first made.
(ii) Notwithstanding anything in the foregoing subsection to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is No public announcement naming all of the nominees for Director or specifying the size of
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the increased Board of Directors made by the Corporation at least seventy (70) days prior to the first anniversary of the preceding year's annual meeting, a Shareholder's notice required by this Section 7 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the tenth (10th) day following the day on which such public announcement is first made by the Corporation.

(iii) Such Shareholder's notice shall set forth in writing: (i) as to each person whom the Shareholder proposes to nominate for election or re-election as a Director (A) the name, age, business address and residence address of such person, (B) the principal occupation or employment of such person, (C) the number of shares of stock of the Corporation which are beneficially owned by such person, and (D) any other information relating to such person that is required to be disclosed in connection with the solicitation of proxies for election of Directors, or as otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including, without limitation, such person's written consent to being named in a proxy statement as a nominee and to serving as a Director if elected); and (ii) as to the Shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made (A) the name and address of such Shareholder, as they appear on the Corporation's books, and of such beneficial owner and (B) the class and number of shares of the Corporation which are owned beneficially and of record by such Shareholder and such beneficial owner.
(b) Nominations of persons for election to the Board of Directors of the Corporation may be made at a special meeting of Shareholders at which Directors are to be elected pursuant to the Corporation's notice of meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that Directors shall be elected at such special meeting, by any Shareholder of the Corporation who is a Shareholder of record at the time of giving of notice provided for in this Section 7, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 7. In the event the Corporation calls a special meeting of Shareholders for the purpose of electing one or more Directors to the Board of Directors, any such Shareholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the Shareholder's notice shall be delivered to the Secretary of the Corporation at the principal executive offices of the Corporation not earlier than the ninetieth (90th) day prior to such special meeting and not later than the close of business on the later of the sixtieth (60th) day prior to such special meeting or the tenth (10th) day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting.
(c) At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary of the Corporation that information required to be set forth in a Shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a Director of the Corporation unless nominated in accordance with the procedures set forth in this Section 7. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the
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procedures prescribed by these by-laws and in that event the defective nomination shall be disregarded. In addition to the provisions of this Section 7, a Shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations there under with respect to the matters set forth herein.
ARTICLE IV. EXECUTIVE COMMITTEE
Section 1. The Board of Directors by the affirmative vote of a majority of the whole Board shall, at the first meeting of the Directors held after the annual meeting of the Shareholders, appoint from the Directors an Executive Committee of which a majority shall constitute a quorum, the members of which Executive Committee shall act as such for one year, or until their successors are elected. Such committee shall have and may exercise all or any of the powers of the Board of Directors including power to cause the seal of the Corporation to be affixed to all papers that may require it and including the power to declare dividends upon the capital stock and shall do all things which they may be directed to do by vote of the Board of Directors.
Section 2. If any vacancy should arise in the said committee by reason of resignation, death, disqualification or otherwise, the Board of Directors shall have power to thereupon appoint a successor for the unexpired term.
Section 3. The minutes of all meetings of the Executive Committee shall be presented to the next regular meeting of the Directors and every action of the Executive Committee shall be acted upon by the Board of Directors. The Executive Committee shall report whenever requested by the Board of Directors. The records, minutes or other papers or documents of the Executive Committee shall be kept at the principal office of the Corporation and shall be open at all times to the inspection of the Directors or any one of them.
Section 4. For any action of the Executive Committee a majority vote of the entire membership of the Committee shall be necessary.
ARTICLE V. ACTIONS WITHOUT MEETINGS
Section 1. Any resolution in writing signed by all of the members of the Board of Directors or Executive Committee or any other Committee of the Board shall be and constitute action by such Board or Executive Committee or other committee, as the case may be, to the effect therein expressed, with the same force and effect as if the same had been duly passed by the same vote at a duly called meeting of such bodies respectively, and it will so be the duty of the Secretary of the Corporation to place such resolution so copied in the minute book of the Corporation under the proper date.
ARTICLE VI. OFFICERS
Section 1. The officers shall be a President, Vice Presidents, which shall not be greater in number than the number of plants operated by this Corporation, a Secretary and a Treasurer, and there may be elected by the Board a Chairman of the Board of Directors. The Board of Directors may elect
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such assistant Secretaries and Treasurers as may be deemed advisable by it. All such officers shall be elected at the meeting of the Board of Directors next following the annual meeting of the Shareholders and shall hold office for one year or until their successors are elected. The Board of Directors may also elect or appoint other officers as it may determine, having such titles and such powers and duties as may be specified in their election or appointment. Any two or more offices may be held by the same person, except the office of President and Secretary.
Section 2. The duties of the Chairman of the Board shall be as follows:
a. If elected, to preside at all meetings of the Board of Directors and Shareholders at which he shall be present.
b. If elected, to represent the Directors as Chairman of the Board at all meetings of Shareholders of Corporations in which this Company holds stock.
 c. If elected, the Chairman of the Board of Directors shall be an ex-officio member of the Executive Committee.
 d. If elected, to represent the Board of Directors in such other ways as may be prescribed by the Board.
Section 3. The duties of the President shall be, in the absence of the Chairman of the Board or when No Chairman has been elected, to preside at all meetings of the Board of Directors and Shareholders at which he may be present and to perform any and all other duties prescribed to the Chairman of the Board by the By-laws. He shall have a general supervision of all business of the Corporation and as such the President shall report in person or through the Chairman of the Board, if elected, to the Shareholders at the annual meeting, the condition of the Corporation.
Section 4. The duties of the Vice Presidents shall be in addition to those prescribed by the By-laws such as may be determined by the Board of Directors.
A Vice President shall preside in the absence of the Chairman of the Board and President at all meetings of the Directors or of the Shareholders, and in case of the resignation, death, disqualification or other removal of the President, a Vice President designated by the Board of Directors shall act as President of the Corporation until such time as the vacancy may be filled.
Section 5. The Treasurer shall have the care, control and management of all of the funds of the Corporation; shall have power to sign checks, notes or other obligations of the Corporation; to pay all bills against the Corporation, and to accept all payments due the Corporation and to receipt there for. He shall report to the Shareholders at such times as the Board of Directors may request. He shall give bond for the careful and accurate performance of his duties in such sum as shall be determined by the Board of Directors.
The Board of Directors may authorize certain persons chosen by it to sign and endorse checks, notes or other obligations of the Corporation or those checks, notes or other obligations which may
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 have reference to the business of any designated plant of the Corporation and to accept payments and sign receipts for said Corporation or said designated plants, all of which acts of any such person shall be under the direction of the General Manager of the plant at which such person shall be employed. The Directors may require such persons to furnish bonds for the faithful performance of their duties.
Section 6. The Secretary shall keep accurate records of the meetings of the Shareholders and of the Board of Directors; he shall in general perform all of the duties incident to the office of Secretary, subject to the control of the Board of Directors and the Executive Committee, and shall do and perform such other duties as may from time to time be assigned to him by the Board of Directors or the Executive Committee or be required by law.
ARTICLE VII. FISCAL YEAR
The fiscal year ends on the Saturday nearest to December 31.
ARTICLE VIII. WAIVER OF NOTICE
Whenever notice is required by the Certificate of Incorporation, these By-laws or any provision of the Connecticut Stock Corporation Act, as amended from time to time, a written waiver thereof, signed by the person entitled to notice, whether before or after the time required for such notice, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Shareholders, Directors or members of a committee of Directors need be specified in any written waiver of notice except to the extent required by law.
ARTICLE IX. INDEMNIFICATION
Section 1. The Corporation shall to the fullest extent permitted by the Connecticut General Statutes, as amended from time to time, indemnify each person whom it may indemnify pursuant thereto, and may provide such indemnification to persons and circumstances not expressly covered by said statutes, including matters relating to Federal and state securities laws, as the Board of Directors may determine from time to time and as is not expressly prohibited by law.
Section 2. For purposes of the foregoing Section 1 of this Article IX, references to "the Corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its Directors, officers, employees or agents, so that any person who is or was a Director, officer, employee or agent of such constituent corporation, or who at its request served as a Director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall have with respect to the resulting or surviving corporation the same rights of indemnification as he would have had with respect to the constituent corporation if its separate existence had continued.
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ARTICLE X. AMENDMENTS
The By-Laws of the Corporation may be amended, repealed or added to by the holders of not less than seventy-five percent (75%) of the outstanding voting stock at any annual or special meeting of the Shareholders or by the vote of a majority of all the Directors at any meeting of the Board of Directors, provided that in either case notice of the meeting shall include notice of such proposed action.

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Exhibit 4
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12(B) OF THE
SECURITIES EXCHANGE ACT OF 1934
The Eastern Company (the “Company”) has one class of securities registered under Section 12(b) of the Securities Exchange Act of 1934, as amended: common stock, no par value (“Common Stock”).
The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, 1,000,000 shares of voting preferred stock, no par value (“Voting Preferred Stock”) and 1,000,000 shares of non-voting preferred stock, no par value (“Non-Voting Preferred Stock,” together “Preferred Stock”).
The following brief description of the Common Stock is a summary and does not purport to be complete. It is subject to and qualified in its entirety by reference to the Company’s Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”) and the Company’s Amended and Restated By-Laws (the “By-Laws”). The Company encourages you to read the Certificate of Incorporation, the By-Laws and the applicable provisions of the Connecticut Business Corporation Act (the “CBCA”) for additional information.
Description of Common Stock
Assessment and Redemption

The shares of Common Stock are fully paid and non-assessable.  The shares of Common Stock are not redeemable at the option of the Company or the holders thereof.  The Common Stock is not subject to call.

No Conversion Rights

The Common Stock does not have any conversion rights.

Dividend Rights

Subject to the rights of any outstanding shares of Preferred Stock, dividends may be paid upon the Common Stock as and when declared by the Board of Directors of the Company (the “Board”) out of funds legally available for payment of dividends. Dividends may be payable in cash, stock or other property.

Liquidation Rights

In the event of any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, the holders of Common Stock are entitled to share, on a pro rata basis, in any remainder of the assets of the Company, subject to the rights of any outstanding shares of  Preferred Stock.

No Par Value

The Common Stock has no par value.

No Pre-emptive Rights or Sinking Fund Provisions

No holders of Common Stock have any pre-emptive or preferential rights to purchase or to subscribe for any shares of capital stock or other securities which may be issued by the Company. The Common Stock is not subject to any sinking fund provisions.

Voting Rights

Holders of Common Stock are entitled to one vote for each share held on each matters submitted to a vote at all meetings of shareholders.  The shares of Common Stock have non-cumulative voting rights.  This means that the holders of more than 50% of the shares voting for the election of Directors can elect all of the Directors standing for election, and in such event the holders of the remaining shares voting for the election of Directors will not be able to elect any person or persons to the Board.

Board of Directors

The Board is not classified, so all Directors are elected annually for a one-year term. The By-Laws provide that the size of the Board shall consist of not less than five nor more than ten persons, but the number of persons constituting the Board may be increased or decreased by the vote of the Directors then in office.

Power to Call a Special Meeting of Shareholders

The By-Laws provide that special meetings of shareholders may be called at any time by the Chairman of the Board, the President of the Company or a majority of the Board, and are required to be called by the President upon the written request of the holders of not less than 35% of the voting power of all shares entitled to vote at the meeting.

Action Without a Meeting

Action required or permitted by Connecticut law to be taken at a shareholders’ meeting may be taken without a meeting by written consent of all of the shareholders entitled to vote on the action.

Amendment of By-Laws

The By-Laws may be amended, repealed or added to by vote of the holders of not less than 75% of the outstanding voting stock, or by the vote of a majority of all the Directors on the Board.

Preferred Stock

Under the Certificate of Incorporation, the Board is authorized without further shareholder action to provide for the issuance of shares of Voting Preferred Stock or Non-Voting Preferred Stock.  Each class of Preferred Stock may be issued in one or more series, with such terms, limitations and relative rights and preferences, including conversion rights, if any, as may be fixed and determined by the Board.

Transfer Agent and Registrar

The transfer agent for the Common Stock is American Stock Transfer & Trust Company, LLC.

Listing
 
The Common Stock is traded on the Nasdaq Global Market under the trading symbol “EML.”  

Antitakeover Legislation

The Company is subject to the provisions of Section 33-844 of the CBCA which prohibits a Connecticut corporation from engaging in a “business combination” with an “interested shareholder” for a period of five years after the date of the transaction in which the person became an interested shareholder, unless the business combination or the purchase of stock by which such person becomes an interested shareholder is approved by the Board, and by a majority of the Company’s non-employee Directors, prior to the date on which the person becomes an interested shareholder.  A “business combination” generally includes mergers, asset sales, some types of stock issuances and other transactions with, or resulting in a disproportionate financial benefit to, the interested shareholder.  Subject to exceptions, an “interested shareholder” is a person who owns 10% or more of the Company’s voting power, or is an affiliate or associate of the Company and owned 10% or more of the Company’s voting power within the past five years.

The Company is also subject to Section 33-841 and Section 33-842 of the CBCA.  These provisions generally require business combinations with an interested shareholder to be approved by the Board and then by the affirmative vote of at least:

the holders of 80% of the voting power of the outstanding shares of the Company’s voting stock; and

the holders of 2/3 of the voting power of the outstanding shares of the Company’s voting stock, excluding the voting stock held by the interested shareholder;

unless the consideration to be received by the shareholders meets certain price and other requirements set forth in Section 33-842 of the CBCA or unless the Board has by resolution determined to exempt business combinations with that interested shareholder prior to the time that such shareholder became an interested shareholder.

The Company is also subject to Section 33-756(g) of the CBCA, generally requiring Directors acting with respect to mergers, sales of assets and other specified transactions to consider, in determining what they reasonably believe to be in the best interests of the Company, specified interests, including those of the Company’s employees, customers, creditors and suppliers and any community in which any office or other facility of the Company is located.  Section 33-756(g) of the CBCA also allows a Director to consider, in the discretion of such Director, any other factors the Director reasonably considers appropriate in determining what the Director reasonably believes to be in the best interest of the Company.


EXHIBIT 31

CERTIFICATIONS

I, August M. Vlak, certify that:

1.
   I have reviewed this report on Form 10-Q of The Eastern Company;

2.
   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 6, 2020

/s/August M. Vlak
August M. Vlak
CEO

EXHIBIT 31

CERTIFICATIONS

I, John L. Sullivan III, certify that:

1.
   I have reviewed this report on Form 10-Q of The Eastern Company;

2.
   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 6, 2020

/s/John L. Sullivan III
John L. Sullivan III
CFO


EXHIBIT 31

CERTIFICATIONS

I, August M. Vlak, certify that:

1.
   I have reviewed this report on Form 10-Q of The Eastern Company;

2.
   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 6, 2020

/s/August M. Vlak
August M. Vlak
CEO

EXHIBIT 31

CERTIFICATIONS

I, John L. Sullivan III, certify that:

1.
   I have reviewed this report on Form 10-Q of The Eastern Company;

2.
   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
   The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c)
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d)
disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
   The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: May 6, 2020

/s/John L. Sullivan III
John L. Sullivan III
CFO